Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 32 - Evidence, October 23, 1998 (a.m.)
MONTREAL, Friday, October 23, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 9:00 a.m. to examine the present state of the financial system in Canada (Task Force on the Future of the Canadian Financial Services Sector).
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Senators, today we start our second day of hearings in Montreal. We are asking for reactions to the MacKay Task Force on the Future of the Canadian Financial Services Sector. Our first witnesses this morning are from the Canadian Payments Association. We have Mr. Bob Hammond, the general manager, and Mr. Doug Kreviazuk, who is the director of policy and planning. As usual, we will ask the witnesses to begin with a brief opening statement, and then we will have a number of questions.
Before you begin your opening statement, please give us a brief description of what the Canadian payments system is. We are live on cable television today, and some people might think you are a collection agency or some such association, given the name. Before you get into the technicalities of your brief, you might explain for our viewers the roles of the payments system and the Canadian Payments Association.
Mr. Robert M. Hammond, General Manager, Canadian Payments Association: The Canadian Payments Association was established by an act of Parliament in 1980. It has two principal mandates; the first is to establish and operate the national clearings and settlement system, and the second is to plan the evolution of the payments system. Our principal and most important mandate is to make sure that the clearing and settlement system is in place, and that it works efficiently, safely and well.
This principal mandate provides the essential foundation for the payments system. For example, people who deal with cheques want to make sure that, when they deposit a cheque, they will get value for that cheque quickly. If they use a debit card at a retail store, they wish to be sure that the payment will go through, and that everything will be done quickly, efficiently, safely, and confidentially. They do not want that information to be made available to other parties, and they want to be sure that they can rely on the privacy of the transaction.
Similarly, when they use another institution's ABM, they want to be sure that the transaction will be authorized, and that they will get the money. They want to know that there is a system behind them, and that it will make sure that the money that is owed between the different financial institutions as a result of these payment transactions gets paid, and gets paid quickly.
Mr. Chairman, we have an opening statement that we have distributed in hard copy to members of the committee. I wish to go through the highlights of it.
Two weeks ago, the CPA board of directors met to review the July 1998 discussion paper published by the Department of Finance as a result of its payment system review exercise. The board also reviewed the three recommendations from the Mackay task force -- recommendations 13 through 15 -- that relate to the payments system.
The recommendations deal with CPA membership requirements, and they also deal with the governance of the CPA from the perspective of public policy oversight. I wish to emphasize that, in general, the board's reaction to these recommendations is very positive.
The board has asked me to stress to the committee that the CPA members welcome the review of the payment system. As I indicated earlier, the CPA was created by an act of Parliament in 1980, and its main objective is to operate the clearing and settlement system. Our legislation has not been amended significantly since 1980, however, and there is no question that it needs to be brought up to date to reflect today's circumstances.
To date, the CPA has prepared five papers for the Department of Finance Payments System Advisory Committee, and those same papers went to the MacKay task force. The papers deal with a number of the issues that are being considered in the context of the review of the payment system.
As a supplementary handout, we have also given you a summary of the positions taken in those papers. We have also provided an overview document that gives you more background on the CPA. It includes a list of our members, and it indicates the names of our directors. We thought that would be interesting to you as well.
The current CPA Act limits membership in the association to the Bank of Canada, the other banks, the trust and loan companies, the credit union and caisses populaires, and other deposit-taking institutions. We currently have 132 members. Interestingly, over 60 per cent of them are non-banks; that is, they are deposit-taking institutions other than banks. Another interesting fact is that in excess of 30 per cent of our members are provincially incorporated and regulated institutions, including institutions of such importance as the Caisse centrale Desjardins, the Alberta Treasury Branches, and the credit unions of a number of the major provinces.
Since the views expressed in our opening statement represent a consensus position of our board, I thought you would be interested to know how our directors are chosen and who they are. Very briefly, the act requires a board of 11 persons. One of the directors is an officer of the Bank of Canada, appointed by the bank, and by virtue of the provisions of the act that director must be chair. Five directors are chosen by the banks, and five are chosen by the non-banks -- two by the trust and loan companies, two by the credit union and caisses populaires, and one by the other deposit-taking institutions.
For each director chosen, the appropriate members then also choose an alternate director. The alternate directors are invited to participate; they attend the board meetings and are invited to participate in the discussion. In essence, we have 22 directors in total.
When you look at the list of our directors, you will see that they are officers from different types of both small and large institutions, and they come from both provincially and federally regulated deposit-taking institutions. As a result, a wide range of views is represented around our board table.
I would now to turn to the specific recommendations made by the task force. The first is recommendation 13, which relates to expanding membership in the CPA. Early in the review process, the CPA made it known to the Department of Finance Payments System Advisory Committee, and to the task force, that it certainly had no objection in principle to expanding membership in the CPA. However, it suggested that, when considering doing so, decision-makers should be careful to consider the ramifications to the efficiency and efficacy of the clearing and settlement system that Canadians so highly value.
While the task force report states that expanded access to the payments system is vital from a competitive point of view, it also recognizes that increased participation will require careful review.
Both the task force report and the discussion paper put out by the Department of Finance suggest that the criteria for deciding which institutions should access the system should focus on certain points. Those points are: regulation and supervisory oversight; access to liquidity support; an appropriate legal framework, in the sense that the laws governing the new participants should be compatible with payments system activity; and, lastly, operational and technical competency to participate. The CPA agrees with the criteria outlined in both the MacKay task force report and the Department of Finance discussion paper.
The specific task force recommendation is that the CPA Act be amended so as to permit financial institutions other than deposit-taking institutions to become CPA members, provided they meet the suggested criteria and are designated by the Minister of Finance. The recommendation also states that the Department of Finance, working with the CPA, should give high priority to determining the classes of financial institutions that would be eligible. The CPA certainly welcomes the suggestion that it work with the Department of Finance on this matter, and looks forward to making a contribution to this exercise.
Now I wish to turn to the recommendations relating to governance of the payments system. Documents prepared for the Finance Payments System Advisory Committee's consideration suggest that there is a perception by some that CPA decisions may favour members of the CPA as opposed to users of the payments system.
The concern is that some of the decisions made may not be made in the best public interest. The discussion paper describes some options for strengthening the governance of the CPA and its oversight from a public policy perspective, and the task force, as I indicated, has made two recommendations with respect to oversight.
Just to put the task force recommendations into context, I would very quickly like to describe the measures currently in place to ensure public policy oversight at the CPA. The CPA Act authorizes the board of directors to make by-laws respecting clearing and settlement matters, but those by-laws must be approved by the Governor in Council. Then, provided that they conform to the by-law, the directors have the authority to approve, pass, or adopt rules relating to clearing and settlement.
The by-laws approved by the Governor in Council set out the broad principles; the board has the authority to make rules that set out the detailed principles relating to clearing and settlement matters. However, the chair of the CPA, who is an officer of the Bank of Canada, has the authority to determine whether or not a rule that the board is considering is consistent with the by-laws that have been approved by the Governor in Council. The chairman, then, has that special oversight responsibility.
The act also requires that the Superintendent of Financial Institutions come to the CPA at least once a year. He or she is to carry out an examination, and then report to the minister as to whether or not the CPA is operating in compliance with the act and with the by-laws that have been approved by the Governor in Council.
Although not required to do so by the act, the CPA has also taken two additional measures to try to strengthen public policy oversight. In 1996 it established a stakeholder advisory council that consists of approximately 20 representatives from payment systems users and suppliers of payments system services. The council has direct access to the board.
The chairman and members of the council are invited to attend board meetings from time to time to report on their activities. Their mandate is to provide the board with advice on payments system matters, and also to make recommendations to the board on the consultative processes that the CPA should follow with respect to payments system users.
In 1991 the board also set up a consultative committee. That committee is made up of a subset of our board and a representative of the Minister of Finance -- the assistant deputy minister responsible for the Financial Sector Policy Branch. The objective is to keep the minister informed of payments system developments as they occur. The committee meets at least twice a year, and more often as necessary. At the meetings, we exchange information and views on payments system matters having public policy implications. The objective here is to try to avoid surprises for the minister and for the Department of Finance.
Some of the options that were set out in the Department of Finance discussion paper on improving the CPA governance structure include clarifying the CPA's mandate and setting public policy objectives in the legislation that should be observed in operating the payments system. The current act does not contain that sort of material. There are no public policy objectives set out for us in regard to our operation of the clearing and settlement system.
The Department of Finance paper also recommended that the stakeholder advisory council be a legislated requirement. That would certainly be important from our point of view. The paper also recommended expanding the board of directors to include independent directors -- in other words, directors who were not chosen by our members. The CPA board certainly supports all these options, and they are included in our proposal -- which I will describe in a minute -- for building on and improving the CPA's existing governance structure.
The discussion paper on improving public policy oversight discusses creating a type of oversight body. This body could be at the Bank of Canada, or at the Department of Finance, or perhaps it would be elsewhere. In any event, this government body would be required to review and approve all CPA by-laws and rules before they came into force.
The task force report did not go that far. It recommended instead that the Minister of Finance, rather than the Governor in Council, have the power to approve the CPA by-laws. It also recommended, however, that the minister have the power to review all new or revised CPA rules, and to revoke any new rule or revision when the minister determined it to be contrary to the public interest.
At the CPA, we have hundreds of rules, and most of them are very technical in nature. Given the need for the CPA to respond quickly to emerging issues, the task force approach would clearly be more efficient than requiring all the rules to be approved in advance by a government oversight body. In other words, the board would approve the rules, and if the minister thought that they were not in the public interest, he or she could revoke them. Of course, we already have the consultative committee that I mentioned earlier, and the process is such that we would ensure that the Department of Finance was aware of any rules that we were considering that might have public policy impact.
The second reason we like the task force approach is that it would place the responsibility and the accountability for enacting rules that are consistent with our legislative mandate -- including the public policy objectives -- squarely on the shoulders of the board, which is where we feel that responsibility should be.
Let us consider the third and final task force report recommendation on payment system issues. It says that the Minister of Finance should have the power to issue a directive to the CPA to make any change that he believes to be in the public interest to a by-law, a rule, or to an operating practice. The CPA board has no objection to this proposal. After discussing the Department of Finance discussion paper and the task force report, the CPA board did approve a proposal for building on and enhancing the CPA's governance structure and its oversight, from a public policy perspective.
A document containing a detailed explanation of the proposal and the reasons for it will be provided to this committee and to the Department of Finance in the very near future. We do not have that document ready today, but I would like to summarize the highlights and the main essence of it. The document itself provides the rationale for the proposal.
First, we think that there should be a clear articulation of the CPA's mandate, including the legislated policy objectives that do not exist now. We have made a suggestion for possible wording, and that is contained in one of the papers.
Second, we feel there should be independent directors on the CPA board, and that they should be appointed through a process to be established by the government.
Third, we believe CPA members should elect the majority of directors, in order to ensure that payments system knowledge and technical expertise are maintained at the board level.
Fourth, the election process for member directors should be such that it continues to ensure diversity and fairness of representation by type, size, region and regulatory jurisdiction of institution. No single type of institution should have a majority of member directors.
Fifth, the existence and the mandate of the stakeholder advisory council should be enshrined in the CPA act, as should a requirement that the chair of the stakeholder advisory council be on the CPA board.
Sixth is the consultative committee, which would consist of a subset of the CPA board, including both member and independent directors and, of course, the chair of the CPA stakeholder advisory council, as well as representatives of the Minister of Finance. This committee and its mandate should be enshrined in the CPA act so as to ensure an early and appropriate exchange of information and views on the public policy implications of payments system issues.
Last, as recommended by the task force, the minister should have the power to approve CPA by-laws. He or she should be able to review and revoke CPA rules that he or she believes to be contrary to the public interest. He or she should also be able to direct the CPA board to make a change that the ministers determines to be in the public interest to a by-law, rule, or operating practice.
In summary, the CPA board believes that having independent directors and the chair of the stakeholder advisory council on the board would strengthen the corporate governance of the CPA. We believe that the proposals for improving public policy oversight at the CPA, together with the new powers for the minister that were recommended by the task force, would provide effective oversight. At the same time, they would ensure that the CPA has the flexibility and the authority to respond quickly to emerging issues.
In conclusion, Mr. Chairman, I should like to say that the CPA has worked hard to establish a very safe and efficient clearing and settlement system. We believe that this system provides the essential foundation for Canada's world class payments system. The task force report states that, compared to other countries, the availability of payment services in Canada is excellent.
We believe that Canada's clearing and settlement system should continue to operate and evolve, thereby allowing Canada to maintain its world class payments system in a rapidly changing environment. With an expansion of CPA members in the prudent manner recommended by the task force, and with the strengthened governance approach that we are proposing and that the task force has recommended, we hope to continue to do so.
At the same time, we believe that the strengthened oversight provisions will provide the public with the assurance that both public policy objectives and the public policy perspective are being taken into consideration in the decisions made by the board.
Senator Angus: Given the complexity of the matters you are charged with, I felt that your opening statement gave us a very clear overview, and it was very helpful in demystifying some of the issues. I wish to continue that process, if I may, by starting with the fact that the CPA is, if not the best organization of its kind, certainly among the very best in the world.
