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

Issue 14 - Evidence

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OTTAWA, Wednesday, May 16, 2001

The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-8, to establish the Financial Consumer Agency of Canada and to amend certain acts in relation to financial institutions, met this day at 3:35 p.m. to give consideration to the bill.

Senator E. Leo Kolber (Chairman) in the Chair.

[English]

The Chairman: Good afternoon, ladies and gentlemen. We are here once again to hear testimony on Bill C-8.

Our first group is from the Canadian Bankers Association, represented by Mike Pedersen and his colleagues.

Please proceed.

Mr. Mike Pedersen, Chairman of the Canadian Bankers Association and Senior Executive Vice-President, Retail and Small Business Banking, Canadian Imperial Bank of Commerce: Honourable senators, thank you for the opportunity to share our views with you today. We provided each of you with a copy of our written submission and we will therefore not go through it today.

I would like to reiterate our bottom line conclusion, and that is that we support the passage of Bill C-8 and hope that it will be put into place as soon as possible. We believe that it offers us some important tools to adapt to the changes that are taking place in the marketplace and to compete for consumers' business as the future of the financial sector is being shaped. It also represents an important step toward ensuring that our policy and regulatory framework is kept as up-to-date as possible.

I note, however, that the ultimate success of the new policy framework will lie in the interpretation given to the legislation by regulatory authorities, and in the ability of our policy makers and regulators to ensure that the framework stays current.

We are committed to working with parliamentarians in the years to come to ensure that the financial services policy framework is up-to-date and that it is flexible and responsive to the changing financial marketplace. To this end, Canada's financial sector will remain competitive with leading jurisdictions and provide Canadians with benefits of increased competition.

However, our support for the passage of Bill C-8 does not mean that we agree with everything in it. Like every piece of legislation, Bill C-8 represents a balance of competing interests. Moreover, there is some unfinished business that we would like to address following passage of the legislation. In our submission, for instance, we have noted that further flexibility can and should be built into the permitted investment regime, by allowing banks to provide after-the-fact notification to the regulators when they have made investments that are permitted by law, rather than being required to obtain prior approval.

As well, in the interests of a more efficient market and better consumer protection, we think it is important that federal governments, interested provinces and financial services stakeholders across the country devote their efforts to creating a single national financial services regulatory system in Canada.

We have concluded, however, that the bill does introduce several key measures that have the capacity to reshape our financial sector in a way that can benefit consumers and create opportunities for Canadian companies to succeed. This legislation will make it easier for Canadian financial institutions to deal with the changes that we face in the future.

If I can leave you with one key message today, it is that Canada's financial sector is undergoing and will continue to undergo tremendous change and there is really no turning back.

Once again, we support passage of the bill and hope that it will be passed soon.

Senator Tkachuk: In your notes on holding companies you say that there is a potential for lighter regulation. Could you be more specific? What does the bill prevent you from doing that you would like to be doing through the holding company structures?

Mr. Terry Campbell, Vice-President, Policy, Canadian Bankers Association: The current legislation requires that virtually all the activities that a bank must undertake be undertaken within the bank itself - things like credit cards, consumer lending and so on - or in direct subsidiaries under the bank. That is all subject - broadly speaking - to the same regulatory regime. Under a holding company regime, many of those activities could be taken out of the bank and set aside under a holding company as affiliates. Because those entities do not undertake retail deposit taking, they would not need to have the same degree or intensity of regulatory oversight that the bank, which does take deposits, would require. OSFI would be able to have oversight, but not the same degree of examinations and regular scrutiny and prudential regulation that the bank itself would. That would be the aim of the holding company regime.

Senator Tkachuk: You say in here that you still see some problems with over-regulation on the holding company, or on the subsidiaries of the holding company. Did I read that incorrectly?

Mr. Raymond J. Protti, President and Chief Executive Officer, Canadian Bankers Association: You read it correctly, Senator Tkachuk. We are signalling the reality that we will all have to wait and see how the holding company regime plays out in practice. There is some experience in Canada with a holding company regime in other parts of the financial services industry, but this is the first time we will see it, potentially, in the banking industry.

There is still a lot of detailed work to be done in working through the regulatory environment and then the interpretative environment that will follow that regulation setting. Therefore, there is a degree of uncertainty on exactly what lighter regulation means and how it will work in practice.

Senator Taylor: Could you explain the relationship between the banks being allowed to own other instruments and greater flexibility for bank involvement? You mention related activities including e-commerce services, a great opportunity for banks to invest and operate in information services. Did you take it further? Will you be trying to get into the insurance business, either casualty or life?

Mr. Campbell: Currently, as you know, banks are allowed to own life and property and casualty insurance companies, but the current regime will be carried on in Bill C-8. Individual banks will not be allowed to get into or provide insurance products directly.

In terms of what banks would be allowed to own, the existing provisions allowing them to own those kinds of companies would be carried forward.

