Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 33 - Evidence, October 26, 1998
SASKATOON, Monday, October 26, 1998
The Standing Senate Committee on Banking, Trade and Commerce met this day at 12:50 p.m. to examine the present state of the financial system in Canada (Task Force on the Future of the Canadian Financial Services Sector).
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Senators, we are here to begin the first of our two days of hearings in Saskatchewan on the MacKay Task Force on the Future of the Financial Services Sector.
Our first witnesses this afternoon are Mr. John Ryan, President and Chief Executive Officer of the Farm Credit Corporation, and Ms Louise Neveu, Executive Vice-President and Chief Operating Officer of the Farm Credit Corporation.
Mr. Ryan, I notice that you have given us a brief, and I assume you will take us through that as part of your opening statement; we will then be delighted to ask you questions. Thank you both very much for appearing here this afternoon.
Mr. John Ryan, President and Chief Executive Officer of the Farm Credit Corporation: Thank you, Mr. Chairman, and distinguished committee members. I also have with me Larry Hayes, our district manager for Northern Saskatchewan, and I am pleased to introduce him to you.
I appreciate the opportunity to be here today, essentially to do two things: first, to respond to certain of the task force recommendations; second, to give you a brief update or overview of what is going on in the Farm Credit Corporation these days.
Let me start by saying that the MacKay task force truly describes a vision of a new financial services landscape for Canada that is both competitive and customer-responsive. It asserts that Canadians have the right to basic financial services, regardless of income or place of residence. MacKay's vision includes the crucial elements necessary to mark the Canadian financial services industry as one of the leading systems in the global marketplace -- the confidence and support of Canadians.
Mr. Chairman, I am pleased to discuss the future of the financial services industry from a Farm Credit Corporation perspective. Let me state that the task force's vision meshes with FCC's vision for what is needed for the agricultural industry of the future.
Let me give you a brief overview of the Farm Credit Corporation. We were established in 1959 as a Federal Crown Corporation. We are the largest agricultural term lender in Canada. We serve some 70,000 primary producers and agri-food businesses and we have about 900 employees in about 100 rural communities spread across Canada, and our head office is located in Regina, the heartland of farming.
The demand for our services continues to grow. Last year there was about $1.5 billion in new authorizations; that was $600 million more than in 1995. So over a three-year period we have seen considerable growth. We are on solid financial footing. We have had eight consecutive years of profit and our portfolio has grown to in excess of $5.3 billion.
Being 100 per cent focused on agriculture in Canada, we have, I believe, a unique perspective to offer today. The FCC has been there to support its customers through all economic cycles. We have offered the agricultural community an alternative in the past, and that is something I expect will become even more important in the future, given the consolidation of the financial sector and the depressed economic cycle we presently find ourselves in.
Mr. Chairman, the appendices in the handout actually provide more details on the FCC and the products and services we offer, so I do not intend to go into any more detail now. However, on behalf of the corporation and our customers I want to address those key recommendations put forward in the MacKay task force report that affect the agricultural communities across Canada.
The MacKay task force states that strengthening competition is the centrepiece of achieving the vision set forth in the report. We believe that strengthened competition and increased access to capital are critical in order to bring the Canadian agricultural industry's collective vision to fruition. From a customer's point of view there are three key considerations that need to be addressed when looking at the future of the financial services industry. I refer to them simply as the "Three As": accessibility, availability, and alternatives.
Rural Canadians must have access to financial institutions through various channels, and that can be by electronic means, by telephone or in person. They must also be assured of the availability of credit regardless of where they are running their business. Finally, they must feel that they have a choice of whom to deal with and a choice in the ways in which they are being served.
The agricultural industry is experiencing radical changes due to the impact of globalization and competition. Only a few years ago, for the majority of people, agriculture was still defined in the traditional sense as the act of primary production. Today, the agricultural landscape spans the full spectrum of the value chain, from production of raw materials to processing and packaging, through to the final destination, the consumer.
The agricultural sector is a vital element in our nation's economic fabric. It is faced with the challenge to increase Canada's share of agriculture and agri-food exports from three to four per cent by the year 2005. That equates to something like $40 billion annually, compared to $23 billion now. Achieving this objective will require a significant investment in the value-added agricultural enterprises to process production here at home prior to export.
Much like business owners in other sectors of the Canadian economy, farmers operate businesses that do not run on a nine-to-five schedule. Therefore, our clients need increased hours of access and easier access to a wider variety of services.
We agree with recommendation number 17, that technological advances in banking, such as Interac, be leveraged to increase access and promote competition.
A recent Canadian survey shows that 50 per cent of our farmers plan to be utilizing the Internet by the year 2000.
The finance sector's involvement in light-vehicle leasing, as recommendation 21 asserts, also would increase access to services and increase competition in the marketplace, thereby benefiting consumers. Over the past few years leasing of light cars and trucks has increased substantially. In 1997 45 per cent of new retail vehicles were leased, up from some 4 per cent in 1989.
Due to the high cost of ownership, the popularity of farm equipment leasing also continues to rise. We are seeing evidence of that in the United States, where Farm Credit Leasing, created by a farmer-owned organization similar to FCC, reports that up to 75 per cent of farm equipment is being leased in certain areas.
In our daily business practice of building long-term relationships with rural Canadians, FCC strives to consistently meet the intent of recommendation number 53, which deals with open disclosure.
In sync with recommendation number 79, that each financial institution appoint an internal ombudsman, the FCC indeed has an independent, peer-loan-review board in each of the provinces. These boards provide a first recourse for consumers who wish to appeal an FCC decision whenever we decline a loan.
In 1997 the FCC commissioned the Angus Reid group to conduct a series of focus groups to pinpoint the barriers faced by producers. Results indicated that there was a real and pressing need for new products aimed at those entering farming or expanding an existing farm enterprise. Feedback from this and other research enabled the FCC to further refine its product concepts, and over the last 18 months we have introduced six new products. Three of them are geared to developing farmers and three of them match the repayment terms to new enterprises that take several years to realize a sufficient return.
In concert with recommendation number 98, the FCC has recognized that the relationship it has developed with the communities served is broader than their business transactions. To strengthen partnerships with communities across Canada the FCC has recently introduced what we refer to as our "Community Relations Program", through which the FCC commits one per cent of its net income to meet the needs of charitable and not-for-profit community activities and programs.
The FCC is in agreement with recommendation 102, which urges financial institutions to find new and creative ways to address the problem of small business financing created by the frequent turnover of business account managers. I am pleased to report that the FCC has maintained a strong and stable presence in rural Canada. Approximately 80 per cent of our staff were born and raised on the farm, and I submit that they understand agriculture and farming, from the perspective of both the challenges involved and the opportunities available. They live in the communities where they work and they are highly knowledgeable about agriculture.
The FCC also agrees with recommendation 104, which calls for financial institutions to provide higher-risk borrowers with more innovative financing packages with an appropriate pricing. This is also an important issue for producers and agri-businesses delving into the value-added side -- processing, and leading-edge processes.
Recommendation 107 urges financial institutions to pursue their knowledge-based initiatives with a focus on seed and venture capital. Agriculture, like other industries, faces the challenges of globalization, increased competition and deregulation. We have to transform our industry at an unprecedented pace. This is only possible with the acceleration of knowledge-based initiatives, especially in the field of new technologies, like production techniques, biotechnology and engineering, all of which need dollars, research and patience. That really creates an increased demand for seed and venture capital.
To quote Harold MacKay, "Change comes through the actions of leaders, entrepreneurs and innovators...We cannot ignore them or pretend that they do not exist." Speaking from an agricultural lender's perspective, the status quo is really not an option as the agricultural sector -- indeed, the entire economy -- continues to change.
As we evolve into a more global community there is a need for more than one model. There is a need for the larger, full-service-financial-institution provider, and I also submit there is a need for strong niche players. We believe that the Farm Credit Corporation fits that latter role as a niche player, as we focus exclusively on agriculture, with all its diversity of commodities and businesses.
As a vital component in the economy, the agricultural industry deserves considerable attention to ensure its challenges are not overlooked, while its opportunities are capitalized on.
I would like to commend the MacKay task force for their work in constructing a report that is both visionary and straightforward. We look forward to working in a spirit of partnership with other financial institutions as the agricultural industry continues to change and find opportunities to grow.
To conclude, Mr. Chairman, I believe that the Farm Credit Corporation is in an ideal position to adapt to the changes, both from an agricultural point of view and from a financial services perspective. We are very much open to discussing ways in which we can align our businesses with those recommendations that will be adopted by the federal government. We are wholly committed to the industry, striving not only to keep pace with the changes but, in actual fact, as our new vision states, to be leading the way in agriculture.
With that I will conclude, and I am open for questions, sir.
The Chairman: If I may ask you a general question, in your brief you indicate that you support a whole series of recommendations from the MacKay task force, but you do not indicate that you disagree with any. That sort of surprises me, just on the simple ground that, out of 124, I should have thought there were at least two or three you did not agree with. If you were just being careful, you do not really need to be with this committee. If there are recommendations that you do not agree with, can you tell us what they are and why?
Mr. Ryan: Mr. Chairman, when I drafted what I thought was the appropriate address for today, my intent was to look at the 124 recommendations and decide which ones most appropriately applied to agriculture and, specifically, which ones would be truly beneficial to agriculture. That was our point of view, and, knowing that we had 10 minutes to get our key points across, we adopted the position of looking at the ones we would be very much in favour of.
If I look at the 124 recommendations as a whole, though, I cannot honestly think of a single one that I could say is really going on the wrong track and should not be given further consideration.
The Chairman: So, to that extent, you are happy with the thrust or the basic direction?
Mr. Ryan: Very much so. I thought that the MacKay task force did an excellent job of creating a balance that did not put forward an either/or situation. They looked at this and said, "Okay, the industry is going to change whether we like it or not. Now what should be done to make it a more competitive financial services industry for Canada, and, indeed, on a global basis?
Senator Tkachuk: Mr. Ryan, just to deal more generally with competition in the industry, is Farm Credit Corporation a competitor to the banks or are you an auxiliary to the banks, or do you do joint projects with the banks?
Mr. Ryan: The simple answer is that it is a combination of all of those, but let me expand on that. In some situations we are a true competitor to the banks; in other cases we are very complementary -- complementary from the point of view that we will look at the long-term financing requirements of the individual primary producer or agri-business, but we do not do the operating credits. In almost every single loan that we do have, or customer contact, another financial institution will have the line of credit.
In terms of working with the other financial institutions, one of the things that we have made a very conscious decision to do of recent date is to develop, as much as possible, alliances. Particularly, looking at the larger financial proposals, rather than taking the proposals on ourselves, we think it is better for us, better for the individual farmer or agri-business for us to be able to share that risk. So if the proposal is of a larger nature, we go out looking for a partner.
Senator Tkachuk: Let us put aside the credit unions because we know they are heavily involved in agricultural lending in Saskatchewan. Of the five major chartered banks, two of which are discussing the possibility of mergers, which of those are strong agricultural lenders and which have been slowly withdrawing from the industry?
Mr. Ryan: I am finding that you almost have to look at it by province, or at least by geographical sector, to determine who are the stronger players. On a regular basis we look at who is most active in the marketplace; we may find in one particular place the Bank of Commerce, in other communities the Royal Bank, and in still other communities the Bank of Montreal.
If my memory serves me correctly, I think it is the Royal Bank and CIBC following FCC in terms of who has the most dollars out in term lending.
Louise Neveu may be able to expand on that. I may have got the numbers wrong or not precisely right by province? I used Royal Bank and Bank of Commerce as examples, because I think it is Farm Credit Corporation, Royal Bank and Bank of Commerce as the top three.
Senator Tkachuk: As you probably know, we have had quite a number of presenters on the leasing side as well as on the insurance side, and the recommendations allowing that to happen within the bank branch, along with the sale of these products within the bank branch. In representing your corporation, you seem to be in favour of the expanded leasing provisions that MacKay recommends. Does Farm Credit do a lot of farm leasing at present? Can you do it now without this particular recommendation?
Mr. Ryan: No. Our act does not let us get into leasing on a direct basis. However, in looking at what is going on across the border, in their affiliates over there they are saying that leasing on the agricultural side is becoming more and more popular; in some cases up to 75 per cent of their lending is going out in the form of leases on the equipment side.
I find it interesting that some of our own Canadian farmers, particularly the new or the younger farmers, are more interested in acquiring a piece of equipment to work on the farm than they are in whether they own it or lease it. One of the advantages of leasing is that it allows them to acquire the equipment and put it to use on the farm without having to make a heavy down payment, and they also have a lower monthly payment.
In other words, they are more concerned with access to it than with how they will actually finance the equipment, whether through regular lending or a term of leasing. Therefore, I see it both as an opportunity for the farmer and as a benefit to the consumer, because it will be beneficial from the point of view that it will increase competition, and in turn that will, in the end, benefit the consumer.
Senator Tkachuk: In fact, however, at present you cannot lease heavy equipment?
Mr. Ryan: No. That is right. Not directly. It is not part of our mandate or our act.
Senator Callbeck: Certainly, coming from an agricultural province I recognize the importance of Farm Credit Corporation. In your presentation you talked about your growth over the past three years and I believe you said that from 1994 to 1995 you had new financing of $600 million?
Mr. Ryan: Yes.
Senator Callbeck: In 1997-1998 you went up to $1.5 billion, which is a tremendous increase. What are the major reasons for that increase?
Mr. Ryan: Well to go back, in 1993 the Farm Credit Corporation received a new mandate; at that time there were three or four major things that would allow us to be more active in the marketplace. First of all, there was a lifting of the authorization; at one point in time we could only authorize up to $600,000 in total; that was lifted. Secondly, on a very positive basis, our new mandate allowed us to move in to support not just the primary producers but the agri-businesses, the value-added side. In addition to that, it allowed us to provide financing for people not necessarily working full time on the farm but combining farm income with off-the-farm income from another job.
Those factors clearly contributed to growth of Farm Credit Corporation. However, in addition to that, I must say in fairness, we have had a good agricultural economy. We have some problems right now, but if we look back to the period from 1993 to 1997, it was good: commodity prices were good; we had a stable interest-rate environment; and we had expansion in the marketplace from an agricultural point of view. Clearly, demand and the need for the services was there, and the expanded mandate we were provided with in 1993 allowed us to respond to that.
Senator Callbeck: Does the change in your mandate in 1993 mean that all part-time farmers can get financing from you?
Mr. Ryan: Yes, it does.
Senator Callbeck: Their income off the farm does not have to be a certain percentage?
Mr. Ryan: No, it does not. Let me just confirm that with my colleague here.
The Chairman: May I just ask for an element of explanation here? If I lived somewhere north of Toronto and had 10 acres with a small vegetable garden from which I sold part of the vegetables, do you mean to say that I would classify as a farmer under the FCC definition, and I would be eligible for an FCC loan?
Mr. Ryan: I do not think we would want to go that far. What we are financing is the primary producer; so if it is some person operating on a very small scale, I do not think that person would be eligible. Moreover, on the value-added side, we have a requirement that it has to be farmer-controlled. In other words, if a number of people got together to look for financing from Farm Credit on the value-added side, say for a seed-cleaning operation, it would have to be farmer-controlled before we could assist.
Senator Meighen: Can we just be a little more precise? Suppose 60 per cent of my income comes from non-farming activities; am I eligible?
Mr. Ryan: From non-farming income?
Ms Louise Neveu, Executive Vice-President and Chief Operating Officer, Farm Credit Corporation: Yes.
Senator Meighen: Therefore, I am eligible for a loan. Does the loan have to be related to farming activities? If so, to what extent? Is growing Christmas trees, for example, a farming activity? Is rearing rainbow trout in a pond a farming activity? Is renting out to tourists some cabins on my land alongside the lake that I border on a farming activity?
Mr. Ryan: The answer is yes to the first couple of points. Certainly, rearing rainbow trout -- or aquaculture in general -- is covered; yes, very clearly. In fact, over the last couple of years we have had a substantial growth in that particular area because there is a real gap in the marketplace. We look at that as farming, but on the fishery side of things. Christmas tree growers is another category that would be eligible.
As it relates to the tourism side of things, however, I would have to defer to Louise on that one.
Ms Neveu: In all these instances we ask for the business plans; that, of course, is the first premise.
For instance, if you are dentist and basically you are looking for a tax haven and this is a sideline, you are not one of those people we would normally be lending to; it is not for that kind of investment. But if you have a viable farm operation, and as an agri-business venture you are operating --
Senator Meighen: I am also a dentist, by the way.
Ms Neveu: -- and you are operating this third business, which is tourism, you would be eligible.
Senator Callbeck: With respect to your growth, has the percentage increase since the change in your mandate in 1993 been more significant in some provinces?
Mr. Ryan: Generally, we have seen a dramatic increase in every province across the country; to be more specific, I would have to go to the operation side of things.
Ms Neveu: It is very general across the country.
Senator Callbeck: I wanted to ask you about something called the Rural Enterprise Loan Fund; I understand that you are partnering that with the Business Development Bank and the credit unions in Ontario?
Mr. Ryan: Yes.
Senator Callbeck: I gather that that helps rural people get enough capital and enough credit history to get involved in a small business.
Mr. Ryan: That is our first endeavour in that particular area over in Ontario, and, yes, you are correct that it is a joint initiative with the Business Development Bank and the credit unions.
The intent really is to help people, as you have indicated, who have not had a credit history. If they have not been able to get financing through normal sources, they can start out with a very small loan from us -- like $1,000 -- and, when they pay that back, they get their second $1,000. Then over about three consecutive loans we would expect them to establish a credit history that would be sufficient for them to be able to go and, hopefully, borrow from the normal circles.
Senator Callbeck: Are you thinking of expanding that? I am thinking of my own province of Prince Edward Island.
Mr. Ryan: I think it would be premature at this point in time to say yes, categorically. It is a pilot project. We only started it a few months ago in Ontario and we would like to see how that works out and see what the benefits are. With any of those things we like to try to do it in partnership with others; where there are opportunities and there are partners, we are certainly willing to look at them, but it is not a carte blanche "Yes" at this point in time.
Senator Callbeck: The MacKay report recommended that under the Farm Credit Act moveable personal property should be allowed to be used as security; how do you feel about that?
Mr. Ryan: It is fine on our part. You are talking about just in farm credit in general? Yes, because we do take that as security now.
Senator Callbeck: Oh, you do?
Mr. Ryan: Yes, we do. The expansion of the 1993 act, if I am not mistaken, allows us to do that; it has only been in the last two years that we have been in that, though. It has, I think, allowed the farming community another alternative in personal-property lending.
Senator Meighen: Mr. Ryan, obviously you are doing very well, generating a profit for eight consecutive years, and you are obviously filling a need, since there are lots of customers out there and you are growing.