I am not sure how you measure that. There are ways that the man on the street measures it in Canada, however. Here, we are able to have a cheque drawn on a far-away bank clear within one day, whereas just across the border, in that vast industrial complex known as the United States, it sometimes takes two or three weeks. It is difficult to understand that. Could you confirm that that is one of the hallmarks of measuring whether your system is a good or a bad one and, assuming that is the case, could you tell us a little of how you got to this state?
Mr. Hammond: There are a number of hallmarks. Certainly the fact that Canadians usually receive same-day provisional credit when they deposit a cheque in a deposit-taking institution is one of them. Canadians only need travel abroad to realize just how good our payments system is.
Another very positive attribute of our system is the fact that Canadians can access their funds -- no matter where they are -- from coast to coast through our ABM network. The CPA does not operate that network, but it provides the clearing and settlement services that provide the essential foundation for that network.
We have an excellent ABM network, and we have an excellent debit card network as well. You can use your debit card from coast to coast, and access your funds in that way. Those are the sorts of measures that people like to talk about in terms of measuring the payments system. As I said earlier, we believe that the effectiveness of our clearing and settlement system, together with its safety, provides the foundation that enables these payments system services to operate so well.
Senator Angus: That is helpful, but could you take it a little bit further? That is, could you tell us why we are able to accomplish this in Canada, but our neighbours to the south, who seem to be fairly advanced technologically in most areas, cannot? Why is it so slow?
Mr. Hammond: There are a couple of factors. We have had national institutions here in Canada, whereas in the United States they have had regional institutions.
The Canada payments system was set up prior to the establishment of the CPA. The major banks set it up, and they laid some good foundations for the system. When the CPA came into existence it automated the system. It also worked very hard to establish rules that ensure that the system works smoothly and efficiently.
People must know the rules of the game. We have therefore worked very hard; we have an extensive committee structure, and a good set of rules that set out the processes. When people know the rules and that they must follow them, things tend to move smoothly.
As part of the work that the CPA has done, we have extensive courier arrangements for making sure that cheques get moved to the regional clearing centres. Again, there are rules, processes, and procedures for dealing with that. We have set up committees for representing our members -- the banks, the trust and loan companies, and the credit unions. Everyone works together and reaches a consensus on these rules. That has worked very well, in the sense that the CPA is a national organization and brings together not only the big institutions, but the smaller ones as well.
As the senators know, settlement is affected at the Bank of Canada. Settlement generally takes place the next day, as you indicated, senator, but it is retroactive. That is, it is adjusted from the point of view of the time value of money to the actual day of the transaction. There is no incentive for the financial institutions to hold back on some of these payment items, because there is no float. That is also an important element of the Canadian system, and it does not exist in many other countries.
Senator Angus: Apart from corporate governance issues, the big issue in the MacKay report, and in the parallel study which was done with respect to the CPA, seems to be this whole question of access.
In your opening comments, you indicated that, in principle, you feel there is no great risk in opening up the CPA. On the other hand, you delineated issues that need to be kept in mind; namely the criteria relating to safety and soundness.
I should like to get more specific now. Perhaps you could tell us which types of institutions would not give you a problem coming into the system and, on the other hand, which ones might pose a problem. At this committee we hear from them all. For example, we hear that the life insurance companies want a level playing field, and that they have their own reasons for wanting access. We hear from certain credit card companies, and so forth.
Could you put it into a perspective, so that we can understand where the divide will come as to who gets into the so-called club and who does not?
Mr. Hammond: The task force recommended that three types of financial institutions have access to the payments system. They have held the door open for others as well, but they specifically said that life insurance companies, securities dealers and money market mutual funds should have access to the payments system.
From our perspective, those are the types of institutions that have been asking for access. We have been focusing our attention mostly on them, because they are the ones that have raised issues with us, and they are the ones that the MacKay task force has talked about.
In my opening remarks, I mentioned the criteria against which the task force suggests each of these types of financial institutions be measured. We agree with those criteria, and they are the same criteria that are set out in the Department of Finance discussion paper. In fact, in that paper they have gone through and done a preliminary assessment of each of the these three types of institutions -- the life insurance companies, the money market mutual funds, and securities dealers -- against these criteria.
The Department of Finance report says that there are some significant issues that still need to be dealt with. It is interesting that many of the items mentioned in the report relate to the legal framework that surrounds some of these organizations.
We are not experts in securities law, nor in what ramifications securities law will have on the participation of securities dealers or mutual funds in the payments system.We do feel, however, that we can be helpful to the Department of Finance as it goes through these issues, and that we can explain the ramifications for the payments system.
I do not think that our members believe these issues to be insurmountable. They are issues that must be considered, and ways must be found to deal with them.
Senator Angus: The list you have provided us with shows that you have some 130 members. The impression tends to be given sometimes that the CPA is a tiny club with very few members, and is tightly controlled. In fact, as I understand it, it is extensive in its membership, and you are quite open to having new members.
When I asked you why our system was more efficient than the U.S. system, you talked about the national institutions. These would be our national banks, of which we have a relatively tiny number compared to the States. One of the other things that comes out of the MacKay report is that we must expand our base of retail banks, and develop a second and third tier -- the credit unions, the caisses populaires, and so forth. Would the introduction of local banks have serious implications in terms of the efficiency of the system?
Mr. Hammond: Not at all. What I wanted to suggest is that the national institutions that existed when we were setting up the clearing and settlement system were helpful in getting it going. Our system is such that I do not believe that that would be a problem. We now accommodate all these members, and most of them would participate in these networks, so I do not see that as an issue.
Senator Kolber: How does the Canadian Payments Association respond when the task force report states that accepting some risks may lead to the failure of some financial institutions?
Economists have been prone to such comments, but how does the CPA react to the likelihood of such events? Do you think that it is possible to adopt policies that will result in only one or two failures, but not more? Can you comment on the contagion problem?
Mr. Hammond: We are just about to implement our large-value transfer system at the CPA. This is a new electronic system for important payments, and there always is a risk of contagion in the payment system. We use the term "systemic risk." In other words, if one of the major players in the payments system cannot meet its obligations, that in turn may cause another player in the payments system to fail, and we would have a domino effect.
That is always a concern in the payments system. It has been a concern with our existing system, in the sense that we do not have same-day certainty of settlement. We are in the process of implementing a new large-value transfer system. It will be a highly secure electronic system for important and significant payments.
Interestingly enough, our statistics show than approximately 10 per cent of the payments that go through our clearing and settlement system account for almost 95 per cent of the value. That shows you that we have some very large, significant items going through the system. At the end of the day, this results in significant settlement balances being owed amongst the players.
The large-value transfer system that we are developing will provide same-day certainty of settlement. It is being backed by collateral, and there is a risk-proofing system. A settlement will occur at the Bank of Canada, but certainty of settlement is guaranteed when a transaction goes through that system, and participants will be able to offer finality of payment to their clients.
Once that system is in operation, we believe the possibility of systemic risk will be significantly reduced. The bulk of the value going through our clearing and settlement system will be handled by that system, and it will provide same-day certainty of settlement and finality of payment.
Senator Kolber: Where does the CPA stand respecting the use of electronic money? The new European Central Bank has already issued a discussion paper on these issues. Its focus is to both develop standards and to ensure that property rights do not inadvertently get established which will be difficult to alter or, indeed, take away at a later stage of development. In this context, can you tell the committee about the prudential concern that ought to be taken into account when considering the task force recommendation to open the payments system so as to facilitate enhanced competition in the financial services industry?
Mr. Hammond: As a matter of fact, senator, a working group was set up at the CPA a couple of years ago to look into issues such as stored-value cards, and they did produce a paper. That paper was provided to the Department of Finance, and it addressed the various issues that relate to stored-value cards. One of the prime issues, of course, is who should be able to issue stored-value cards; who should be able to accept money from the public in exchange for providing stored-value cards.
The CPA working group recommended that the Department of Finance perhaps begin to think about some high-level regulations on who should issue stored-value cards, because of the risks that might occur. Our position was that CPA members should be able to issue stored-value cards, but we did not limit it to that. Another option that was suggested was that only CPA members should be allowed to issue stored-value cards.
Another option would be to say that only regulated financial institutions should be allowed to issue the cards, and another would be to say that, provided there were some sort of monitoring, any financially strong and responsible organization could issue them. They working group did suggest, though, that the department should be thinking about doing something with regard to stored-value cards.
Thus far the department has not done anything about this issue. We ourselves have amended some of our rules; for example, to accommodate debit cards that use stored-value applications, the debit cards would draw on accounts issued by our members.
To answer your question, the CPA members do feel that there are some risks with stored-value applications, and that there should be some level of control. We are not suggesting for a moment, however, that only CPA members should be allowed to issue shared-value cards. Perhaps there is a high-level government role for setting out some guidelines or some requirements with respect to who issues stored-value, and how it works. That has not happened yet.
Senator Kolber: Could you comment on the international risk-proofing measures that are now in place to protect national clearing systems?
Mr. Hammond: In Canada, the first step that we are taking in that direction is to implement our large-value transfer system. At some point we expect that international systems will provide the same sort of safeguard that we have embodied in our large-value transfer system, but those systems do not yet exist.
Currently the best we can do is work with the systems in other countries that correspond to our large-value transfer system. When you are making an international payment, you make the first part through our system, and it then moves through the equivalent system in the other country. At some point in time, international systems will better-connect the payments systems of the major countries of the world.
Senator Kenny: I have a supplementary question on stored-value cards. I have difficulty seeing why a rational person would ever choose to use a stored-value card. Perhaps there is a market out there, though. Is there a market for them, or is this something we are talking about theoretically, but which will never happen?
Why would someone wish to store money in a card and not have it earning interest somewhere? Why would anyone ever use a stored-value card?
Mr. Hammond: Stored-value cards will be used mainly for small value transactions. In Guelph, for example, the Mondex people have a pilot project. People are using the cards for bus fares, and they are using them to buy a newspaper when they do not have the change.
These are small-value transactions. I do not believe people will use stored-value for large transactions. The indication is that the cards' main use is in the smaller transactions. They are convenient, and you do not need to carry a bunch of change in your pocket or purse. You can make your transactions quickly; you just give them your card, they zap it, and you can run out with your chocolate bar or your small purchase.
The Chairman: One of the results of the study which is being conducted in Guelph right now is that people are doing exactly that. They are using the card with the chip on it in lieu of carrying a pocketful of change. If the purchase involves anything over $10, people do not use the card.
Senator Oliver: My first question is a supplementary to Senator Kolber's second point. I note there is a footnote in the papers you handed out today. You state that the CPA is not responsible for regulating networks such as Interac. I was hoping that you could explain that, and give us assurances that you will be getting that responsibility.
My second question relates to ministerial discretion. You stated that you and those around you agree with giving the minister this additional discretion. When I read about the kind of discretion you are so willingly to give him, it scares me a bit.
You spoke about providing the Minister of Finance with the power to review and revoke CPA rules that are contrary to the public interest. When do you determine whether a public interest is a political interest? It seems to me that the minister would be given very broad discretion if he or she were allowed to direct the CPA board to make changes to CPA by-laws, rules or operating practices that he or she deemed to be in the public interest.
My third question relates to corporate governance in the chair. You said that the chair is nominated by the Bank of Canada and becomes the chair. Later on you said that you would like to see more independent directors. Should the chair not be an independent member, and should the chair not be chosen from among all other directors, thereby making the CPA more arm's length and more independent? Right now this is tied to statute, but should that be changed?
Mr. Hammond: The responsibility for regulating Interac is an issue that has been discussed for a long time at our board. We have, as we indicated, 130 members. We have 20 some people sitting around the board table. You must appreciate that sometimes it is difficult to get a consensus on what should be done or what needs to be done.
There must be an incentive to innovate and develop. You can appreciate that the people sitting around the table all have a proprietary interest in being there first, and in doing things first. The consensus that our directors have reached is that we should be providing the essential foundation for these networks to use in clearing and settling their payment items. In the interests of innovation and encouraging people to invest money, however, we recognize that there will be different networks, and that we would provide the clearing and settlement services to those networks. If those networks wish to put payment items through our clearing and settlement service, they must ensure that their payment items meet certain standards for safety and soundness.
In order to create an incentive to invest in technology, and in order to encourage people to develop these things, our board has taken the position that it is best to let the networks develop on their own. We only provide the essential foundation for them.
The Competition Bureau takes a close interest in what the networks are doing, and we are all very much aware of decisions relating to things such as Interac. We make sure that any payments that Interac puts into our clearing and settlement system meet our standards, but we do not establish the membership requirements for Interac or deal with those sorts of issues.
Again, I believe the view of our board is that this encourages people to develop and invest in new networks.
Senator Oliver: It is still affording protection to Canadians, though?
Mr. Hammond: Yes.
With respect to your second question regarding ministerial discretion, one of the proposed alternatives is for a government body. Everything our board would decide would have to be submitted to that body in advance, and approved by it. Our directors are not enthusiastic about that approach, because they believe it removes their responsibility and their accountability as directors to ensure that what they are doing is consistent with the legislation.
There is nothing in the legislation now about public policy objectives, but we feel there should be. Directors should be responsible and accountable for ensuring that what they do is consistent with the legislation and with the public policy objectives that are set out in that legislation.