Senator Taylor: So banks will be able to own insurance companies?

Mr. Campbell: That is currently the case.

Senator Taylor: My understanding is that insurance companies can be owned by non-Canadian firms, but banks cannot. Is there an interface in there somehow? If a bank has a holding company that calls itself an insurance company, that company could be foreign-owned. Do you see any conflict or possibility of getting around the rules regarding outside ownership of banks by having their insurance company subsidiary do a reverse takeover?

Mr. Campbell: I think the ownership provisions in the legislation are fairly clear and explicit in terms of ownership regimes for a bank. There are fairly detailed rules regarding ownership by an insurance company and ownership by other entities. In terms of being able to use the legislation to skirt the ownership rules, our reading is that that would not take place.

Senator Taylor: If the banks then have the insurance companies but not in direct competition, is there anything in the bill that would prevent the insurance companies from getting into the banking business - in other words, holding deposits?

Mr. Protti: There are a number of insurance companies that already have deposit-taking but, in addition, in this bill there are changes to the payment system that will permit insurance companies and money market mutual funds to begin to offer deposit-like products without being a bank.

Senator Taylor: That is what I am getting at. The insurance companies do not have regulations on their ownership, or have fewer than the banks, yet they can get into the banking business. Something may not be quite right here. Are we working to the disadvantage of one side or the other?

Mr. Protti: The ownership provisions that deal with large institutions, those above $5 billion in shareholder equity, are the same for the demutualized life companies as they are for the banks. They have the same set of rules.

Senator Oliver: Like Senator Tkachuk, I had some questions on holding companies. One of my concerns about Bill C-8 is that it has several provisions that give a lot of discretion to the minister. It has several provisions that give a lot to regulations yet to be drafted. I note that in the provisions you have here on holding companies, you do express very serious concerns about some of the problems with potential regulations.

For instance, you say that when you convert as a major bank and you roll out some things to a holding company, it has to be tax neutral. There is a chance that it may trigger some income tax and GST problems, but that will later be covered by regulation.

The bigger question I have is, OSFI is the entity that will determine the extent and the degree of the regulations on these holding companies. We will not know what those rules and regulations will be like until later. Have you entered into negotiations already with OSFI and do you have any idea of the extent of the regulations there will be on these holding companies?

If not, do you think it would be useful for the regulations to come to a committee such as this or the finance committee in the other place before they become law so that we can have a serious look at them, so that financial institutions can do the creative things they like to do in order to compete in a world market?

Mr. Protti: Thank you for the question, Senator Oliver. There have been some conceptual discussions with the Department of Finance and OSFI about the nature of the regulations that might come out with respect to the holding company. We will all have a chance to see, hopefully not too long after the bill is passed, the actual nature of those regulations because they will be published in the Canada Gazette. We will all have an opportunity to formally reply to the regulations that will be put in place at that time.

Senator Oliver: You can reply, but will there be an opportunity to change them?

Mr. Protti: There is a 30- or 60-day notice period where the government is actively seeking input from all those who may be impacted by those regulations. I am confident that if we have a case to make that there is an impact from a regulatory change that is against the intent and spirit of the legislation, then certainly the Department of Finance and OSFI will respond to that.

Senator Oliver: Do you not think that this committee and the House of Commons Finance Committee would be an appropriate forum for that debate?

Mr. Protti: That was the second part of your question. You are raising an important issue of parliamentary procedure and the relationship between the House of Commons and the Senate and the government of the day, and it goes well beyond this particular issue. It is difficult for us to comment substantively on the desirability of that change. It is an important change in terms of Parliament and how it operates.

You also raised the importance of having transitional tax rules, which are neutral. No one is looking to escape any liability, but we do not think we should be penalized just because we change the structure. It is a difficult issue and technically complicated. We do not have a satisfactory answer at this point. It must be resolved, or else this model will not be used by any one.

Senator Oliver: I have many concerns about the so-called "widely held" rule. I would direct you to your report and the paragraph in the second column of page 12, "once the Bill C-8 is passed." Could you please give us an elaboration of the concern you express there about the investor not being able to own more than 10 per cent of the bank and the holding company at the same time? This puts the finger on a very important problem with the rule, and I would love to hear you elaborate, if you would.

Mr. Campbell: Senator, the rule as it is currently structured is that a single investor could not own more than 10 per cent of a parent as well as more than 10 per cent of a bank's subsidiary.

Senator Oliver: So 10 and 10 making the 20 in this case?

Mr. Campbell: No, I think it is more a case of ensuring that the cumulative rule would not kick in. Going forward, we wanted to see if there was an opportunity to explore further flexibility on that in the sense that, at 10 per cent of a parent, no investor is controlling the parent, and the control would not flow down to the subsidiary below. We wanted to explore, in the future, once people are more comfortable and have had more experience with the new ownership regime and have seen how it works in practice, whether there are some opportunities for some flexibility, but that is a discussion for the future.