Just going back tangentially, perhaps, to the subject that I asked you about on that supplementary question, originally, if I am not mistaken, the FCC was created to fill a void or respond to a need that apparently was not being met. Do you still view yourself as doing that or do you see yourself differently now?
Mr. Ryan: I think we see ourselves as much more than that. There is a need out there, clearly; we are in some cases, as I said in response to an earlier question, very much on a competitive basis with the financial institutions. The farming community has said that they look at us as an alternative; they want to be able to come and talk to people who understand agriculture.
As I mentioned earlier, 80 per cent of our employees come from the farm, so they understand farming very well. That does not mean, though, that we are out there competing just on what I refer to as price alone. I think our expertise and understanding of agriculture has been of significant benefit to our customers, and we want to be out there as a solid alternative for the agricultural community.
Certainly, they can get money, but there is more to it than just money itself with the agricultural expertise that we can bring to the table from a lending perspective.
Senator Meighen: That is very laudatory, but I am wondering, in addition to the relationships you indicate you have built up between your employees and customers and the approach you have taken and the innovative products you have developed, is there anything else that gives you some advantage over, let us say, one of the chartered banks? Do you, for example, have access to any monetary guarantees by the Government of Canada or otherwise?
Mr. Ryan: I think things have changed quite dramatically with Farm Credit Corporation. At one point in time we were fully financed or supported by the Consolidated Revenue Fund; we no longer have access to the Consolidated Revenue Fund for the long-term borrowings that we need. We have had access to short-term funding from the Consolidated Revenue Fund but at the end of this fiscal year that will be gone also. So there is nothing that we would be able to get in terms of cheap access to financing.
We need to borrow our money on the open markets and, of course, we very clearly borrow it on a competitive basis so that we, in turn, can lend it back out to our farming community, but we do not receive guarantees from the federal government in terms of direct guarantees on the loans that we provide.
Senator Meighen: Do I understand you correctly that, as at the end of this year, you will be on exactly the same footing as any other "bank"?
Mr. Ryan: From the point of view of a broad perspective, yes. However, we did receive funding from the federal government several years ago, when we had severe financial problems within the corporation. That goes back to the late 1980s or early 1990s, when there was a capital injection from the federal government.
It could be argued that because we got that capital injection we are on an unfair playing field. One of the things I wanted to bring out in my report is that we have had eight years of solid profit. Those eight years of solid profit, in terms of our equity today, represent about half the equity within the corporation itself. We do pay taxes; we do pay, or have the provision to pay, dividends -- and for a few years we paid dividends and for one particular year we did not. So the playing field is getting more and more level.
Senator Meighen: So your profit, then, stays within your corporation; it does not go back to the government via the Consolidated Revenue Fund?
Mr. Ryan: It does not go back to the Consolidated Revenue Fund, but there is a provision by which, on an annual basis, we decide whether to declare dividends, which would, in turn, go back to the government. The policy approved by the board is that 10 per cent of the net profits after one-time gains could be declared as dividends.
Senator Meighen: You will have noticed, I am sure, as did all of us, that the MacKay task force decided not to deal in any depth or to any extent with Crown corporations such as the FCC. I must say I found that a little surprising, but given what you have said to me and to other senators today, and given that MacKay is clearly in favour of increased competition and opening up the marketplace and providing greater flexibility so as to offer a wider range of products to customers, why do you not just cut this tie with government, whatever it may be? Get out and start your Farm Credit Bank, period. You can be the first president and we will get Senator Tkachuk to be the first customer. Why keep fiddling around with the government? You will have cut all the umbilical cords, you tell me, as of the end of this year.
Mr. Ryan: I think at the end of the day that will be a government decision. I did not come here today to promote being privatized or anything like that. I do think, though, that Farm Credit, because it is rural-based, with 100 offices and all of its employees located in rural Canada, is playing a very significant role there.
Senator Meighen: I agree.
Mr. Ryan: And I would hope, as we move forward and start looking at the alternatives, that Farm Credit will come back to the table and ask, perhaps, what more it could be doing.
Senator Meighen: Well, if I were the minister or the prime minister -- which is not totally likely within the next couple of months or maybe even years -- and I were to wave my pen, or whatever one does, and say, "Right, you are on your own", would you be upset?
Mr. Ryan: I think we would have to look at the implications to the corporation itself. I think it is certainly an alternative or an option but, quite frankly, we in the corporation have not gone to the point of considering whether this is an option that we should be pursuing at this point in time.
Senator Meighen: Your critics say, of course, that you have an unfair advantage. Now you have explained to us that in your view you do not.
Mr. Ryan: Right.
Senator Meighen: Then what is the advantage of being half pregnant? Why not be one or the other? Either you are a creation, a child and a dependant of the government or you are out on your own.
Mr. Ryan: I really do believe that at the end of the day it is the government that will have to decide that, not me.
The Chairman: I think the point the witness is trying to make is that that is a policy statement.
Senator Meighen: I just asked whether he would be in favour or would he be upset.
The Chairman: I understand that and I think your logic is quite irrefutable.
Senator Oliver: Mr. Ryan, I agree with the line of questioning that Senator Meighen has been putting to you, but leaving that for the moment, let me ask you how competitive you are; what rate do you charge compared to banks for the kind of financing that you do for farmers? Is it higher or lower, or about the same? And what type of security do you take vis-à-vis the banks?
Mr. Ryan: Generally speaking, our rates would be a quarter-point to a half-point higher.
Senator Oliver: Is that all?
Mr. Ryan: Yes, than what you would find in the other financial institutions.
Senator Oliver: Do you charge any farmers prime plus three, four, five or six?
Mr. Ryan: No.
Senator Oliver: What is the highest you would charge?
Mr. Ryan: Our rates would be prime plus two and a quarter -- in that range. That is what we, internally, have set as a target for the corporation. We are finding -- and I think this has come out in the MacKay task force -- that you have to look at what degree of risk you are actually taking. We have, as a corporation, moved to a more customized interest rate based on the risk itself. We still have, I think, some room to move in that particular area.
As we do more on the value-added side, we find, for example, that it should dictate a different rate than what we would see in the primary producer. I am making a general statement here, as I hope you can appreciate, but we have to look at the individual risk associated with it and price it accordingly.
Senator Oliver: But your security is just like the banks'?
Mr. Ryan: The security would be very similar, yes. You will note one difference, though: when you start looking at the overall rate structure, you will find that within Farm Credit we are not heavy on the side of fees.
[Translation]
Senator Hervieux-Payette: The questions of my colleague, Senator Meighen, are very interesting. But I would like to ask you a question from another angle. You are a specialized bank that is under federal government jurisdiction.
Is there a specialized commercial bank that competes directly with you in this sector or are you the only ones whose vocation it is to help out farmers and the agricultural sector?
[English]
Mr. Ryan: We are solely focused on agriculture. You will not find any other financial institution whose sole business is agriculture. In addition to that, we are totally rural based, so we represent the interests of rural Canada.
[Translation]
Senator Hervieux-Payette: If we opened up the market to foreign banks, are there any foreign banks that specialize in agriculture?
[English]
Mr. Ryan: To my knowledge, no. I think we are seeing situations where foreign banks come in and they have particular niches; some are looking at just financing very large transactions. I think Global Bank is one. If you look in terms of Wells Fargo, they are very clearly focused on small business and smaller amounts. I think the unique thing about Farm Credit is that it is just agricultural, focused on the primary producer and the value-added side. Louise, would you like to add anything?
Ms Neveu: Global Bank would be the one that comes to mind most easily, because they are, obviously, a co-operative with their roots in agriculture, as well, and so they come into the U.S. and Canadian markets looking first for that sector.
[Translation]
Senator Hervieux-Payette: I see on page 11 of the English version of your brief that Quebec has $731 million in its loans portfolio and Ontario $1,500 million. Is it because the Quebec corporation is active in the same sector and grants loans to the same clientele, or is it because the caisses populaires are there? How do you explain that Quebec's loans only amount to half of those of Ontario?
Ms Neveu: In Quebec, the Société du financement agricole is a parallel provincial agency that competes against us. It has an interest rate that is subsidized up to $250,000 per client. They also have a grant for young farmers, depending upon their agricultural training, and this is an excellent program. They encourage young people to pursue post-secondary studies in the field of agriculture, and they give grants for this. It isn't enormous, but there are small grants for training.
In the agricultural sector in Quebec, we are generally the second lender or else the lender that comes into play behind the Société du financement agricole. Loans granted by the Société du financement agricole are guaranteed by the banks. The caisses populaires are first, followed by the Banque Nationale.
Senator Hervieux-Payette: Therefore, the people who work in Quebec have analysts for the various files. And the financial transaction is done in an established financial institution?
Ms Neveu: Yes.
Senator Hervieux-Payette: Whereas in your case you act in the same way as a bank, correct?
Ms Neveu: Yes.
Senator Hervieux-Payette: There is nevertheless quite a difference. In any event, I note that in various sectors in Quebec we are ahead in the area of competition. Take, as an example, an established farm that wants to do research and that qualifies for the research tax credit. Could we picture a client who would have a file with you, who would reinvest a portion of his profits in research and who would ask for farm credit? You will support him. In other words, do you have the necessary expertise to get into the financing of research on a new process or a new product?
Ms Neveu: At the present time, we have no mechanism. As far as the venture capital that you speak of is concerned, we don't yet have the necessary mandate, but it is something that might interest us. However, at present, it would have to be a loan, in the form of either a mortgage or a personal loan, but it could not be based on research.
Senator Hervieux-Payette: Right now, who must people wishing to develop a new process or a new or improved product call upon?
Ms Neveu: The Federal Development Bank.
Senator Hervieux-Payette: You are going to be working in partnership with the DBC?
Ms Neveu: We haven't up until now. We don't have that type of file. But we could have the same type of loan for a farmer, in which case part of the financing would be with the DBC and the other would be with us.
Senator Hervieux-Payette: Do you find that there is duplication of your role and that of the Société du Québec, or do both complement each other?
Ms Neveu: Our mandate is nearly identical. There is duplication between the two. We compete against each other in a good many cases. But we are very open to new products. We have in most cases played a leadership role, be it for new products or new companies. Therefore, in a way, we complement each other and we find ourselves in situations where we are pushing each other back and forth so as to better serve the farmer.
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Senator Kelleher: As we know, the MacKay report mentions concerns that if there is a merger, there will be a lack of competition and services, particularly in rural areas. They are recommending a second tier of banks. We saw this in the United States with community banks and saw it over in Britain with the building societies, which became banks.
They have looked around, wisely, I think, and have recommended that the credit unions and the caisses should get into the banking business. I think that sounds very attractive and I am personally very interested in that area. But I am concerned, and have been concerned for some years, because your organization and others are in the same business that MacKay is recommending they get into. I foresee that when the credit unions try and move in -- for, after all, the western areas are where the credit union movement is the strongest -- I am concerned that they are going to bump right into a federally financed government organization.
I do not like to see that kind of competition, frankly. I do not have a problem with the Farm Credit Corporation providing services where none existed. That obviously can be interpreted as a failure on the part of the large banks, to some extent, so I do not quarrel with that. But if the credit unions do move in, where does that leave the two of you? Are you really going to compete with them? That is not something that I favour, personally.
Mr. Ryan: Perhaps I will respond to your question from a couple of different tacks, or approaches. First of all, in terms of MacKay, yes, he is recommending tier-two financial institutions, and the credit union, from my understanding, is getting favourable hearings in that particular regard. They are community based and I think that is positive.
My take on this whole thing, though, is that Mr. MacKay and his task force have recommended enhanced competition. Although he did not talk about Crowns, I would hope that that is an alternative. There will be occasions in which Farm Credit and credit unions would probably be bumping heads on an individual transaction. I think that is healthy from the consumer's point of view.
We have taken a strategic decision to meet with the credit unions across the country and ask how can we find ways in which Farm Credit and the credit unions can work together for the benefit of the customer. My view or position on this is that if we take our dollars and our expertise to the table and they take their dollars and expertise to the table, that the consumer, i.e., our customer, will be better off.
We have some very strong working relationships with certain credit unions across the country. In other areas, I would say that the relationship is just starting to develop. So I do not see it as an either/or situation. I see that from an alliance point of view we can be working forward.
In my discussions with both credit unions and the major banks, we made it clear at the outset that there will be situations where we will compete directly, head-on, but that we want to find ways to work together for the benefit of our customers. I have only been with Farm Credit for the last year, and these discussions took place over that time, The initiative has been very positively received and we are seeing some positive results, not just from our point of view but from the customer's point of view.
Senator Oliver: I guess I am going to be a little critical here, but looking at your past history, the Farm Credit Corporation has not been shy about getting its mandate increased. I, personally, do not suspect for one moment that this is going to stop. I think you people must continue to try and get your mandate increased. For example, the next thing you might be asking for is to be regularized for full banking services and also leasing light and heavy machinery and things of that nature.
Mr. Ryan: You are correct when you say that Farm Credit Corporation in the past has come forward looking for new legislation and a new mandate. In each situation, though, we look at it from the point of view of what is going on in the marketplace. Are the tools that we have within Farm Credit sufficient for us to do the job today?
When I responded to an earlier question as it relates to the growth and activity, I equate a lot of that to the changes in the mandate. If we were out there in the marketplace and, for example, we were providing some kind of a substantial subsidized interest rate environment, then I would say it was unfair competition. But as I stated earlier, we are talking interest rates, in a general statement, a quarter- to a half-point above.
I think there are opportunities in terms of what our customers are telling us today, that we need your help.
From a Farm Credit Corporation point of view, we have a role to play. When we say, "Leading the way in agricultural financing", we do not say it with the intent that we would lead the way in new products and no one would follow us. But at the end of the day, if we lead the way and other financial institutions recognize our good products and service, there is a benefit there. If they copy us, that is great.
Senator Oliver: Do you step aside in that situation, then, saying we should not be doing this because we are a government organization, that it would be better left to the private sector?
Mr. Ryan: I doubt that we would stay. We would step aside, to be very honest with you.
Senator Oliver: That is what I am concerned about.
Mr. Ryan: We would look at what else is out there and what our next step should be, instead of being complacent or satisfied to remain doing exactly what we are doing now. Our business really is needs-driven. We go out on a regular basis and we talk to our customers individually, or we hire research firms to tell us what the needs of the agricultural community are today. Who is filling those needs and what more can we do?
The last point I would like to make is that whatever we will be doing, it will be focused on agriculture. We are not interested in becoming a full-scale bank offering all services, all products to the general public, because that is not where our expertise is; it is on the agricultural side.
The Chairman: I understand that you are not interested in becoming a full-service bank, providing services to the general public. Are you interested in becoming a full-service bank providing services to your natural community, which is that of the farmers? In other words, are you interested in moving from essentially being a loan-type operation for farmers to being their primary financial institution for the full gamut of banking services?
Mr. Ryan: Perhaps I could ask for a point of clarification. Is the question more to the point of whether Farm Credit is interested in going into deposit-taking, as an example?
The Chairman: That is a good place to start.
Mr. Ryan: We have looked at that in the past and said that there is a need there. But if we look at our expertise from a people point of view and from a systems point of view, I do not see that we are ready to be able to take on that particular challenge. I think it is a major challenge in itself.
We would see ourselves, on the other side, looking at other venues that are closely aligned to what we are doing on the term financing side now and saying, how can we expand on that? If there was a real need and if a position was put forward that made sense, for example, that farmers required more access to lines of credit, we would then ask ourselves whether we could best meet that need ourselves versus somebody else doing it.
Senator Angus: What about credit cards; would you consider getting into them?
Mr. Ryan: I would have to be honest and say that we would look at that, if there is a need. We have not done an analysis.
Senator Angus: Have you looked at it?
Mr. Ryan: Not at this point in time. We have talked about it within the corporation, but we have not come to the point of saying that this makes good sense. There are a lot of credit cards out there now, so I do not think we would want to find ourselves in a "me too" situation. But we will have to see as we go through and do our needs analysis.
Senator Kroft: My question by its nature is a little bit amorphous, but try to bear with me. I would like to pick up on Senator Meighen's thought that perhaps you are not always going to be owned as you are. Senator Kelleher, from his perspective, assumes that that is the given. What are the problems flowing from there?
Let us just forget for a moment about whether you are a government arm or not. These are the kinds of questions that I think would be appropriate for the Business Development Bank and perhaps even more so for you. Forget that complication; just take it as a given that you exist as an institution.
What are your long-term ideas? What role will your corporation play in the entire Canadian economy? Let us say for a moment that it is privatized and that you are doing exactly what you are doing.
Are you filling an area that you believe the conventional banking structure as it exists now would never really be seriously interested and effective in pursuing? Or if your organization is not there, is there likely to be a systemic or structural gap in the financial structure?
Mr. Ryan: In terms of structure, I think that there has been, is and will continue to be, gaps. I listen to our consumers or our customers across the country, and because we are so rural-based, there are concerns that relate to what is happening in the financial services industry. Indeed, who is going to serve them in the future? I clearly see that there are gaps. I mean, our average loan size is less than $100,000. We are not talking about the multi-million-dollar transactions, as a general statement, so I think rural Canada will continue to have particular needs.
So you have rural Canada, you have the needs, you have the government, or Canada, as a whole, saying that agriculture is very important to us: it is 10 per cent of our GNP.
We want to move our exports from roughly $22 billion to $40 billion by the year 2005. I think that there is going to be a tremendous need for support from the financial community to help the agricultural community get to that magic figure of $40 or $45 billion on an annual basis.
To me, that offers tremendous potential to rural Canada. If we can do the value-added, we create jobs. If we create jobs, we have the economic spin-offs. But rural Canada needs the financial backing of players, including ourselves, to make that happen.
Senator Kroft: If one is in the process of constructing a business plan to take to the minister responsible for privatization, can you see that this need and this business opportunity is enough to be financially self-sufficient and, indeed, profitable, in the long term?
Mr. Ryan: I think, Senator Kroft, that before you came in I touched on some of these things <#0107>
Senator Kroft: I apologize for that.
Mr. Ryan: We have had eight years of profit. But the corporation is not being generated or run on the basis of profit maximization. We have a different shareholder. Yes, we have to generate a return. In the last few years, our return on equity has been 8 to 9 per cent. When you move into the private sector environment, I suggest that that probably would not be acceptable. Their returns have been anywhere from 17 to 20 per cent.
We see ourselves as neither private sector nor public. As a Crown, we are somewhere in between, and we have to generate a return. On average, our profits have been running about $40 million a year. We lever our equity base up 10 to 12 times; that would mean $400 to $500 million in new financing on a growth basis, net portfolio, on an annual basis. So yes, it could be profitable, but would it be sufficient to attract the interest of the private sector at an 8 to 10 per cent rate? It would be a big question.
Senator Kroft: But you did say that if you were not doing it, you could not be sure that any of the other players in the financial structure would fill the spot?