We do realize, however, that there is a perception that sometimes decisions are being made in the interests of our members and not in the interests of the public. We are proposing measures -- such as independent directors -- to try to ensure that that does not happen. We also hope to enshrine the stakeholder advisory council in legislation, and to make sure that the chair of that organization is on our board. The board is interested in public policy issues.
We also wish to enshrine the consultative committee in legislation. This committee requires our board, including, if our proposals are accepted, the independent directors and the stakeholder advisory council, to meet regularly with representatives of the minister. We will talk about developments in the payments system and about what we are doing, and we will hear any concerns they have about public policy issues. There will be many processes for trying to ensure that the minister will never have a concern that we are doing something that is not in the public interest.
Our board is satisfied that these processes will be comprehensive enough that they need not worry about giving the minister this power. We are trying to make decisions in the best public interest. People know that, and they are prepared to live with giving the minister this power, because they think that the processes will be such that the minister will never need to use it. They feel they are determined to make this work.
The Bank of Canada holds the chair of the CPA. It is also an important member, because the Bank of Canada processes payments on behalf of the government. It acts as a direct clearer, a processing party for government payments, and our board has not taken a position on that.
Senator Oliver: Should the chairmanship be controlled?
Mr. Hammond: The board has not taken a position on that issue, so I cannot express an opinion. I do not believe that they think that the chair should be occupied by one of the other financial institution members. I do not think they would be opposed to having it occupied by an independent director, but they have not taken that position.
Senator Oliver: In terms of good corporate governance, is it something you might wish to consider?
Mr. Hammond: It might be, but there is certainly no suggestion that one of the members other than the Bank of Canada should chair the board.
[Translation]
Senator Hervieux-Payette: Your organization is certainly envied. If it acted as a consulting agency to other countries and you sold the CPA's services, would you act as consultants in other jurisdictions?
[English]
Mr. Hammond: Senator, we do have many visitors from developing countries. We have had delegations through from many African countries, and from many Asian and South American countries. We do try to help them and to provide them with information on our systems. We operate the clearing and settlement system --the Interac network is not ours, but the clearing and settlement system is -- and we have indicated that if anyone wishes to use it, it can be available to them.
I have talked about our large-value transfer system, which we think is quite an excellent system. It will be fully implemented in January. As a matter of fact, one of our officers has been invited to Brazil next week to speak about our system. We do hope that we will be able to make that system available to other countries.
[Translation]
Senator Hervieux-Payette: Given our experience, the quality of our system and, especially, the globalization of markets, I get the impression that what we have developed in Canada may be of use to the international community and may allow us to be perceived as non-threatening players, unlike other jurisdictions.
Coming back to the question of the system's security, I have previously chaired a committee on computer crime. I would like you to reassure us about the measures you are taking to prevent the criminal world from entering your system. Is this one of your major preoccupations?
[English]
Mr. Hammond: It is certainly a major preoccupation. We are very concerned about the security of our clearing and settlement system. Our large-value transfer system, which we hope to have implemented in January, has the highest security possible. We have gone to the utmost level in attempting to ensure that, using encryption and a number of the other special technologies.
I am not an expert in this field. It has, however, been a high priority for our board and a high priority in building this system. It is certainly an issue that we always consider in developing our rules and modifying our clearing and settlement system.
[Translation]
Senator Hervieux-Payette: We are talking about new members, such as representatives of the life insurance industry, mutual funds and brokers. I know that one bone of contention in this area is the admission cost or the cost of entry for new members into the systems that have been developed. There were originally fewer than 160 members, but as new members have been added, have they paid an entry fee? And do you charge per transaction in your cost structure? Is it the banks that charge per transaction? In other words, if I make a withdrawal or a deposit or pay a bill, how does your organization's cost structure deal with me, as a citizen and a bank customer? I suppose you have charges, and the bank does as well. What is the cost distribution per transaction conducted through the system?
[English]
Mr. Hammond: The admission costs of the CPA are recovered from our members based on the number of transactions they put through our clearing and settlement system.
Our major institutions pay the largest share of our expenses. We do have a minimum fee that our members are required to pay which is $4,000 a year. Out of our approximately 130 members, about 70 would only pay that fee of $4,000. It has not been our practice to charge any new player. For example, some new deposit-taking institutions have come to Canada and have become CPA members. Like everybody else, they just pay the annual dues that are necessary to meet our expenses, based on the number of items that they put through the system. There has been no discussion at the board about requiring any special charge of new participants to cover the infrastructure.
With respect to our large-value transfer system, our members are eligible to participate in that system if they are willing to build the infrastructure necessary to connect to it. We are talking about large and important payments here, so only 16 institutions have chosen to become active participants in the LVTS.
The cost of building the CPA part of the system was paid for by our members at large through their dues, but it is being repaid starting this year by the 16 participants. In other words, the participants who use the system are repaying to the CPA over five years the total cost of building the LVTS, which is about $15 million. The amounts that they repay then reduce the dues that all of our members would otherwise pay.
If next year new members decide they want to participate in LVTS, then they must participate in the pay back of what is left of the $15 million over five years. In other words, if they join within five years, they must help pay back that cost, but they would only participate based on the number of payments that they put through the system. It is hard to imagine that a new player would have a tremendous number of payments.
[Translation]
Senator Hervieux-Payette: In fact, my specific question is this: do you charge a unit fee for every transaction, such as a payment, a withdrawal or a deposit? Is there a standard payment for all transactions?
[English]
Mr. Hammond: No. We do not necessarily charge for each transaction, but we do keep track of the number of items put through the system. We keep track of the number of cheques, for example. We have a number of streams in our clearing and settlement system. For some systems, a bulk amount is put through in certain circumstances and counts as only one item. So we do not necessarily keep track of each individual transaction that a bank or another deposit taking institution does. Members then must pay our expenses based on the number of items they put through. For our non-LVTS system, the cost of one payment item is two one-hundredths of a cent.
[Translation]
Senator Hervieux-Payette: Is the advent of electronic business a major change for you? When you talk of large-value transactions, what amount do you feel represents a very large-value transaction? Is it $50,000, $100,000, $1 million? What size transaction does the Club of Sixteen have to conduct to get into this system?
[English]
Mr. Hammond: There is no limit on the amount of a payment that can be put through the large-value transfer system. However, that system costs more because it is backed by collateral, et cetera. Most people probably would not use it except for a payment of in the order of $50,000 or more. You might want to use it for a house purchase transaction because then you are guaranteed finality of payment. You know that the payment has gone through. There is no limit on the amount put through.
I should like to come back to the question of electronic commerce, which is an issue we are interested in. We are developing this electronic payments system for large payments, but we are also very interested in the subject of payments over the Internet. We have set up a working group called the Emerging Payments Policy Working Group comprised of representatives of our members and staff. Doug Kreviazuk is the staff person working with that committee, which is looking at emerging payments issues, particularly payments over the Internet. The group is working with Industry Canada and Public Works and Government Services Canada to try to come up with recommendations regarding our role with respect to those types of payments.
Senator Callbeck: You referred in your presentation and in your written remarks to the perception held by some people that some CPA decisions tend to favour its members over those who are actually affected by the decisions. You also indicated that the MacKay task force makes recommendations for strengthening the oversight of the CPA.
One of our previous witnesses talked about his long association with the organization. He concluded that it should be an independent commission made up of people who were not associated with financial institutions. He felt that that was necessary in order to provide fairness to everybody involved. I should like to have your comments on that.
Mr. Hammond: There is a need for us to expand our board to include independent directors, and the board recognizes that. At the same time, it is very important to have the technical expertise around the table. We are talking about some very complex systems that are very important to the business community and to Canadians in general. We have a pretty good system that works well, but we need sitting around that table people who understand payments, who understand the business, and who can provide the expertise necessary to help us move forward. It is a combination of the two.
I want to emphasize that most of our rules are very technical. They are related to the business of clearing and selling payments, setting out the standards for payments, et cetera, and they do not have a lot of public policy implications. One rule, H4, has caused some problems. H4 deals with pre-authorized debits and third parties having access to your account. There is concern about that issue, and we are moving on that. We are doing some work that we think will respond to some of the concerns that have been raised and will still provide the security we think Canadians want in terms of third parties having access to their accounts.
The bottom line is that we still think we need the expertise. It is important to bring in independent directors and to put the existence of the stakeholder advisory council in the legislation. Make the chair a member of the board and make sure that we have those processes in place with finance; enshrine them in legislation. We think we can deal with the public policy issues and the perception issue in the context of the MacKay task force recommendations.
Senator Callbeck: The task force felt that this expertise could come from experts who would advise these independent people, but obviously you disagree with that.
Mr. Hammond: Our board would think that we need a combination of both.
Senator Kroft: This is an unusual presentation, because we live in a world where we are told everything is changing and nothing can stay the same, yet here we keep hearing that, other than fine tuning on governance issues and around the margins, basically we have something wonderful, the best in the world. I am immediately very suspicious.
You were asked by Senator Angus why it is that the Americans have not been able to get their act together to do all this as well as we have. That leads me to think that you do not automatically have a wonderful system; people make judgments or decisions that work or do not work.
As we consider the structure of our financial institution for the next millennium, I am concerned about what we might do that could mess it up. Do you foresee anything? Have people put forward ideas or proposals that you foresee might endanger the effectiveness, strength, and security of our system? Are there things that we should be watching out for? It is a neat package now, and we are tempted to say, "Settle a few little issues and keep up to date and the world will be fine," but I am not inclined to think that life is like that. What should we, as policy-makers, be watching out for that might be a threat to the effectiveness of our payments system?
The Chairman: In particular, is there anything about your computer systems that we ought to be worried about given all of the problems one hears about Y2K and what happens at the turn of the century?
Mr. Hammond: Maybe I could deal with the Y2K situation. It has been a major issue for the CPA board, and we have had a Y2K project plan in place for some time. At every board meeting the directors insist that we give them a progress report on where we stand.
We have our two major clearing and settlement systems. One is the automated clearing settlement system that supports everything but these large-value payments which we are talking about. There are some supporting systems as well. We have indeed already made the changes necessary to make that system Y2K compliant. We are in the last stages of testing, and the project plan calls for it to be Y2K ready and tested by the end of this year.
Even though the LVTS system was just built in the last two years, it is not yet Y2K ready. The code was Y2K compliant, but we had to buy some component software and hardware for the system that was not available Y2K compliant at the time it was purchased. The system actually began to operate in August, but without the collateral, because we needed a testing period. The actual computer system is working, but it is not fully Y2K compliant.
We were able to demonstrate that it works well and our members are very happy with it. Therefore, we have now essentially shut down the system and we are making those changes in the software and hardware components. It will be Y2K compliant by the end of the year and then it will be fully implemented. Our major activity, once we get through this testing in 1999, is refining and developing all of our contingency plans.
Some issues may be of concern. One is the question of who will participate in the payments system. At the end of the day, the various parties owe each other money, and if one of them cannot pay, there can be ramifications not only for the other players but also for you and me as customers of deposit-taking institutions.
One of the issues that would be of concern to us is ensuring that the expansion of membership -- to which we are not opposed -- is done in a prudent way. We are pleased to see that the task force has suggested that. They have set out the criteria that they think are appropriate, and we agree with those criteria. So we are pleased with that prudent approach.
However, there is a concern about the future of the system if it is not done in a prudent way.
As to other issues for the future, where we are headed with e-commerce is a question. As I said, everything is changing so quickly. We set up a task force or working group to look at all of those issues. We want to make sure that payments over the Internet, if we have them, are secure, et cetera. We do not want the reputation of our payments system damaged by future activities in this regard. That is an issue we are grappling with now. We are not saying that we should not have e-commerce; we must have it, but we want to make sure that it is done in the right way.
Senator Kroft: Again, those are basically management or housekeeping issues. You are not faced with pressures on any policy issues, and I appreciate the financial membership.
Mr. Hammond: We do not know where the world of e-commerce is headed. Things are developing so quickly that there may be some policy issues there.
Senator Joyal: First, where did you get your technology? Did you develop it in-house or did you buy it off the shelf in Canada or abroad?
Second, could you tell us what happened in the past? I look at the list of your membership. Some of your past members disappeared because they had financial trouble. Could you tell us, with examples, what happened when one of your customers defaulted? What are the red lights in the system? How does the system operate? If you can quote some examples in clear figures we would appreciate that.
Mr. Hammond: With respect to technology, we did build our own ACSS system.
The Chairman: What is that?
Mr. Hammond: The automated clearing settlement system. That is the system we have been using for all payments up until now, and it will continue for the non-LVTS payments. We also built our large-value transfer system. We got our members together and developed the functional specifications and so on and then built our own system.
Senator Joyal: Did you buy anything in the United States, for instance?
Mr. Hammond: No. We like to think that our large-value transfer system is a good one, because it provides the protection that is necessary but, at the same time, it minimizes collateral compared to some of the systems in other countries. This makes it less expensive, which is important because, as a country, we have fewer payments than the United States, for example.
We have had some members fail. I do not think any significant institution has failed in the time I have been with the CPA. Our by-laws set out a process for dealing with financial institutions that end up in trouble. We are not necessarily privy to the day-to-day problems that our members may be experiencing. We are not OSFI; we are not a supervisory agency, so we do not receive the financial information that they receive.