Senator Oliver: Is there anything that you see in the current language of Bill C-8 that could help bring this flexibility right into the current legislation?

Mr. Campbell: In terms of the current legislation, I think the rules on ownership are fairly explicit and fairly clear, including the 10 and 10 rule that we just discussed. We will have to see how the rules work in practice. It is new to all of us. As it stands right now, I think they are a fairly comprehensive and self-contained set of rules that will operate on their own basis.

Senator Oliver: Would you have any concern if two American multinational corporations were to buy 20 per cent each at arm's length of a Canadian financial institution? Would it be of concern to you if they jointly held 40 per cent?

Mr. Protti: As my colleague has indicated, the rules that have been set out in this bill with respect to the change in the ownership regime are really quite clear. The Minister of Finance has also indicated quite clearly that he will exercise his discretion and his judgment-making power on any change from 10 per cent that would go higher, potentially up to the 20 per cent level. He has indicated that he will look long and hard at what the implications are in making such an adjustment.

He has also indicated that, at some point, he will certainly put out some guideline on the issue of control, and we will all be looking to see what the contents of that guideline are. Our view is that he spelled out quite clearly the sort of environment we can operate in going forward. We are comfortable with that environment.

Senator Furey: My question concerns your comments on consumer issues and that Bill C-8 sends out mixed signals. I know you have outlined that there were some concerns and that banks seemed to be targeted. Are your concerns rooted in the fact that there is duplication, or is it over-regulation or just unfair application?

Mr. Protti: Senator Furey, the answer is some of all of that. When we looked at it from a consumer perspective, there were mixed signals. A significant package of initiatives here are designed to enhance consumer protection, but there are some competitive measures that the government could have taken in this bill and chose not to, and they would clearly have benefited consumers from our perspective.

We think it would have been a benefit to consumers if we had had an opportunity to offer some retail insurance products through our branch networks. As well, we definitely thought that we could offer a better deal to the 800,000 Canadians who lease their cars if we could have competed against GM Credit, Ford Credit and Chrysler Credit. That was the point of the comment on the mixed message. We think other things could have been done to enhance the benefits to consumers.

Mr. Pedersen: There is a significant issue around regulatory duplication and overlap. By my count, my bank deals with more than 80 regulators when you count up the jurisdictional agencies across the country. Every time we introduce a new product or a change in policy, we have to deal with lots of those. In terms of employment-related ministries or agencies, there are 54 across the country that we deal with. There are 14 or 18 securities commissions and trust commissions. It is very difficult. It obviously increases costs. It results in cumbersome processes, and it is not good for Canada.

Senator Kelleher: We share a similar concern about the need for a national financial regulatory body. I am sure you are aware, as much as we are, that the problem here is that some of the jurisdiction lies with the provinces, and hence the problem in trying to get a national commission going. In light of that, are you people working with the provinces and the federal government to try to secure this form of commission?

Mr. Protti: The answer is yes. I will come back and answer it specifically, but let me step back and pick up the comments that my chairman just made.

We really do think, going forward, once the bill is passed and the regulations are in place, that we need to begin to focus on the nature of the regulatory process affecting the financial services industry as a whole in this country. As my chairman indicated, we have just a plethora of regulatory agencies across the country affecting the entire industry. We think there are some alternatives out there that would be better for this country.

The answer will not be found in an exclusively federal jurisdiction or an exclusively provincial jurisdiction. It will be found in developing a model that is truly national. The Swedes have moved to improve their regulatory system, as have the Danes. The U.K. has moved significantly. Australia, which has a similar constitutional set-up to ours, has come to grips with sorting out its federal and state responsibilities in financial services. We are starting to do many things, and we are not doing them by ourselves. We are doing them in conjunction with the other players in the financial services industry.

Mr. Chairman, the Senate Banking Committee has historically played an important role in doing some first-rate analysis and research on what is required to have a viable financial services industry in this country.

As you think through your agendas for the coming months and years, I would encourage you to think about whether you want to play an active role in finding a viable option for this country. We would certainly welcome your participation and interest in this issue.

The Chairman: We have been approached by the Investment Dealers Association to do precisely that. I have discussed it briefly with our Deputy Chairman Senator Tkachuk. When we break for the summer we will have time to consider whether it is the right thing to do.

Senator Kelleher: You have pointed out in your brief the difference in the powers apparently given to the insurance companies vis-à-vis those given to the banks. They can get in but you cannot. I am sure you brought this to the attention of the Department of Finance in your discussions. I would be interested to know what their response was to that concern.

Mr. Protti: As my chairman indicated in his opening remarks, legislation like this is always a balance of competing interests. The view of the government was that they had accommodated the balance of interests rather well with this legislation. We did want to signal, though, in our submission to you that there remain some asymmetries in the relationship in the financial services industry and that is certainly on our agenda for the next round of reform after this bill passes.