Mr. Ryan: Over the last few years, we have had considerable growth, going from some $600 million to $1.5 billion. Looking at that, I would have to come to that conclusion.
In addition to that, when we go out and talk to our customers, they are saying that they need new products, in terms of the inter-generational transfer of the farm. We have to be able to help the new and beginning farmers who come in to buy the farm and carry on, and we must help the developing farmers to expand. They have a limited equity base and do not have a strong track history. Special programs are needed to help and to encourage the continuation of farming on to the next generation.
Ms Neveu: It is very hard just to keep quiet. It gets to be just a tad overwhelming. Senator Kroft, I think your question may be amorphous but the issue is much more one of philosophy.
You are looking at a different approach. Do you truly believe that agriculture is different from any other industry? If you look around the world, most countries have looked at us and regard Farm Credit as something very special. Most of the countries around the world with developed agriculture have their own agricultural systems. The U.S. has a farm credit system that is very, very similar to our own organization. It is a co-operative, which is an option in terms of how we could develop. But they have focused very specifically on agriculture.
We believe that if we were not in this marketplace, there is no other institution that would step in with the same degree of attention and specialization that we can bring to the market. Yes, everybody wants the top "A" clients -- that is where we are really going to face competition. But the developing, the younger, the new markets, the new entrants, the new enterprises are truly where we believe we have a very strong role to play.
The Chairman: Using the terminology of the MacKay report, could I describe the FCC as essentially a community bank, where "community" is defined not in a narrow geographic sense but is defined to be the community of farmers and people living in rural Canada? Or would another description be that you are essentially niche marketing to a clearly defined niche, in the sense that MacKay talks about second-tier institutions entering and being successful as niche marketers. Are both those descriptions a fair description of what you are doing?
Mr. Ryan: If you look at it, first of all, from a niche market point of view, we clearly position, or attempt to position, ourselves that way.
We can be a niche player because we are very closely linked to the community. Our people live in the community and they understand what agriculture is all about. As a consequence, we can help people capitalize on the opportunities that may present themselves.
The Chairman: The last part of your answer simply told me what your marketing strategy was. I am trying to make sure that I understand whether my description of you in the MacKay terminology is correct.
Senator Angus: As I see it, it is not.
The Chairman: Do you think it is not?
Mr. Ryan: If you are asking me to choose one versus the other --
The Chairman: No, I think they are both accurate.
Mr. Ryan: We do not look at ourselves as a bank. In fact, if we went across our network, our 900 employees, and did a survey and said, "Do you consider yourself a bank?" The vast majority of people would say, "No".
The Chairman: Okay, I accept that. What if I substitute the words "financial institution" for "bank". You are targeting a particularly clearly defined set of geographic customers and you are doing so with a very specific set of services. To that extent, you are a classic niche-type marketing institution, right?
Mr. Ryan: A financial institution, yes.
The Chairman: Okay. That is in the context of MacKay. Could I just ask you one other question: what is your shareholders' equity?
Mr. Ryan: In total, we have about $550 million in equity.
The Chairman: So in the MacKay context, you are in the under-$1-billion class?
Mr. Ryan: Yes.
Senator Tkachuk: Have some other institutions said that you are unfair competition? You said that you made a profit in the last eight years. I know you do not pay capital tax -- in fact, you pay no tax. What happens to the profits at the end of the year?
Mr. Ryan: We are a little different than the other Crowns; we actually do pay a tax, and we also pay a dividend. If I look at the last eight years -- I am talking off the top of my head -- about $38 million was paid back in terms of taxes and dividends.
Senator Tkachuk: What taxes do you pay?
Mr. Ryan: We pay a capital tax. We pay a dividend. We are not paying a profit tax at this point in time because of the losses that we had in the late $80s and early $90s. There is a loss-carry-forward provision. In time, though, as soon as that is erased, we will be paying taxes, income, capital and our dividends.
Senator Tkachuk: Okay, I just wanted to clarify that.
The Chairman: I have two last questions. One relates to your statement and the other relates to your answer to Senator Oliver, I think. You said a couple of times that you typically charge a quarter- to a half-per cent more than a typical chartered bank. Why does anybody borrow from you?
Mr. Ryan: First of all, we are around in good times and bad. We are there through all economic cycles. We are located in rural Canada. We have a real understanding of agriculture. We have done surveys and people say that they want to deal with an institution that understands their business, that will help them through their problems, will help them capitalize on opportunities, and that is fair, honest and trustworthy.
The Chairman: Do you have any sense of what percentage of the people who come to you have already been turned down by a chartered bank?
Mr. Ryan: I do not have that. Do you have that, Louise?
Ms Neveu: We used to. The older philosophy of "lender of last resort" no longer exists. I think you also have to look at the full package. Our interest rate might be a quarter- to a half-per cent above, but if you compare what the farmer will end up actually having to pay in fees, it may not be all that different.
The Chairman: May I ask you a couple of questions about your reference to your loan review boards? You say on page four of your presentation that if someone has been turned down for a loan that they have a right of appeal. What percentage gets appealed? How does the appeal process work? Does the applicant ever win the appeal process or is it simply an appeal process to look like an appeal process? I mean, tell me about it.
Mr. Ryan: First of all, the loan appeal boards are in every province. We set them up and the appeal board can consist of anywhere from four to 14 people, but generally there are six to seven. They are their peers in the agricultural community. They are farmers; they do not work for Farm Credit Corporation. They come together when we decline a particular loan and the person does not feel that he has had a fair hearing. They will go to the loan appeal board and they have the opportunity to present their case versus that of Farm Credit.
Now, it is non-binding. I do not know how many get turned aside versus how many are supported -- you may have the numbers, Louise -- but in some cases, particularly if there is new information, we will reverse our decisions. In other cases, we will not.
Maybe the simplest way of describing it is that we take very seriously the recommendations of the appeal board.
Do you know the numbers, Ms Neveu?
The Chairman: I would like to have them. So I will give you a set of specific questions. I would like to know what percentage of the loans that get turned down actually go to an appeal board? And what percentage does the appeal board recommend you change your mind on and what percentage of those do you actually change your mind on? This seems to me to be a kind of novel approach to the small business issue that we hear about a lot.
I am surprised that you said that the appeal boards are made up of peers. That would mean that people would have to outline their financial position. I would have thought that might be quite difficult for people to do.
Mr. Ryan: On the one side, yes. But then again, on the other side, this is their opportunity to present their case to people who are very close to their industry or business and who will give them a fair hearing. At the end of the day, they may come out on top. So they do share.
Ms Neveu: There is a long tradition in agriculture of this type of structure. Through the difficulties of the 1980s and 1990s, the Farm Debt Review Board had a similar kind of structure. The appeal board structure within Farm Credit goes back to 1959.
The Chairman: As I know, Mr. Ryan, you have had many years with the Federal Business Development Bank, which is now the Business Development Bank of Canada. Does a similar process exist there?
Mr. Ryan: No, it does not.
The Chairman: Does it exist in any other lending financial institution that you know of?
Mr. Ryan: Not that I am aware of. But I really have not researched it. I know that there are ombudsmen in many of the financial institutions, but I am not aware of any loan review boards.
Senator Oliver: Our chairman asked you to characterize whether you are like a little community bank dealing with agriculture, and you gave your response. But earlier you had said that you do not take deposits like a bank and that you do not give operating credits. One of the reasons why so many small businesses fail is that they run out of working capital or operating capital.
How closely do you work with banks? If you finance a tractor and a barn and some other things for a farmer, how closely do you work with that individual farmer, with the bank, in trying to get some operating capital for him?
Mr. Ryan: We basically get the business plan -- when business plans are available -- and look at not only the short-term requirements but the long-term requirements and at the working capital. It depends on how involved the farmer wants us to be.
Senator Oliver: You are not going to give your capital in loans unless there is some working capital in place. Otherwise the thing is going to go down the tube.
Mr. Ryan: Exactly. We have to look at the full picture. In some cases we find ourselves sitting side by side with the farmer in the financial institution, the bank, to talk about needs.
It is not uncommon for us to phone the bank and say that we have a client who is interested in doing some work on the long-term side with us but who needs short-term funding, and are they interested in entertaining the proposal?
Senator Oliver: I would think that the fact that you cannot and do not take deposits, and the fact that you cannot give operating credits makes you very, very different from any other kind of financial institution that does the kinds of things that you do.
Mr. Ryan: Well, certainly we are no threat, and we would not want to be, on the operating credits and deposits.
The Chairman: Our next witness is Mr. Harvey, who is with the Credit Union Central of Saskatchewan.
Please proceed, Mr. Harvey.
Mr. Elwood Harvey, President, Credit Union Central of Saskatchewan: I want to thank the committee for inviting us here today to discuss the MacKay report, especially, as we see it, the enhancement of domestic competition.
You have had an opportunity to meet with Credit Union Central of Canada and today we want to focus our comments with regard to the credit union system of Saskatchewan.
The Chairman: Mr. Harvey, please introduce your colleagues so that we can know, for camera purposes and for Hansard purposes, who is here.
Mr. Harvey: Thank you, senator, I was just leading into that, but that is fine, I will introduce my colleagues. To my far left is Keith Nixon, who is the Director of Government Affairs for Credit Union Central of Saskatchewan. On my immediate left is John Vinek, who is the manager of Lloydminster Credit Union. To my right is Mr. Sid Bildfell, who is the Chief Executive Officer of the Credit Union Central of Saskatchewan, and to his right is Jim Scopick, who is the Chief Executive Officer for the Credit Union Central of Alberta.
Today, we want to focus on the system in Saskatchewan and Alberta. We also have a representative here from the Lloydminster Credit Union, who will talk about the real world at the retail level.
In my opening comments, I want to talk about the vision of Saskatchewan credit unions, which is working together to build a better community and to provide the best financial services anywhere, any time, any way. I want to emphasize that because I think that is very significant. That is our vision.
In our presentation, we have a profile of the credit union system of Saskatchewan and I think you will find it pretty impressive. We have about 548,000 members, which is about half the population of the province. Our numbers indicate the contribution that we make to the Saskatchewan provincial system.
Senator Angus: Does that number include Lloydminster?
Mr. Harvey: It would include Lloydminster. We have 340 credit union outlets, locations in the province, 130 of which are the only financial institution in that community. We have 2,800 employees in the province, and $6.3 billion in assets.
In Alberta, the statistics are somewhat similar: 560,000 members, 178 credit unions, 24 of which are the only financial institution in that community. They have 1,900 employees and $5 billion in assets.
In addition to these statistics, we want you to recognize and to note that credit unions provide full financial services, well beyond the traditional deposit and loan activities of a credit union. Full financial services today mean financial planning, financial advice, investment products such as ethical mutual funds, trust services, insurance, payment systems and 24-hour electronic access.
We just want to indicate that the credit union system in Saskatchewan has, we think, a real history of innovation in serving our members. We want to stress that we look forward to the future; we welcome change; and we really are encouraged by the recommendations of the MacKay task force that recognize that credit unions have a significant role to play as a domestic alternative in a competitive market.
Your invitation to us suggested an open dialogue, but I would like to call on a management representative to give some extra comments and observations.
I will at this time say that Mr. Jim Scopick has indicated that he will not make a presentation or comment at this time, but he will later in our discussion. So if you would, Sid, please begin.
Mr. Sid Bildfell, Chief Executive Officer, Credit Union Central of Saskatchewan: Thank you, Elwood.
The Chairman: By the way, Mr. Bildfell, when going through your presentation, I noticed that you made reference to both CUCORP and CULEASE, for which the description in here is extremely brief. You might enlarge on that a bit so that we understand precisely what it is.
Mr. Bildfell: Thank you, Mr. Chairman and senators. Chapter five of the MacKay task force background paper certainly recognizes credit unions as an alternative. We were quite pleased to see that.
Also, the recommendations of the task force recognize that we are participating through our own national organization, Credit Union Central of Canada, as we specifically look at the proposals to amend the Co-operative Credit Associations Act, and, quite frankly, at our capacity to consider the creation of a co-operative bank.
Over the years, we have been the masters, if I can put it that way, of developing networks of relationships, partnerships and alliances. We have had to do that because of the nature and structure of credit unions, quite frankly. We are responding to our members' demands.
I hope that some of the activities illustrated in the booklet that we have given you give you a sense of how we actually organize ourselves to provide a very broad range of products and services to our members in their communities. We are able to compete with very large national and international organizations. We have been at the business of alliances and partnerships for many, many years.
For example, the Saskatchewan and Alberta centrals -- and I am really pleased to have Jim with us today to speak on our collective behalf -- have been working on a lot of initiatives together. I have a couple of examples here. One example is what we call Credit Union Payments Services, in which we try to organize ourselves to be more cost-effective for credit unions in the provinces of Saskatchewan and Alberta.
We have jointly owned for many years an organization called Credit Union Electronic Transaction Services. This is an organization and product service card for both personal and merchant accounts from the MasterCard family. We are pleased to have some 95 per cent of the credit union market across Canada. We provide those services on a national basis from that organization.
In my own province of Saskatchewan, we have been busy adding to the service gaps. You mentioned, Mr. Chairman, the issue of CUCORP and CULEASE and my comments are in that first paragraph.
If we turn our mind to CUCORP, it is a wholly-owned subsidiary organization of my own central. That organization provides very comprehensive services to the mid-sized corporate and government financial services. So that would be in treasury management payment systems, asset liability packages and payroll systems. It provides those kinds of products and services to that mid-sized corporate and government financial services market.
For an example, we have had health care districts coming together in this province that require much more sophisticated products than would be available from an individual credit union. We have been able to help and support them in their market on a provincial basis.
That is a similar concept to CULEASE, where we have created that organization. We just started, Mr. Chairman, about a month ago, and that organization will be providing a broad base of leasing services to credit services. Credit unions will be able to market these services throughout the province to their membership, and to the agricultural or industrial-based organizations that they have. That organization will be expanding into other markets across Canada, so we can get the economies of scale and so on. We are already providing leasing services, for example, in the provinces of Manitoba and Alberta.
Those are just a few examples of what we have had to do to try to get around, quite frankly, some legislative and structural barriers that create difficulties for us when we are trying to compete in the marketplace.
So when we look at some of the legislative framework being considered by the MacKay task force, it certainly speaks to our uniqueness in terms of our structure and the need for us to be creative in terms of responding to the marketplace, as I mentioned earlier.
You may be aware, Mr. Chairman, that in Saskatchewan, the provincial government recently passed the Credit Union Act. We are confident that this framework will provide the legislative and regulatory framework for the credit unions, who we all know are provincially regulated, such that we will be able to compete in a more aggressive manner with our competitors. We want to provide real alternatives in this province. We want the framework so that we can compete very aggressively with many of the large financial institutions that we have now and the others that we are sure will be coming to our marketplace, as a result of the MacKay task force, whatever the response to that report may be.
We have outlined some of the major recommendations that we thought were important for your consideration. We have attached those to the report and you may have some particular comments or observations on these. If so, we will be happy to respond to them.
I would now ask John Vinek, the general manager of Lloydminster Credit Union, to add to the comments.
Mr. John Vinek, General Manager, Lloydminster Credit Union: Thank you, Sid, Mr. Chairman and senators. Lloydminster is a border city and we have a Border Credit Union on the Alberta side and we have Lloydminster Credit Union on the Saskatchewan side, so there are two credit unions in one small city of 20,000 people.
Early in the life of the task force, I had the opportunity at a system meeting to discuss issues with Mr. Michael Andrews, associate research director with the task force. Following his comments -- and he was just newly appointed -- I drafted a letter and sent it to him and that is how I became involved in the task force.
The substance of our letter focused on the issue of foreign competition. I can tell you that, from our part of the world, the competition is alive and well. It was interesting to listen to the Farm Credit Corporation presentations earlier.
Trends have been underway for some time to narrow interest margins and shift to fee-based income to support operational costs. In fact, the competition on margins at the financial institution level has been so intense that most financial institutions have introduced customer-pay or user-pay approaches to creditor disability insurance, creditor life insurance and even fees for appointments with lenders or managers.
The MacKay report strongly encourages consumer empowerment. We have also seen auto manufacturers develop financial divisions and move into large volumes of financial leasing and auto financing. We have seen up-selling arrangements, including add-ons for warranties and insurance with commission-sharing arrangements that are very generous to the dealers, with their suppliers.
Foreign credit card companies are entering Canada with introductory offers of low financing. They have low financing rates and then later, you read the fine print, and these lower rates are converted to higher rates. They say that this will happen in the longer term, but it happens usually within about six months.
We have been calling for truth in lending and disclosure laws for some time to ensure that consumers have the protection of full disclosure in understandable terms to make informed choices on financing and particularly on leasing costs. As we understand it, some work is being done in this area but we do not think that there is really any truth in leasing in legislation today.
Another area that is critical to us is taxation policy. It has contributed to the popularity of mutual funds and participation in capital markets at unprecedented levels. Much of this leads to the continuous research for operational efficiencies and, in many cases, has resulted in branch bank closures in our immediate area of the country, and across Saskatchewan, as far as that goes.
Care should be taken to ensure that our domestic suppliers are provided with the framework and the opportunity to be the best possible competitors. Opening the door to foreign and domestic competition with uneven regulatory playing fields may ultimately result in job loss, rather than contributing to our domestic economy.
So again, thank you, on behalf of our group here, for the opportunity to discuss our industry with you. We would now like to field the questions that I am sure you people have.
The Chairman: Senators, I think you should know that Appendix "A", which follows the opening statement, contains detailed comments of support from the witnesses on the specific recommendations of the MacKay report.
I should also say for the record that our colleagues, Senators Kroft and Tkachuk, will be back shortly. They went to meet with the editorial board of The Star Phoenix. As we go across the country, we try to have a couple of our committtee members meet with the editorial boards of the local newspapers as a way of explaining what we are doing and what some of the issues are surrounding the MacKay report.
Senator Kelleher: I can see from your briefs that you are well-aware of the recommendations of the MacKay task force with respect to its strong suggestion that a second tier of banking be created in Canada. It strongly recommends that caisses and credit unions move in and take this opportunity as soon as the legislation is created.
When Mr. Knight appeared before us, I believe in Ottawa, a week or so ago, he was strongly supportive of this and advised us that they would like to get into this business. In response to a question from myself, he thought it would take one or two years to get up and running.
You have not come right out and told us that you wish to get into this business, but I get the feeling that you do. Am I correct in that?
Mr. Bildfell: We have certainly supported national initiatives that supported Credit Union Central of Canada in all its submissions. So when we say that we are supporting their viewpoint, certainly that is part of it. In terms of providing full financial services to small and medium-sized business consumers in Canada, we are certainly very interested in positioning credit unions nationally as one of the very strong domestic alternatives.
Senator Kelleher: I thought that would be your answer. I am personally, in any event, glad to hear that. You heard our committee questioning the Farm Credit Corporation before you gave your presentation and I think you sensed, at least from some of us, a concern about their ever-enlarging mandate and whether or not this was going to create a level or an unlevel playing field.