Our by-laws deal with circumstances where members can get into difficulty. Generally, under the existing bylaw, our members are divided into two categories, direct clearers and indirect clearers. Most of the institutions that failed would have been indirect clearers. They would have done their clearing and settlement through one of the 13 major institutions that is a direct clearer.
That direct clearer of course has a contractual relationship with the indirect clearer, to which we are not privy but, at the same time, that direct clearer would make sure that it was protecting its own interests. Direct clearers do not accept indirect clearers as clients unless they are satisfied that they are in a reasonable financial position. As their financial position deteriorates, they would probably ask for more and more collateral in order to process items on their behalf.
If an indirect clearer fails, say, at noon hour on a certain day, any cheques that are drawn on that indirect clearer that come through our clearing and settlement system to be settled the next day or that night would be returned to that institution.
It is not always possible to return payments. If you have withdrawn money from an ABM or used debits cards, those payments cannot be returned. They would have to go through the system and the direct clearer that is sponsoring that institution would have to absorb the loss. That is to say, if the collateral that the indirect clearer has put up is not enough to meet its clearing and settlement obligations at the end of the day, recognizing that the cheques that have not been processed would be returned, then the direct clearer must absorb the loss.
Senator Joyal: In the past, as you know, a life insurance company in Canada ran into serious problems. Do you feel that your system can protect your customers, particularly if we open up the system to a much larger number of people in the years to come?
Mr. Hammond: It is not the clearing and settlement system per se that will protect them. That is why we believe that, if we are to expand membership, it must be done prudently. We must be satisfied that, by and large, these new member organizations will be able to meet their obligations because the clearing and settlement system cannot protect them against the failure of a member, except to the extent that I indicated.
Senator Joyal: Do you have any special relationship with the office of the superintendent, the other body involved in monitoring the financial system?
Mr. Hammond: If the superintendent is taking action to close down a company, he will let us know immediately. There is a procedure in place to do that. However, because we are an organization with a large number of members, he cannot give us private information respecting what he is doing with the troubled company until he actually takes public action.
Having said that, most of the institutions that have ended up in difficulty have been the smaller institutions. They go through a direct clearer, so there is a lot of market intelligence about them out there. Most of the big institutions would know, or have a sense, that there may be a problem with a smaller institution and would take steps to protect themselves with respect to their clearing and settlement items.
Senator Austin: I would like to continue with Senator Joyal's line of questioning. Would you make a distinction between risk-taking institutions -- institutions that may find that their deposit and lending systems are mismatched by nature -- and money market mutual funds which do not lend but have a pot of cash? Is there any risk in drawing rights on a pot of cash?
Mr. Hammond: It depends on what the cash is. There are money market funds and money market funds. Certainly, with money market funds based on government securities, you can always have some fluctuations based on market values, but you would not think it would be so significant that the risk could not be handled in the payment system.
Senator Austin: What money market funds are more at risk?
Mr. Hammond: I was involved on the supervisory side of the business to do with Olympia and York. There were money market funds in the short term paper of Olympia and York. There could be some issues there, but it is not common.
Senator Austin: What is the role of the Bank of Canada in terms of access to liquidity support?
Mr. Hammond: There is a provision in the Bank of Canada Act that gives them the authority to provide emergency liquidity to any CPA member. You would have to ask them about their conditions, but there is that authority. If the CPA were expanded to include new members, my interpretation of the existing provision in the Bank of Canada Act is that they would have the authority to provide them with emergency liquidity on a secured basis.
I cannot say that they are required to do it. It is a question you must ask the Bank of Canada officials.
Senator Austin: When was the last time Bank of Canada liquidity support was required?
Mr. Hammond: I cannot tell you. It is not always public information. It is not information that they would, necessarily, share with us. That is confidential information.
Sometimes you can tell from the Bank of Canada statements that they have provided liquidity support to some institution, but you would not necessarily know the identity of the institution.
Senator Austin: How frequently in the payment system is the lender of last resort issue actually a reality?
Mr. Hammond: It is not a frequent occurrence. We do not always know.
Senator Austin: Two chartered banks in Western Canada failed, Northlands and CCB. Did those failures impact in any way on the payment system?
Mr. Hammond: That was before my involvement.
Senator Austin: We will not hold you responsible.
Mr. Hammond: I was involved in CIBC at that time, so I remember it well. My understanding is that a number of the tough litigious issues coming out of that failure related to payment system issues.
Senator Austin: That was also my understanding. How has the current system dealt with the issues that arose at that time? How have you adjusted the system so that the risk level is eliminated?
Mr. Hammond: My understanding is that they were not issues related to our clearing and settlement system. They were legal issues.
Senator Austin: Liability.
Mr. Hammond: Yes. However, I am not a lawyer, so I may be wrong.
Senator Austin: What interests me is the relationship between the direct and the indirect clearers. Obviously, the direct clearers, in performing the clearing function under a contract with indirect clearers, have enormous control over the behaviour, and therefore the commercial competitiveness of the indirect clearing system. You have a private and competitive financial entity making decisions that have a commercial impact on the secondary users.
Senator Callbeck asked you a rather interesting question when she asked whether the so-called level playing field in terms of the payment system required a regulatory agency at arms length from the users. In the current system you have a consortium of the players combining to make the system work. There were problems when the CBA alone was running a clearing system.
You told Senator Callbeck that, in your opinion, the system works quite well, and that an arms length regulatory system is not necessary which means that most of the issues between the direct members of the clearing system and the indirect members are resolved inside the CPA.
Mr. Hammond: I believe they are, although, recently, some institutions have raised the issue of whether the direct clearer concept continues to be necessary in the electronic world. For example, with LVTS, we do not have a direct and indirect concept. You either participate or you do not.
Senator Austin: There is a liquidity supplier of some kind even in the electronic world.
Mr. Hammond: That is right. In the electronic large value transfer system it would be the Bank of Canada. The direct-indirect clearer concept has served us well in the paper world, but as we move forward, we must determine if it continues to be necessary in the electronic world. Our members would acknowledge that there are some types of payments where it is necessary, and some others where it is not. It was certainly a practical way of doing things in the paper environment when the CPA was established. It is an issue that will require some consideration as we move forward.
Senator Austin: I appreciate your pointing to that particular area of development.
The Chairman: Thank you for a very thorough brief. You know my views on the governance issues of the CPA are fairly strong. You have made some very significant progress according to the proposal you have put forward today.
I would welcome Mr. Martel and Mr. Gagnon to our committee.
Senator W. David Angus (Acting Chairman) in the Chair.
[Translation]
The Acting Chairman: Our next witnesses will be the people from the Commission des valeurs mobilières du Québec, the Quebec Securities Commission, Mr. Jean Martel and Vice-President Viateur Gagnon. Sirs, I believe you have some preliminary remarks. Who will proceed? Mr. Martel, you may begin.
Mr. Jean Martel, President, Commission des valeurs mobilières du Québec: We are very pleased to be able to give you a certain number of comments on the MacKay report in our city, and we hope you will have a pleasant stay among us. I am the President of the Commission des valeurs mobilières du Québec, the CVMQ, to use our acronym.
First, I would like to offer you my sincerest thanks for your invitation to present our views here today as representatives of the CVMQ.
We are very pleased to accept your invitation, which, to my knowledge, is not all that common, and, if I can strike a historical note, I believe this is the first time a Quebec supervisory and control agency has had the pleasure of appearing before this committee.
The Acting Chairman: Mr. Martel, I can assure you that this is a great pleasure for us as well.
Mr. Martel: Considering the pleasure is mutual, it will be an even greater pleasure for us to express our reaction to the recent publication of the report of the Task Force on the Future of the Canadian Financial Services Sector, to which we will refer from time to time by its increasingly common name, the MacKay report.
However, Mr. Chairman, our reaction comes with a caveat, which is traditionally stated by Canadian market regulators in similar circumstances. The views we express here will be our own personal views and must not be considered as binding the Commission with respect to the future exercise of its powers.
As you can understand, Mr. Chairman, this goes without saying, given our role as an administrative tribunal and the, shall I say, legal framework in which those powers are exercised.
The Acting Chairman: Particularly in view of the upcoming election.
Mr. Martel: As a supervisory authority, we are always at arm's length from these things. The markets continue to operate. I am also seizing the opportunity you have afforded, and I believe it is important to say that our views are not binding on the Government of Quebec, even though we are its agent.
Having made that point, allow me to introduce the people who are with me here today. You have already introduced Mr. Viateur Gagnon, who is the Commission's Vice-President. The Chief of the Commission's Board of Commissioners, Mr. Daniel Laurion, is also here today.
We have produced a brief of its claims and we will be pleased to discuss it with committee members after a brief presentation we would like to make to highlight certain points we want to emphasize. To this end, we will proceed in the order in which the topics are addressed in our brief.
First, a few words on the task force's terms of reference and the way it understood them, as compared to the way we feel it should have understood them.
In our view, the task force's terms of reference convey a notion of the Canadian financial services industry which is essentially territorial, rather than jurisdictional, in approach. They don not refer to the federal financial services sector, but rather the Canadian sector.
Unlike what the task force has done, it is important to draw a clearer distinction between these two concepts to avoid any confusion. The two concepts are not interchangeable, and the report often tends to overlook this. For the purposes of our presentation, and in our view, the Canadian sector should include the securities industry, whereas the federal sector does not include it.
This distinction is important for a proper understanding of the report and is also central to the process of reflection which has begun in political, administrative and financial circles since the MacKay report was published.
We believe that this committee, as well as the other competent authorities that will have to act on the report, should refrain from analyzing the task force's recommendations solely from the standpoint of the regulation of federally incorporated financial institutions. They should analyze these recommendations and form their position after considering the problems of the Canadian sector as a whole, not simply those of the federal sector.
Whether we like it or not, these issues necessarily include what is done by provinces and securities regulation administrators in their sectors.
Our commission has chosen to help you correct this weakness in the report, Mr. Chairman, and we have come here today to shed some light on the issues.
The Acting Chairman: And we very much appreciate your presence at this stage, but are we to understand that you were not consulted at the time of the MacKay task force's studies?
Mr. Martel: No, Mr. Chairman. Neither Mr. MacKay nor any member of his task force nor the consultants cited in his report consulted us on any topic whatever.
The Acting Chairman: Then you are right to point out these weaknesses, and we appreciate your doing so.
Mr. Martel: I believe it is important to do so because we ultimately called this a somewhat limited vision of the industry's situation, and I believe we are here to try to correct that, or at least to give you information that will enable you to do so.
Now let us turn to the task force's recommendations.
The task force report expresses a vision of the Canadian financial services industry and recommends certain measures for the purpose of realizing that vision. It thus makes recommendations under four major themes: competition and competitiveness, increased consumer power, consumer trust in the conduct of financial institutions and an improved regulatory framework.
For discussion purposes, we propose to go a little further and focus our remarks on what we perceive are the main themes of the vision developed by the task force.
These main themes are enhanced competition, the ability to offer a broader range of financial products and services, a reform of sales practices through the adoption of a transparent and non-coercive approach and, lastly, eliminating overlap and regulatory inconsistencies.
The first subject we want to address is competition.
On this point, Mr. Chairman, I will say that, generally speaking, CVMQ is quite comfortable with the vision expressed by the task force of a more competitive market providing an arena for the further unregulated distribution of a range of financial products and services, an arena in which consumers are better informed.
Where the MacKay report talks about enhancing the ability of the institutions in place to compete against the banks, eliminating barriers to entry for new Canadian competitors, increasing the power of consumers by guaranteeing them free choice of their financial products and services through transparency and more accessible and effective remedial mechanisms, we are in complete agreement.
The task force's initial assumption is that there would not be any genuine competition without the discipline inspired by well-informed and vigilant consumers.
We feel this is an accurate observation of the operation of the financial services markets in general. It is true that, to foster genuine competition and customer migrations toward the most efficient supplier, consumers must be able to evaluate and compare the products and services offered.
In the securities markets, investors, who are recipients of advisory services, derive confidence from the fact that, with information, they can reach an informed judgment as to their participation in the market. This confidence enables them to play their role as capital suppliers to business more fully and to contribute to the proper operation of the market.
The second part of the vision offered by the MacKay task force is that financial institutions should be able to offer a broad range of products and levels of service and price.
In Quebec, every financial institution and full service broker -- and here we are talking about brokers authorized to offer all types of securities and advice, and which are members of a recognized self-regulating agency, a stock exchange or the Investment Dealers Association of Canada -- will soon be able to offer, in addition to what I would call their basic products, mutual funds, insurance products, financial planning services and certain other products whose distribution is subject to little or, in some instances, no regulation at all, such as certificates of deposit and government bonds.
But consumers are very well served in this area, and we believe that the report's recommendations to improve product distribution capabilities have virtually been implemented in our market in Quebec.
A third component of the MacKay vision is the adoption of non-coercive sales practices in the Canada financial services industry, that is to say practices that prohibit so-called tied sales and foster transparency and clear, intelligible and timely disclosure of product terms and conditions, related risk and conditions of sale.
This enhanced disclosure of information and transparency for consumers of financial products and services will enable consumers to obtain better information and thus to protect themselves by being able to assess the scope of transactions they conduct when they do business with their financial institutions.
This reasoning reflects in every respect what securities brokers have been doing for investors for decades. We are therefore completely in favour of it.