Senator Kelleher: I would like to point out in that regard that it has been about 25 years since the last round, so good luck.

Senator Oliver: In your response to Senator Kelleher you talked about your strongly held position on auto leasing and insurance in your branches. It surprises me that this view has been held strongly by you for a long time.

Why have you not come forward with a suggested amendment to this legislation to include something that you so badly need and feel would be in the public interest? Why are you not advancing a request for an amendment to give financial institutions this right?

Mr. Protti: We presented our case as forcibly as we could starting in the early 1990s. We must remember that the legislation before us is the first major update since 1992. The 1997 reforms, as you know Senator Oliver, were purely technical. We presented our case and the analysis to support it before the MacKay task force, which supported our views at that time. We pressed the case with the Government of Canada but were ultimately unsuccessful.

We are facing the reality that this has been an exceedingly long process. It has been four and one-half years since the announcement of the government's intent to set up the commission. We would have definitely have liked to have seen these changes. We think they made a tremendous amount of sense for consumers. We were unsuccessful in selling that point of view, but we have to get on with it. As soon as this bill is passed we will be back to the issue.

Senator Oliver: You will be back at the issue?

Mr. Protti: We will not give up on this. At some point, the consumer benefits associated with permitting us to do these sorts of things will become obvious and we will get a change.

Mr. Pedersen: We have been at this for five years. We wish to reiterate that there are some things that we think are very good about this bill that will give us more flexibility and enable us to compete better. We think it is important that we get on with those and not delay the legislation because we have a debate around insurance and auto leasing. However, our position on those issues is very clear. We think that Canadians would be better off if were allowed into those sectors, and that it is the right thing to do from a public policy point of view.

Senator Kroft: My question is directed in a very specific area. Last week, we received a presentation, as we did during our hearings on the MacKay report, from representatives of companies whose business is bill payment and payroll payment. I want to pursue the questions they raised for us because I did not completely understand why their problem could not be solved.

The issue seems to be, in lay terms, that they put in their money and there is a gap in time that creates a credit exposure that they have to cover by guaranty or some other costly form.

A couple of my colleagues and I were questioning why they could not somehow get inside a form of payment system. I will direct this same question to the representatives of the Canadian Payments Association when they are here, but I did not want to miss the opportunity to raise it with you because the solution to the problem, or the answer to my confusion, may lie with you.

Is there not a way that that industry could be brought within a payment system? You have your large-value transaction system which, while I do not profess any deep technical understanding, it seems to me, superficially at least, might be able to accommodate. The numbers are staggering to the layman in terms of the dollars involved and what they do.

Would you comment on whether there is an answer to the problem of that industry that is not clear to us so far?

Mr. Campbell: Our sense is that the LVTS - the large-value transfer system - to which you refer would be a viable alternative. It is available. It would offer a speedy solution and finality of payment, which is important for these participants. It is run by the Canadian Payments Association and, as you pointed out, it would be worthwhile posing the same question to them.

In our view, it would be a viable alternative. It is available through the individual companies you mentioned. They are bankers and we would encourage them to explore that avenue as a way of solving that issue.

Senator Kroft: You would encourage them to, but have you in any way been party to discussions with that industry in trying to solve that problem? I am trying to find out where the roadblock is for them, and that has been difficult to do.

Mr. Protti: The centre for discussions for those issues would be inside the Canadian Payments Association. I suggest that when they appear before you later this afternoon you might want to focus the discussion with them.

Senator Kroft: Thank you very much. We now know where the answer lies.

The Chairman: A couple of weeks ago there was an article in the National Post about Canadian banks in which the writer said that the people around the Canadian banks had dropped the ball. People like the Hong Kong and Shanghai banks saw the opportunity, took it, and make us look amateurish.

You may agree or not agree with that, but the fact is that we have not expanded beyond our borders in the way some of us believe we should. That is probably the only opportunity we have to build what some of us call a national champion to make us more powerful and able to follow our big customers into other parts of the world. You know the story.

We are talking about a vision for the industry and what the industry's vision is. It is not up to us to present a vision. Once this bill is passed, what, in your opinion, will be the major issues still facing the financial services sector and what will still have to be done?

Mr. Pedersen: Currently, 46 per cent of Canadian banks' earnings are from outside the country, so there has clearly been lots of penetration, particularly in the last two years, from most of the banks outside of the borders of Canada. So that has changed to a significant extent, although I would agree with the HSBC that it took some time, for various reasons.

Looking forward, this bill will do many good things for us, as I said earlier, in term of the holding companies, flexibility, and other elements. However, we need to think about a couple of things. One is clearly the issue of M & A activity. This bill does not directly address that but that is something that each bank will have to think about in terms of greater scale. There is no question that greater scale is a significant issue these days, particularly in the wholesale side of the banks. We will continue to have to find ways to expand outside of Canada if we are going to be, as you say, national champions.