It is a given that you wish to move into this area across Canada, particularly because you come from the rural parts of Canada. Do you feel that if you move in and have to compete with the Farm Credit Corporation, that you will be playing on a level playing field or an uneven one? Do you feel that the competition will be fair? I would like your opinion on that, please.
Mr. Jim Scopick, Chief Executive Officer, Credit Union Central of Alberta: I would say, in fact, that we do currently compete head-on with the Farm Credit Corporation and with the Business Development Bank. Both organizations, I feel, and you may be surprised to hear this, can play a role in the Canadian financial industry by operating at the margin, serving as complementary lenders and engaging in lending in areas where financial institutions, banks and credit unions find it difficult to compete. I am thinking of knowledge-based industries. The type of financing approach would be more of a venture capital type of financing.
On the other hand, I think that these organizations are always pressing at the edge of their mandate, trying to move into areas that probably serve no incremental benefit to Canadians by moving into these areas. One very obvious area would be in the deposit market. That market is extremely competitive; there is no need for anybody in that area.
I would also say that those organizations could perform a role in nurturing the second tier of financial institutions that you described earlier.
In fact, in the provinces of Manitoba, Saskatchewan and Alberta, we are very strong in terms of commercial and agricultural lending. It is a major part of our portfolios here. That is not the case in Ontario or British Columbia, for example. I am not talking about very small businesses but about small and medium-sized businesses. We compete very effectively in those areas, but there are a lot of areas in Canada where that is not the case.
Senator Kelleher: You mentioned earlier that they are competing at the edges but you expressed some concern that those edges might enlarge.
Mr. Scopick: Sure.
Senator Kelleher: If you receive the legislative authority to move into banking, should you then, as a private, profit-making organization, have to compete with government-owned and operated organizations such as the Business Development Bank and the FCC? How do we control this? I am speaking for myself, not the committee, but I have a concern as to how we control this.
Mr. Scopick: I think the mandate of these organizations has to be described in a way that puts them in a complementary role, as opposed to a competitive one. There will always be friction or tension between those types of organizations and other financial institutions, but I do not think that that should be our main area of concern.
I think we ought to be concerned about consumers, and about ensuring that, across the country, they do have clear access to the kinds of services that they need. I think, therefore, there is a role for these organizations to co-operate with second-tier institutions, if you want to call them that, in the provision of some of these services.
Owing to the way that we have developed in different parts of the country, we are frankly not fulfilling the mandate that people would like us to fulfil. We can move in that direction, however, and we could do that much more quickly if those organizations were to nurture the development of our second tier, rather than compete with it.
If we are to have second-tier institutions, I do not think we will ever get away from having them rub up against a mandate issue. I have been on both sides of the fence in my working career, and I think that where you stand often depends upon where you sit.
Mr. Vinek: Perhaps I could add a comment to that. You talked about competition, and at the local level we do view the banks as a very tough competitor. Just recently, some of these funds were referred to Farm Credit, and NISA must have got the smaller funds, so right now they are all being transferred; either back to the Toronto Dominion Bank or to another institution of the member farmer's choice. The FCC is really exiting the federal NISA stabilization program for farmers.
In rural areas, if the smaller credit unions do not have the funding available for larger loans, they need someone to pass those clients to. If they cannot pass them up to a central organization, then Farm Credit could be a viable alternative.
When you are forced into dealing with competitors, however, it is very tough to sit down and work out a deal that will meet the farmer's needs, without giving away more than is gained. If both parties knew what their mandates were, however, I guess we could work towards that end, and it could be complementary and a benefit for all players.
As we move towards having credit unions fill that role, we may have more access to capital through forming a community bank. If we had more access to capital, we would be able to service more of these needs, so that is a very big plus there.
Is there room, then, for another competitor? The fact is that the banks have been leaving rural Saskatchewan, and other rural areas as well, because there is not enough business for the three groups -- credit unions, banks and Farm Credit. Is there enough room in rural areas for all three groups, or will someone else vacate?
The Chairman: I have a question for Mr. Scopick. In response to Senator Kelleher you used the word "nurture". You said that the Business Development Bank and the Farm Credit Corporation could help the credit union movement and nurture its development in that direction.
Can I press you to be more precise on what the word "nurture" means? How do you actually do it? What changes in the FCC or BDC mandate would we have to recommend in order to make that nurturing a reality, rather than merely an option for the Crown corporations?
Mr. Scopick: In many parts of the country, credit unions are not engaged in commercial lending to a large extent, or in agricultural lending. For us to provide a comprehensive service to all Canadians, then, including small and medium-sized business, we have to develop a skill set that currently does not exist in our organizations. I do believe that by working closely with, for example, the Business Development Corporation, we could share the burden and benefits of dealing in this area. I think they have a strong disciplined way of dealing with commercial borrowers, and we would benefit from working closely with an organization like that.
Obviously, the form such an arrangement might take could vary. I would favour something that had us owning something jointly. I am not sure that something less than that arrangement would force us to do business together in a positive sort of way.
I think both the BDC and the FCC describe themselves as being complementary to the financial community, in that they provide loans to small and medium-sized businesses, and to agriculture. I believe that you would probably have to look at adopting a change to that mandate. Such a change would make them competitive, provided they were working in concert with somebody in the second tier.
The Chairman: Now that I understand exactly what you mean by "nurture", it might be helpful if you were to give us your thoughts on what that change in their mandates might be. We hope to report by the beginning of December, so we would appreciate hearing your thoughts.
Let me pick up on Mr. Vinek's point. I am inclined to agree that, as long as it is a purely voluntary arrangement, you have the same problem that Mr. Vinek described. What help can we be in making it non-voluntary?
Senator Angus: I would just like to be sure I understand the nature of the credit union "movement", as I have always heard it referred to, or the "system", as you folks describe it.
Mr. Bildfell, you referred to the historic legislative and structural barriers related to your industry. I see a movement that really welcomes the MacKay report. Previously you felt as though you were in handcuffs, because you were forced to operate in a very restricted environment. Now there is the hope that the shackles will come off, that there will be large-scale liberalization, and that this will be the advent of a whole new era. We have also sensed this feeling in other witnesses from your movement.
Could you perhaps outline what those barriers and restrictions were? I will then have a few follow-up questions.
There is also this business of "system". I take it that the word "system" relates to the fact that this was such a complicated and regulated thing. I do not know.
Mr. Bildfell: First of all, our description of "system" is very similar to what the Desjardins would call the "movement". That is why you may have seen the two terms.
From our perspective, "system" is just a description of the three tiers. That is, the local credit unions, the provincial credit unions, and then our national association. The system is the amalgam of all three levels.
The provincial credit union, then, is under provincial legislative and regulatory regimes. The provincial centrals are by-and-large federal, and the provincial legislation acknowledges that we are under federal legislation, as is our national association.
Our challenges really stem from the fact we are organized from the bottom up. We have individual members owning local credit unions, who in turn own the provincial centrals and national associations.
Our current legislative framework does not contemplate the new environment or the need to compete with very large financial organizations, both domestic and foreign. We are trying to amass our capital as best we can, and to build new business enterprises through areas such as subsidiary organizations. The current legislative framework almost restricts that.
When we try to put our capital together, or when Mr. Scopick and I try to do business together because it makes good financial sense for the members in both of our provinces, we are up against legislative barriers. Those barriers are actually identified in the MacKay Task Force report. The report refers to use of capital, and suggests joint venture activities as a way for credit unions to provide retail activities that they cannot now provide because of the size and scope of the credit unions. We are currently restricted in those areas.
Yes, then, that is where we are coming from. The fact is that today's -- and, more importantly, tomorrow's -- real environment is not being addressed.
Senator Angus: I believe that there is an inherent spirit of change in MacKay, particularly in terms of your system. I think that it will require harmonized federal and provincial public policy initiatives to meet your requirements, however.
A lot of creative thinking is emerging now, both from your own national organization and from some local ones. I would like to refer to one example, and then perhaps some of you or all of you could comment.
As I understood it, the Credit Union Central proposed the creation of a national credit union. Deposits and liabilities would remain with the local credit unions. They would have the option of either becoming affiliated with the national, a move that would give them full access to a network of services, or, on the other hand, of remaining more independent and opting into only certain programs. That was suggested by Mr. Knight.
On the other hand, the gentleman from VanCity pushed the concept of a federally regulated national co-operative bank. In that scenario, the individual credit unions would essentially become branches by rolling their assets and liabilities into the national entity. At the same, however, each credit union would retain its own identity, and its own name.
Which of these proposals would seem to be the more practical, or are they both interesting?
Mr. Bildfell: If you do not mind, senator, I will speak for Saskatchewan. Mr. Scopick may have specific comments on Alberta.
Senator Angus: That would be super.
Mr. Bildfell: The national services entity proposed by Mr. Knight is the one that my board and my provincial organization are supporting, and it is the one towards which we are working. This concept looks at how we provide services from coast to coast, and specifically focuses on small to medium-sized businesses and consumers across Canada. It creates a network, giving credit unions the capacity to provide a core set of financial product services. No matter where you are in Canada, your membership gives you access to those kinds of services.
Senator Angus: The members would still be members. It would be a co-operative, and the members would effectively be the shareholders. Any profits would stay at the local.
Mr. Bildfell: It would be a national organization, and it would provide services on a wholesale or a very broad-based basis. It would allow credit unions to compete with their very large competitors in the local markets.
The concept of that organization still recognizes the autonomy of individual credit unions. Credit unions can say, "Yes, it would make sense for my members to have access to the products and services, and I will participate by providing those services to members across Canada." That is the kind of concept, and it recognizes the nature of our system. Credit unions can make choices as to whether or not they want to participate in this kind of entity.
We need to support credit unions in a cost-effective way, and get the technology to connect the membership across Canada. That is the concept that we are driving for in Saskatchewan, and the one that we are participating in.
I realize that VanCity is presenting another alternative, but I do not know what has been presented to you in terms of schematics. In either system, things that make sense from a volume perspective are tied together. For example, the Canadian Payments Association, liquidity management, high-volume transaction, switching access to ATMs, and those sorts of things. From that point of view, we maintain the volume in one spot for cost-effectiveness and efficiency.
Senator Angus: Do you have access to the payments system under the present set-up?
Mr. Bildfell: Yes.
Senator Angus: In our preparations for the MacKay report, this committee did a comparative study in other countries of the financial services sector and the systems in place. We looked particularly at deposit-taking institutions, but we did consider others as well. It became obvious to us that the chartered banks were not backed up by another tier in Canada, at least in the domestic field, other than by the credit unions and the caisses populaires in Quebec. This is a very interesting time for you people, and it is provoking some creative thinking.
I hear your positive response to the concepts in MacKay. You seem to be optimistic that this recommended liberalization and deregulation will allow you to do great things. In that kind of an environment, the possibility of mergers would not scare you at all. Is that a fair conclusion? That is, you would not be against the mergers?
Mr. Scopick: The answer to that is yes and no. The banks are already formidable competition. In a post-merger environment, they are going to be even tougher competition.
First of all, let me say that the Alberta system agrees with the Saskatchewan system on the format that should be followed.
Senator Angus: The national, central credit union?
Mr. Scopick: Right. Whenever and wherever the credit union model is implemented effectively -- and by that I mean local orientation, local autonomy and control over such things as pricing and presentation and service -- we gain market share from the big banks. We do.
Senator Angus: It is the same situation with the community banks in the U.S. There is an analogy there, is there not?
Mr. Scopick: Exactly, and that is my point. The model we are talking brings us together in a national network, but also preserves the best of what makes us competitive at the local level.
Senator Angus: Let us be clear on one thing. Many of the things that these big Schedule "A" banks want to deal in -- the globalized type of products -- are not of any particular interest to you.Is that correct? I do not want to get the wrong impression.
Mr. Scopick: You are correct in saying that our vision extends to the community and to the country.
Senator Angus: With pooled resources and capital?
Mr. Scopick: Yes.
Senator Angus: I am certainly getting a clearer sense now, listening to you.
The credit unions are not evenly spread out across Canada. I think you have a very strong system in this province. Ontario, as you know, is more densely populated, but it still has rural areas and a large farming sector. Relatively speaking, however, it has very few credit unions. I find this very curious, but I am sure there is a simple answer. Could you explain the uneven development of your movement across the country?
Mr. Bildfell: Again, I will respond for Saskatchewan. Mr. Scopick may want to respond for Alberta.
The credit unions in this province actually started from the community. They did not start from an industrial base, nor were they tied to a particular industry. Right from the beginning in 1936, the community looked for financial services for everyone in that community. If there is one fundamental difference, from my perspective it would be that we were community-driven.
Senator Angus: But is yours a political movement? If we are going to participate in this policy-making process, we need to understand it.
As I understand it, what you are saying is that employees at a GM plant in the east might get together and form a credit union because they were brought together by their jobs, whereas out here it would be the whole community?
Mr. Bildfell: Right.
Senator Angus: Would it be political, though? I think of William Aberhart and the CCF, and you mentioned a particular date. Was this all tied together?
Mr. Bildfell: As a matter of fact, the introduction of the credit union in this province occurred under neither a CCF nor an NDP government. It is interesting, but from a political perspective that is not what permeated all of that.
Senator Angus: From my point of view that is good to hear. I think there are some misconceptions in this country. The feeling seems to be that the credit union movement is part of the NDP and everything else like that.
Mr. Bildfell: Oh, no. It is part of the community.
Senator Angus: Mr. Knight, of course, is a good Tory, is he not now, now that he is in the private sector?
Mr. Bildfell: I will let him speak for himself.
Mr. Scopick: We have done research on this, and our membership in Alberta reflects a cross-section of the provincial population. In that sense, it is certainly apolitical.
Senator Angus: Do you have any bright ideas for how we can harmonize and get deregulation to take place in concert between the federal and provincial governments?
Mr. Bildfell: In my opening comments I made reference to the Credit Union Act.
Senator Angus: Is that a new law?
Mr. Bildfell: It is, yes. It is quite complementary to the task force recommendations, so we are very fortunate. We will be able to move in concert with the recommendations in the MacKay Task Force report, whatever the response may be. We are positioning ourselves to make sure that harmonization takes place. The legislation is quite broad in scope, and it will allow us to compete very rapidly, complementing any federal changes.
We have also been working very hard with our provincial regulations to make sure that they are in lockstep with any federal harmonization. We need that because of the fact that credit unions are provincially regulated.
Mr. Scopick: At this time, the major initiatives that are implicit in the type of organizational change we are talking about would only require federal legislative change. Such change could be accommodated with virtually no changes to provincial acts or regulations.
Some of the powers that are suggested for financial institutions in the report -- such as those for leasing and insurance -- do require provincial legislative change, certainly in Alberta and Saskatchewan. I therefore expect that this will be phased in. Hopefully the federal government will push them along. If that is the case, then we will be able to do a good part of what we hope to accomplish. Dealing with the powers, however, will have to wait until we deal with the provincial governments.
Senator Angus: That is really helpful, sir.
Senator Oliver: As Senator Angus told you, this committee did a study in Europe. After speaking to people in the financial industries in the U.K., Holland, and Switzerland, we came to the conclusion that Canada's financial system is not that bad. The MacKay task force also concluded that, prima facie, the Canadian financial system is very good. The status quo will not work, however.
When Matthew Barrett, the head of the Bank of Montreal, appeared before us, he told us that neither his bank nor the Royal Bank would be able to continue as full-service national banks without the merger. He went on to say that they would have to explore certain niches. He did not go on to say that they would have to close branches, however. What he was really saying is that, in this new modern age, you have to pick some things that you are good at, cut your costs, and become very competitive and really good at them.
You said that you take deposits and loans, you offer financial planning advice, investment products, ethical mutual funds, trust services, the insurance payments system, and electronic access. My concern is regulation. Are you not going too fast? You are partly provincial, but you are also in other provinces.
Banks have a federal regulator, and the one thing Canadians like about our banking system is that it is safe and it is sound. You say that the new Credit Union Act provides for consumer protection and responsible self-regulation. Self-regulation normally does not give the safety and soundness that has given us a good banking system, however.
What kind of provincial regulations do you need in order to get into the financial products that you want to get into nationally?
Mr. Bildfell: I am the one who made the comments on that legislation. I will respond first of all, and others may want to add to my comments.
A self-regulatory environment has been the premise in Saskatchewan's legislative environment for as long as I have been in the credit union business, and I have been in it for a long time.
We work hand-in-hand with our provincial regulators in terms of building the framework, and in deciding responsibility and accountability in terms of financial management. We do the same thing for any product or service that we want to introduce to the marketplace. We stand by what we have built for the past 30 or 40 years in that environment, and we take some pride in moving forward in that fashion, and responsibility for having done so.
When we add any new product or service to credit unions in this province, we must go through a pretty rigorous process. That process is designed to ensure that the product or plan has financial soundness, has good business case development, and it is not going to impede unnecessarily on the capital of the credit unions. Credit unions are, after all, owned by their members. We do have quite a history of that in our system, and we will carry on with it.
If you look at the breadth of the products and services we offer, it really boils down to about three. We are very interested in building relationships with our members, and we are very interested in adding to the access option of our membership. That is what our chairman talked about when he said "Anywhere, anytime, any way."
We are very interested in how we can work with other organizations at the national level to bring products and services to our credit unions in a cost-effective way. We do not necessarily do that by building and owning our own networks. That is why we do an extensive amount of building strategic alliances and partnerships with other organizations who have significant capital, and who can bring us products and services in a cost-effective way.
We do not necessarily bring in the products and services; we wholesale them from others. We understand the size and scope of what we have, and we do not unnecessarily put our capital at risk.
That is why we have strategic alliances with entities such as Citicorp Travelers Group, one of the largest U.S. financial organizations. It is so we can bring in product for our membership.
Mr. Scopick: I would just add one thing, and that is that we are subject to the same prudential capital rules as the rest of the financial industry is. We operate under the business rules. That is, a certain amount of capital must be in place before we extend our business.
Senator Oliver: If there is to be a second tier, we as policymakers must ensure that Canadians are well served by the financial sector.
A number of people have recommended that you, the credit unions, become this second sector, and that the law be changed to allow you to do more things. In doing that we, as policymakers, have to make sure that the safety and soundness that is so much a part of the Canadian financial system is protected, and that is one of my concerns. If this thing goes too quickly, it seems to me that a lot can be lost in the cracks. Canadians will suffer, and that is a major concern.
That said, let me tell you my biggest problem with the task force report. My biggest problem is that I think that Harold MacKay recommends too much government regulation. I am therefore torn.
I wanted to leave you with those thoughts. Perhaps you could write a paragraph on that when you send your report to our chairman. That might give me some relief and some assurance that Canadians will be well protected, and that the safety and soundness that we have always had in our financial system will still be there as the credit unions progress and grow.