Mr. Chairman, it will probably not be a futile exercise to refer you once again to recent legislative developments in Quebec, more particularly the new legislation respecting the distribution of financial products and services, the development of which Mr. Gagnon was closely involved in prior to his appointment as Vice-President of our commission. Our brief describes some of the measures provided for by this legislation which are entirely consistent with the argument put forward by the task force. Mr. Gagnon will obviously be available to answer your questions.
Furthermore, Canadian securities authorities made considerable progress last year toward improving investor access to clear and complete information on securities offered. We focused on the area of mutual fund organizations and proposed measures to improve the presentation of prospectuses issued by them.
Our fear is that, with respect to what we consider a highly avant-gardiste regulatory framework for securities sales practices, and which will remain that way, additional standards are being imposed on participants and their related institutions, the concurrent enforcement of which would add to distributors' regulatory burden without generating any further benefits for consumers.
We can obviously state a premise which can be inferred quite easily: We want to protect consumers and must set standards accordingly, except that, if we create only disadvantages, we w ill not come out winners in the end. That is our position.
As regards the new consumer protection role that we would like the Office of the Superintendent of Financial Institutions to play, we wonder whether the tasks force's proposals are realistic.
OSFI is a prudential organization -- I believe the MacKay report acknowledges this fact -- whose culture and expertise have developed accordingly. Its priorities, reflexes and instincts are naturally directed toward safety, compliance with the undertakings of regulated organizations and their solvency. This is an organization whose structure is highly centralized and will be even more so if its governance structure is altered in accordance with the report's recommendations. As for its geographical presence, its proximity to consumers and its knowledge of the particular characteristics of each regional market in the country, these will have to be vastly improved to enable it to meet all the challenges the task force has thrown at it.
The CSAs consist of 12 securities administrators covering the entire country from home bases in each region, and their collective experience gives you an idea of the full extent of an operation designed to convert OSFI quickly and efficiently into an authority for monitoring business practices, or what the report calls "market conduct."
This experiment leads us to believe that we would do well to consider other avenues than that considered in the MacKay report before getting involved in an OSFI reform operation whose prospects for success, at least at the outset, we feel are uncertain.
The MacKay report proposes a reorganization of the regulatory framework, eliminating as far as possible all overlap, inconsistencies and non-compliance with standards resulting from multilateral regulatory activity that is not centralized or coordinated.
In the Canadian securities industry, we have made remarkable progress in the past two years, which I would call the post-national commission years, and we are in the process of establishing a unique collaborative model which kills three birds with one stone: by systematizing harmonization without forcing standardization, structuring collaborative efforts and integrating the process as though we were dealing with a single vast pan-Canadian organization.
The Canadian Securities Administrators have done this without having to turn their backs on their markets, stock exchanges, respective financial communities, investor populations or specific needs and, in particular, by retaining an independence of action that inspires creative discipline in every part of the whole.
This is an achievement that the task force would have done well to consider. This could be a good model to follow to reduce the disparities and successive layers of regulation criticized by the MacKay task force. Incidentally, Mr. Chairman, in the sustained international talks we conducted with my colleagues around the world, the Canadian model of cooperation and collaboration is setting a new standard. In the financial industry in the 1980s and 1990s, I remember we talked about Europe in 1992 and thought that it was marvellous and would work well. But now the Europeans are looking at what we do because very soon, particularly once the single currency is introduced, they will find themselves in a situation very similar to the one we were in a few years ago. Even at this level, I believe the models we have put in place in Canada can definitely inspire many other initiatives in the European community or in other regions of the world, which would be well advised to draw on the initiatives, efforts and resources of a number of countries.
We believe our recommendations on eliminating disparities and overlap conflict with other measures recommended in the MacKay report, and that the MacKay recommendations cannot be implemented without increasing those disparities or adding other monitoring authorities with jurisdiction over the same stakeholders.
For example, direct access to the payments system for mutual fund organizations and securities brokers, even though it is proposed in the report in response to apparently valid concerns, and is even being demanded by people in the securities industry, can nevertheless cause major conflict if the federal government finds itself indirectly regulating the securities business. My colleague Robert Hammond, who has previously testified and who is also an eminent former Canadian Superintendent of Insurance, definitely did not have this in mind, but I believe that, in the task force's clearly established thinking, we must avoid regulatory overlap and be very watchful as to what federal authorities might impose on these two types of stakeholders in the way of rules, given their concern for averting risk in the system.
If participants and members of the Canadian Payments Association are added, their financial situation will clearly have to be monitored, and the chances that they might jeopardize the system's proper operation will have to be watched as well. In addition, it is far from clear in our view that direct access to the payments system for mutual funds and brokers will not result in other types of risks that we must avert from a securities regulation standpoint. This factor will have to be evaluated.
On these issues, which I would characterize as delicate, because they are potential causes of conflicts over rules, we feel the report should be reviewed, subject to our being able to rely on an interjurisdictional dialogue of unusually high quality compared to the experience of the past 20 years. We are not overly optimistic. We can come back to this in a moment.
I would like to conclude by speaking briefly about one issue among many that regularly come back to haunt this committee: the Canadian voice in international forums concerning financial sector regulation.
This issue is specific to the securities industry since it is the only sector that has experienced significant development respecting the organized international exchanges, and where Canadian spokespersons are not federal public servants or federal government appointees.
Mr. Chairman, the report expressly states that it is unfortunate that Canada and its interests are not properly represented in the securities industry, unlike in the fields of banking and insurance, where OSFI is doing significant work, which it performs with a great deal of leadership.
We hope to see these remarks corrected or, at least, supplemented for the reasons stated in our brief, which show quite decisively that the task force's assessment does not err on the side of fairness or equity.
On that note, I would like to conclude this preliminary presentation, Mr. Chairman. I am at the committee's disposal to answer questions.
Senator Hervieux-Payette: Without wanting to dwell on the jurisdictional issue, I enjoyed your comments on the words "Canadian vs. federal." It is true that the distinction is not frequently made in the MacKay report. The business community does not see itself as falling within one field of jurisdiction or another and looks instead to its economic future. In this sense, your contribution is even more important.
Since the voice of consumers will not be heard as often as those of financial players -- you make specific recommendations on pages 4 and 6 of your presentation on the role the Office of the Superintendent of Financial Institutions has played in this area -- could you give us your recommendations as to how consumers or consumer groups might secure better protection in a field as complex as financial products?
We have seen an increase in the number of mutual funds and financial instruments in insurance and your field as well. Is your priority to protect consumers? Should consumer associations not be consolidated so that they can play the very significant role of ensuring that all players, including regulatory agencies, move in the right direction to protect consumers in as important a sector as the economic sector?
Mr. Martel: That is definitely a central concern, both in the theory of our mandate and in the mission of the various securities administrators, including the Commission des valeurs mobilières du Québec in particular, as well as in the mission to protect consumers through information.
Unfortunately, this is one of the sectors where we really have to make significant progress. Curiously, in the financial sector, we all too often see supervisory and control authorities that are distant from consumers and somewhat elitist, interacting instead with the first representatives that appear before them: industry people, institutions, market participants and those administering the infrastructures.
A very significant balance must be maintained and we must absolutely distance ourselves from participants' interests and from the structures because we ultimately have a mandate to ensure the market operates properly. We must also maintain a balance that ensures citizens, individuals, consumers and investors are not forgotten in all this. I like to think we have acquired extensive experience in this area. This attempt to strike a balance is apparent in everyday operations.
Consumer associations are somewhat dependent on this elitism in organizations. In Quebec, we have established a number of investor communication and education programs which bring us a good deal closer to consumer associations because they thus improve their awareness of the issues presented and their knowledge of the way the financial industry's institutions operate.
Incidentally, we are about to receive quite original powers in Canada. In public hearings or debates before it, the commission will have the power to require applicants or institutions pleading their case before you to ensure an investor spokesperson is present at their expense. In this way, we will have consumer associations that are more involved in the various issues in our industry and that want to express their views and will have the means to do so.
There are cases where the commission, as an administrative tribunal, finds itself on the horns of a number of different dilemmas. The commission's purpose is in a way to protect investors who are not present to be heard. This is where we can make progress.
Senator Hervieux-Payette: In the report, the role of the ombudsman is disputed as regards the banks. His role is played in two stages; that is to say there is one ombudsman within the banks and another outside responsible for resolving conflicts between the customer and the financial institution.
To my knowledge, there is no such mechanism in the securities field. However, if we look at the past five or 10 years, we see a major change in consumers. They have been shifting their assets and savings to securities firms.
What kinds of protection have been put in place to help consumers, experienced or otherwise, who complain that they have been misinformed, misadvised or mistreated or, worse, that they have received incomplete information on which they relied to buy securities, resulting in considerable losses? I remember one particular securities issue that people bought from a holding company, believing that they had purchased them from a well-known company, and thus lost a large portion of their savings.
What mechanisms are in place in your industry to resolve disputes between consumers and the institutions governed by you?
Mr. Martel: We are under the authority of the Quebec Ombudsman as regards the work of regulating and overseeing the securities markets.
The Acting Chairman: With a general mandate?
Mr. Martel: Yes. The Ombudsman has a general mandate to ensure that public and parapublic institutions operate properly and are efficient, somewhat like us becoming a legal person independent of the government. However, we nevertheless remain within his sphere of activity.
Every year in his report, the Ombudsman details the various complaints and questions he has received concerning the operation of the Commission and the market. This is a disciplinary organization.
The Ombudsman identifies deficiencies in a system, then acts as a go-between or catalyst to resolve them. We need monitoring authorities capable of taking coercive measures to secure compliance.
Senator Hervieux-Payette: Does the Quebec Ombudsman have the power to resolve a conflict between a consumer and a securities firm?
Mr. Martel: No. The Ombudsman looks at how the commission does its job, then recommends action, or reports on situations that have been referred to him, draws his conclusions based on an analysis and makes recommendations to the government, which publishes them in order to bring about legislative amendments and corrective measures so that those situations do not reoccur.
Senator Joyal: Under the legislation in Quebec, or in the other provinces, an ombudsman has no power of enforcement; he merely has a power to recommend. He does not have the authority to intervene directly and impose a change.
I do not necessarily want us to go into an assessment of the role of the Quebec Ombudsman, but we are all thinking about the comments Mr. Jacoby made some time ago concerning some of his recommendations which the government did not act on.
Is the existence of this position enough to guarantee consumer protection in view of the fact that he has no power to enforce recommendations?
Mr. Martel: In the securities field, I should say that the culture is that we rely on those who are closest to the operation of the markets to ensure a certain self-discipline, or what we call self-regulation.
The commission recognizes organizations that are more capable of performing this kind of function. Once these powers have been delegated, we then rely on the industry itself or the Association or the Stock Exchange, for example, to take the necessary steps to ensure that the client or final user of the system is not harmed and is treated as he would wish.
Senator Hervieux-Payette: Is there a national ombudsman organization overseeing and controlling financial transactions through banks, insurance companies or brokerages? This would be an organization independent of governments in which consumers have official representation on the board of directors, and so on.
In the Canadian situation, a similar organization could act precisely as a catalyst for consumers who cannot be given access to 12 different doors -- I am talking here about a specific transaction involving a financial product that, in some instances, may be sold in more than one place. A single door to ensure that consumers who believe they have been wronged can at least resort to an appeal mechanism after filing an official complaint with the organization they are in conflict with.
Mr. Viateur Gagnon, Vice-President, Commission des valeurs mobilières: The single service point role that the Canadian ombudsman would have may be filled to some degree by the future financial services office that Quebec will be establishing under Bill 188. The office's mandate is to play the role of a reference centre for complaints concerning the distribution of financial services. It is already here.
A consumer protection ombudsman is one part of a whole. First, there have to be rules. In securities, any intermediary that sells financial products must consider its clients' needs. Bill 188 has extended this rule to any intermediary, even in insurance, financial planning and mutual funds.
You do not have these rules when the banks sell deposits or even when they advise their clients to invest in various types of deposits. They are legally considered as vendors, not advisers. They are not required to sell a product that suits their clients.
Before introducing an ombudsman, perhaps we should begin by setting rules, because, if an ombudsman has no rules, he cannot improvise. He will therefore recommend that you establish rules.
The first step would not be just to have rules regarding transparency, but also to establish rules regarding the sale of products that suit clients' needs.
There is also a disciplinary system in Quebec. Not only are there rules, but, for securities brokers, there is an entire disciplinary mechanism, which may be the Commission or the Stock Exchange. Such mechanisms are also being established elsewhere, in Ontario, for the sale of mutual funds. There is a disciplinary mechanism as well.
In insurance, this will be changed in Quebec. There is also a disciplinary mechanism, which does not exist for the banks and major distributors. This all forms a whole. I am not convinced that introducing a Canadian ombudsman would not be a duplication of what we already have in Quebec, particularly since the passage of Bill 188 and its future implementation.
Mr. Martel: I would add that the new financial independence which the act has given us, as a result of which we are self-financed, enables us to develop programs or action plans that will be more of a driving force in investor and consumer information activities.
Investors and consumers will be much better informed about the existence and characteristics of these various disciplinary systems and will know more about their regulator. We are establishing the technical capability to shunt people to where they can find a solution to the problems they describe to us. We can do that.
The other factor is that, under Bill 188, we also have a disciplinary mechanism in that a trustee is also appointed by the commission to ensure that proceedings and disciplinary measures are ultimately instituted because self-regulation is a system that has limits.