The Chairman: You say that 46 per cent of your earnings come from outside of Canada. Is that because you actually have a presence in some of these countries, or is it because you use a lot of offshore forms of tax avoidance?

Mr. Pedersen: We have a presence outside the country.

The Chairman: But you have not bought other banks.

Mr. Pedersen: Each bank has significant operations outside Canada right now. In our case, a huge amount of our earnings comes from our wholesale bank in the United States, much greater than our Canadian earnings. You know about some of the other banks. There are significant earnings coming from outside Canada.

The impressive thing of that is that while 46 per cent of the earnings come from outside of the country, 98 per cent of the Canadian jobs are still here and 78 per cent of the taxes are paid in this country.

The Chairman: In other words, the banks are in great shape and we need not worry?

Senator Angus: If you want to keep them in Canada, you had better worry.

The Chairman: Thank you very much for your time, gentlemen.

Our next group of witnesses is from Credit Union Central of Canada. Please proceed.

Mr. Wayne Nygren, President and Chief Executive Officer, Credit Union Central of British Columbia, Credit Union Central of Canada: We want to go through some of the issues that we have with the credit union system and credit unions across Canada. I know some of you are familiar with the credit union system in Canada, especially those people from the Prairies and I guess from British Columbia. Let me give you a brief overview of the credit union system in Canada.

Approximately 10 million Canadians belong to credit unions all across the country, and I am including the caisse populaires movement in Quebec. In British Columbia, we have $56 billion in assets and 1.5 million members.

Normally, at least one-third of the population of the Prairie provinces belong to credit unions. In British Columbia, one out of every four mortgages is written on a credit union, and I would suggest that probably other organizations like those in Manitoba and Saskatchewan have higher percentages than that.

Credit unions are community-owned. We operate on a democratic basis of one member, one vote. Credit unions offer a full range of financial services, including mutual fund brokerage, insurance, all the wealth management products, and effectively all the services that other financial organizations would offer, including home banking and remote banking.

If you look at the whole country, there are approximately 900 communities across the country where the only financial organization is a credit union. Just this last year, we bought approximately 70 branches from a number of banks where they have pulled out of the communities. Our objective is to stay in rural communities, in communities where we are needed. This, in many cases, is not a good investment for us. We certainly cover our costs, but we are there to provide a service to the community. We intend to stay in rural Canada. We intend to stay in places where other financial organizations have pulled out. That is why it is important that we look at restructuring our business across the country.

We have moved our emphasis from basically rural community to provincial, interprovincial, and now national. As a result, the requirements of legislation keep changing as we continue to go from rural community to more of a global environment. That is why we want to talk today about Bill C-8 and some of the implications it has for us and how we would like to deal with that.

With those introductory remarks, I will pass the floor to Bill Knight who will go into some of the details of how we see this moving ahead.

Mr. Bill Knight, President and Chief Executive Officer, Credit Union Central of Canada: I want to point out something that is well known by this committee and others but often needs to be restated. We are part of the financial services legislation at the national level through the Cooperative Credit Association Act, which covers our centrals - our wholesale basic banking operations. The amendments within Bill C-8 to our proportion of the Financial Services Act gives us three areas of substantive flexibility.

First, it allows us to have federal associations of our centrals and our retail credit unions that give us greater flexibility throughout provinces across the country. As Mr. Nygren mentioned, it gives us enhanced capacity at the national level through a federal association - an unprecedented move that enhances our capacity to deliver product through the retail operations.

Second, it enhances our business powers in terms of Canadian centrals and centrals across the country to support and back up our credit unions to provide that kind of community full service package for our credit union members.

Third, it allows us to get into some very significant restructuring of our system to keep up in the market to get cost efficiencies, economy of scale, and to be more competitive.

For us, it is time for Bill C-8 from a business point of view. For us, there are very significant gains in there that allow us to pull together our operations and work together to service Canadians.

We have one major issue for which we need to provide an update and refer to its impact. We made a submission to you related to section 390(4) to you. We have to update ourselves in terms of that presentation.

We will be asking you, in this legislative reform round, to defer any changes or any amendments as they relate to our needs, as we have seen significant gains since the House committee hearings. We were concerned about a control issue, because we are based on a cooperative model. The current CCA act allows substantial investments in association without the particular 1050 type of control provision.

The first version of Bill C-38 allowed credit unions to own associations without a control. The amendment in Bill C-8 now allows credit unions and provincial centrals to own an association without control, but will not allow an association within our system to own another association without a control mechanism.

The practical implications of this submission can be far reaching. For example, today, several provincial centrals have substantive investments in Canadian central without control. If any of those centrals decide to use the tools provided in the bill to reorganize as an association and to continue to have substantive investments in Canadian central, they will have to control Canadian central. Control in financial cooperatives is not mandated. In a financial cooperative organization, it is done by a shared proportional responsibility. It is often done by contractual agreement in order to understand responsibility and effective control. It is an interesting nuance.

