NEW ENTRANTS
1. The Co-operative Sector
2. More Flexible Corporate Structures
3. Entry of Foreign Financial
Institutions
4. Capital Tax Holiday
SECTION A
NEW ENTRANTS
Background
The Task Force believes that credit unions and caisses populaires have great promise to be a significant competitive force in the Canadian financial services sector.
Credit unions and caisses populaires today play an important role in meeting Canadians’ financial services needs. Indeed, in some provinces, they are dominant market forces in many product lines. Their role can and should be strengthened. It is important that there not be public policy constraints on the ability of credit unions and caisses populaires to make their greatest possible contribution to a competitive financial services environment. (Task Force Report, p. 91)
The credit union/caisse populaire system is characterised by a three-tiered structure: at the local level, individual credit unions or caisses populaires; at the next level, provincial centrals or regional federations; and, at the third level, Credit Union Central of Canada (CUCC) or the Confédération des caisses populaires d’économie Desjardins du Québec.
Credit unions are member-owned. Each member has one vote notwithstanding the number of shares owned. The members elect the board of directors of their local credit union or caisse populaire. Representatives from local credit unions elect the boards of directors of the provincial centrals or regional federations in Quebec. The boards of the provincial centrals in turn elect the directors of the Credit Union Central of Canada, while the boards of the Quebec regional federations elect the directors of the of the Confédération des caisses populaires d’économie Desjardins du Québec. (Task Force Report, Background Paper #2, p. 112)
Each local credit union operates independently and is regulated by provincial legislation. Provincial centrals provide a number of services in support of local credit unions such as:
- marketing, product development and public relations;
- research;
- member education and professional development programs;
- electronic data processing;
- systems and manuals to facilitate day-to-day operations;
- management counselling;
- legal and taxation services;
- treasury functions; and
- government relations.
Provincial centrals also manage the liquidity pool for their member credit unions and participate in the national liquidity pool which is managed by CUCC. CUCC, which is the national finance facility and trade association, also provides access to the Canadian Payments Association for credit unions outside Quebec and is a member of Interac. In Quebec, liquidity support for local caisses is maintained by Mouvement Desjardins through the regional federations. At the provincial level, Mouvement Desjardins provides access to the payments system for the local caisses.
Local credit unions are regulated by the legislation of their home province. Provincial centrals are incorporated under provincial legislation. Six provincial centrals – British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Nova Scotia — are also federally regulated under the Co-operative Credit Associations Act. The CUCC is regulated pursuant to the federal act and supervised by the Office of the Superintendent of Financial Institutions. (Task Force Report, Background Paper #2, p. 117)
The credit union system in Canada is comprised of over 850 independent financial co-operatives operating from more than 1800 locations throughout the country. In over 300 rural communities in rural Canada, credit unions are the only financial institution providing services. Collectively, the credit union system has combined assets of over $48 billion and represents about 7 per cent of the financial services market in Canada. There are over 4.5 million members in the credit union system. Combined with the 5.6 million members who belong to the caisses populaires in Quebec, some 10 million Canadians are members of a financial services co-operative. According to the Task Force, credit unions and caisses populaires have about 10 per cent of the assets of all deposit-taking institutions in Canada.
The credit union movement has had varying degrees of success across Canada. It is particularly strong in British Columbia, Saskatchewan, Quebec and parts of New Brunswick. Credit unions are an important presence in Manitoba where they account for 25 per cent of the assets of all deposit-taking institutions in the province, but less so in Ontario. The Ontario market is segmented – in Toronto, the major banks dominate; outside Toronto credit unions have a stronger foothold. For the most part, credit unions in Atlantic Canada tend to be small, fragmented institutions and have not developed significant share of the market.
Since its inception, the credit union system of British Columbia has grown to $21 billion in assets and serves more than 1.4 million people through 86 credit unions with 335 branches in 125 communities. In 28 B. C. communities, a credit union is the only financial institution. In addition to Credit Union Central of British Columbia, credit unions in B.C. have established a second central credit union – Stablization Central – to work with credit unions encountering managerial or financial problems.
According to the Task Force, the five largest credit unions in Canada are located in British Columbia. Canada’s largest credit union, VanCity Savings Credit Union (VanCity), has over 250,000 members, and some 38 branches. VanCity and its subsidiaries, Citizens Bank and Trust have consolidated assets of $5.6 billion.
With about 35 per cent of deposit taking institution assets in Saskatchewan, the credit union movement is strong in that province. Credit unions in Saskatchewan have 548,000 members, 340 locations, 2,800 employees and $6.3 billion in assets. In 130 Saskatchewan communities, a credit union is the only financial institution.
In Alberta, the statistics are similar. Credit unions in that province have 560,000 members, 178 locations, 1,900 employees and $5 billion in assets. In 24 communities, credit unions are the only financial institution.
The credit union centrals of Saskatchewan and Alberta have recently joined forces to create efficiencies providing credit union payment services as well as credit card and electronic transaction services.
In Quebec, the Mouvement Desjardins is the largest financial institution and the largest private sector employer. With $71 billion in assets, it ranks as the sixth largest financial institution in Canada. According to the Task Force, the Mouvement Desjardins has over 5 million members through over 1,200 caisses. It also has approximately 360,000 affiliated member through over 100 caisses and three federations in New Brunswick, Ontario and Manitoba.
The Mouvement Desjardins is a major force in the Quebec financial services market. It offers a full range of services including: taking deposits, mutual funds, RRSPs, consumer credit, residential mortgages, commercial credit, agricultural credit, life insurance and general insurance.
The Task Force noted that credit unions are effective competitors in some provinces, but not all. Their strengths lie in their community roots, their innovation in meeting the needs of their customers and in the provision of financing to small commercial and agricultural businesses. It also pointed out many of the challenges facing the credit union system. These include:
- serious structural problems in co-ordinating the use of the system's capital because of its fragmentation;
- raising capital to support growth;
- system-wide decision making is difficult and slow given the system's democratic structure;
- duplication of effort, administration, human resources and backroom activities as each credit union is an entity on its own.
- the inability of many credit unions to meet the growing needs of the more sophisticated consumer. (Task Force Report, Background Paper #2, p. 119)
The Task Force concludes that the credit union system will need a renewed vision in order to meet these challenges. In framing its recommendations, it pointed out that neither the Task Force nor the government could provide this vision, but the regulatory framework could better support the decisions that are made by the system.