Peer justice is all well and good when peers really want to get down to this task. I am not opposed to having an ombudsman, because that is an additional disciplinary element that ensures everyone does his work, but that takes people, like trustees. The trustee will receive complaints and institute proceedings. The trustee will also make sure rules are enforced if people do not obey them.
It would then be better to inform consumers that there are available remedies. The remedies are there, but the current system is a maze. As the "regulator", we are able to play a highly beneficial and effective role in this area.
Senator Hervieux-Payette: You are getting some free publicity this morning, at least for the mechanism in place. In your presentation, you told us that the Office of the Superintendent of Financial Institutions, a regulatory agency like your own, cannot play the same role and that it should not interfere in the consumer protection sector. You say you can play this role in services and the sector under your authority.
If you can play this role, why could the federal Office of the Superintendent of Financial Institutions not play a similar role to the one you play in organizations under its authority?
Mr. Martel: The solvency component and the prudential component of our mandate, as regards securities brokers, are different from the prudential component in the area of deposits, in banking, in trusts and even in insurance.
Compliance with commitments is there, but, for us, it is much more a question of ensuring that investments and orders are given to brokers, that the transactions they are authorized to make are made and that they can be attributed to an investor in particular.
If the broker ever disappears, we have to be able to trace the assets of the various clients. Mechanisms are in place for that, but this is not an absolutely demanding mandate compared to the other aspects of your mission.
The Office of the Superintendent of Financial Institutions bears the weight of its prudential role, but, if you want to offset that role to achieve a balance, that will require much greater efforts than what we are required to make, first of all.
Second, we have been in operation for 40 years. We have not had the ideal conditions over that entire period that would have enabled us to achieve an ideal combination for consumer protection and market protection or proper market operation, but experience is experience.
We have managed to develop a certain number of mechanisms that enable us somewhat to accommodate both sides of our mandate. OSFI could definitely do this if it were given the mandate, but what we are telling you in our mandate is that it is going to take a long time to get there. That is what we are telling you.
Senator Hervieux-Payette: In any case, we are far from sure that the superintendent will be able to consult you with your 40 years' experience in order to establish that kind of office, if ever our general consultation leads us to believe that that is how this kind of protection should be provided.
If we give the banking industry permission to sell insurance, with the problem of tied sales -- since this issue in Bill 1988 has been discussed -- where would be the best place for consumers wishing to complain, when the banks have forced them to buy a particular insurance policy?
Would they go to the ombudsman or the superintendent, who could have a trustee or another protection mechanism for consumers, who will have to have an arbitrator if they do not obtain satisfaction after discussing the matter with the banks?
Mr. Gagnon: Before answering that question, I would like to return to the previous one. The equivalent of OSFI in Quebec is the Inspector General of Financial Institutions, who focuses on the prudential rules and is interested in matters of institutional solvency.
The Commission des valeurs mobilières is for issuers. It stands between the consumer and securities issuers and regulates brokers.
The same question arises in Quebec. In view of the globalization of competition, with the phenomenon of similar products being offered virtually everywhere and the need for improvements to insurance, all the consumer protection issues have been raised and the Minister has not responded to them. He announced that he was going to appoint a working committee to consider the question: Should we not make the Commission an organization that should monitor market conduct in all areas, including insurance?
Should we do that or should we merge the Inspector and the Commission to create a kind of OSFI, which would focus on solvency as well as market conduct? Our answer was more to expand the Commission's mandate, somewhat like in Australia -- the MacKay report refers to this -- to make it an organization that is concerned more with market conduct in insurance and securities matters.
This was somewhat where Quebec was headed. The same question arises for Canada.
Senator Joyal: You mentioned that you were not invited either directly or indirectly by the MacKay task force. Do you know whether your colleagues in the other province were invited in one way or another?
Mr. Martel: I am informed by my colleague at the OSI, the Ontario Securities Commission, that they had a certain number of discussions or meetings with Mr. MacKay. I could not say whether the task force's support staff and OSI's staff worked together on that. I do not think so.
Senator Joyal: You do not know whether they presented a brief, which obviously you have not read or seen since?
Mr. Martel: I believe information circulates quite well within the Canadian Securities Administrators, and, if there had been a brief or consultation, all the Canadian commissions would have been involved in it. As I was not involved and was not part of the process, I do not believe there was a brief.
Senator Joyal: Is there a kind of Canadian organization for the market as a whole, enabling you to discuss issues with your colleagues from other provinces? I imagine the answer is yes, but I want to hear you discuss this so that we can establish the framework from my next question.
Mr. Martel: Absolutely. The Canadian Securities Administrators, or CSAs as they are always called, form an informal forum that has been in existence for a long time. It is quite real, but not a corporate body.
The first CSA resulted from a decision made in the 1930s. It is an organization that has evolved enormously over the years. We are in the process of dividing up the task addressing a certain number of pan-Canadian challenges. We meet four times a year and have conference calls several hours long to discuss issues of common interest to all Canadian markets.
The Canadian securities markets are well integrated. Several national firms control extremely large volumes of market transactions. We have to respond to that.
The same is true for the issuers: big issuers always try to deal with the Canadian market most of the time when they want to do national issues.
We absolutely have to deal with these situations and that is why we divide up the task and get organized to achieve the full potential of the resources we have together.
I will give you an example that may be relevant to this discussion. We had our last CSA meeting in Charlottetown, Prince Edward Island, two or three weeks ago. Quebec was instructed by the group of Canadian Securities Administrators to develop a plan under which we would provide the entire insider report regulation implementation service for all of Canada.
We will run the system and ultimately ensure compliance with the various statutes and regulations in effect in Canada's jurisdictions. We will publish the information submitted by those parties with significant interests in the companies.
Quebec handles or will handle this with the consent of the other Canadian Securities Administrators. One of the benefits of self-financing is that we make sure we carry out our mandate on a much more efficient basis than previously.
Senator Joyal: Was this association or group consulted by the MacKay task force?
Mr. Martel: Not to my knowledge.
Senator Joyal: On page 7 of your brief, you describe the situation of a unique collaborative model. You spoke of a non-corporate, but nevertheless professional association. Did you develop this model within that association? In accordance with the terms of your mandate, which concerns the future, should the Canadian service begin dealing with this association for the purpose of implementing the MacKay report's suggestions concerning securities?
Mr. Martel: It would be helpful to point out that there is an appendix to our formal brief. There are my speaking notes, but there is also a brief prepared by the commission. On page 23 of our brief, you will find the mutual reliance system or the model you are referring to. We call this the Mutual Reliance Review System. You will see a statement and a description of the characteristic principles.
This enables an issuer to go to the Commission of the jurisdiction where it has its head office. It goes to that commission and the commission concerned does the work for all the commissions. It takes responsibility for gathering the comments of the other jurisdictions and for interacting with the issuer, but the issuer only does business with its commission.
Senator Joyal: With its territorial commission?
Mr. Martel: Its preferred commission. We adopted the head office criterion because we thought it did the most justice to the corporate decisions that are made, but it is a single service point that provides access to the Canadian market as a whole and to the entire regulatory framework that we collectively comply with. This is for the issuers themselves.
For representatives and brokers, it is exactly the same principle. They can go see the commission that governs them, or in the jurisdiction where they have their head office or where they are established. Then a Quebec representative will come and see the Commission des valeurs mobilières du Québec and it will give it the service. If it wants to do business in more than one province or in all provinces and both territories, it will obtain the service in Quebec.
Lastly, we went even further because we have a hybrid status, that is to say our organization focuses on operations; we review the prospectuses, we issue the visas and we register intermediaries. We are also an administrative tribunal.
It is possible to apply to the tribunal of each of the commissions for discretionary relief. We have the power to grant relief from the application of certain rules if we are convinced that this is in the public interest or not contrary to investor interests. Applications for relief are frequently filed considering the pan-Canadian scope of our clients' operations. Consequently, this grants more than one regulator or commission jurisdiction. The most common applications for relief are also covered by the Mutual Reliance Review System, so that, if you are seeking relief for an operation involving all Canadian jurisdictions, you may apply to the province or commission where you have ties. In the case of a Canadian issuer, it is the head office commission. In the case of a foreign issuer, there must be certain factors linking the foreign applicant to the jurisdiction to which it applies, but this is nevertheless still a single service point.
In other words, each securities commission exercises its jurisdiction in accordance with its authority. This is what enables us, as it were, to kill two birds with one stone, to work both sides of the fence. In any case, the major commissions have their own stock exchanges to monitor. We know our community better than anyone.
I would say there are administrative benefits, efficiencies involved in this. So we do not lose out because we have a system in which we regulate in a fairly identical manner on the basis of the regulatory common denominators that we determine. Our action is integrated across Canada, but we nevertheless have jurisdiction. We can do a certain number of things in our jurisdiction, things that other commissions elsewhere in Canada very regularly draw on.
We have experimentation centres virtually everywhere. In the West, you have a certain approach, a certain type of consumer and investor. In Quebec, it is another type; in Ontario, it is another type, and in the Maritimes, it is also another type of consumer. We can accommodate this, while maintaining the efficiency of a well-integrated system in which the rules are known. The appendix contains the ground rules that apply to everyone. People can rely on this.
Senator Joyal: In the next few years, will this organization with common objectives, which is aiming to achieve a certain form of harmonization of obligations and to monitor protection markets, be institutionally formalized for greater flexibility and market reliability? Because those are ultimately the two objectives we are attempting to achieve through the national commission project.
Mr. Martel: That is a question that is been around for a number of years and has perhaps been asked more insistently and relevantly in the past two years. In my view, there is every reason for that to be so.
We currently have to finance a number of joint efforts. If, for example, we want to integrate our various data processing systems and computer systems in order to act as one large firm, build bridges between the data bases, and so on, we have to hire consultants. We really have to draw up computer master plans for this integration and finance it all. At present, four commissions in Canada are self-financed: Quebec, Ontario, Alberta and British Columbia. We are putting our resources to work to carry out efforts to redeploy and generate benefits for all the various commissions in Canada.
At one point, we will have to be able to share the load -- the costs that regulation entails for us -- fairly across the country. The creation of a more formal organization would probably be a solution. When we talk about a more formal organization, we mean a non-profit corporation guided by a certain number of bylaws that would accommodate the situations of Canadian markets. The only commissions that are not self-financed have budgets allocated by their respective legislature.
So the idea is to establish an association that virtually cannot be ignored, which you would have no choice but to join if you wanted to be an effective regulator in your jurisdiction. That would probably lead everybody to contribute to its financing in the form of dues.
[English]
Senator Kirby: I have two questions based on pages 14 to 17 of your report. One is on financial holding companies and the other is on allowing mutual funds and securities dealers into the Canadian payments system.
As you correctly pointed out in your report, when this committee, in 1990, recommended that financial holding companies be allowed as a means of providing additional organizational flexibility to businesses, we also pointed out that they had to be carefully structured in order to avoid potential federal-provincial jurisdiction conflicts.
You make reference to that and then on page 15 you present your solution:
It would therefore be sufficient, in our view, to allow an equivalent power if, as the Report proposes, the acquisition by the same person of the voting shares of a bank were to become possible.
I do not know what you mean by "equivalent power," but the broader question is: Given the desirability of maximizing flexibility for businesses in the financial services sector -- and clearly a holding company of some form does that -- what do we have to do federally to ensure that the holding company becomes an option available to the private sector while simultaneously avoiding a conflict in federal-provincial jurisdiction? Would a particular structure for a holding company solve that problem?
[Translation]
Mr. Gagnon: No, I would not say there is any particular structure for a holding company that should be desired, regardless of the authority. Two banks in Quebec have subsidiaries: trust companies and provincially incorporated insurance companies. They also have securities brokers and securities advisers who are under provincial jurisdiction. If the opportunity for restructuring arises in order to obtain more flexibility, we will have a holding company and a federal bank and the other institutions will be under provincial jurisdiction. If you pass a statute requiring federal incorporation and regulating the holding company, you are telling provincial supervisory authorities that they no longer have the right to examine because it is usually the federal government that examines financial institutions or federally regulated organizations. So in a way you subordinate the provincial regulatory authorities to a federal authority to obtain information.
So the idea is to abandon any idea of mandatory federal incorporation. They must be left free to incorporate wherever they want, even outside the country. We think you can impose conditions, ownership standards, capital conditions or any other condition. These are rules aimed at shareholders and holding companies, not banks or institutions.
The Bank Act contains rules for shareholders. A holding company that is a shareholder will have to obtain the Minister's permission to exceed the 10 per cent limit. The act will have to provide that the Minister can impose ownership conditions. The act may provide that, in order to hold more than 10 per cent, the holding company must comply with the same ownership rules and meet the same capital requirements as a bank. There are ways to do this in the Bank Act so that, in administrative terms, the federal government can ensure holding companies obey the rules. In the provisions concerning shareholders, the provincial authority could also impose its rules, without any incorporation obligation. This is merely a technical matter, but its purpose is to ensure that federal and provincial regulatory agencies have access. I believe there is a model in the United States under which holding companies are not regulated and every securities and insurance administrator has access to all the information it needs. Through these rules, we could achieve exactly the same effect for shareholders.