We have found, with all of the gains we have made, that it continues to be a complexity for all the stakeholders and participants whether it is finance, committees of the House, the Senate Banking Committee, et cetera, at the national level. Around cooperative principles, the assumption of mandating effective control often means you do not get them to cooperate among themselves as cooperatives and credit unions, but they do effectively proportion out responsibility when they put associations, centrals or operating companies together.

We had considerable concern about this heading for the House of Commons finance committee. However, in the committee and coming out of the committee, it became a substantive amendment for greater flexibility around regulatory change.

This process has led to us believe that there is significant room for us to resolve this issue in the short term. From our standpoint, in terms of the legislation, we take the following approach. There is too much to be gained for us to suggest any further amendments of a substantive nature to the bill.

Why? Quite frankly, you have seen from time to time the credit union system move ahead and then sort of stall out for a little while in terms of creating national entities, but in the short term - namely this year - we have substantive business to be done within our system. That includes an opportunity to create a treasury utility that will service over 60 per cent of our assets by our colleagues in B.C. and Ontario. Second, a number of our business enterprises, by using the new act, will allow us to pull together our resources in a substantive way - particularly in the wealth management area.

To the committee, we say respectfully we have done a lot of work together. In fact a number of changes were started with you in this committee years ago. We are gaining ground here, which will allow us, with this act, to make big changes.

We also believe that significant changes at the house committee and changes around regulatory provision within our section of the act allow us to come back to this issue.

Finally, I turn to the issue of time. Perhaps I am showing my age, but I was in Parliament at the time of the Benson reforms. Some of you might ask who Benson was.

Senator Oliver: That was a long time ago.

Mr. Knight: I was there and I went through it in the house committee. In those days, we did not expect to see substantive change from that run for maybe another 20 years. Then I saw the changes, working with many of you, in the early 1990s. I remember everyone thought the next changes might take another 20 years. In fact legislation, from our vantage point and experience, is ongoing. We will no sooner get this act in place but the radical shifting of the market will mean, time-wise, we need to come back very quickly to review its impact and its implications. At that time, we will be back to propose an amendment to the actual law in the area of cooperatives and controls. We will go through it again. At this point, we have enough here to make big changes and to answer that need to have a stronger competitor, for my good friend Ray Protti.

Senator Tkachuk: It is in our interests to increase the competitive forces in the country because of the rumours we hear about mag-mergers and the rest. You mention concern with the control provision. What are the practical implications of that in terms of the ability of the credit unions to develop new banking institutions or new bank branches across the country? Is there a practical implication? You talk about product, but if the change had been made the way you envision it for the future, what would it mean for the growth of credit unions in Canada? Could you brief us on the practical implications of that?

Mr. Knight: That change would have made it easier for us, but I will let Mr. Nygren take you through one example.

Mr. Nygren: To back up a little bit, in this economic environment - the financial services environment - the credit unions are provincially regulated. We are trying to keep that value, that culture, because that has made us strong.

We are now trying to build our associations. We are trying to keep the values of the credit unions local, while trying to bring together service providers, like Ontario and ourselves, under one businesses company from which our credit unions can buy services. These "businesses companies" are federally regulated so we must build a bond and a comfort level between the two provinces and between provincial and federal regulators.

When Ontario and British Columbia credit unions come together, we will be an association under the federal act. The only other association is the Credit Union Central of Canada, which is an association under the federal act. That means, under the 10/50 rule, either we own 10 per cent, less than 10 per cent, or we own the majority of Canadian Central. From a practical perspective, anyone who owns more than 20 per cent of Canadian Central must have control. That creates a practical problem for us.

Where do the other provinces fit in? If they form an association and get their 20 per cent of the system, they are over 10 per cent so they must also have control. How can everyone have control over the same association?

Senator Tkachuk: That was an excellent answer, Mr. Nygren.

Mr. Nygren: That is the practical implication of this association owning others. We will run into this as time runs on because we are trying to build local financial institutions into provincial and national. As we roll up, while trying to protect our cooperative and democratic principles and try to put in business efficiencies, we get boxed in. We are moving a cooperative structure within a corporate environment, and sometimes adjustments are needed. We are saying that these are some of the adjustments needed in that environment.

Senator Tkachuk: Even though you support Bill C-8 and you wish the bill to pass - because, as Mr. Knight said, you have enough to do - there is some urgency to move forward with some of these provisions. In other words, we should not be waiting another 20 years, right? We should get on with it and move ahead?

Mr. Nygren: The concern I have personally is that we can solve this issue. We have had enough positive response back from the government that I feel comfortable that we will solve this in regulation. I am not comfortable with the cooperative sector moving into the future, into an unknown environment, into a more global environment, especially the service providers, while needing to fix things all the time with regulations. That is time-consuming and costly. It is not the way to move in this environment. If we can work this time with a regulation, we are comfortable with that. I do not like it, though, as a broad principle for doing business.