Task Force Recommendations
22) Federal legislation should permit co-operative banks and other financial institutions to be chartered as new institutions, with ownership and governance to be based on co-operative principles. Subject to compliance with applicable provincial legislation, provincial credit unions and credit union centrals should be able to continue as co-operative banks under the Bank Act.
23) Federal and provincial governments should take such steps as may be available, within their respective jurisdictions and subject only to prudential constraints, to remove legislative and other regulatory barriers to the success and growth of the co-operative financial services sector, including in particular credit unions and caisses populaires.
24)Restrictive provisions contained in the Co-operative Credit Associations Act upon the business activities of credit union centrals should be removed except to the extent that they are necessary for prudential reasons. Specifically:
- a credit union central should have the ability to provide wholesale financial services to another financial institution without the present requirement that the other institution first make an investment in a subsidiary service corporation of the credit union central.
- credit union centrals should have the ability to provide retail financial services directly to members of local credit unions.
- where credit union centrals act in concert in relation to an investment, they should be treated as one entity for purposes of the Minority Investment Regulations.
- The credit union movement, OSFI and the Department of Finance should establish a Working Group to resolve any prudential issues.
Views of Witnesses
The Task Force set out proposals for two legislative frameworks for the co-operative sector.
The first entails changes to the Co-operative Credit Associations Act that would:
- allow credit union centrals to provide wholesale services to other financial entities or retail services directly to their members; and
- remove some of the restrictions on the ability of credit union centrals to enter into financial joint ventures among themselves and with credit unions.
The second would provide for the creation of one or more co-operative banks under the Bank Act. This option would permit a credit union or groups of credit unions to apply to become a federally chartered co-operative bank. In addition, credit union centrals could become co-operative banks whose only business would be to provide services to local credit unions.
Credit Union Central of Canada outlined for the Committee that areas of the MacKay report that were of particular important to the credit union movement.
The MacKay report has set out two legislative vehicles to help us move forward in the new environment and thus provide us greater competition in the financial services sector.
First, the report endorses our submission last year to the task force, in which we propose desirable changes to the Co-operative Credit Associations Act. At present, if centrals wish to provide wholesale services to other financial entities or retail services to their own members, they must do it through a subsidiary which they must own, for example, Co-operative Trust, Agri-Finance, leasing companies, and credit union corporations that provide credit services. This is immensely costly. In addition, the Co-operative Credit Associations Act restricts the ability of centrals to enter into financial joint ventures among themselves and with credit unions to provide an efficient and harmonised delivery of financial services. In summary, such legislative changes would enhance the centrals' capacity to provide a broad range of support services within the credit union system. These changes, it should be mentioned, would only be enabling changes. They would still require OSFI's approval in each particular case.
A second legislative option outlined in the MacKay report would consist of the creation of one or more co-operative banks under the Bank Act. Under this option, a credit union, or a group of credit unions, would apply for continuance as a federally chartered co-operative bank. As well, credit union centrals could become co-operative banks, whose only business would be to provide services to local credit unions which otherwise might not be able to afford the necessary investment in systems. At the moment, a number of credit unions are working out the business, legislative, and regulatory implications of migrating to the Bank Act. (William Knight, October 8, 1998)
Credit Union Central of British Columbia outlined three scenarios — one wholesale and two retail — for restructuring the co-operative sector.
At the wholesale level, we are considering the possible restructuring of our provincial and national organisations which provide services to credit unions. We are looking to wring efficiencies out of the system’s upper tiers in order that credit unions might compete with banks and other financial institutions, more efficiently. Making their service providers as efficient as possible will contribute to their success in the future....
At the retail level ... the two scenarios we are exploring as the enhancement of our present system and the possible creation of a national institution, a community bank.
Most credit unions place a high value on autonomy and their capacity to serve their local community and their market niche. These credit unions are not banks and have no desire to be banks. They are prepared to bear some additional administrative expense as the prove for that autonomy.
To address the issues of costs and image, we are exploring ways in which these credit unions can present a more distinct and integrated presence to members. This includes a review of our branding and the promotion of more homogeneous products and services. This will require a greater level of co-operation among Canada’s eight hundred credit unions.
The second retail scenario is the creation of a national retail financial co-operative or community bank. (Wayne A. Nygren, October 28, 1998)
The President of VanCity Savings Credit Union provided additional elaboration of these options.
We … have attempted to provide options for credit unions — and there are three options here — depending on their position today. Of the approximately 800 credit unions, there are several that, because of the nature of their business, are quite happy to continue to maintain their operations as they are today in a totally autonomous environment. We provide for that because they need services that they cannot provide for themselves. By and large, these are very small organisations and they cannot afford all the back-room services required for them to succeed.
There are others that want to maintain a significant amount of local autonomy as well but see the advantage of being affiliated with other credit unions across the country. Through our national service entity, and by providing certain minimum standards, a number of credit unions may feel very comfortable in becoming part of that group.
There is yet another group, of which my credit union happens to be one, which feels that we need a lot of change and we need it quickly. We feel that we need it quickly because we compete head-on with the banks in this country on the retail and small business sides. Our industry, as you all know, is going through incredible amounts of change. We believe that we need change now.
As a result of that, this group of credit unions has developed a third option, which requires us to receive legislative accommodation from the federal government to enable us to operate interprovincially. (Bob Quart, October 8, 1998)
Twelve credit unions from across Canada and Citizens’ Bank are proposing to amalgamate their assets and liabilities to form a national community bank. This group, which includes large and small credit unions, represents about 25 per cent of the assets of the total English Canadian credit union system and about 800,000 members. (Mike Tarr, October 28, 1998)
Representatives of the participants in the national community bank proposal appeared before the Committee. They described how the bank would be owned by co-operatives, would improve efficiencies, enable the pooling of capital resources, provide a platform for enhancing services to small business and provide more choice for Canadians.
Proponents of the community bank proposal estimated that it would take three to five years to develop a "mature organisation".
... We are all up and running organisations. We can start tomorrow, with the legislation, in terms of starting to move down an implementation plan. In terms of actually putting everything on to a common technology platform and a number of those issues, we, along with every other start-up organisation are probably going to want to wait until the year 2000, for obvious technical reasons that are related to technology banking systems. ... But it will be a roll-out strategy that will not happen all at once. We will start in those areas of back-room operations where we can do those things quickly. ... By five years you would see a national brand people will think had been there forever. (Mike Tarr, October 28, 1998)
The advantages of a co-operative bank were noted by Mr. Claude Béland, president of the Mouvement Desjardins.