Do you think that the task force report recommends too much regulation? Is there too heavy an emphasis on things such as the statement you have to give on your work in the community, and on the privacy and tied selling rules?
Mr. Vinek: In some areas, such as truth in leasing and truth in lending, I do feel that there may be a need for more regulation. Customers do need to have disclosure in plain, simple language.
When we move into areas like ownership rules, though, I think those sections are very, very complex, and very difficult to interpret. In those areas I cannot really comment on whether regulation would be good or bad.
Senator Oliver: What about tied selling -- selling insurance and giving loans at the same time?
Mr. Vinek: That is a difficult one, because institutions would be able to put a fair bit of pressure on customers. We do not think that you should have tied selling. That is what MacKay says; we would make sure that tied selling does not creep in, and, in order to keep it from creeping in, we have to have fairly tough regulations.
Senator Oliver: Are the task force recommendations strong enough for you, or would you suggest further changes?
Mr. Vinek: In that area I think they are probably strong enough.
Mr. Scopick: We operate under those guidelines at the present time. We have a responsibility to ensure that there is full disclosure and adequate management and operational practices to deal with things such as tied selling. I think we are in the forefront of honouring our responsibilities to consumers. Credit unions have always been at the forefront of all these consumer issues.
In terms of the community consumer statement that is talked about in the MacKay report, you only have to read the annual report of any community credit union -- including Lloydminster -- to find a very, very complete community statement.
Senator Callbeck: In your opening brief you gave statistics about the number of credit unions in Saskatchewan and Alberta. You said that you are the only financial institution in 130 communities in Saskatchewan, and 24 in Alberta. What is the smallest community where you have a credit union, population-wise?
Mr. Bildfell: You could probably throw a rock across Saskatchewan on a windy day, so that community would be relatively small. It could have only 400 or 500 people.
Mr. Vinek: Lloydminster Credit Union has eight rural branches and one sub-office. In our sub-office we just have one job -- two people share it. It is a satellite of a 1000-person community about eight miles away. Our smallest branch has only 219 people, but they have about $13 million in loans and about $10 million on deposit.
Again, this is a case where they amalgamated with us because they did not have the capital base to fund the larger loans. We had a larger capital base, so we were able to pump in the larger loans.For us, larger loans are those that are $100,000 and up. We find that, as soon as you can grant those larger loans to farmers, the deposits start coming. You have to be able to that.
Those would not be typical communities, but there are some that might be even smaller. In those cases, we are the only institution in town, and we still provide the same services as people in a larger centre like Lloydminster would receive. These branches are 10 to 50 miles out.
Senator Callbeck: Are any of your branches in supermarkets or in stores like Canadian Tire?
Mr. Vinek: No, we do not that. Across the province, however, there would be some branches in malls.
Mr. Bildfell: In smaller communities you will see credit unions partnering with another business in that community. We use that in northern Saskatchewan quite a bit, actually. We do that so we can provide services from Prince Albert, for example, and then use the Co-op store or some other business as an agent for us. We try to make sure that we provide some basic services in those areas where it is just not cost-effective to start a full-service organization. We partner with businesses in those communities.
Senator Callbeck: You sell insurance. I assume that you sell property and casualty insurance, as well as life insurance. How many years have you been able to do that, and what percentage of the market would you have?
Mr. Bildfell: In Saskatchewan, we are restricted to direct sales of group products, whether it be group loan products or group term insurance, through our credit unions.
We do have insurance companies -- such as the Co-operators Group or Cumis Insurance -- that provide us with insurance products. Our sales come through their agents, because we are restricted, for legislative purposes, from providing those products.
Mr. Vinek: At the local credit union level we are not allowed to retail auto insurance either. We do not retail auto insurance or insure homes or commercial buildings.
We do have insurance for loan or deposit products, however. When a member borrows money and needs loan protection, we sell the insurance. In fact, it is a condition of The Insurance Act that the member must have a loan in order for us to sell them an insurance product that is sort of tied to that loan. It is not tied selling, however.
Senator Oliver: It is institutionalized selling.
Mr. Vinek: We cannot just sell term insurance to a person who walks in off the street. Before we can sell insurance, that person must purchase a loan produce from us.
Senator Meighen: In case you are wondering, the politically correct term is "bundling." You bundle it.
Senator Callbeck: The MacKay report states that, except in two provinces, credit unions can lease cars. Can I assume that you are leasing cars?
Mr. Bildfell: Leasing is restricted to size. Our leasing, which I mentioned earlier, is for vehicles whose gross weight is above the automobile level. In Saskatchewan, we are under the same restrictions as any of our competitors.
Mr. Scopick: In Alberta -- and in Manitoba, I understand -- there are provisions for us to be able to lease, but they are so restrictive that we effectively cannot compete.
Senator Callbeck: Is that a market that you would like to get into?
Mr. Scopick: Obviously. It is a major change in the way cars are being sold, and we are unable to participate in it.
Senator Callbeck: On the last two pages of your brief you have listed some of MacKay's recommendations. I assume these are the ones with which you agree. The last one you mention is the one for the community accountability statement. What form would you see that statement taking, and what do you think would be accomplished if financial institutions had to make out a community accountability statement every year? What information do you feel should be asked for and that a financial institution should have to provide, and what would that statement accomplish?
Mr. Bildfell: When we look at the credit unions, as Mr. Scopick pointed out, the statement gives very detailed information as to exactly what is going on in that community. It outlines what the deposits are, and shows what has happened in the financial activities of that organization, including the types of loans that were granted and what kind of classifications were given.
In addition, most of the credit unions also speak to the issue of what participation they had in their communities. That could be economic development, it could be financial contributions to community activities, and it could also be indirect participation, through volunteerism and that sort of thing.
I also am aware there are other jurisdictions where they speak to specific interest groups that may or may not be well served by the activities of a financial organization. I am inclined to think that, with some due care and caution, that could also be included in the community statements.
The statement would allow members of that community to determine whether or not a financial organization was serving the community well. That is, is it investing in parts of the community that are important to its members?
Mr. Vinek: Credit unions are local entities, and we already do a lot of these things. I think your question was more along the lines of what good it would do to make larger financial institutions comply with this. Was that your question?
Senator Callbeck: Yes.
Mr. Vinek: It is difficult for us to address that. As Mr. Bildfell was saying, we do all those things now, but our competitors do not. People do not have any idea what is going on in the offices of the banks, for example, because they only get one annual report. Under the proposal for this statement, the banks would be required to disclose this type of information. The community would then know whether more loans than deposits were being made in this community, and whether deposits were being siphoned out of the community. Those things would be good for community leaders to know, because it would show them how their community was faring compared to one down the road or in the neighbouring city.
Senator Callbeck: I have one other question, and it regards taxation. Some witnesses have indicated that our taxation system is different for credit unions, and it gives them an advantage over banks. Do you agree with that?
Mr. Bildfell: I will answer that first, and Mr. Scopick may also wish to comment. First of all, the taxation structure for credit unions recognizes how we are organized. The fact of the matter is that most credit unions are small businesses, and they are treated that way within our tax considerations.
In addition, we have to recognize the fact that our competitors have different methods of capitalization and access to the capital markets. Credit unions do not generally have those options, because we finance our activities and investments from within each and every individual credit union, and we do it through retained earnings or profits.
To be frank with you, I have some difficulty when I hear that one of the largest financial institutions in the world is worrying about John Vinek's credit union in Lloydminster, Saskatchewan.
We do have credit unions in this province, by the way, who are paying upwards of 50 per cent tax because of their particular structures. Once they come out of that small business structure they have to pay the tax like anyone else.
Mr. Scopick: I believe the taxation arrangements for credit unions go back to the 1970s and the Carter commission. At that time, they looked at our industry and said that we were basically small businesses, and therefore entitled to the small business rate.
The second issue related to how we can generate capital when we actually do not go to the public markets. Our generation of capital is assisted by the fact that our dividends are a tax-deductible expense. In the hands of the consumer, however, it is taxable income at the full rate, not at a dividend-adjusted rate. We are treated differently, but I think that reflects the actual nature and needs of the second-tier financial institution network that we have. We are -- and this should be clear -- subject to capital taxes and municipal taxes, and to the GST. All of these are important costs in our business.
Senator Hervieux-Payette: If the green light were given to the mergers, and that led to some closures and loss of services in small communities, would you like the government to provide some partnership -- with Canada Post, for example? That would allow you to share fixed costs, but you could still operate at the local level.
Mr. Scopick: Yes, absolutely. I think it would be possible to have remote service centres, possible located in Canada Post locations. It would require some training of their personnel, but it could be very effective.
The Chairman: Gentlemen, thank you very much for coming. Our next witnesses are from the Association of Canadian Law Foundations.
Senator W. David Angus (Acting Chairman) in the Chair.
The Acting Chairman: Good afternoon, ladies and gentlemen. Perhaps you would proceed with your presentation, Mr. Friend.
Mr. Anthony Friend, Chair, Alberta Law Foundation: We appreciate this opportunity to appear before your committee today to submit our brief which I think you have now received. I will start by introducing Mr. Owen Snider, Executive Director of the Alberta Law Foundation; Ms Pat Pitsula, Executive Director of the British Columbia Law Foundation; and Mr. Robert Arscott, Executive Director of the Saskatchewan Law Foundation. I am a lawyer from Calgary, and Chairman of the Law Foundation of Alberta.
To help you understand our organization, I will briefly describe what law foundations are. Attached to the brief that has been submitted is Appendix I, a list of all of the foundations across the Canadian provinces and territories. They are all members of the Association of Canadian Law Foundations.
Attached to the brief as Appendix II is a list of the members of a subcommittee that was struck to prepare this brief and to appear before you today.
Without reading the brief which you will have an opportunity to go through at your convenience, I would like to highlight certain points and briefly describe law foundations. The full history is set out in our brief.
In summary, the concept of a law foundation was first developed in New South Wales, Australia, in 1967. Originally, the objectives of the foundation were to further legal education, legal research and law reform, as well as to establish and maintain law libraries.
Over time, the objectives of foundations in Australia and elsewhere have expanded to include a wide range of areas intended to benefit the general public.
A law foundation is a creature of statute. Its purpose is to disburse funds by way of grants. The funds are accumulated on interest that arises from general trust funds that are maintained by lawyers as a matter of requirement.
After 1967, the concept of a law foundation quickly spread into Canada with the introduction of the law foundation in British Columbia in 1969, the first in North America. By 1986, law foundations had been created by provincial statutes across the country. Their objectives were similar to the original Australian concept.
In Quebec, a legal studies fund and a notarial studies fund, which are similar in nature, were created for the use of interest monies on trust accounts. In British Columbia, notaries also established their own foundation. In addition, there are real estate foundations in Alberta and British Columbia which utilize funds that accrue on real estate commission and deposit accounts.
In 1981, the concept was also introduced in the State of Florida. There now is interest on lawyers' trust account entities in every state of the United States. The funds are used primarily for civil legal services for disadvantaged citizens.
As I mentioned, all of the individual foundations listed in Appendix I are members of the Association of Canadian Law Foundations. The purpose of our association is to facilitate communication and discussions on matters of common concern and interest. At its annual meeting in August of this year in St. John's, Newfoundland, the association resolved to seek a hearing before this committee to make a submission.
To summarize the points we wanted to put forward to the committee, Mr. Chairman, I refer to the first page of our brief.
Firstly, we are here to say that the association is not taking a stance either against or for the contemplated merger of financial institutions. Our objective is the fair treatment of the foundations in the event that one or more of the contemplated mergers were to proceed.
Secondly, all the foundations share the concern that a merger, or mergers, might result in the lesser of two existing interest arrangements between the merging institutions being carried forward and thus resulting in a loss of interest revenue.
Thirdly, the message we would like to reinforce is that the law foundations should not suffer as a result of any mergers that occur. Their revenue should be maintained and possibly enhanced after a merger.
Fourthly, the payment of interest to law foundations by financial institutions results in a public interest benefit to the community. We think this is something that can be of service to the institutions themselves in playing a public interest role in the financial services sector.
Law foundations are non-profit organizations that operate with volunteer boards of directors. They receive interest accruing on general trust accounts. As lawyers will know, in the case of general trust account funds and those who have maintained them, the interest accruing to any individual client funds on relatively small amounts, over relatively short periods of time, cannot practically be accumulated. Interest cannot be calculated and accounted for to that individual client. As a result, a lot of interest is not being accrued or accounted for. For many years, the interest that was accruing on those funds -- interest which in total could be rather significant -- was being retained by the financial institutions for their own benefit.
That has changed with the introduction of legislation, first in Australia, and now across North America. It created law foundations and designated that the interest, that had previously been lost, be considered to be public monies to be distributed by the foundations according to their objectives.
For the benefit of those who may not have been members of law foundations, I would make the point that, in most cases, client funds are of a size and are held for a time period that allows them to be maintained in trust accounts and the interest accumulated is accounted for individually. In the majority of situations where lawyers hold trust funds, those funds accrue interest for the benefit of the client. In addition, there are many instances where it cannot practically be done. Over the past decades, in those cases, the law foundations have been able to put those moneys to good public use.
The history over the last 10 or 20 years of attempts by the law foundations in Canada to negotiate interest arrangements with the institutions that hold these funds is set out at page 3 of our brief. In summary, it is our view that this has never been an easy process. In fact, it has been a difficult bargaining relationship because of the uneven bargaining positions of the parties, namely, the foundations and the financial institutions. In their dealings with the financial institutions, the foundations have had to rely on whatever competitive factors they can bring to bear to the relationship and appeal to the institutions' good graces and desire to meet any public interest, benefit intentions that they may have.
That brings us to the two primary concerns we want to leave with the committee. First, what effect will a merger of financial institutions have on competition and the ability of the law foundations to negotiate competitive trust rates on their general trust accounts so that they can maintain their revenues and meet their objectives? Second, -- it is not really a concern, but a submission that we think could be helpful to all concerned when considering the matter of mergers -- there is a public interest objective that can be met through the continuation and, indeed, the enhancement of these relationships as well as the accumulation of interest into the foundations.
At pages 4 and 5 of our brief, we deal with the first point, the potential effect on our negotiating position and competition by virtue of the merger. At pages 6 and 7, we deal with the public interest role we think the foundations might be able to play with institutions in the context of a merger.
With respect to the first point, competition and effect on competition, it is true that, if these general trust funds were not in many accounts for many clients, but were, rather, in the account of one client, there would be a significant amount of money. The financial institutions, as a matter of commercial imperative, would be paying a competitive rate of interest on those funds to ensure that they are able to maintain those deposits in the face of competition from other institutions.
With respect to these small trust accounts, the foundations do not have that advantage. It is difficult to have the same bargaining position that the amount of money would justify if it were held in the hands of an individual or a smaller number of clients.
The underlying premise of any negotiation is the assertion that the financial institution should be paying a competitive rate of interest. That is certainly the approach that the foundations continually try to maintain. The area of disagreement is: What is a competitive rate of interest?
This comes from a background where the banks previously had the benefit of these funds in full. Obviously, as an institution, they have an interest in maintaining their own financial performance. There is, therefore, the tension between the foundations trying to assert a negotiating position for the public good, and the banks recognizing their own concern about the handling of these funds which involves charges to maintain these accounts and matters of that type.
We conclude that, because of this unequal bargaining power there is limited recourse for the law foundation when the financial institution sets the terms and conditions after a negotiation.
In our view, in a market with fewer institutions than there are now, the competition could clearly lead to higher prices or lower rates of return. Seventy-five per cent of the revenue of the law foundations of Canada is received from the five major chartered banks. There is the risk, the real risk, that, in an environment of merged financial institutions, we could end up being worse off than we are today.
The association submits that any merger should not have the undesirable effect of reducing the need for some of the financial institutions to continue to offer competitive arrangements to the law foundations on the general trust accounts they are maintaining.
The public interest can be served with the institutions, merged or not, working positively with the law foundations. The law foundations provide a cross-section of law related programs and initiatives across Canada. Some of the organizations funded by the foundations have a range of social objectives. Many of the grants go to programs designed to make the law and the justice system available to members of the public, many of whom would not have access to the system without the assistance of the organizations that are being funded.
We think there is a significant general public benefit from the activities of the organizations that are being funded by the law foundations. It is important to note that often the law foundation funding is a major or core funding source for these organizations.
Appendix IV lists some examples. This is certainly not a complete list of the organizations that are being funded by the law foundations, but it will convey some sense of the public interest that is being served by the foundations.
For example, British Columbia funds the B.C. Coalition of People with Disabilities. Alberta funds the Native Counselling Services of Alberta. In fact, one of the specific objectives of the Alberta Law Foundation is to provide assistance to aboriginal legal programs. Saskatchewan funds the Elizabeth Fry Society. There are many other examples beyond the ones listed in Appendix IV, which we think demonstrate the significant public benefit that accrues from the funding of the foundations across the country.
Near the end of the brief, we refer to two of the recommendations in the MacKay report. Recommendation 98, at page 6, states:
Financial institutions should work with the voluntary sector to develop new, innovative partnerships that would help build stronger, healthier, and more caring communities. Leaders in the financial institutions and in the voluntary sector should work together to this end, beginning with innovative pilot projects.
In this case, we do not need pilot projects. We have an arrangement in place that can be built on to strengthen a relationship between financial institutions and the communities they serve. Our point to this committee, and indeed to the financial institutions, is that the law foundations constitute a means by which the institutions could and can work towards meeting the public interest objective contemplated by recommendation 98. We think it applies rather pointedly to the situation that the foundations have with the institutions today.
I refer to recommendation 99, at page 7 of our brief which states:
Each federally regulated deposit-taking institution and life insurance company should be required to make available to the public and file with the Minister of Finance one or more annual Community Accountability Statements to describe its contribution to the community and to identify emerging community needs to which it intends to respond.
Activities of the community organizations are funded by the law foundations using public moneys -- moneys that should be accruing not to the financial institutions but to the law foundations and, in turn, their organizations. We think the financial institutions, through the same mechanism, could include in their community accountability statements the goodwill that they have shown in their negotiations with the law foundations, and the monies that have been paid over for distribution.
In the middle of page 7, we make the point that the payment of interest on these trust accounts is not a matter of charitable donation by the banks, but rather the recognition that these funds are accruing, although, practically speaking, not to any one individual. They should be put to the benefit of public service. In my submission, that would be precisely the policy behind the concept of law foundations and the legislation that resulted across the country.
In conclusion, at page 7, we mention that the MacKay report examines the basis for the high expectations of Canadians regarding the behaviour of regulated financial institutions, particularly banks, and conclude that the expectations are legitimate.
Our association submits that the financial institutions are bound by those expectations to treat the law foundations fairly in the wake of any merger, or indeed in the absence of a merger. It is our opinion that this point would be favourably received by the institutions.