The Chairman: Thank you for your time, gentlemen. Good luck.

Our next group is from the Insurance Brokers Association of Canada. Please proceed.

Ms Francesca Iacurto, Director, Public Affairs, Insurance Brokers Association of Canada: Thank you for this opportunity to present our views on the federal government's proposed financial services legislation, Bill C-8.

[Translation]

I am Director of Public Affairs of the Insurance Brokers Association of Canada. With me are Mr. Jim Ball, our Chairman of the Board, and Ginny Bannerman, President-Elect. Mr. Ball and Ms Bannerman are property and casualty insurance brokers in the areas of Vancouver and Calgary, respectively.

IBAC is the national trade organization that brings together the provincial and regional member associations of property and casualty insurance brokers in Canada.

These associations represent approximately 25,000 brokers throughout the country, the majority of which are small to medium-sized enterprises. Insurance brokers are the principal distribution channel for the services of property and casualty insurance companies.

Proper and casualty insurance primarily covers real estate, automobiles and other non-life assets.

Property and casualty insurance brokers offer independent advice to their clients regarding their insurance needs, fulfill the critical role of interpreting for them the insurance policies that are complex legal documents, and represent them to insurance companies in case of a loss.

[English]

Ms Ginny Bannerman, President-Elect, Insurance Brokers Association of Canada: As this committee is no doubt aware, even though property and casualty insurance brokers are provincially regulated, we have a large stake in federal reforms to the financial services sector. We work with and provide the products of federally chartered insurance companies to consumers. We also compete directly with other federally regulated insurers and financial institutions that provide insurance. In view of this, the Insurance Brokers Association of Canada has actively participated in the lengthy review process leading up to this bill, and we have made representations at every available opportunity.

The perspective of property and casualty insurance brokers on reforms to the financial services sector is unique and threefold. First, as members of the SME community and taxpayers, we are concerned about Canada's financials services sector and its contribution to our country's economic growth and productivity. Second, as consumers ourselves of the many products and services offered by financial institutions, we are concerned about price, accessibility, and consumer protection rights, particularly as they relate to tied selling. Third, as members of the SME community and the principal distribution channel for property and casualty insurance companies, we seek competition on a level playing field with other players in the financial services industry.

Our summary position on Bill C-8 is that it is a very balanced piece of legislation that we fully support. We believe that it achieves the difficult task of effectively addressing the many different and sometimes competing stakeholder interests in the financial services sector. We also believe that this bill will provide the necessary measures to ensure the viability and competitiveness of the property and casualty insurance industry. Our key recommendation with respect to this bill is therefore that it be passed as quickly as possible so that its considerable consumer and industry benefits can begin to take effect.

However, before Mr. Ball speaks with respect to IBAC's views on key areas of interest, I would like to express our deep gratitude for the resolve of the government and parliamentarians from both houses to proceed with the reforms contained in this legislation. We extend particular thanks to the many senators who have listened to the concerns of property and casualty brokers and carried them forward during the lengthy review process that culminated in this review.

Mr. Jim Ball, Chairman, Insurance Brokers Association of Canada: In terms of specifics, we are most pleased that this bill effectively addresses and brings closure to the long-standing concerns of property and casualty insurance providers in two important areas: bank sales of property and casualty insurance, and tied selling. I will briefly discuss these in turn.

First, we believe that Bill C-8 should be most praised for what it does not do. It does not change the rules governing bank sales of property and casualty insurance. Our summary view is that the existing rules benefit consumers by providing them with greater choice and benefit the property and casualty sector as a whole by maximizing competition. There is therefore no doubt that, primarily for what it does not contain, Bill C-8 is instrumental to the continued strength of our industry and is wholeheartedly supported.

Second, as the committee is no doubt aware, we have had long-standing concerns relating to the opportunity for the banks to tie the provision of certain services - property and casualty insurance in particular - to extensions of credit or other financial products and services. Tied selling is a practice that adversely affects competition, as consumers no longer base their purchasing decisions on factors of price or product attributes. This activity can result from coercion by a seller or from a customer's perception that they might receive preferred consideration by volunteering to accept another product or service from the same seller. Neither situation is advantageous to the consumer.

The 1998 amendment to the Bank Act prohibiting coercive tied selling in relation to loans was a good first step. However, the extension of this prohibition to all other banks products and services will ensure that competition between banks and providers of insurance in other financial services institutions is on a level playing field. That is important to remember - the level playing field. Consumers will also benefit from the requirement that the prohibition on coercive tied selling be disclosed to them. The tied selling provisions in Bill C-8 are strong, and we recommend that this committee not consider any changes to their wording.

With respect to the eventual review of the restrictions on bank sales of property and casualty insurance, we believe it should take place after a thorough evaluation of the consumer protection regime proposed in this bill.