As for the co-operative bank, we are very happy to see that the Mouvement des caisses Desjardins has managed to convince the task force members of the importance of allowing the co-operative sector to establish one or more co-operative banks and eliminate the legislative and regulatory barriers to the growth of the co-operative sector in financial services. This is necessary today for a number of reasons.
First, the means we have available to move forward with our members at the national and international level, especially small and medium businesses, are rather limited currently.
On the other hand, a plethora of banking and non-banking institutions operating with very light infrastructure costs covet our market share and target choice and low- risk clienteles.
In addition, financial disintermediation and the changes in consumers' savings investment habits will exert strong additional pressure on the supply of capital needs from the co-operative sector. That is why we have proposed that it be allowed to establish a co-operative bank, a central organisation that would allow it to minimise the operational obstacles that it faces and also improve its efficiency. Such a co-operative bank would allow the Canadian co-operative sector to obtain a better position in the financial services market because it would allow it to: first, group together the so-called banking and financial operations; second, effect economies of scale; third, better approach the national and international institutional capital markets; fourth, to diversify its portfolios both at the regional and sectoral levels; and finally, to increase its capitalisation. For us, that is an important step. (Claude Béland, October 23, 1998)
Several witnesses strongly supported the Task Force recommendations pertaining to the co-operative sector. Many believe that credit unions have the potential to provide the meaningful level of competition to existing large financial institutions that is contemplated in the Task Force report. One witness noted that the success of a second tier financial system in the form of credit unions in British Columbia, Quebec and Saskatchewan was fostered by provincial legislation that consistently provided those organisations with the opportunity to provide a full range of services to consumers. The Task Force recommendations, it is argued, would establish the framework for the credit union system to become more competitive at both the local and national level.
Clearly, the proponents of the national community bank proposal are optimistic about their prospects as a national competitive force.
We agree with the fact that provincially constrained and regulated credit unions will not provide that level of competition I think MacKay was contemplating. ...Our position is ... that the credit union system generally and our group in particular represents a viable, credible option to the federal government in terms of providing in a fairly quick manner, a tier two form of financial organisation that will be coast to coast and will deal with people in all forms of communities in this country. (Mike Tarr, October 28, 1998)
Others were less optimistic about the ability of credit unions to play a larger role in the financial services sector and compete with other financial institutions. The President and CEO of the Atlantic Provinces Economic Council was of the view that, save for parts of New Brunswick where credit unions and caisses populaires are important players, it would be a long time before credit unions in Atlantic Canada would be effective competitors to the banks.
The Report proposes that co-operative banks could be established as a way of allowing credit unions to strengthen their centralised services and provide a wider range of business services. However, in our view, this would primarily benefit larger credit unions across Canada. The small size and scope of the credit union movement in Atlantic Canada, particularly in Newfoundland and Labrador, suggests that this proposal would offer only limited benefits to Atlantic Canada at the current time. Even with the accommodating changes in the regulatory environment, in our view, it would take a number of years before credit unions in Atlantic Canada could achieve economies of scale and compete effectively with other financial institutions. (Brief to the Committee, October 20, 1998, pp. 1-2)
The Canadian Federation of Independent Business (CFIB) was of the view that, perhaps after a decade or more, credit unions could begin to co-ordinate their activities, build networks and develop expertise in existing and new markets. However, the CFIB believes that the landscape will continue to be dominated by the large banks and does not anticipate that opening the market to new competition, particularly credit unions, will mean greater choice for small firms.
The Metropolitan Halifax Chamber of Commerce was somewhat more optimistic about the prospects for the credit union movement, suggesting that, within ten years, a national community bank would likely have a significant share of the Atlantic Canadian small business market if it went after the market aggressively.
Conclusions
The Committee strongly supports the recommendations of the Task Force relating to the co-operative sector. It is the Committee’s view that these recommendations are essential to the goals of enhancing competition and encouraging the development of domestic competitors in the financial services sector.
The credit union movement is at a critical juncture in its development. The opportunity exists for the movement to become national in scope while not sacrificing its community ties, its high-quality service to its customers and its local roots. The Committee is of the view that the credit union movement has an opportunity to gain a greater share of the financial services market and, in some areas, achieve a degree of success comparable to that attained by the Mouvement Desjardins in Quebec.
The Committee believes that government can assist the co-operative sector by creating a legislative framework that will enable co-operatively owned institutions to grow and prosper.
Credit unions have the potential to be dynamic innovative competitors to the large financial institutions. This will not happen overnight, however, nor is the competitive effect likely to be the same throughout the country. The greatest potential for competition is likely to be in areas where the credit union movement already has a strong base. The Committee is of the view that the creation of a nation community bank should give the credit union movement a platform to compete against the large banks in the foreseeable future.
The Committee believes that if the credit unions are to develop into strong competitors, it will be important for the Task Force’s recommendations to be acted upon expeditiously.
2. More Flexible Corporate Structures
Background
The Task Force recognises that, as financial markets evolve, institutions need greater organizational flexibility. Today banks and other institutions offer products and services that extend well beyond their traditional core activities. As product lines diversify, new players have emerged to compete with financial institutions in discrete product areas. Asset-based lenders such as Newcourt Credit Group and GE Capital and credit card issuers such as MBNA and Capital One are just a few examples of these.
The emergence of new product lines and market players has focussed attention on the organizational structures within which these institutions must operate. Traditional financial institutions such as the banks contend that their ability to compete against new players is inhibited by an organizational structure that requires all their activities to be regulated while other competitors engaged in the same activities are either less regulated or not regulated at all.
The Task Force acknowledges that one way to support more competition is to provide financial institutions with the option of using more flexible organizational structures that would allow for more nuanced regulation of financial groups without compromising the basic principles of safety and soundness. To this end, the Task Force, among other things, recommends that a holding company structure be available to allow financial institutions to organize their activities.
In Background Paper #2, the Task Force points out that, at the present time, two forms of organizational structures are allowed for regulated financial institutions: the "unregulated holding company" and the "financial institution parent model."
Holding companies for Schedule I banks or mutual insurance companies are not permitted because the law requires these companies to be widely held. Since there is currently no wide ownership requirement for trust companies or stock insurance companies, however, these institutions can be owned by holding companies.