We urge that the committee consider this brief and consider our specific recommendation, which is outlined at the conclusion of the report, at the bottom of page 7, that the committee support the view of the association that the net rate of return currently being paid on lawyers' general trust accounts should not be worsened as a result of any mergers of financial institutions.
We are very grateful for this opportunity to make these points to the committee. We hope you will have an opportunity to review the brief. We would be pleased to provide your committee with any additional information you may require.
The executive directors and I are now available to respond to any comments or questions you might have arising from the presentation.
The Acting Chairman: It seems your presentation is not driven by the recommendations in the MacKay report but, rather, by the spectre, as you see it, of the subsequent mergers involving four of the major banks. Am I correct in that?
This is a unique representation on a non-general point. It could be made by any other party who has funds and deals with financial institutions.
Mr. Friend: Shortly stated, the answer is yes. The difficult environment we find ourselves in looks like it could become much more difficult, to our great detriment and that of our organizations, if a merger does proceed. The MacKay report does seem to contemplate the cooperative relationship that we are trying to further, a relationship that exists right now, one that we think could develop to an even greater extent under a merger.
With the merger of two major financial institutions, the pool of funds would become even larger. It would naturally flow that there could be a higher return and even more funds available for the public interest.
The Acting Chairman: I can see that you found some wording in the MacKay report that you are piggy-backing on to make your point. However, in fairness to our wider audience on television, I must emphasize what our chairman, Senator Kirby, has said at each venue: Our committee is considering the 124 recommendations in the MacKay task force report, and we are not, I repeat "not", holding hearings on the proposed mergers of the banks, that is to say, the Royal Bank and the Bank of Montreal, or the Toronto Dominion and the CIBC. In fact we have no mandate to comment directly or indirectly on that although it, quite naturally, is raised in discussion with our witnesses. The possibility of mergers obviously gives rise to some debate on the MacKay proposals, because they are fundamental to the financial services sector, as we know it under present law.
I am saying this only as a caveat because your submission seems so particular. It does not seem to have anything to do with the MacKay report, and I say that with the greatest of respect.
Without further adieu, I will go to Senator Oliver.
Senator Oliver: Our acting chairman has gone to the root of what I wanted to raise myself. What is at issue here is the interest that is paid on short-term trust accounts of lawyers and that later goes to legal foundations in the various provinces of Canada.
You referred to the MacKay task force recommendation 98. However, as I read that, this can be done without the involvement of law foundations across Canada.
When I read your last and main recommendation on page 7, it seems to me that you are not asking us to put this into legislation. The only reason that the banks are now agreeing to give the interest earned on these accounts to lawyers and, therefore, to law foundations is because of a private arrangement or a contract that has been negotiated with them. Surely you would not want that kind of arrangement enshrined in legislation.
Mr. Friend: I would take a different view. As your chairman has said, we are concerned about something happening if the mergers go ahead. It is a very specific point. Even if the mergers were to be abandoned, and if recommendation 98 is that financial institutions should work with the voluntary sector, I would not agree that, under the current arrangements with respect to the foundations, they meet that particular recommendation.
With respect to enshrining in legislation a voluntary arrangement, we wanted to raise as a matter of concern for the financial institutions that are monitoring this, and for the committee considering the recommendations in the MacKay report, this background in the hope that the message would reach the financial institutions that this is part of their community service work as outlined in recommendation number 98.
Mr. Snider, the executive director from Alberta will also make a comment on that.
Mr. Owen Snider, Executive Director, Alberta Law Foundation: As a matter of fact, the payment of interest to the law foundation is typically found in provincial legislation that governs a relationship between the law societies, the government, and the public. What is not in the legislation is the amount of interest the financial institutions should pay. That is what is negotiated. They must pay interest on these accounts to the law foundations. That is already enshrined in legislation.
Senator Oliver: Surely you are asking us to legislate the rates of interest -- rates that can fluctuate.
Mr. Snider: No. You are perfectly correct. We are not.
Senator Oliver: Do you think it is good public policy for this committee to be making the kind of recommendation you are suggesting?
Mr. Snider: I think it behooves the committee to recommend that the financial institutions, not just the banks and not just the ones that are merging or contemplating mergers, be aware of the community benefit that arises from a relationship such as the one that exists.
Senator Oliver: Do you think they are unaware of that and that they need to hear it from us?
Mr. Snider: It would not hurt to hear it from another source.
The Acting Chairman: Surely the best place for you to sit down and make this recommendation is before the Canadian Bankers' Association, who have discovered to their surprise that they are about as popular as politicians or senators. Agreeing with your recommendation might enhance their perception in the marketplace. Do you not think it would be better to ask that the financial institutions pay a competitive rate of interest rather than asking that the rate paid not be worsened? If the banks were to agree to pay a competitive rate of interest, would that not solve your problem?
Ms Pat Pitsula, Executive Director, British Columbia Law Foundation: I think you are right about that. Perhaps this brief would be better put before the competition bureau.
This is not an attempt to slip a point across. This appearance offers a unique opportunity for us, for the first time on a national level, to have the work of law foundations recognized. That work is in the public interest. Of course, the MacKay report does address the reorganization of financial services, and the public interest is a factor.
Yes, I agree that our best forum would be with the individual banks, but that is part of the nature of the problem that we had hoped to describe to this committee or perhaps to another. There is an inherent inequality in the bargaining relationship. In fact, just last week, I met with the vice-presidents of the four major banks in B.C. Individually they told me that I should have no concerns, that our rate of return would stay the same. They even told me that there is a real possibility that it will improve. That was just as we read in the media that Matthew Barrett was saying that they are willing to give written commitments regarding various aspects of reorganization with respect to the mergers, whether it dealt with job losses and so on. We came here with a view to getting the endorsement of a body such as this which is involved in this huge question of recognition of the kind of relationship we have with the banks in trying to negotiate in the public interest. We think it is most reasonable to expect that we should not be worse off as a result of the reorganization which could be endorsed by a body such as this.
Mr. Friend: Senator Meighen, your wording regarding "competitive rate" is indeed preferable. That goes back to my point that if these funds were being held by one or two or three individual corporation customers or individual customers then they would get competitive rates. We are not looking for a floor below which it never goes. Obviously we have to negotiate in the marketplace, but we would just like to be treated by the institutions in a competitive way, not a better way, and certainly not a worse way, and we thought that the MacKay Report and its recommendation with respect to community interests invited that representation.
The Acting Chairman: I reiterate that I think that the CBA is the place for you to make your case, and I think it is a compelling case. You are right in that many of us around this table are members of various bars and we take the very good work of law foundations a bit for granted. The public perhaps is not quite as aware of what you do as we are.
You based many of your assertions on the fact that there are fewer institutions if mergers, for example, were to go ahead. On the other hand, MacKay spends a great deal of time and puts a great deal of emphasis on opening up the financial institutions market in Canada, and if I am not mistaken, there is a very large foreign bank that is already paying a rate of interest, on overnight deposits anyway, far in excess of what you might get. I do not know if you have spoken to them.
Senator Oliver: You are referring to ING.
The Acting Chairman: The point simply is that, if one or both of the mergers went through, when all is said and done, it would not necessarily mean that there would be fewer institutions in Canada with which you can place these trust funds and get a competitive rate of interest, unless you are constrained by provincial legislation of the chartered banks, and I am not clear on that.
Ms Pitsula: That simply is not reality. That argument applies both to major banks and to credit unions, who you just heard from.
The Acting Chairman: Sorry, what is not a reality?
Ms Pitsula: I am referring to the negotiating power that you think we have so that they will just automatically give us a competitive rate of return.
The Acting Chairman: I do not suggest for a moment that they will automatically do that. I am challenging you on your assertion that there are going to be fewer institutions with whom you can place the funds, in other words, less competition, if the mergers go through. Why is that necessarily so?
Ms Pitsula: That may not necessarily be the case. However, right now in B.C., if the mergers of the four major banks goes through, they will hold 70 per cent of our revenues. Being as vulnerable as we are to the possible outcome of the negotiations that take place, we are concerned about what may happen in the immediate few years and, therefore, we are trying to position ourselves.
If there was more competitors in the market, be it from foreign banks or others, of course, we would benefit in the end, but I would say that part of the psychology around all of these hearings is the concern of an unknown future. Will we be protected? Will we be harmed?
The Acting Chairman: Did you make representations to the MacKay task force?
Mr. Friend: No, we did not. If 10 years down the road we found ourselves with numerous and increasingly large and popular institutions that lawyers were using, as opposed to the Big Five or the Big Three -- whatever we end up with -- then we could use that to our advantage to the extent that we would have competitive pressures to bring to bear.
The concern would be if that did not happen for, say, six or seven years and the rates changed, even by a point, in a B of M/Royal merger. As our paper outlines, the interest rate produces the big swing. Certain organizations could lose their funding entirely, at least in that interregnum, assuming we are moving towards having an increasing number of institutions and competition in the industry.
Senator Oliver: Would you not be vulnerable as well, if interest rates in Canada were 12 per cent and 13 per cent and they suddenly dropped to 5 per cent? You would be equally as vulnerable in that situation as you would be in the event of bank mergers, would you not?
Mr. Snider: There is an appendix that sets out exactly that situation in the report. In four years, we went from $13 million to $1.4 million in revenue in Alberta for exactly the reason you set out.
Let me put it to you this way, in discussing these issues with you today because, I at least have some "faint hope clause", if I may call it that, that we can have an influence. There is no such thing in terms of the fluctuation of the prime rate, so all we can do is try to minimize the differential, the spread between the prime rate and the rate we get paid, and take our lumps with the rise and fall of the prime rate.
With respect to competitiveness, I have negotiated our law foundation operating account with a particular bank. They pay me prime minus 1.75 per cent with no service charges, but on a far greater amount of money in the general trust accounts, they pay prime minus 3.75 per cent with service charges.
It is a conundrum. There is a two-point spread there.
Mr. Friend: Senator, it really comes down to what you are able to negotiate against prime, whether it is 12 per cent or 5 per cent. That is where your negotiating position comes in.
[Translation]
Senator Hervieux-Payette: I have no doubt you are prudent managers. Since you are in such a weak negotiating position, are you compelled by provincial legislation to use this process to invest your funds? Is there no better way? Couldn't you negotiate a better return with other financial institutions, like credit unions or brokerage firms? Does provincial legislation require using banks?
[English]
Mr. Snider: We cannot play the institutions off one against the other with respect to where the deposits go because that is not the law foundation's decision. It is the decision of the individual lawyer or law firm as to where they hold their trust funds. The law societies do have some control over the general picture. For example, it wasn't until 1991 that trust funds could be held with credit unions in Alberta, but now they can be held with credit unions, trust companies, chartered banks and with the treasury branch, which is a financial institution of its own sort.
We are largely unable to use any lever other than the community goodwill of the law firm -- where you can suggest to the law firm that, if they have a choice as to where they put their funds, we would prefer that they put them with an institution that pays a higher rate of interest on them to the law foundation. We have made the lawyers in many provinces aware of that choice.
[Translation]
Senator Hervieux-Payette: Thank you for this clarification. I was under the impression that you were captive of a couple of large banks and had no access to other sources. I understand the process. I hope this allows people who are listening to our proceedings to understand you are doing a good job and that it is not easy to get all lawyers to deal with one institution or use one process that would provide a better return for the law foundation.
I glanced at your list of projects you are funding. There are groups who advocate for consumers without being called consumer associations. The "Tenant's Right to Action Coalition" could be described as helping consumers to deal with landlords. National organizations have asked us to urge financial institutions to include in the bank statements sent out to customers a form by which customers could donate money to a legal aid fund that would assist consumers in their disputes with a financial institution.
I am raising this because I am looking at the amounts you have available to fund these organizations as compared to the amounts this method might generate. Apparently, the amounts collected this way in the United States is quite significant. Have you looked into this? There are lots of contracts and legal documents that the consumer is not always able to understand well enough, which puts him at a disadvantage when dealing with insurance companies and banks.
Since you are all part of the legal profession, do you think that having another method for collecting funds would be useful in order to establish a more level playing field and provide consumers with more easily understandable legal information?
[English]
Mr. Friend: I think I am the only lawyer here and the rest are normal people.
The work being done currently across the country by the organizations that are funded by the foundations do much to provide access to those who would not otherwise have it, both to the legal system directly, and to certain rights under the legal system, such as tenants' rights.
In Alberta, for example, there is a central Alberta women's outreach society which assists women who live outside of large urban centres and who are in situations, for example, of abuse. They are given access to protection and legal rights.
The concept that you raised of funding from other sources, not from trust accounts, to similarly assist such advocacy/access groups, is certainly something that one would be hard pressed not to support in a general way. I would see it outside of the mandate of our foundations, which are, pursuant to provincial legislation, instructed to negotiate the best rates possible and then distribute according to objectives. I do not think it would be the position of the foundations, as part of their mandate, to make a direct recommendation with respect to that, but I invite the comments of others.
Ms Pitsula: In B.C. we do things differently. The law foundation has encouraged groups to secure alternate sources of revenue because of the diminished funding situation. In fact, the tenants' group is now working on a legislative scheme with the government to collect interest on security deposits, and that would fund tenants' rights actions.
On that point I am most appreciative that you looked at that list because, going back to the MacKay report, we have often been involved in negotiations where they look at our annual report, and then decide to just give us a charitable donation.
In terms of the community accountability statements, our concern is that we not be marginalized and just treated as a charitable donation. It is a business relationship in which we seek a competitive rate of return.
[Translation]
Senator Hervieux-Payette: In an ideal world, what would you suggest should be done in order to put you in a better bargaining position with the banks, at least in the future? It is not enough to say, "Go see the Canadian Bankers' Association, they just sunk $20 million in an advertising campaign." I am sure you could make good use of that money. But how could we at least ensure in the future a better bargaining power for you in your dealings with financial institutions?
[English]
Mr. Friend: It comes back to simply being competitive, and being treated as a competitive equal. At this stage we are not looking for anything other than a statement to the banks that they should treat the foundations like any other individual or customer that would have those types of funds on demand deposit with their institutions, and that we be offered a competitive rate.
If the institutions did not do that, despite that encouragement, then there might be a requirement for other, more forceful solutions. All we want to say is that, pursuant to recommendation 98 of MacKay, we should be treated as any others and not as a charitable foundation. Treat us in a competitive fashion and we will conduct our affairs on that basis.
Ms Pitsula: How can we create a more level playing field? We had hoped we would take a step in that direction today because, in fact, there is very little recourse. A meeting with the Canadian Bankers' Association, with all due respect, will not be really helpful. I am not even sure we would get a meeting. We all negotiate province by province, institution by institution.
In B.C. alone, we conduct 42 negotiations with credit unions every two or three years, so it is kind of an impractical suggestion to implement.
We had hoped a body such as this would recognize, in the reorganization of the financial sector, that one way of creating a more level playing field is by recognizing this particular relationship among many other consumer groups, and acknowledging that it is worthy of being protected and held harmless through this change.
Senator Tkachuk: At page 4 of your brief there is a statement that, if the general trust funds were in the account of just one client, the financial institutions would pay an excellent rate of interest on the funds to ensure the client would not invest those funds elsewhere. The issue is, as a legal trust fund, you cannot take speculate and monitor the other markets. You must leave it on deposit at a bank. What you are saying in that statement, and just correct me if I am wrong, is that you think that the banks are taking advantage of the fact that you cannot put your money elsewhere, in other words, you cannot be competitive with your money as if you were a private person with the same amount of money.
Mr. Snider: That is probably pretty close to the truth. As we speak, there is $2.5 billion on deposit in general trust accounts in Canada. It is not a small amount of money. The amount of money on deposit by any particular individual citizen is probably $4,000 or $5,000. If you go to the bank with $4,000 or $5,000 you get whatever rate is posted. However, if you go to the bank with a million dollars, you get a much different rate.
That is not how the trust accounts are treated, even though there might be well over $.5 million or even $1 million in there as a general floating balance. It is not looked at in that light. The banks suggest to us that there is a high cost to maintaining these accounts because of the entries and so on, notwithstanding the fact that most of them do get service charges for that cost.
Suffice it to say that your interpretation of the paragraph is bang on. We do feel that we are not being given the same rate of interest that an individual with the same amount of money would be given.
Senator Tkachuk: Lawyers are important people in the community. You cannot be compared with, say, four new, small business people. Lawyers are smart and organized, and yet you feel you are being treated in this way.
Mr. Snider: Let me correct you on one small point. It is not the lawyers' money. It is the clients' money.
We, the law foundation, are not part of the law society we and are not working for the benefit of the lawyers. We are working for the benefit of the general public from whom the principal in those trust accounts came.
Having said all of that, we do have some fairly high profile people involved in the negotiations, particularly in British Columbia where even members of the provincial government have been involved. In Ontario they have also worked at that level.
It seems that what we are able to do is work on the incremental schedule. If we get another half point in this five-year period we will be doing okay, even though we are still nowhere near the general market competitiveness rate.
Senator Tkachuk: Your testimony is quite telling because we are being asked to make recommendations on banks and how they handle themselves when they have the consumer at a disadvantage. Of course, they all tell us what great people they are, that they never do this, but small business people keep telling us that they do.
Now you are telling us that, if they have you at a competitive disadvantage, they do not treat you as they would if you were not at that disadvantage. The banks, who want to get into other businesses, constantly assure us that they will not take advantage of the situation, that they will not get into personal supplies, that is, sell insurance, lease cars or whatever, and we listen to them.
You have referred to recommendations 98 and 99. Your testimony is important because the MacKay report touches on how banks organize themselves in their community. The report includes recommendations regarding accountability statements. Banks may do good works on their own, but how they treat other institutions that may not have clout is just as important to a community as whether they make donations to a charity.
We should take your recommendations seriously. When the small business people complained about small business loans, they told us that one solution was for them to open a new bank which would deal exclusively with small business. Special interest groups do ask for special treatment. Perhaps how banks treat non-competitive customers is an issue we should address.
Ms Pitsula: Perhaps I could just make one point for the record. I would be very concerned if the record showed that, in any way, we were bank bashing or not appreciative of the rates that we now enjoy. As Mr. Friend mentioned, there there is a fundamental, honest tension going on here.
Banks are doing their job, making a profit, getting the best rate they can in order to make their investments. We are trying to get the best rate of return for the public interest. Until the MacKay report, no outside force has had any influence. I am referring to instruments such as a community accountability statement that would bring some pressure to bear on what I think is an honest tension in the bargaining relationship.
Senator Tkachuk: I did not intend to suggest it was otherwise.
Senator Michael Kirby (Chairman) in the Chair.
The Chairman: Our next witness is Mr. Robert Rosen.
Mr. Robert Rosen, President, City Lumber Corporation: Mr. Chairman, I appreciate the opportunity to come before your committee.
Our objective is to identify key issues that exist today between consumers and banks, a system that I think has evolved not in the best interests of consumers or Canadians.