Mr. Martel: I would take the liberty of adding that the potential federal-provincial conflict to which this committee referred in 1990, and to which your question alludes, was over the concern of supervisory authorities to ensure that, in the control structure of the financial institution that regulates them, there are no risks that could circumvent or jeopardize compliance with the rules by regulated financial institutions. This has previously been debated, in the United States and elsewhere. It is the institutional regulator that is controlled by the holding company. It wants to gain access to information and to be able to check to ensure there are no risks in the ownership structure of which it was not aware.
There may also be other more positive concerns such as the holding company's capitalization capability for the purpose of promoting the capitalization of the financial institution that is controlled. However, these are supervision concerns or problems, and they may be resolved among the various regulatory authorities.
On certain aspects, we have similar concerns to those of other supervisory authorities. If we had the power to impose a certain number of requirements on the holding company, that would definitely provoke a discussion. You must regulate to the extent that everyone agrees on a certain ownership structure, but it is ultimately up to Parliament to decide.
[English]
Senator Kirby: That is a good summary. I understand the U.S. approach on that, so I see what can be done. At the very end of your comments you raised the issue of having mutual funds and securities dealers come into the Canadian Payments Association. Everybody else we have talked to thinks this is a wonderful idea, but I am curious about something. You say that it is by no means clear that direct access to the payments system for mutual funds and securities dealers may not present other types of risk that require securities regulation to prevent them. What other types of risk could arise as a result of allowing mutual funds and securities dealers into the Canadian banking system?
[Translation]
Mr. Martel: We ask ourselves the same question. Remember Bill C-100 on clearing and settlement. At the time, we had hotly disputed the wisdom of making the Bank of Canada responsible for structuring the system risk in within the securities clearing and settlement system. You will remember certain concerns that were expressed at the time such as, "If you make the definition of system risk as broad as that, does that mean that the Bank of Canada will look into the clearing system to see what is going on among the brokers?"
For a large broker, I would say that the concern can emerge to the extent that the debate on mergers encourages it. We were considering these questions and I think the facts are in my favour. The talks showed that it was not clear there could not be a certain number of duplications to the extent that people would not have been aware that there should not have been any. So in the case of securities brokers eventually joining the Canadian Payments Association, we hope that a situation similar to the one that arose at the time of the discussions on the clearing and settlement of securities transactions will reoccur.
Everyone involved in this is definitely in good faith and no one wants a system disturbed by improper transactions by its members. What is good for the settlement of securities transactions is good for the payments system. We do not deny at the outset that there may be significant benefits for brokers or mutual funds companies. We are saying that we will have to talk because this has to work for us as well.
[English]
Senator Kirby: We are in the same place, in that we both think it is a good idea. Essentially, you made the point that it may not be as pure, easy and simple as it is generally portrayed to be.
[Translation]
Mr. Martel: It may be a painful birth.
The Acting Chairman: The next witness will be Mr. Jean Roy of the École des Hautes Études Commerciales of the University of Montreal. Senator Kirby will resume the Chair.
Senator Michael Kirby (the Chairman) resuming the Chair.
[English]
The Chairman: Thank you very much for coming, Professor Roy. In light of the time, rather than read your eight pages, you could hit the highlights and then we can ask you some questions. Think of it as a situation where suddenly your lecture period was shortened.
[Translation]
Mr. Jean Roy, Professor, École des Hautes études commerciales: First, I would like to thank you for this opportunity to express my opinion on the MacKay report. My report is divided in two parts. In the first part, I will identify the report's overall strengths and weaknesses as I see them, and, in the second, I will offer some opinions on specific proposals by the task force.
The main strength of the MacKay report, in my opinion, is its balance. I have identified four main types of balance that have been struck. First, there is a balance between change and stability. What is most striking are the changes, but many aspects have been preserved and will ensure the Canadian financial system is solvent and stable. Second, a new balance will be struck between suppliers and consumers of financial services. Certain measures could create stronger suppliers and the task force was very careful in attempting to strengthen the position of consumers. Third, there is a balance between future suppliers of financial services, large, medium and small, be they limited companies, mutual companies or cooperatives. I think this is very good. Last, I believe there is a balance among national interests. Certain measures, it must be pointed out, remain somewhat protectionist and the report explains why we are right to adopt this attitude in the case of the financial system and why we are more open to the international dimension.
The second strength, in my view, is the report's scope. A number of issues are addressed and the report is very well supported by 18 research reports. Now that all these positive qualities have been mentioned, there remain the report's weaknesses. In my view, the report is not completely exhaustive, given the challenge of analyzing the entire financial system.
On certain points such as compensation plans, the task force was unable to make unequivocal recommendations. Other issues are not sufficiently addressed, and here I refer to the functional approach to regulation, national implications, international risks taken by Canadian financial institutions and the regulatory framework of the securities industry. All in all, I believe this is an excellent report, and I support the vast majority of the proposals made in it. However, in this brief, I will emphasize instead the points on which I differ and those that were not sufficiently deal with by the task force.
[English]
The proposals in this report are likely to affect the structure of the financial sector because they modify the permissible activities for institutions and the rules that govern ownership. I am in favour of all of the proposals that broaden the activities permitted to financial institutions -- namely, insurance sales in bank branches, automobile leasing, and liberalization of access to the payments system.
Overall, I am also in agreement with most of the provisions covering ownership, including priority given to Canadian ownership, maintenance of the principle of largely distributed ownership for large institutions, and openness vis-à-vis groups and holding companies. Nevertheless, I must express certain reservations, particularly regarding the evolution of the 10-per-cent rule.
I am concerned that the flexibility introduced will erode that rule to the extent that it will ultimately be eliminated entirely. I support the idea of allowing 100 per cent ownership of institutions with less than $1 billion in capital. I also endorse the concept of a transition class for institutions that owe between $1 billion and $5 billion in capital. However, I propose that this class be split in two; 65 per cent ownership should be permitted only for capital of less than $2.5 billion. For the segment between $2.5 billion and $5 billion, the ownership limit should be lowered to 35 per cent.
According to the task force's "Background Paper No.2," there are currently four financial institutions with federal charters that fall into the $1 billion to $5 billion capitalization range. Referring to Exhibit 2.6 on page 35, they are identified as the National Bank, CT Financial, Canada Life, and Mutual Life. I do not approve of the idea that a single shareholder could take legal control of those institutions. A position of 35 per cent would be sufficient to ensure that the principal shareholder could exert significant control over these companies.
The reason I take this position is that it is very difficult to analyze the effect of concentration in Canada. I very much look forward to the report of the Competition Bureau, but my guess is that by now they must have a really hard time coming to a global conclusion, because in some areas it is clearly very competitive and in other areas it is probably less so.
The great virtue of the 10 per cent rule is that it ensures that if, and I underline "if," there are oligopoly profits or profits coming from concentration, they are redistributed. If we take away this rule then we allow those excess profits to be concentrated in one shareholder.
Furthermore, I somewhat oppose the flexibility measures proposed by the task force for the class of institutions that hold over $5 billion in capital. In my opinion, the 10 per cent rule has very interesting advantages and it is important that this rule be maintained with sufficient rigour. Moreover, it is also true that it entails disadvantages, such as granting more power to managers vis-à-vis a fragmented group of shareholders. I am consequently slightly disappointed that the task force does not devote more attention to this problem and that it has not examined in greater detail the antidote represented by cumulative voting, which perhaps should be imposed on large institutions.
As for the merger examination process, I agree entirely with the task force's position. I regret only that the task force did not adequately specify the requirements related to the contents of the social-impact document that large institutions must submit if they wish to merge.
Last, McKinsey and Company, in their research report titled "The Changing Landscape for Canadian Financial Services," identified three strategies that government could apply with regard to the financial sector. The first is that found in the United States and the United Kingdom, which is an attitude of non-intervention in the area of competition. The second strategy, that of Switzerland and Holland, supports the emergence of national and international champions. The third, seen in Australia, involves adopting a moderate approach that balances the promotion of competition and the advantages of having major players on the international scene.
I am disappointed that the task force did not deem it fitting to examine in its final report the advantages and disadvantages of each of these strategies for Canada. I personally prefer the second option. Given the size of Canada on the global scale, the emergence of national champions could have numerous advantages. The first is the power to create high-level employment in Canada linked to the export of our financial services. The second is having a strong banking network that could support Canadian companies abroad.
Last, as your committee noted in its comparative study of financial regulatory regimes, the presence of major financial companies on the international level would enhance the power of the Canadian government in it interventions with international regulatory bodies. Moreover, the export of financial services, in particular those related to credit, carries substantial risk, including the possibility of importing foreign economic problems. Therefore, we must take precautions against this eventuality. In this respect, the new holding company mechanism offers interesting possibilities. The example of the ING Bank in Holland could be used effectively as a model for Canadian banks. At its apex, a holding corporation possesses a subsidiary in charge of national operations and, in parallel, another subsidiary that carries out international activities. It separates the risks while sheltering the national subsidiary to a certain extent from risks taken overseas. The government could envision imposing this structure.
The MacKay report emphasizes the importance of the social mission of financial institutions. It requests that all Canadians be granted access to financial services and recommends that all deposit institutions and life insurance companies regulated at the federal level periodically issue reports on the activities they undertake as part of their responsibilities to the population. In reality, the task force proposes a flexible Canadian version of the U.S. Community Reinvestment Act.
Those recommendations are highly laudable and very difficult to oppose. Nonetheless, it is important to bear in mind that those measures may place the large Canadian institutions in a difficult situation. On the one hand they are being asked to play a social role, and on the other hand they risk being placed by the new financial environment in competition with various types of financing companies, some from abroad, that will not be subject to the same obligations. In my opinion, this problem should be examined in greater detail to ensure that the competition conditions are truly identical for all participants.
The report proposes expanding the role of the Canadian banking ombudsman so that it will cover all financial services. I fully support this recommendation. In addition, I believe that the role of the ombudsman should be extended to the entire field of consumer protection and not be restricted to mediation of individual problems. It seems clear to me that consumer protection at the group level and at the individual level are naturally complementary. The accumulation of individual problems of the same type leads to the proposal of collective measures. These group measures consequently will reduce the load of individual cases to be processed. Therefore, I suggest that the ombudsman examine questions of contract transparency protection, tied selling transactions and financial services access standards.
[Translation]
Evolution of public institutions: The MacKay report proposes that the responsibilities of the Office of the Superintendent of Financial Institutions be expanded to include a consumer protection section. I disagree with this recommendation because it places the OSFI in a conflict situation. The primary mission of the OSFI is to ensure the stability and the solvency of the Canadian financial system. In fact, the profitability of institutions is a critical factor in ensuring their solvency. Moreover, several consumer protection measures may well have a negative impact on the profitability of financial institutions and consequently on their solvency. If the OSFI was conferred an additional mandate of ensuring consumer protection, it would regularly find itself in situations that bring into conflict its responsibility toward ensuring the solvency of institutions and that of consumer protection. Moreover, professors Kryzanowski and Roberts' international study of regulatory and supervisory organizations, presented in Appendix 2 of the OSFI brief to the Task Force, clearly states the problems linked to a dual mission. In consequence, I consider it more practical to confer the consumer protection mandate on an Ombudsman with expanded functions, as mentioned above.
Regarding the insurance plans for consumers, the task force recommends that the Canada Deposit Insurance Corporation be gradually merged with the Canadian Life and Health Insurance Compensation Corporation to form a public corporation, or a private corporation. On the one hand, I consider it unfortunate that the Task Force was not able to issue a clearer recommendation. On the other hand, I fail to understand why the Task Force has not endorsed the proposal described in the brief of February 1998 submitted by the Canadian Life and Health Insurance Association. In this brief, the CLHIA suggested privatizing the current CDIC to put it on the same footing as the Comcorp and the two other private compensation regimes: the Property and Casualty Insurance Compensation Corporation and the Canadian Investor Protection Fund. Moreover, the CLHIA advocated the creation of a public organization that would supervise compensation plans. This body could intervene if a regime experienced financial difficulty. In my opinion, this proposal is more appealing because it would standardize the consumer protection conditions for the financial services sector as a whole. I therefore suggest that the government reconsider this proposal by the CLHIA.
In its discussion paper of June 1997, the Task Force raised the question of securities regulation (point 4.10, p. 42). Specifically, it asked the following question:
If a national securities commission fails to emerge, or is of limited effect, are there other initiatives the federal government should take in order to address the same issues?
This question is very important. A modern financial system cannot be analyzed without consideration of the securities sector. Unfortunately, most probably for constitutional and political reasons, the MacKay task force has not addressed this question in its final report. I personally believe it would be beneficial for the country to have a central agency regulate securities. I believe that we must accept the cohabitation of provincial and national institutions. Therefore, citizens must be granted the right to select the regulatory body to which they submit, the same way that one can choose a provincial or federal charter when forming a trust company or insurance company. A context is thus created whereby competition can emerge between the regulators. This is in fact desirable, to make the market more efficient and more dynamic. One solution is for the federal government to consider bartering power with the provinces, whereby the provincial governments would accept federal government intervention in the securities sector in exchange for the right to grant regional bank charters.