The "financial institution parent model" permits any regulated financial institution to own any other regulated financial institution as a subsidiary. Thus, as the Task Force notes, a bank can now own insurance companies, trust companies and investment dealers. This model is similar to a holding company model except the holding company is the operating financial institution. (Task Force Report, Background Paper #2, p. 48)
Background Paper #2 sets out four main arguments that are advanced as reasons why a holding company could offer important flexibility:
- organizing activities in separate legal entities could provide greater flexibility for raising capital and bringing in strategic business partners;
- a holding company model could allow more nuanced regulation;
- to expand their operations to foreign countries some institutions will increasingly be required by foreign governments to establish joint ventures with local partners; and
- as the financial system continues to be restructured, a holding company provides a vehicle for facilitating the coming together of medium-sized financial institutions in different pillars to form a conglomerate that can benefit from economies of scale and scope.
The Task Force proposes a holding company regime for financial institutions. Under the Task Force proposal, the holding company would be a regulated non-operating financial holding company. Regulation would be achieved through a separate statute, a Financial Holding Companies Act. Subject to one exception, existing unregulated financial holding companies that control federally regulated financial institutions would remain unregulated. This exception would provide that grandfathered holding companies controlling a bank in Canada well as foreign banks must be regulated under the proposed statute.
Task Force Recommendations
25) There should be no restrictions on corporate structures available to financial institutions unless required by safety and soundness considerations.
26)Federally regulated financial institutions should have the option of being organized as subsidiaries of regulated financial holding companies incorporated under a new Financial Holding Companies Act. Specific principles to be applicable in the holding company regime would include the following:
(a) The regulatory requirements applied to the holding company and its unregulated subsidiaries should be as non-intrusive as possible.
(b) The ownership requirements, and the other prescribed indicia of Canadian control which are applicable to regulated financial institutions, would also be applicable to financial holding companies.
(c) The holding company would be required to have a controlling interest in its principal Canadian operating regulated financial institutions.
(d) The holding company should be capitalized in such a way as to avoid double gearing so that the holding company can serve as a source of strength for the group.
(e) The holding company would be a non-operating company and its permitted investments and downstream subsidiaries should mirror those of operating regulated financial institutions conducting business under the financial institution parent model.
(f) Related-party rules would apply to transactions between the holding company and its subsidiaries.
(g) OSFI should have full access to information from all companies in the corporate group.
(h) There should be disclosure rules to ensure that persons dealing with unregulated entities in the corporate group are clearly informed that the entities are not regulated, that their securities are not deposits and are not insured or guaranteed by CDIC or any other government-sponsored insurance program, and that related regulated financial institutions do not provide guarantee support. Unregulated entities within the group should not be able to use the name "bank."
(i) A reorganisation of a regulated financial institution as a subsidiary of a holding company under the Financial Holding Companies Act would require the approval of OSFI.
27) Existing unregulated holding companies should be grandfathered so that they would not be required to comply with the provisions of the Financial Holding Companies Act, subject to OSFI’s continuing to be satisfied with the quality and substance of undertakings in respect of prudential issues. The grandfathered status would be lost if the grandfathered company controlled both a bank in Canada and a foreign bank.
28) The Department of Finance and OSFI should review the present downstream restrictions on subsidiaries and minority investments with the objective of determining:
(a) whether activities that are currently required to be conducted in the parent financial institution could be permitted to be conducted either in a permitted subsidiary or in minority investment form; and
(b) whether functions which are now required to be carried on in a subsidiary could be permitted to be carried on by way of minority investment.
Views of Witnesses
A number of witnesses expressed views on the holding-company recommendations.
The Canadian Bankers Association (CBA ), which supports a holding company concept for federally regulated financial institutions, endorsed the recommendation that the regulatory requirements applied to the holding company and its unregulated subsidiaries should be as non-intrusive as possible. The CBA was of the view that the Task Force’s proposal that would require the permitted investments of a holding company to mirror those of an operating regulated institution was unduly restrictive. Unless the range of permitted subsidiaries or designated entities of a financial institution is reviewed and broadened, there would be little flexibility. The Task Force suggests a review of permitted subsidiaries and the CBA supports this. (Raymond J. Protti, September 29, 1998)
The CBA also argued that it was important that corporate groups have the ability to carry on retail and wholesale activities in separate entities with a level of regulation that is appropriate to each. It agreed with the Task Force that the options of a financial holding company structure might permit more nuanced regulation without serious risk to safety and soundness.
Other financial institutions such as Sun Life Assurance Company of Canada, Great-West Life Assurance Company, Royal Bank of Canada, Bank of Nova Scotia, Bank of Montreal, Toronto Dominion Bank, and the Laurentian Bank of Canada were favourably disposed to the holding company concept.
The Bank of Montreal felt that it would be useful to have the option of a holding company structure.
I would like to have the option, only because it is an organizational option. I can create logical holding companies rather than physical ones. The original bogeyman about holding companies was commercial financial linkage, and whether or not you could get that kind of contamination through a holding company. Therefore, it was banned outright. (Matthew Barrett, October 8, 1998)
The Chief Executive Officer of Harris Bankcorp Inc. emphasized the advantages from a regulatory standpoint.
I think the holding-company approach — which we have in our own company in the United States — works well. Regulations have been tweaked in order to allow different regulatory agencies and bodies to work together better. There is less rigidity now between the subsidiaries. There used to be more rigidity and less ability to serve customers across the component subsidiaries. That seems to have been worked out over the last decade, and today I find it works quite well. (Al McNally, October 8, 1998)
Industry organisations such as the Investment Dealers Association of Canada and the Canadian Life and Health Insurance Association Inc. also supported the Task Force recommendations in this area.
Great-West Life Assurance Company, which currently operates in under an unregulated holding company, noted that holding companies were particularly useful for raising capital. (Raymond McFeeters, October 6, 1998)
Laurentian Bank of Canada saw the holding company structure as important for facilitating inter-pillar mergers between financial institutions.
The reason why the holding company model would be better in the current situation is precisely because of the process aspects. … As a bank, we try to build a parent subsidiary company by inviting an insurance company and a mutual funds company to join us. In that case, that group of shareholders, coming from the two others, will receive Laurentian Bank shares.
For perception and accounting reasons, and many others, it will be a lot easier if, on approaching somebody else, we propose to our shareholders, and you to your "mutualists," that they receive the shares of a new holding company. That company will be the owner of all the companies on a pro rata basis, so process-wise, perception-wise, it is a lot easier.
I see the difference between the two, especially on the aspect of how much regulation is placed at the top, be it the parent or the holding company. (Henri-Paul Rousseau, October 22, 1998)
The Royal Bank of Canada was of the view that a federally regulated holding company structure would give "individual financial institutions flexibility to organize their corporate structure as they deem most appropriate within a sound prudential framework." (John E. Cleghorn, September 29, 1998)
The President and Chief Executive Officer of Sun Life Assurance Company of Canada felt that there were distinct advantages to a holding company structure.