If we go right to page 2 of my handout, we see that the banks have inordinate power and influence in dealing with small business or consumers. In today's world, there is vulnerability between a small lender or a small business and a bank. Given today's rapid pace of technology, it makes it even more difficult for a small lender to have access, as was the case many years ago.
If we go to page 3 -- and I think this is a true reflection of the situation in Canada -- we see communities in which the economy can vary quite dramatically, whether it be Prince Rupert or St. John's, and during that time companies in those communities are very vulnerable to the decisions of the banks and how those bank decisions are made.
Page 4 identifies how quickly a bank can respond to a situation. The consumer or the small business is very vulnerable, because if the bank decides to move quickly the assets of a small business can be immediately tied up by the bank. The small business has minimal ability to defend itself in this situation. Under agreements that are signed currently in Canada, the borrower is at the mercy of the bank.
If you go to page 5, again the banks can move very speedily. Because the banks are few in number, they can influence each other's decisions. Therefore, even though we say that the marketplace is competitive, the creditor is unable to move to another bank. A discussion process takes place and companies find themselves in a very vulnerable position; it makes things very difficult.
There is only one institution that I know of that is not involved in these things, and that is the FBDB, the Federal Business Development Bank. The FBDB is independent and, for that reason, has value.
Page 6 deals with the vulnerability of companies to the banking system, whether they have been in business for 10 years or 50 years, and the relationships that banks identify as being very committed. I think we can probably see a development in B.C. where this issue is going to become fairly immediate.
The bank's actions against a company -- actions that can be very swift under law today -- can have the effect of employees losing their jobs and suppliers getting caught in a credit situation. These actions against a company have a ripple effect, from customers, to families to the economy. The company itself gets caught in a very stressful and fear-like position.
The circular chart shows the complexity of the process in which a consumer or a company will find itself, in the event of a dispute with the bank.
On page 9, we deal with the legal fraternity. One of the issues that is very significant and very relevant is the relationship between the banks and the legal fraternity. Many law firms look to banks as their major clients, and therefore the banks have undue influence on legal firms when dealing with the consumer. Lawyer's fees are non-negotiable, usually under agreement. The profession is self-regulated. If a consumer has a dispute with a bank fees or costs, the process is long and difficult. It is a taxing process, and it leaves the consumer in a very indefensible position.
The same position relates to monitors and receivers -- who, I might add, do not even have a taxing process. If a bank creditor has been treated unfairly, the process is very long, arduous, and expensive. A small player will not survive the process.
I would like to make a comment about the courts. When we appoint judges in Canada, all of whom are very competent, we do not, unlike the United States, encourage them, if they are involved in the financial side, to develop a better understanding of balance sheets and cash flows. This is a very serious issue. In the U.S., the process is different.
In addition, because of precedent, banks have the advantage in the courts and, as such, the consumer finds himself in a very untenable position.
My comment on the banking ombudsman is that it is just window dressing. If you look at how the ombudsman is instituted, the position carries with it no binding power. Unfortunately, the ombudsman is really not of great value.
On page 14, I suggest an alternate dispute resolution mechanism, one that would allow creditors or small businesses to defend themselves against the major banks. A key factor here is confidentiality.
I am very hopeful that this committee will review the points I have brought forward and that its research will show that, because of the size and influence of the banks, consumers are at a disadvantage when dealing with the banks.
The Chairman: When this committee looked at the changes to the Bankruptcy Act about a year and a half ago, we were of the same opinion as you, that monitors should not be allowed to be receivers. This committee has urged that that not happen. We did not, however, make an amendment to the law to do that. Examples were brought to our attention where in certain cases it might be desirable for the monitor to also be the receiver.
Nevertheless, our basic point of view coincides with yours; that is, they should in fact be two different positions. In most cases, there is an element of conflict, in the sense that there is no desire on the part of the monitor to try to save the business if the monitor is also the receiver. I just give you that by way of background.
My question to you pertains to your alternate dispute resolution mechanism. Were you here when the Farm Credit Corporation talked about their process?
Mr. Rosen: I think that process has some excellent considerations and is one that I think is very worthy of looking at.
I would like to come back to the monitor issue. It puts the consumer at a real disadvantage. Monitors have no reason to be sensitive to the consumers' needs because they are there on behalf of the bank. They are partial, and they carry that partiality into the receivership process, which puts consumers at a great disadvantage.
The Chairman: Right. The view of our committee was that, if monitors knew in advance that they could not be the receiver, they would try very hard to keep the monitoring process going and thereby avoid the receivership and bankruptcy problem. On the other hand, if the monitor knew that he or she was still going to have the job regardless of whether the company went into receivership, then the incentive to maintain a monitoring role was diminished.
Mr. Rosen: The monitor has been put there by the bank. The bank instructs the monitor to do very little, or nothing, to help that business stay in business, and, therefore, that monitor's involvement is a negative investment.
The Chairman: As opposed to positive.
Mr. Rosen: Absolutely.
The Chairman: Any particular comments you want to make on the Farm Credit Corporation's review process?
Mr. Rosen: I think the main issue is that the consumer does not have the ability to say, "Stop. I would like to have an independent and impartial group review what is going on, to see if these actions are reasonable." The Canadian consumer lacks the ability to do that.
Clearly, the issue is that the consumer does not have the power to identify if the bank has over-reacted. Usually, the bank will have the consumer sign a disclaimer, which then makes it impossible to even challenge the bank. In point of fact, we have a totally vulnerable consumer and a process that works efficiently for the bank, unless the consumer is financially strong enough to deal with it -- which, as I say, can take almost two years, and very few consumers can survive that.
The Chairman: Right, whereas the Farm Credit Corporation model is essentially an appeal mechanism of a kind.
Mr. Rosen: I think the key element here is to review the issues and see if there is not a middle ground to be found. This is what the ombudsmen are supposed to do, but I think they are quite unable to accomplish that.
Senator Tkachuk: I notice that you are the president of City Lumber Corporation. Is that a business in Edmonton?
Mr. Rosen: It is a 50-year-old business in Edmonton; that is correct.
Senator Tkachuk: Is what you have told us today the result of personal experience, or is it the experience of many of your business colleagues, who would have had discussions with you?
Mr. Rosen: It would be a combination of both. One of our companies did have this experience, which is why I have chosen to come here today. We had the financial strength to deal with it, but the costs were amazingly high. I wanted other Canadians to know about my experience. I do not think many other consumers could have survived the process. As we move into the 21st century, these issues must be re-evaluated.
Senator Tkachuk: You referred to the U.S. when you talked about judges and their ability to be conversant in business finances. Could you just expand on that a little bit?
Mr. Rosen: There is a bankruptcy court in the United States that has a special tier of judges who are appointed because they are specialists in dealing with finance. My suggestion is that Canadian judges be given an opportunity to extend their awareness of balance sheets and cash flow, just as we have judges in family law or other areas of law. With all due respect to lawyers, all of whom are generally very knowledgeable, but not necessarily all on financial issues, I think this is a very important issue.
Senator Tkachuk: Do you agree that we should have a national ombudsman? Is that a solution to this problem?
Mr. Rosen: I do not believe so. The situation requires an impartial, independent body, not a former bank employee, which is usually the case. I respect Mr. MacKay's knowledge, as long as the ombudsman was formerly in the employ of a bankers' association or bank, there will be a built-in bias, and I think that is dangerous.
Senator Oliver: The MacKay task force report says that the status quo is just not good enough. He says that one of the things we have to do is to find ways to get more competition into the financial services sector, that competition should make it better for consumers and better for small business.
On page 5, you say that Canadian banking fraternities will not extend credit to companies known to be in distress. The MacKay task force report has recommended that more foreign banks be permitted to come into Canada, to compete with the big banks, and that credit unions be allowed to flourish and grow, and so on. My question to you is this: If that comes to pass, will it go a long way towards overcoming some of the problems that your brief has highlighted?
Mr. Rosen: I believe that the need to bring in other banking institutions or to allow credit unions to be more active is absolutely correct and positive.
The bottom line is that today's banks are not the banks of 25 years ago, where the relationship with customers was similar to a family relationship and the banker was at your home if there was difficulty. Today's banks are bottom-line, business-oriented, international institutions. Today's banks have a new vision, their destiny has changed, and I believe that credit unions and other institutions are much more sensitive to smaller community needs.
The Torontos, Vancouvers, and Edmontons will always have banks. The Moose Jaws, the Prince Alberts, and smaller communities in the Maritimes will need these closer relationships. There needs to be a special process, one that will allow the consumer to be heard when dealing with the banks -- such as the Farm Credit Association. I think it is critical.
Senator Oliver: You were here I think when Senator Meighen asked a number of very pointed questions about the Farm Credit Corporation, which is a government bank or a government lending agency, as opposed to a free enterprise. What changes, if any, would you like to see in that organization, which is a special lending organization for agriculture?
Mr. Rosen: I am from Alberta -- and I a strong supporter of Ralph Klein, I might add. Those associations are important because they provide a balance between free enterprise, which I certainly strongly believe in, and industries that go through various cycles. The agricultural element is a fundamental one, and it is important that it be accessible.
Senator Oliver: As a government agency?
Mr. Rosen: As a government agency, but monitored and evaluated in a very businesslike way.
Senator Kroft: To enhance competition and the competitiveness of the financial marketplace, the MacKay Report recommends broadening the powers of financial institutions, through their branches. It recommends allowing them to carry on other activities, such as the selling of P and C and life insurance, and a broader area of leasing than they are now able to do.
If I accept that you are one who has at least a healthy guard up at all times about inordinate power relationships, how would you fit that into the mix? Would it be a step forward in broadening the competitive side, or is there a dark side to it?
Mr. Rosen: I am uncomfortable with it, and I will share with you my own experience. When my company was building a shopping centre, the bank we were dealing with at the time -- and I will not mention any names -- insisted that in order to retain our line of credit we had to take our mortgage on that shopping centre from that bank. The cross-selling issue is one that inhibits competition rather than contributes to it. That would be my feeling.
Senator Kroft: So that was a direction to you in that development?
Mr. Rosen: Absolutely. It was a straight cross-selling issue, and I thought it was most unjustifiable.
Senator Kroft: I presume that because it was a shopping centre, there were more zeros than there would be with an individual car lease or an RSP?
Mr. Rosen: We had a better rate someplace else, but the bank said that they wanted us to arrange our mortgage through them.
Senator Kroft: You have articulated very clearly the problem you see in the operation of the banks with the business community. How would you put the prospect of merger in the context of the main burden of your paper today? Would it just be more of the same, or would it change the scale and scope of the issue in a significant way?
Mr. Rosen: I am sensitive to Senator Oliver's comments because I believe that there is need to bring in more competition. We are also in a global marketplace, so we would not want to inhibit any major institution from being financially effective in the best interests of their investors. However, at the same time, there must be an evaluation of what that accomplishes in the best interests of the community. The community is their customer, and I think that is the key issue. Is there really going to be a great benefit to the customer? Does the global market really show that bank mergers in various countries have contributed to the best interests of the investor? Those are difficult questions.
Like many others, I am trying to be as constructive and open as I can be about it.
Senator Callbeck: I have a question on the proposed change, your alternative dispute resolution. Are you proposing that mainly for a commercial deal or for an individual consumer, too?
Mr. Rosen: I would have to believe that it would reflect more for a small business situation. However, I also believe that consumers who have loans with a bank or other financial institution have every right to be properly serviced. As I say, our current banks are very intimidating in dealing with people who have a disagreement with them.
Senator Callbeck: Certainly we have heard that from other witnesses. We have had many critics of the bank say that tied selling itself is a major concern or issue. In fact, the MacKay report talks about a poll they did that shows that 16 per cent of the people they surveyed felt they had been subjected to tied selling, but we get very few complaints. In 1996, there was one complaint; in 1990, none; and in 1998, one.
It seems to me that what you have proposed here is mainly for commercial concern. What about the consumers? How would you make the ombudsman process more friendly towards the consumer?
Mr. Rosen: I believe that today's borrowers are generally very worried that they will alienate their banks, which in turn will cause their loan to be disallowed, which in turn will put them into great financial trouble. That situation is much more serious than has been identified, I believe. Clearly, there is more than one person out there who has gone through difficulties and receivership; there have been many.
It is a serious issue, and I think even the banks, because of their unpopularity in the polls, realize that it is a serious issue. This committee and the MacKay task force are playing a critical role in brokering a partnership between Canadians and their financial institutions, which, as it stands, is a very unfortunate and unsatisfactory situation for all involved.
In my experience, senior partners of major accounting firms across this country have never even heard of the ombudsman process. I can share that with you very honestly. It is a very unknown process. If you talk to a regular banker in an average city, they will not even recommend it to you. The process has potential, and I think the MacKay report identifies it.
It comes back to this: A new relationship must develop between our banking institutions and the people of this country. I think this committee and the MacKay committee will play a very critical role in building that.
Senator Callbeck: You mentioned that the process is not well known, yet you said that where it is known it was not even recommended. Why?
Mr. Rosen: With all due respect to the men and women who have been appointed ombudsmen, they have no binding authority. They can be overruled. With all due respect to Mr. Michael Lauber, in speaking to him at the time, he was so overwhelmed with what he was doing that he was unable to even discuss any further issues.
Again, I want to be very respectful because I respect these people. They are fine, intelligent people, but I believe, as I have said here very clearly, that I think it is just window dressing for the banks until a better process comes forward. I mean that very sincerely.
Senator Callbeck: Do you have any suggestions as to what that process might be?
Mr. Rosen: I believe that the Farm Credit concept is probably a beginning. Another one, which is used by the professional standards for auditors, is a process used by the Institute of Chartered Accountants of Alberta. It is complicated, but at least it can be evaluated effectively.
The Chairman: Senators, our last group of witnesses today comes from insurance brokers associations in Saskatchewan, Manitoba and Alberta.
I would ask Mr. Gaschler to proceed.
Mr. Ernie Gaschler, Executive Director, Insurance Brokers' Association of Saskatchewan: I have with me here today Mike Saunders, who is filling in for the president of the Alberta association, who is ill; Harold Baker, who is the Executive Director of the Independent Insurance Brokers' Association of Alberta; my president, Barbara Ricard, President of the Saskatchewan association; and Brian Gilbert, who is the President of the Manitoba association.
I trust that our brief has been circulated to everyone on your committee. We do not intend to read it. We, of course, understand that your committee has also heard from a number of our fellows and our colleagues across Canada. Our brief reflects many of these same themes that you have probably heard before.
We would like to make a few brief introductory remarks and then entertain questions.
If I may, I would also like to at least acknowledge that quite a number of our colleagues who are interested in the proceedings today are in the chairs behind us.
Our national association, the Insurance Brokers Association of Canada, has outlined the general view of brokers in regard to the inadequacies of the MacKay report as it relates to the P and C insurance sector. Our colleagues in Atlantic Canada asked you an important question: When a financial institution holds both the insurance and credit portfolio of a consumer, whose interest would they represent in the case of a disaster?
Our colleagues in Quebec told you that, as a small business, we must share with our bank, which is also our competitor, our entire private business financial information, including our business plans, in order to obtain credit. Is there another industry where this practice exists? On behalf of Western Canadian brokers, we would simply like to reinforce that Canada's P and C insurance sector is intensely competitive and that it gives the consumer enormous choice in product, price and service.
From a broker perspective, we think that there are some fundamental questions that still need to be asked. Is the P and C insurance sector broken? Does it need to be fixed? Is there anything wrong with the current distribution systems? Is the consumer underserved? How does the government adequately police coercion, particularly when it is subtle or implied? Will banks replace the loss of jobs and create small businesses in the insurance marketplace? We believe that the insurance consumer is well served and that there is no need to broaden the business powers of the banks beyond what they were given in 1992.
Mr. Chairman, that would conclude our brief remarks, and we will certainly entertain questions.
The Chairman: Thank you, Mr. Gaschler. We heard from the Mouvement Desjardins in Montreal on Friday, which is effectively the holding company of the caisse populaire movement. They have been retailing P and C insurance for approximately 10 years. Their data showed that in that 10-year period they have built up to approximately 11 per cent of the market, or thereabouts. Frankly, I was surprised that it was that small; it seems to be a lot less than what the dire forecasts predict will happen if the banks enter the P and C market.
I am asking you to comment on that because we were surprised at how relatively small that percentage was. Now I admit that doesn't deal at all with the conflict of interest issue, which is a totally separate question. But I am just curious because it is an example of a deposit-taking institution selling property and casualty insurance in the Canadian marketplace. The caisse populaire movement as a whole is by far the largest single deposit-taking institution in the province of Quebec. They have some 40 per cent of the market, so it is not a small, irrelevant example. Yet that market evidence would appear to be in contradiction to a lot of the statements made by some of your colleagues to us across the country. You are the first group we have had the opportunity to ask this question to since we got the caisse populaire data. I am curious as to what your response would be.
Mr. Gaschler: Some of my colleagues may want to comment on that further. I have no way of verifying the 11 per cent figure.
The Chairman: I think it is fair to say that we believe the data is right. The other data we have had from them has always been accurate, so I believe it is a reasonable statement of their market share.
Mr. Gaschler: We have heard these observations as brokers from our national colleagues. The caisse entered the marketplace with the promise of very low rates. That obviously attracted a segment of the population. We understand that some of that business is returning back to brokers because they have had to increase their prices, for underwriting and other reasons.
I think that it did, however, have an impact on the brokerage community in Quebec. I believe that you have been told by representatives of our colleagues in Quebec that it had a substantial impact. There are 1,000 brokerages, if my memory serves me correctly, that are no longer in business.
I would not comment on whether or not 11 per cent is considered too much or not enough or whatever.
Mr. Mike Saunders, Past President, Independent Insurance Brokers' Association of Alberta: The only comment in relation to their capturing 11 per cent of the marketplace is that it took out of the marketplace significantly more than 11 per cent of the brokerages operating in the province of Quebec. I think that at the time there were 2,700 brokerages. Our statistics show that about 1,000 of them are now gone from that landscape. Those jobs were lost, moved or dislocated.
When you are dealing with the large banking industry in the small communities, that can have a very disruptive effect.
The Chairman: Is it fair to assume or draw the conclusion that the number of brokers went out of business solely due to the entry of the caisse populaire movement into the P and C insurance? If we look across every other part of the financial services sector, in fact every other part of the retailing sector in the last decade, there has been huge consolidation. In retail you have Home Depots and Wal-Marts. The number of credit union branches has dropped. There must have been consolidation in your business, although it is perhaps not as dramatic as the Quebec numbers would indicate. But is that not happening, as certain firms become more efficient than others?
Mr. Gaschler: I cannot speak for Quebec, but I can speak for Saskatchewan. I reviewed our licensing statistics, and there has been a slight decline in the number of brokerages in the province over the last five years, somewhere in the neighbourhood of 5 per cent. However, at the same time there has been roughly a 20 per cent increase in the number of people who have been licensed.