Furthermore, it is disheartening to note that the task force has decided not to analyze the question of the functional approach toward regulation. It is clear that the solvency conditions will ensure that it will always be necessary to have a certain amount of institutional regulation. Regulation by activity, or functional regulation, offers considerable advantages. For one, it can ensure a more stable and equitable regulatory framework. The task force should have examined the characteristics of the two approaches toward regulation and should have considered the possibilities of combining them, to take advantage of the benefits offered by each approach.
In conclusion, overall, the task force report adequately responds to financial institutions' need to adapt to the new environment. Its major strength is the equilibrium it advocates. However, its main shortcoming is its overlooking of certain themes that are relevant to the current reform. All in all, it nonetheless makes a highly significant contribution to the evolution of the structure of the Canadian financial sector.
In this commentary, I have stressed certain points upon which my opinion diverged somewhat from the report. In particular, I noted that the rules of ownership should not be so lenient with regard to the concentration of ownership. I would prefer that the OSFI not receive the mandate of consumer protection and that this duty be conferred instead on an Ombudsman with expanded functions. Lastly, I support privatization of the CDIC and the putting in place of a system that would treat all compensation regimes in the financial sector on a uniform basis.
Despite the undeniable quality of the MacKay report, it is fortunate that the government has provided this opportunity to review its recommendations before applying them. My comments are intended to contribute constructively to this collective exercise.
[English]
The Chairman: I wish to ask you a question related to your comments on page 5, which deal with the report's proposal for community accountability statements. I was quite surprised that an economist in a business school would describe the community accountability statements as "highly laudable." It seems to me that they are interventionist of the first order, that they clearly envision an element of a regulatory system, as opposed to market forces, being used as the discipline in the marketplace.
First of all, I was surprised that that would be your point of view. Then you said -- and now I am really confused -- that financial institutions on the one hand are being asked to play a social role. This is true, but I should like you to explain why they ought to do that. On the other hand, you say that the new financial environment might place these financial institutions in competition with various other types of financing companies that would not be subject to the same obligations. Presumably, this creates a significantly unlevel playing field. Given that you understand the nature of the unlevel playing field that would result, I am curious about why you think we ought to be asking financial institutions to fulfil a social obligation other than the kinds of social obligation we impose on all sorts of businesses, such as environmental regulation. Why have we strayed from the market into social regulations?
Mr. Roy: It seems to me that the first social obligation of financial institutions is to ensure access to the system for everybody. Clearly, this means that they must accept customers who probably will not be profitable. There is in the payments system a dimension of public utility, and more and more consumer groups are putting pressure on institutions to give everyone access to that system. We know that in France and in Belgium they have already written charters that ensure that all residents are entitled to open an account at their wish. That is the first dimension.
I say it is laudable, because I believe it is a situation of compromise. We must be very careful in the way this compromise will be designed. What the MacKay report proposes is a "soft approach" -- not yet regulation, but just disclosure, just making it clearer to institutions that they must fulfil this role. We hope that they will respond to this social pressure and will report, and we hope that these voluntary or to some extent unregulated reports will be enough and that we will not need to go to a more rigid approach.
The Chairman: I agree with the first part of your statement, which says that, in a sense, financial services have an element of public utility, and therefore one wants an element of universality. However, I do not understand the connection between that and the community accountability statement.
Let me take it outside the realm of financial services. Bell Canada, which is a utility, is not required, nor have I ever heard it suggested that it ought to be required, to provide some form of community accountability statement. Major natural-resource industries, such as forestry, which are the dominant employer in many communities, are not required to publish annually a statement regarding what they do in those communities.
Assuming we dealt with your public utility issue, which is a universal-access issue, why should we subject financial institutions to a different standard of public accountability than we require even of monopolies?
Mr. Roy: That is a matter of context. It is clear that we are influenced by what is going on in the United States. It is clear also that the MacKay report is a reaction especially to la coalition canadienne pour le réinvestissement communautaire, which had a very extensive memoir war on that topic. I feel that those social elements may have put pressure on the MacKay report to propose that. I would guess that some people will hope that it is just a first step, that we can ask that of our big banks because they can afford it, and eventually similar demands can be made of other companies. There is political and social pressure on companies to be socially responsible. It may be only a first step.
The Chairman: My objection is not to the notion of social responsibility, but I am concerned about imposing on one sector of the economy conditions that we do not impose on anyone else. I hear your comment about the U.S. situation, for example, but many things are true of U.S. financial services that are not true of Canadian ones, and most of us would not want those elements in Canada. I do not know why we would pick this particular one. I am not arguing that it would not be enormously politically popular, but here we are trying to look at public policy as opposed to narrow politics, and I have yet to find anyone who can explain to me why it a good public policy.
[Translation]
Senator Joyal: I would like to come back to the part of your brief where you point out the MacKay report's weaknesses. The representatives of the Commission des valeurs mobilières du Québec, whom we met this morning, discussed a certain number of those weaknesses and you have confirmed them in your brief. I would like to focus on an aspect that is extremely important and was not very frequently raised in previous testimony, and I cite your brief at page 3:
...the national implications of international risks taken by Canadian institutions...
You raised these discussion points, which are an essential element of financial services policy and management for the future, since, with the globalization of capital markets, this is an activity that will become increasingly important. We have met the representatives of the major banks, who outlined their foreign operations. For a number of large financial institutions, these activities represent a very significant percentage of their profits. Consequently, if this sector is to remain at its current level and eventually even to develop in future, this must be an essential part of our concerns. How do you explain that the MacKay task force did not pay more attention and suggest structural adjustments in this area?
Mr. Roy: I have no explanation. It is a puzzle for me as well.
Senator Joyal: In the first full paragraph on page 5 of your brief, you describe suggestions that were implemented in Holland, at ING, separating domestic and international operations so as to better distinguish between the risks that Canadian banks or financial institutions might take outside Canada and the way we could put a protection system in place for both Canadian depositors and the Canadian public. Because, ultimately, if a bank or financial institution were to encounter difficulties outside Canada, those problems could affect the status of shareholders, but also affect consumers, the clients of that bank and Canadian taxpayers as a whole. How do you perceive a system in which we could achieve better protection for consumers and Canadian taxpayers in this area?
Mr. Roy: I think the example of ING bank is a very interesting one. Clearly, in a forced separation, additional costs can be imposed on the businesses in question. I would say that, from a Canadian standpoint, these regulatory costs may be worth it, precisely so we can separate risk and be more certain that an organization such as the Canada Deposit Insurance Corporation will not have to intervene in the fund to compensate for deposits that otherwise cannot be compensated for as a result of international losses or loans. It must be clearly understood that you obtain this benefit simply by slightly complicating the lives of the institutions and banks.
Senator Joyal: Furthermore, you cannot obtain the desired degree of protection without having access to better information on the way capital is managed outside Canada and how the risk that that capital represents is evaluated. Today, when we consider the financial reports of banks, we have an overall idea of what their offshore operations represent and of the percentage of profits generated by those operations. Beyond that, there is no really specific information and, in assessing the global financial conduct of a financial institution, we do not distinguish between an assessment of the risk taken in the domestic market and an assessment of the risk taken offshore. We must necessarily manage to develop a regulatory framework that gives us the necessary tools to assess the impact that the foreign operations of financial institutions represent in their current global operations?
Mr. Roy: Yes. In modern finance, the concept of diversification is clearly an important consideration, particularly the notion of international diversification. Some major banks will claim that they in fact have an international portfolio; when things are going well in one country, they may be going poorly in another, and these effects offset each other. The problem is that there are diversification effects such as that, but we also know perfectly well that there may be effects of system risks -- the economy is increasingly global -- and that diversification effects may not be as great as all that.
Senator Joyal: Is the current international situation not precisely an illustration of this, where, on continents as far away as Asia and South America, you have a situation that is global? Should the situation we are currently experiencing -- which is not a hypothetical, but a real one -- not lead us in practice to reflect more on the kind of regulatory framework that should be put in place if we are to further liberalize the ability of financial institutions to merge and to do business in international markets?
Mr. Roy: I do not know. The MacKay task force has completed its mandate, but it is quite conceivable that other task forces might address this question directly, that is to say the question of optimizing the regulatory framework in the context of the even greater internationalization of our institutions, particularly if the bank mergers were to take place.
Senator Joyal: At the bottom of page 3 of your brief, you express reservations regarding the evolution of the 10 per cent rule. Many witnesses have raised this point. We have all taken it for granted -- and I have been the first to do so -- that the 10 per cent rule was a hard and fast rule and that we were really protected. I see from your statements that what the report recommends on the subject of ownership could lead us to a relaxing of the 10-per-cent rule. Could you elaborate further on this point?
Mr. Roy: It has obviously been relaxed in a number of ways, by creating three classes, for example. Then, in the bottom two classes, there is the 10 per cent rule. It completely disappears for the fist class, banks or institutions with capital of less than $1 billion. In the class with capital from $1 billion to $5 billion, a majority shareholder is essentially permitted to hold 65 per cent of shares. I am making this incidental remark because we know perfectly well that the National Banks falls into this class.
This means that a majority shareholder could take control of the National Bank and, given its position in the Quebec market, that thought makes me uncomfortable. Obviously, for banks with more than $5 billion in capital, there is what I would call a nominal 10 per cent rule; 20 per cent can be authorized in normal conditions. The Minister may authorize more than 20 per cent ownership in exceptional circumstances. So if you interpret the last part of this element of the report, this means that, in exceptional circumstances, the Minister could authorize 100 per cent ownership. The 10 per cent rule is maintained in theory, but, in actual fact, it is undermined. There are a number of provisions in the report that would change the new 10 per cent rule.
Senator Joyal: Is the rule not being relaxed to permit a greater presence of foreign banks and financial institutions that existed 10 years ago? We have often been told that, despite the Canadian market's acceptance of foreign banks, the result, or, to use a leasing expression, the net net 10 years later is a decrease rather than an increase. Is this one way of enabling a foreign bank to really enter the Canadian market and thus to stimulate competition?
Mr. Roy: I do not believe that is the main purpose. The foreign component of the Canadian system is still weak because the Canadian subsidiary rule has been imposed. This rule will be abolished. In other words, banks wishing to come and carry on wholesale operations may do so from subsidiaries. No conditions are placed on the ownership of these foreign banks which will be operating subsidiaries in Canada.
Banks wishing to conduct retail operations are still required to have a Canadian subsidiary so that depositors can be protected by the Deposit Insurance Corporation. Thus, in all likelihood, foreign subsidiaries operating in the retail market would have Canadian capitalization of less than $1 billion.
Senator Joyal: In your brief, you mention that one point should be clarified, and that is the assessment of the social impact, in accordance with recommendation 49 of the report. Could you elaborate further on that?
Mr. Roy: For the moment, the report lists seven points, essentially the seven themes that represent the public interest. And honestly, the MacKay task force clearly wanted to state the public policy, but not get involved in the operational complications resulting from this recommendation.
So I obviously do not know what is going on at the Department of Finance. I hope it has not simply informed the banks of the MacKay task force's concern and asked them to prepare a report bearing those concerns in mind.
In my opinion, we should ideally have an economic accounting system. The merger decision will have economic effects, and we must develop an integrated framework for measuring the economic impact of the merger in dollar terms.
The Minister of Finance should give specific instructions -- and I hope he is doing so -- on the figures and calculations he wants to get from the banks.
Senator Joyal: At the bottom of page 4, where you talk about various models the task force evaluated, you obviously talk about the U.S. and British models, the Swiss and Dutch models and the Australian model. Could you elaborate further on your preference for the Swiss and Dutch models over the Australian model?
Mr. Roy: That is a good question. I am probably in favour of the Dutch model for the purpose of conveying a clear position and stimulating discussion. The Australian model could also be acceptable to us.
Senator Joyal: That is why I am asking you the question.
Mr. Roy: But in practice, it is only a matter of degree and subtle distinctions, is it not? The Australian model nevertheless favours the presence of national champions in the international arena, although perhaps to a lesser degree.
The reasons I state in favour of developing national champions, either on the tough Dutch model or the softer Australian model, are essentially job creation in the sector itself, support for exporting business and the fact that that can serve as a support for Canadian regulatory bodies internationally.
Senator Joyal: According to the scenario, the recommendations and comments you make for enabling Canadian financial institutions to merge their international operations, as far as that is possible, while maintaining in the domestic market the kind of competition we currently have so as to preserve consumers' and borrowers' choices. However, given the international institutions' freedom of access to international markets, their power to structure or merge their international operations in accordance with the relevant regulation designed to protect Canadian or domestic consumers that can be put in place, we would ultimately achieve our desired objectives under either of the models we have here.
Do you believe this is a mental economic aberration or do you think such an approach is possible, if we take the arguments that have been put forward to date as our basis?
Mr. Roy: That is theoretically possible. The heads of the major banks obviously will not like that solution because that clearly might put them in difficult situations in which they will have to compete in the domestic market and collaborate in the international market.
So it is not unfeasible, but this relationship of collaboration and competition on a day-to-day basis will clearly be more difficult for them. They will not have the same springboard by operating in this way.
So that is one option they can be given, but it is not at all certain they want to exercise it. If domestic mergers are not permitted and they are given the option of creating an export consortium, I believe this would be quite fairly shared. They would have the choice of exercising the option or of preferring to continue operating alone.
Senator Joyal: Have you yourself not studied the implications this could have within a regulatory framework?
Mr. Roy: Unfortunately, no.
The committee adjourned.