We believe that there are potential significant business advantages to the holding company structure, including more efficient regulation, greater flexibility for raising capital, and the potential for greater value for shareholders of the holding company.
We recognise that from a regulatory point of view, there are legitimate concerns associated with holding companies in the financial services sector. However, we support the conclusion of the task force that increased organizational flexibility is attainable without unduly compromising safety and soundness. (Donald Stewart, October 6, 1998)
Canada Trust did not object to the Task Force’s holding company recommendations provided it was not subjected to additional regulation as a result. It feels that the fundamental issue with respect to holding companies is whether holding companies will be permitted to do things that the regulated entity cannot. If not, there will be few advantages to such a model.
The Commission des Valeurs Mobilières du Québec suggested that jurisdictional stumbling blocks may exist when it comes to the regulation of a financial holding company.
The problem is a classic one. We know that it very likely that there will be financial holding companies created in Québec bringing together a bank, an insurance company and a trust company, created under Québec law, while the securities dealers and advisers are also subject to Québec jurisdiction. Obliging such a financial holding company to incorporate under federal law and forcing it to submit exclusively to a federal regulatory framework would be a highly controversial measure which some would find in no way desirable. (Jean Martel, October 23, 1998)
The Commission was of the view that the recommendation should not be adopted unless the federal and provincial governments develop ways to eliminate any overlapping or interference that might be caused.
In addition to the jurisdictional concerns, the Commission questioned the usefulness of the recommendation from a financial perspective. Since holding companies may already control federally incorporated insurance and trust companies, the Commission felt that it would be sufficient for the Minister of Finance to have the power to approve more that 10 per cent of the voting shares of a bank and to establish whatever conditions on the acquisition that the Minister deems appropriate in the circumstances.
Another witness, Dundee Bancorp Inc. recommended that the Task Force proposals not be supported if they lead to a greater concentration or increase in the types of business activities that might be undertaken by the major banks.
The Superintendent of Financial Institutions expressed a note of caution about the holding company recommendations.
Recommendations 25 to 28 propose that institutions be permitted corporate structures best suited to their operations. They also set out principles for the regulation of holding companies and recommend that the current restriction on downstream investments be reviewed. Recommendation 26 also recommends the development of a new Financial Holding Companies Act.
It has always been and continues to be our view that financial holding companies raise a number of issues and present a number of risks which do not arise under a widely-held ownership applicable directly to the regulated financial institution. They would also significantly add to and complicate OSFI's regulatory and supervisory challenges. While the principles enunciated by the Task Force in connection with the regulation of holding companies would lessen some of these risks, the risks and complications cannot be eliminated altogether.
As noted by the Task Force, its recommendations with respect to holding companies are based on suggestions received from OSFI. These suggestions were made with the reservations that I have just expressed, and represented what we saw as minimum standards for providing a reasonable degree of protection to depositors and policyholders of regulated financial institutions within a holding company regime.
Further, our development of these principles was based on the assumption that holding company structures would be available only to widely-held institutions. As the Task Force has recommended that the regulated holding company regime be extended to closely-held institutions, these principles might have to be reviewed.
We support the proposal to review the current restrictions on downstream investments in conjunction with the holding company regime. In fact, we believe this review should occur irrespective of whether the government proceeds to implement a holding company regime. (John Palmer, November 3, 1998)
Another witness felt that holding companies present certain regulatory challenges that would require an increase in OSFI’s employment levels.
If they think they have been busy so far, good luck. If they start to get into the holding company, they will have to increase their employment by a multiple of 100. It gets very complicated. What you really want to do is to protect the regulated financial institutions. The depositors, the people with money, are what you are trying to protect. The way the thing is structured now, if you took the trouble to really study it, you could not squeeze a mouse through it. What are they worrying about? Are they worrying that someone way up here will do something? If they are doing the job as a regulatory body, they will not worry about that because there is no capacity to attack or otherwise misuse the customers' money.
I guess a regulator would prefer a subsidiary. It is easier because he has the regulated company and just drives straight down into the subsidiary. … The problem with the holding company is that he has a whole bunch of things going on up there, and all he is watching for is that they do not use the creditworthiness or assets of the regulated company and lose it over selling bananas to someone or some other crazy idea. There are some good examples in the history in Canada of regulated institutions that got into holding companies and lost a lot of money. I can see that they would sooner have it the other way around. It is easier for them to have the problem going on down here than up there. Do they have the capacity now? If the OSFI chose to chase up to our holding company, which is the one that is listed, can they gumshoe around there any day they want? (James Burns, November 5, 1998)
Conclusions
The Committee supports the Task Force’s view that increased organizational flexibility is desirable and attainable without unduly compromising safety and soundness." We applaud the Task Force recommendation that there should be no restrictions on corporate structures available to financial institutions unless required by safety and soundness considerations.
The Committee also endorses the Task Force’s recommendation for a review of the present downstream restrictions on subsidiaries and minority investments.
At the heart of the Task Force’s recommendations on flexible corporate structures is its proposal for a regulated holding company. The Committee has long supported the concept of a bank holding company. In its 1990 report, Canada 1992 Toward a National Market in Financial Services, the Committee recommended that Schedule I banks be allowed to reorganize their ownership structure by creating a widely held holding company.
The Committee continues to endorse a holding company structure for federally regulated financial institutions. Like the Task Force, the Committee believes that a holding company structure could afford a much-needed level of flexibility to financial institutions without compromising safety and soundness. A holding company model would make it easier to separate wholesale and other financial services activities from retail deposit-taking activities than is now possible within the confines of the parent-subsidiary model. The ability to separate deposit-taking from other activities would allow for more nuanced regulation according to the level of risk, thereby making the level of regulation for these activities more closely aligned with the regulation of non-bank competitors.
A holding company model would also allow subsidiaries of the company to engage in a broader range of financial services. Furthermore, it would make it easier for regulated financial institutions to raise capital, enter into strategic alliances with business partners, and facilitate the grouping of medium-sized financial institutions across the different financial pillars.
The Committee believes that, if there is an appropriate set of rules relating to capital adequacy, related party transactions and investments restrictions in place, more flexible corporate structures can offer benefits that are not available under the present parent-subsidiary model.
The Committee wishes to propose a holding company model that is somewhat different from the model proposed by the Task Force. Like the Task Force’s model, the model proposed by the Committee would be a regulated non-operating financial holding company (FHC). At the present time, such a structure is not permitted in Canada for Schedule I banks.