From a job point of view, there are more people working in the brokerage sector, but, yes, you are right, there has been a small decline in the number of brokerages.
The Chairman: So the number of individuals employed has gone up, but the number of actual companies has gone down?
Mr. Gaschler: In Saskatchewan, that is the case.
The Chairman: Is that generally true in Manitoba and Alberta, or do you know?
Mr. Saunders: I think there has been some consolidation of the number of brokerages in all the provinces, but if you look at the Quebec situation, it was precipitous. It was not just this natural consolidation of the industry. There was a drop-off of 1,000 brokerages. That is about a 20 to 25 per cent drop. That is significant.
The Chairman: Do you have any comment on Manitoba?
Mr. Brian Gilbert, President, Insurance Brokers' Association of Manitoba: From a Manitoba standpoint, I can confirm that our numbers are similar to Saskatchewan. We have had a very slight decrease in the number of individual offices. We have had an increase in the number of brokers working within the entire industry.
Senator Tkachuk: To get an idea of how competitive the marketplace is, could you tell me how many brokers and/or brokerage companies are in existence in the prairie provinces? Or if you cannot, can you at least tell us how many are in the provinces you have here at the table?
Mr. Gaschler: I can give you just a very rough estimate because we put our heads together and tried to collect some data. In the three prairie provinces, we think that there are roughly 1,300 brokerage firms, and they represent somewhere in the order of 12,000 to 13,000 people.
Senator Tkachuk: In a small town in Saskatchewan you might have one. Let's say in Rosthern or Yorkton or Melville, there would be, what, one broker, two brokers, three brokers?
Ms Barbara Ricard, President, Insurance Brokers' Association of Saskatchewan: I am from Kindersley. In Kindersley, we have two brokers as well as a Co-operators agent. The two brokers each employ four employees.
Senator Tkachuk: You have three companies. How many banks operate in Kindersley?
Ms Ricard: There are four banks and the credit union.
Senator Tkachuk: So three brokerage companies would have to deal with four banks and a credit union, correct?
Ms Ricard: Yes, that is correct.
Senator Tkachuk: So if they entered the marketplace and were selling insurance as well, they would all know your business, all three of you?
Ms Ricard: Of course, yes.
Senator Tkachuk: The banks keep telling us that if they sold insurance, there would be increased competition and consumers would benefit. I will state that I don't buy that argument, but I just want your views on how you counter their argument that it would be a more competitive marketplace if the banks sold insurance. How do you debate that argument without questioning whether they get into your files and all the rest of it?
Mr. Saunders: When they enter the business, certainly there will be more competitors. Whether the business will be more competitive is another question. I think the credit unions stated that there was already enough competition in the banking sector, and there are only roughly 40 of them operating in Canada. I am not sure of the number. There are 230-plus insurers operating in Canada now, providing an enormous amount of competition and choice for the consumer.
Adding four more or five more to the mix does not necessarily mean that it will be more competitive. There may be some predatory pricing initially, and as those prices are unsustainable by losses, they will fall back and then once again you will probably have fewer brokers alive because you cannot sustain -- I cannot sustain -- losses for five consecutive years and stay in business.
A bank might price their insurance products so competitively for a long enough period to make it difficult for me to remain in business. At that point they will have captured my segment of the marketplace as well, and the competition dries up.
Senator Tkachuk: If we take the example of Kindersley, if the banks and the credit unions get into the business of selling insurance, do you think that all of you will remain in operation? In other words, there will be five of them and three companies surviving, so there will be eight competitors.
Ms Ricard: No, I definitely do not believe that the brokerage would be in business in any way, shape or form. As Mike alluded, I am not financially capable of sustaining a loss for more than three years. As Mike also pointed out, if the banks come in with low prices, I would still be governed by insurer rates and I would not be able to compete.
Mr. Harold Baker, Executive Director, Independent Insurance Brokers' Association of Alberta: In response to that, in Alberta we recently did a survey that showed that 3 per cent of our brokers' businesses have been lost to banks in Alberta, and the banks have only been in Alberta for about a year. We have already seen 3 per cent of our business go out the door, and most of that business has disappeared in Edmonton and Calgary. It has not had an effect on rural Alberta, but they have not marketed there. We have already seen a 3 per cent decline in our business.
Senator Tkachuk: You are talking about the fact that the banks themselves have insurance companies that sell insurance, not the fact that they are selling it through the branches. Which is the issue?
Mr. Baker: They are already in the marketplace. They are already selling insurance. That is a given. They are not retailing it. They are using call centres, and they are also using the Internet. We have seen 3 per cent of our business go over to the banks already, as I say, primarily in Edmonton and Calgary.
Senator Meighen: Just by way of background, the life insurance companies have CompCorp. I think that is their financial backstop in the event of a serious demand on industry funds. And you have got what? The Property and Casualty Insurance Fund; is that what it is called?
Mr. Saunders: It is called PACIC. I would like to differentiate or let you know that we are retailers of a product delivered to us by insurers, and it would be very difficult for us to speak about PACIC and how it works. We are just the retailing end.
Senator Meighen: No, I understand that. I don't want to shoot the messenger. In light of things like the ice storm in Quebec and those sort of catastrophes, I wondered, as somebody who has an interest, if not a financial one except indirectly, whether you could enlighten us as to whether you felt that PACIC protects the soundness of the industry.
Mr. Saunders: I believe, Senator Kelleher, that we had this discussion a few years ago as it related to developing an adequate fund for earthquake insurance in British Columbia and finding a methodology to do that. Our industry is very concerned with the ability to handle catastrophic losses, and the largest catastrophic loss that we can see on the horizon would be an earthquake in British Columbia.
Basically, we are looking at a methodology to try to deal with that as an industry and to put adequate funds away to deal with those issues.
I think the total bill on the ice storm in Quebec was half a billion to a billion dollars. I think the industry responded to that quite adequately and protected the consumer as best as humanly possible in such atrocious conditions.
Senator Meighen: In practice, if not in law, is property and casualty insurance a financial service? I'm trying to draw a distinction between property and casualty insurance if I can, and life insurance. Maybe I am wrong. Life seems to me to be more of a wealth-management operation. P and C is financial protection in the light of a catastrophe.
Mr. Saunders: I think that is a good point. As a financial service, I don't think so. I think we are attached to wealth management. We are wealth protection, not wealth growth, financial growth. We protect the assets in the event of an unlikely and unforeseen event.
You are right that it is a little different. In fact, it is a lot different from the life insurance industry, particularly because we cannot predict ice storms, earthquakes, tornadoes and $500 million hail storms.
Senator Meighen: Or even somebody running a car into mine. What would be the reaction of you people here today -- and the industry generally -- if, heaven forbid, I waved a magic wand and said that as of tomorrow, life insurance could be sold by the banks out of their branches, but that P and C could not?
Mr. Saunders: You don't need to wave the magic wand. They are doing it already through their bank branches when you go for a mortgage. I went to renew mine a few years ago, and we got down to the little box where they put the X that says you want to life insure the mortgage, and I had to ask them to erase the X out of box because I do not want it.
Senator Meighen: You did not because you thought you would get a better rate by shopping around.
Mr. Saunders: No, I chose not to deal with a financial institution for my life insurance products. But the point is that they do that now. They are doing it. The danger in letting them into the property and casualty business is the effect that it will have on our industry.
Senator Meighen: I understand your submission in that regard. As far as life insurance is concerned, it is another matter.
Mr. Saunders: It is difficult for us to speak to that because we are property and casualty brokers. It would be very unkind of us to speak on behalf of the life insurance industry.
Senator Meighen: I just wondered if it would have a detrimental effect on you. I understand that your answer is "Not particularly".
Mr. Saunders: Exactly.
Senator Kroft: I want to pursue two questions. You talk about predatory pricing or aggressive pricing. I just want to come to understand better the limitations on the range of possible pricing. Insurance is a pretty cut-and-dry business. You have a loss history, and you have risk. Over a period of time it becomes clear whether the carrier is making money or losing it. The insurer then either continues or adjusts the rate.
Everyone who is selling the product has to carry that, no matter who it is. I am trying to understand where there is room for substantially altering or shading the delivery cost. As you describe your operation, it sounds to me like a fairly basic cost. You obviously don't spend any money that you don't have to.
Now, if one of those banks starts selling P and C insurance, they will have to train their people, I should think. I mean, you talk about having exceptionally high standards, higher than those of foreign jurisdictions, in terms of your level of professionalism.
If that banker down the street was doing all the things that you do, training their people, creating the professional standards, making the calls and giving the customers service, what is there in the bank structure that you think could inherently allow them to deliver a product at a cheaper price over the long term? Forget the tied selling or any of these issues. Is there anything inherent in the structure that would allow them to deliver the product more cheaply? It seems to me that you have a lot of advantages in that regard.
Mr. Saunders: Senator, we feel that, in the long run, they really have nothing within their bank branch system that would give them that competitive advantage. But they have that short-term ability to underprice us until we don't exist. Banks can also use the information that we have been obligated to provide to them about our client's insurance needs to help put us out of business. Those are our concerns.
In the long-term, as long as the playing field is level, we can compete with anyone. The banks are now currently marketing insurance through their insurance subsidiaries. The rules that were put in place in 1992 seem to be working. As long as we have that level playing field where we can compete with the same types of advantages or the same rules, we can compete. It is when you tilt that field and give them an unfair competitive advantage that we may not be able to stay around to see the end of the game.
Senator Kroft: Would professional training be one of the areas where you feel that they might get away with less, because they would be using people already in place?
Ms Ricard: They might get away with less in professional training and licensing, but our problem is that it would be very difficult to police whether these things were actually being monitored and actually being done. That is our fear.
You can often have people that will maybe perform a certain duty, and, therefore, they fall outside of what the licensing is supposed to be. But human nature will always allow you to, or make you, stray from what your focus is, so we feel that it would be hard to police whether the people are licensed and educated properly.
Senator Kroft: Is licensing issued upon the passing of examinations?
Mr. Saunders: Exactly, and the examinations fall under provincial jurisdiction.
Senator Oliver: I have two specific questions, and they both really arise from my sense that maybe we are over-spooked by this fear of the banks moving in and being able to sell insurance products in their branches. This is a question I asked another witness, and I want to see what you will say about it. Some people have said that it is highly unlikely that Canadian banks will make a run at companies in the property and casualty business due to the fact that many of these P and C insurers with the largest market share are deep-pocketed, foreign-based companies, not Canadian companies. They have better access to capital than the Canadian banks. I am referring to something like the Dutch ING or the French AXA, and to banks that are more likely to form strategic alliances, say the Royal Bank with Co-operators.
Do you believe that the task force makes it easier for the banks to form those strategic alliances with P and C companies?
Mr. Saunders: I believe that at this point they have already set up their own P and C networks. They do not need to make alliances with anyone now. They have developed their own. We have Scotia Insurance, CDI and CIBC Direct.
Senator Oliver: They cannot compete with the Dutch and the French companies in terms of deep pockets, though.
Mr. Saunders: They seem to be doing it quite nicely. In Alberta, in six months, they have captured 3 per cent of the marketplace. They will survive. We have 70 to 80 solely Canadian companies. They compete quite nicely against those large, foreign companies.
The property and casualty insurance is different than life insurance and anything else. It is a pretty finite product and we sell this thing for a finite period of time. It is an annual thing.
I just do not see that the idea of having them huge makes any difference to the accessibility or the capital pool that is necessary to fund insurance risk in Canada. It does not make a large difference.
Mr. Baker: I think it is important to recognize that in the property and casualty industry, we have competed with people with deep pockets. The banks seem to be afraid to take on the challenge of competing with somebody. They like to have the rules in place.
A lot of Alberta-based property and casualty insurers have a fair share of the market and compete with companies who are foreign-based and who have deep pockets. That's a reality of our industry.
I think that the banks' challenge is to find a way to do that themselves in their own industry, without rules and regulations.
Senator Oliver: Let me throw another set of scenarios at you. Some people would say that the argument that you are putting forward is not so much about companies, banks and insurance companies and so on, but more about the consumer, the end-consumer, and is it not true that Canadians right now are underinsured? Someone earlier was talking about earthquake insurance. How many people in this room have earthquake insurance, do you think?
Banks will get into the commodity P and C products, and, therefore, increase the market, and P and C will be left with a complex project with high value added. The price for P and C will drop. The P and C industry has been very slow to adapt to new technologies for delivering the product, so why, therefore, would the banks not choose brokers to sell their product, to have you retail it?
Mr. Gaschler: I do not know. They have made a decision to market their own products through their own distribution system, whether they do it through an exclusive agent or through telemarketing or Internet or whatever.
I guess I would say that insurance is a pretty mature industry. I think many of them know and understand the risk management assessment and management process. They know what their costs are. I don't think that there has been any evidence at all to show that the cost of delivering the product for a direct writer is all that different from a broker-based company. Therefore, I am not sure where in that distribution cost a real advantage can accrue to any competitor.
Senator Oliver: If the costs are not that different, then the brokers are doing the follow-up and the personal attention to the customer in the event of a catastrophe.
Mr. Gaschler: Absolutely. I think the difference between the broker and someone who works directly for one of the product manufacturers, a company, is that they are the consumer's advocate. They help consumers identify their risks and their needs and then help them buy insurance in the marketplace.
Mr. Saunders: Another point, senator, is that you talked about the banks providing the P and C commodities, as you will. As we have seen so far, their interest is only in taking the round peg that fits in the round hole. Everything that falls outside of that is to be picked up by the rest of the industry. Our industry has not been negligent when it comes to earthquakes and putting adequate funds away. It is a daunting and enormous task, for an enormous amount of money needs to be accumulated to fund that foreseeable loss, if you will.
I do not think that our industry is slow to react to what is necessary in this country. I just think that sometimes we have tax constraints, and there are a number of issues that make it difficult. But to say that they will take care of the commodity things and that we will do the specialized things I think would be like saying that you guys cannot have the things that make money, you can only handle the things that don't make money. I think that that would be bad for the consuming public. At the end of the day, all those high-risk ventures or things that are not round, that do not fit in the little round hole, that fall outside, will become more expensive to the consuming public. Quite frankly, what I have seen of what they have put together is pretty basic stuff. They want to take the money-making portion, and they will let the rest fall by the wayside. I don't see that this would be a beneficial thing to the consuming public in that regard.
Senator Oliver: I was just trying to suggest that the banks might bring a new dimension to the marketing of the product, that is all. But you seem to be saying no, no, no.
Mr. Saunders: I have not seen it yet. CIBC has been at this for three years in Ontario. I have not seen anything exciting in the way of new products from them or telemarketing.
Senator Oliver: Do you telemarket any of your products when you are retailing?
Mr. Saunders: Yes. I live in a tiny town of about 7,000 people, and, oddly enough, in that small community, we do. However, unlike some other companies, we do not go to the United States for a telemarketing firm. We do ours in Canada.
[Translation]
Senator Hervieux-Payette: I want to go back to the experience in Quebec with the credit unions. The people selling insurance in the Mouvement Desjardins are well trained, are professionals and have a code of ethics. Therefore, they will be disciplined if they offend by tying insurance products to loans. It is not in their interest to do so. Do all brokers in the rest of Canada have the same training? Is a broker who commits a breach answerable to a redress mechanism to which the consumer has access, in other words could he lose his licence? What oversight is there over brokers in the Western provinces?
Mr. Saunders: I think we all have committees that deal with these issues. It is exactly the same process as in Quebec, I believe.
Senator Hervieux-Payette: So, if you make a mistake and a customer wants to complain about his broker, he goes to this committee?
Mr. Saunders: Yes, senator.
Senator Hervieux-Payette: And we are given the guarantee that the loan manager will never be in a direct relationship with the broker selling insurance in the bank. Don't you think that this board would be able to discipline a person practising tied selling in a bank?
Mr. Saunders: Only if he has a licence from that province. But I don't believe employees of a bank need to have a licence at the present time. Therefore, the board will not have authority.
Senator Hervieux-Payette: Mr. Béland, the President of the Mouvement Desjardins, told us that people selling insurance are licensed as brokers. Therefore they are not ordinary employees with no training. They are trained as brokers. Does this not alleviate your concerns?
[English]
Mr. Saunders: If in fact we all meet the same licensing standards and have the same education and are subject to the same continuing education rules and market conduct rules, obviously, there is no concern for us. It is more a case, at least where brokers are concerned, of the individual being in an institution or in a position where undue influence and coercion affect the consumer. That would be an unfair disadvantage to the other licensed individual and would cause us concern.
[Translation]
Senator Hervieux-Payette: If our committee recommended that in order to sell P and C insurance in a bank, employees are required to have the same training as you, would this alleviate the concerns of your associations?
[English]
Mr. Gaschler: For my part, I would say no, that we would not. It is not because of their training or whatever. If they were to operate outside of the bank in insurance subsidiaries or in a company owned by a bank, then it would be a level playing field. But as long as they are in that position of being an employee of a lender dealing with the customer, we believe that would constitute an unfair advantage and would cause concern.
Ms Ricard: The bank has the ability to coerce people into purchasing the insurance because they want financial services from that bank, and so, therefore, the playing field is not level.
[Translation]
Mr. Saunders: It is impossible to change perceptions. If the consumer believes that he needs to buy insurance from the bank in order to get his loan, he will do so. You cannot regulate this.
Senator Hervieux-Payette: Therefore, the consumer is not in the same situation as when he deals with you, where no loan is at stake?
Mr. Saunders: Yes, senator.
Senator Hervieux-Payette: Are there any regions where there are greater risks, for example of ice storms, where traditional insurance companies refuse to provide insurance so that you, as brokers, cannot provide coverage? I am talking about all companies presently in the market, and would banks be likely to provide such coverage?
[English]
Mr. Saunders: I would like to respond to that one in English because it happens in English Canada. It appears in Calgary all the time. Our industry has always responded to catastrophic losses. I don't know of any companies that have refused to write insurance in Calgary, but our industry pumped several million dollars into a hail suppression program to alleviate the hail problem there. I am not sure of anyone else who would step to the plate and do that.
We saw that as a way to stop the losses from happening, keep the cost of the insurance reasonable, and still make a profit. Pumping several million dollars into a hail suppression program made sense, and it was done.
Senator Hervieux-Payette: I could give you an example of what Desjardins did during a snowstorm in the Quebec City area. They even sent people to shovel snow off the poles that were in danger of breaking to prevent damage. In Quebec City you can have up to 10 feet of snow, enough to significantly damage external poles. I think it is important for us to know that you actually offer coverage on just about anything.
How many companies does an average broker use to cover the risk? Are you tied to one company or do you sell every product on the market?
Mr. Saunders: Our latest statistics show that the average brokerage works with seven to ten insurers.
The Chairman: I wish to thank everyone who participated in our meeting today.
The committee continued in camera.