- Under the Committee’s proposed financial holding company model, products and services would be offered to customers through both bank and non-bank affiliates of the regulated holding company. This approach differs from the present parent-subsidiary model under which the parent company (a bank) offers some financial services such as savings and chequing accounts and loans while other products such as insurance and investment instruments are offered through subsidiaries of the bank.
- The Committee’s proposed regulated FHC could control both bank and non-bank affiliates. The retail deposit-taking bank, for example, would be an affiliate of the regulated FHC. It could offer products such as CDIC insured deposits and consumer loans. Wholesale banking functions such as credit card operations, asset securitization activities and high-risk lending would be separated from the CDIC-insured retail activities in other affiliates.
- The retail deposit-taking subsidiary would be ring-fenced from the other entities in the corporate group with appropriate related-party rules, capital adequacy requirements and restrictions on investment powers, among other things.
- The non-retail deposit taking entities would operate under a regulatory regime geared to the risk associated with their businesses. This would allow a regulated FHC to more effectively compete against other financial services providers that offer products and services in an unregulated environment.
- The regulated FHC would serve as a source of strength for the retail deposit-taking affiliate and other regulated financial institution affiliates such as trust and insurance companies. Each of the regulated entities in the group must meet the appropriate capital adequacy tests without including the capital from any of the other entities within the regulated FHC structure. Since the retail bank and other regulated affiliates would be separated from the other entities in the group, the failure of an unregulated entity (that is not an affiliate of a retail bank) should not adversely affect the solvency of the retail bank and the other regulated entities.
- Provided an acceptable capital adequacy framework is developed, risks are isolated and ring-fenced and firewalls put in place between the regulated and non-regulated entities of the group, the regulated FHC should have a broader range of investment powers than would be permitted under a parent-subsidiary model. There should be no double counting of capital within the corporate group.
- The Committee is of the view that OSFI should have full access to information from all entities in the corporate group and the resources necessary to carry out its regulatory responsibilities.
- In addition, there should be disclosure rules to ensure that persons dealing with unregulated entities in the corporate group are aware that the entities are not regulated, that their securities are not insured or guaranteed by CDIC or any other government-sponsored insurance program, and that related regulated financial institutions do not provide guarantee support.
- Unregulated entities within the group should not be able to use the name "bank."
3. Entry of Foreign Financial Institutions
Background
The Task Force is of the view that foreign financial institutions operating in Canada are now and will continue to be an important competitive force in the financial services sector. As part of its strategy for increasing competition in the sector, the Task Force makes a number of recommendations that would remove barriers to the entry of such institutions.
The Task Force noted that there are two ways in which a foreign bank can do business in another country. One is by setting up or acquiring a bank as a wholly or partially owned subsidiary of the foreign bank. The other is for the foreign bank to enter directly as a branch operation of the parent company (in this situation, a branch operation refers to the ability of a foreign bank to enter a jurisdiction without establishing a subsidiary.) (Task Force Report, Background Paper #1, p. 103)
At the present time, there are some 44 foreign bank subsidiaries, down from a high of 59 in 1987, operating in Canada. Foreign banks account for about 10 per cent of total assets held by the banking sector in Canada, 7.3 per cent of business credit, and 2.8 per cent of credit extended to small business. Consumer or retail deposits can be accepted by foreign banks operating in Canada through a subsidiary or branches of the subsidiary.
The vast majority of foreign-owned Schedule II banks operating in Canada concentrate on corporate markets, focussing on wholesale financial services in urban markets. A bank which restricts itself to corporate markets and does not compete for retail deposits is generally known as a wholesale bank. The Hongkong Bank of Canada, on the other hand, has chosen to compete with domestic financial institutions for the business of the small depositor. It operates 117 branches in 71 communities and nine provinces as well as two branches in the western United States. The Banca Commerciale Italiana, which operates a branch network in parts of Ontario and Quebec, also takes retail deposits.
ING Bank of Canada offers its retail deposit and loan products by telephone, computer and mail. Since it began operation less than two years ago, over 100,000 Canadians have opened accounts with that institution.
In 1997, the Department of Finance published a consultation paper in which it set out options for relaxing restrictions on the entry of foreign banks into Canada. The paper discussed the conditions under which a foreign bank could operate in Canada through a branch, rather than or in addition to a subsidiary. It also looked at options for regulated foreign banks that were interested in undertaking a more limited form of financial activity in Canada.
The Task Force report summarized the consultation paper in the following manner:
With respect to the ability to operate in Canada through a branch, the consultation paper set out a number of requirements for the parent bank. The branch itself would have to hold capital in Canada, would be barred from accepting retail deposits (defined as deposits under $150,000), would be supervised by OSFI, and would be subject to a taxation regime that would put the branch on a reasonably level playing field with respect to Canadian banks. A foreign bank would be allowed to operate through both a branch and a subsidiary.
For foreign banks that wished to undertake a more limited form of financial activity in Canada, the Department proposed two options.
The first option would force a foreign bank to choose between a "regulated stream" and an "unregulated stream." If regulated, it could operate a subsidiary or a branch, or both; if unregulated, it could engage in a limited range of financial services, such as consumer or small business lending with no prudential regulation, although it would still be subject to market conduct regulation. The two streams could not be mixed. If a foreign bank had a regulated operation, all of the activities it engaged in would have to be regulated. If it had unregulated activities and wished to open a branch or a subsidiary, it would have to cease the unregulated activities or transfer them to the regulated entity.
A second option would permit a foreign bank to create a "limited purpose" entity that would be subject to lighter regulation than a subsidiary or branch but would have restricted powers (for example, credit card or leasing powers). This option would be available only if the foreign bank had no deposit-taking entity in Canada. (Task Force Report, p. 100)
The Task Force believes it is important for the Government to move quickly to permit foreign banks to operate through branches in Canada as well as through subsidiaries. It was concerned, however, that the $25 billion worldwide asset requirement for a parent bank suggested in the consultation paper was too high and would deter well-capitalized smaller institutions from doing business in Canada.
In its report, the Task Force went on to set out its thinking about the regulation of foreign banks subsidiaries and branches operating in Canada. First, the regulatory regime should be as light as possible where a subsidiary or branch of a foreign bank does take retail deposits. Second, prudential regulation should not be used where it is not required. The Task Force felt, however, that prudential concerns were paramount when banks take deposits from the general public and, therefore. was not prepared to recommend that foreign banks be able to accept retail deposits through direct branches of their parent rather than through branches of a Canadian subsidiary.
Task Force Recommendations
8) Withholding taxes should be removed for interest on all arm’s length borrowings, regardless of their term, to encourage non-resident lenders to compete in extending credit to borrowers in Canada.
9)Canadian public policy should encourage foreign financial institutions to carry on business in Canada in order to broaden the choice of providers of financial services to Canadians. To that end:
(a) Foreign banks should be able to carry on any banking business in Canada, other than the taking of retail deposits (i. e., deposits below $150,000), through branches of the foreign banks as well as through subsidiary corporations, as is now the case.
(b) The Task Force endorses the conditions for branch entry outlined in the Department of Finance consultation paper published in September 1997, except that:
(i) the proposed condition that the foreign bank must have $25 billion in assets worldwide should be revised to permit smaller, well- capitalized foreign banks to compete in the Canadian marketplace through branch operations; and
(ii) the requirement that the foreign bank should have international experience should be restated to encourage entry from competent banks that may not have international experience, but may still be able to contribute to enhancing competition in Canadian markets.
(c) Foreign banks that wish to take retail deposits in Canada should continue to do so through subsidiaries and branches of those subsidiaries, to ensure adequate depositor protection.
(d) The regulatory regime applicable to foreign bank subsidiaries and branches should be as light as possible. Prudential regulation should be substantially reduced where the foreign bank does not take retail deposits.
Views of Witnesses
There was little negative reaction to the Task Force’s recommendations to ease the restrictions on the entry of foreign banks into the Canadian financial services sector. Favourable views were expressed by witnesses such as the Canadian Bankers Association, Consumers’ Association of Canada, Bank of Montreal, Royal Bank of Canada, Canada Trust, Mouvement des caisses Desjardins, GE Capital Canada, Capital One Financial Corporation, and Banque Nationale du Canada, to name a few. The present Schedule I banks welcomed the prospect of greater competition.
One witness argued that there is good reason to facilitate the entry of foreign players into the Canadian market because they would likely have the ability to overcome the technological and marketing barriers to entry into core banking services. However, this witness was not optimistic about the prospects of foreign players actually attempting to compete in core retail banking services. (William Black, October 21, 1998)
The Schedule II Foreign Banks Executive Committee strongly supports the Task Force recommendations with respect to foreign bank branching at the wholesale level in Canada and urged the federal government to move to implement the necessary legislative changes this year.
There is general recognition that permitting direct branching by foreign banks will increase competition within the financial services industry in Canada, All Canadians will benefit from a more competitive domestic banking sector. (Schedule II Foreign Bank Executive Committee, Committee Brief, November 3, 1998, p. 7)
Deutsche Bank Canada, a wholly owned subsidiary of Deutsche Bank AG of Frankfurt, expressed its support for the concept of greater regulatory flexibility. Arguing that foreign bank branching is an important first step to creating sufficient competition in Canada and that it will increase the availability of additional services in Canada, Deutsche Bank Canada urged that branching not be delayed.
Deutsche Bank Canada proposes a "same business, same risk, same rule" regulatory scheme for the financial services sector.
Our message that the regulatory scheme applied to financial services sector should be evenhanded remains consistent. We can advocate this position with some specificity because we witness the ongoing effect of the uneven regulatory playing field here in Canada on one of our own businesses, Deutsche Financial Services, a division of Deutsche Bank Canada.
In 1995 DBAG acquired ITT Finance Inc. and its subsidiaries and subsequently changed its name to Deutsche Financial Services. In Canada, Deutsche Financial Services offers a range of finance company services related to providing inventory and accounts receivable financing to some 1,600 small and medium-sized businesses. Although an application was made asking that DFS be incorporated under the Trust and Loan Companies Act that permission was not forthcoming since it was believed that "a commercial bank could not own a commercial bank".
We believe that we are providing a valuable service through Deutsche Financial Services, however, since it has been held to be a commercial bank it is subject to banking regulations including capital adequacy and reporting, corporate governance and examination requirements.
Deutsche Financial Services operates at a disadvantage vis-à-vis its unregulated competitors such as Newcourt Credit Group Inc. and Transamerica Commercial Finance Corporation Canada to name just two. Although the Federal Reserve Board does not regulate DFS in the US, DFS in Canada is regulated as part of DBC by OSFI.
In lieu of choosing a regulated or unregulated stream for DFS, we propose that it be allowed to operate in Canada regardless of its size and parentage as an unregulated company. (Nicholas Zelenczuk, November 3, 1998)
The Council of Canadians was not enthusiastic about the entry of new foreign banks into the Canadian market. The Council felt that foreign entrants would concentrate on profitable niches. If a foreign bank were to provide full service retail banking, it would do so by taking over an existing major Canadian bank. (Peter Bleyer, November 5, 1998)
The Schedule II Foreign Banks Executive Committee supported the Task Force recommendation with respect to the elimination of withholding tax on cross border lending by foreign banks. Capital One Financial Corporation also endorsed this recommendation. Because Capital One does not take retail deposits in Canada, the recommendation would substantially increase the availability of funding for its business in Canada and lower the business’s cost of funds.
Conclusions
The Committee believes that, over time, foreign financial institutions have the potential to become important competitors in the Canadian financial services sector. Encouraging the entry of foreign institutions will increase the level of competition in the sector and ultimately benefit consumers. Regulatory barriers, therefore, should not constrain their ability to serve Canadians. The goal should be to regulate where necessary for sound prudential reasons, but otherwise to free these institutions from restraints that pose artificial barriers.
To this end, the Committee agrees with the following conclusions of the Task Force:
First, the lightest, or even no prudential regulation should apply where a foreign branch or subsidiary does not engage in activities that could create prudential concerns, such as taking deposits from consumers.
Second, prudential regulation should only be used where it is required; it should not be used to level the playing field with domestic competitors.
Third, there are prudential concerns relating to deposit insurance and the absence of a requirement to invest capital in Canada that weigh against recommending that foreign banks be allowed to engage in direct retail branching.
In its October 1996 report, Lowering the Barriers to Foreign Banks, the Committee recommended that the federal government adopt a policy toward foreign banks that would offer these institutions the options of running their operations in Canada through a foreign branch, or through a subsidiary, or through both a branch and a subsidiary. At that time, the Committee also recommended that the Government implement a foreign bank branching policy as quickly as possible. The Committee stands by these recommendations.
The Committee endorses the Task Force recommendations to ease the entry of foreign banks in Canada as well as to remove of the withholding tax for interest on all arm’s length borrowings.
While the Committee supports competition in the financial services sector by foreign-based competitors, it also recognises that additional foreign competition in the retail banking sector may not be significant, at least not at the traditional "bricks and mortar" branch level. Hongkong Bank of Canada, for example, created the core of its retail branch network by buying the branches of institutions such as the Bank of British Columbia. The President and CEO of Hongkong Bank told the Committee that retail branches are expensive to establish.
… It is very expensive to start up such a network from scratch. These days it is $1 million to build a branch from scratch…. If a branch starts breaking even after five years, it is very lucky. Some take a lot longer. We were fortunate in that over the years a number of failing institutions became available which gave us the basics of a national network. … That gave us a basic nucleus of branches.
These are branches that have been in their communities for a long time and the customers knew us. The relationship most customers have with the bank is not necessarily with the bank itself, but with the employees who work in that bank. Starting with that advantage it then became easy for us to add product lines to open up a few more branches to complete the network. If we had to come into it from scratch and open up 117 branches, we probably would not have shown a return until well into the 21st century. (Youssef A. Nasr, October 29, 1998)
Other witnesses echoed the view that foreign banks are unlikely to be active in retail branch banking.
The Committee believes that new foreign competition at the retail level has the potential to make an impact, however, through banks such as ING which take deposits and provide access, by telephone, mail and computers. In addition, foreign institutions such as Capital One and MBNA are likely to make important inroads into the credit card market.
Other changes such as the full functionality of automatic banking machines could assist foreign entrants. The President and CEO of Hongkong Bank and Professor David Bond made their case before the Committee for full functionality of automatic banking machine networks (the ability to use any automatic banking machine for making deposits, cash withdrawals, transferring funds, paying bills, checking account balances). They argued that full functionality will break down the greatest barrier to entry in the field of deposit taking – the cost of building a retail branch network.
Full functionality would provide each new entrant with an instant 19,000 new locations to offer their services, thereby ensuring that other players, however, large, would continue to face intense competitive pressure in all regions of the nations. (Youssef A. Nasr, October 29, 1998)
… This move (full functionality) is one of the most significant moves that can be implemented to increase competition in the financial services sector. Such a move would substantially improve consumer choice, facilitate entry of new firms and is consistent with the main theme of the Task Force’s Report: the financial services sector exists to serve consumers and must be responsive to their needs. (David Bond, October 29, 1998)
The Committee agrees that full functionality will help to topple barriers to entry into the retail market.
The Committee sees foreign-based institutions as important niche players in the Canadian market. Removing unnecessary barriers will serve as a catalyst to increase the presence of foreign-based wholesale banks in certain sectors. Strong niche capability has already been developed by banks such as Deutsche Bank Canada, which is now the global centre for Deutsche bank AG activities in the metals and mining sector. This is just one of many examples of how foreign institutions can build upon the strengths in the Canadian economy.
Background
As part of its strategy to encourage new entrants into the Canadian financial services market, the Task Force proposes a 10 year holiday from federal capital tax holiday for new financial institutions. The Task Force also urges the provincial governments to introduce similar holidays.
In Background Paper #1, the Task Force describes the capital tax structure for financial institutions.
The federal large corporations tax of 0.225 percent of capital is applicable to companies with capital of more than $10 million, capturing almost all financial institutions. In addition, federal Part VI capital tax applies to institutions with more than $200 million in capital. This means that any bank or trust company with more than about $4 billion in assets is subject to a tax which is payable even if profits are not earned. Since Part VI tax is creditable against income tax payable, it functions as a minimum tax and is a less significant burden for large, profitable institutions.
Over 60 percent of the $872 million in capital taxes paid by financial institutions in 1996 was collected by the provinces. Application of capital taxes varies among the provinces but has generally increased in recent years through higher rates and broader definition of the capital base. A small deposit-taking institution with only $10 million in capital, doing business in all provinces, could expect to pay $219,500 in annual capital taxes, or 2.2 percent of its capital, even if it is not profitable. (Task Force Report, Background Paper #1, p. 101)
The Task Force notes that capital taxes have a significant impact on new businesses. They undermine the strength of new institutions by eroding their capital base. Moreover, as the Task Force points out, most institutions run losses after start up and have no income against which to credit capital tax.
Task Force Recommendations
5) There should be a 10- year holiday for new financial institutions from federal capital tax (including both large corporation and Part VI tax). The Task Force urges provincial governments to introduce similar holidays to encourage new entrants in their jurisdictions, free from the debilitating impact of capital taxes on start- ups.
Views of Witnesses
A number of witnesses commented favourably on the Task Force proposal for a capital tax holiday. Smaller banks such as the First Nations Bank and Canadian Western Bank strongly favoured a capital tax holiday.
The President and CEO of Canadian Western Bank, spoke of the impediment that capital taxes place on small institutions
… capital tax is certainly a major component and a hindrance in growing and developing a bank. If you raise capital and you start paying tax on it immediately… it is a huge impediment. It not only eats up your tier one capital, it eats your potential to raise tier two capital because you can only have half as much tier two as tier one. (Larry Pollock, October 28, 1998)
The First Nations Bank of Canada noted that:
… the recommended or proposed ten-year capital tax holiday would be extremely beneficial to a start-up institution like ours. Currently the First Nations Bank of Canada will pay hundreds of thousands of dollars of capital tax before a return of profit for our investors. This is a significant barrier to entry in the industry and especially for a Saskatchewan-based chartered bank, where a province like Saskatchewan adds another capital tax on top of the federal capital tax. (Keith Martell, October 27, 1998)
The Canadian Bankers Association, however, that that the Task Force was inconsistent in recommending a 10-year tax holiday for new financial institutions without calling for the equivalent treatment of all institutions. GE Capital also expressed some concern about potential discrimination between existing and new financial institutions.
The Canadian Association of Retired Persons argued that the capital tax holiday should not be supported because it was not in the best interests of consumers in rural areas, small towns and poorer urban areas.
Conclusions
The Committee believes that a capital tax holiday as recommended by the Task Force would be advantageous for small institutions. By giving these institutions the ability to establish themselves and grow without seeing their capital unduly impaired, the tax holiday would serve to encourage new entrants into the market and promote competition.
Task Force correctly pointed out that revenue loss to the federal government (and provincial governments, if they established a similar holiday) would be small, as the capital taxes paid by new financial institutions represent a small portion of the total paid by the industry.
The Committee therefore supports the imposition of a 10 year capital tax holiday for new financial institutions.