The swift passage of Bill C-8 will provide investors with market certainty and a stable policy framework within which sound business decisions can be made. It will also enable our industry to focus its energies on meeting the changing needs of customers, improving service in every way possible, and continuing serving as a model for greater competition in the financial services sector. Indeed, the property and casualty industry, with its hundreds of insurance companies and thousands of brokers, is an excellent example of how well fair and abundant competition, more choice, innovation and excellent service can benefit Canadian consumers and the economy at large.

To conclude, the Insurance Brokers Association of Canada fully supports Bill C-8 and recommends that priority be assigned to passing it quickly. We particularly urge this committee not to consider any amendments that would be contrary or inconsistent with the federal government's stated policy in the area of bank, property and casualty sales in tied selling.

We would be pleased to answer your questions.

Senator Kelleher: I can well understand why you are pleased with the bill in its present form. I will not pursue that. I think you have made that abundantly clear. You are pleased because the government has not permitted competition by the banks in the insurance field. Yet, if you have the best interests of the consumer at heart, why would you want this? Would it not be a benefit to consumers to have a more competitive market out there?

Correct me if I am wrong, but I think in the United States the banks can sell insurance, and I think in the United Kingdom they can sell insurance, too. It does not seem to have hurt the insurance companies. I have not heard of the great demise of a number of companies.

Frankly, I have a little problem. Maybe you could explain to me why this would be so bad for the consumers if the banks were, in fact, allowed into the insurance business.

Mr. Ball: I would like to respond to that. Let us look at the jurisdictions you mentioned. In the United States, there are probably over 9,000 banks. In the United Kingdom, there are 600 odd banks. In Germany, there are 3600 banks. In France, there are over 600 banks. In Canada, five banks control over 80 per cent of the business.

We are an extremely competitive industry. I mentioned before that there are over 230 insurance companies and thousands of brokers representing customers. That is a bit unique in that we represent the customer, not the insurance company. When we take that customer's business and shop it around to a number of different companies every day, thousands of brokers are forcing the insurers to be competitive.

The return on equity for the general insurance industry in the year 2000 was probably in the range of 5 to 7 per cent. The return on equity for the large financial institutions is three times that. The Royal Bank of Canada has 3.5 times the assets of our whole industry.

That is one point of view with respect to the competitive nature of our business, versus what would happen if the banks had these opportunities.

Let us be clear about something. Selling insurance from their branches really means allowing banks to use the information they have gathered from banking to sell insurance. That works against the consumer in a couple of ways. Let me elaborate.

Suppose you have your house mortgaged with a bank. To get that mortgage, you had to provide the bank with a copy of an insurance policy. The bank has, sitting in their file, a copy of the policy that I sold to you with the effective date, the expiration date, the limits, the coverage types and the price. That gives the bank a tremendous advantage if it is allowed to tie that mortgage to the sale of insurance.

Also, some of the information in a bank's file relates to credit and health and other issues that the consumer has disclosed to them. I do not have that information in my file. The bank can be more selective in rating and accepting insurance risks and in deciding whether to sell a policy to that individual.

The whole purpose of making change is to offer more competition. Ours is probably one of the most competitive sectors of the financial services industry in Canada. We think that the 1992 reforms kept that playing field level. We like the continuation of having a level playing field. The banks can all sell insurance. They all have insurance subsidiaries and they compete very effectively against us. We now only control about 75 per cent of the market. The companies most active in taking business away from us have been the wholly owned bank subsidiaries.

Senator Kelleher: Control of 75 per cent of a market does not tell me it is horribly competitive but, in any event, thank you for your explanation.

The Chairman: Thank you for your presentation.

Our next witnesses are from the Retail Council of Canada.

Mr. Peter Woolford, Vice-President, Policy Analysis and Government Relations, Retail Council of Canada: Thank you for this opportunity to participate in considerations on Bill C-8. As an opening comment, I would echo what the last witnesses said. We believe this is good legislation. It is an essential, positive step in the right direction. We fully support it. We encourage the committee to move this through expeditiously and have the government pass this into law.

This bill sets a series of ground rules into place that will be positive for our industry and for Canadians generally.

Senators on this committee received a copy of our submission electronically yesterday. I will canter quickly through the key recommendations that we have made and then I will be glad to answer any questions.

The first piece reflects the fact that, within the retail trade, the overwhelming majority of businesses are small, owner-occupied retail stores. We are particularly interested in ensuring that the complaints process that is being put in place under this legislation for consumer complaints can also extend to the concerns and needs of small businesses.

As I am sure many senators are aware, it is hard for a small retailer to separate out in his or her mind the difference between "running my small store" and "my personal life." The two are very much integrated. Small-business people have similar needs and concerns. They stand in a similar relationship with a large financial institution and if their concerns could be handled through the same kind of complaints procedure, that would be very positive.

We connected that directly to the whole question of access of retailers to loan capital, for working capital and for investment in their businesses. When my colleague Bill Yetman and I first met one of the new senators last fall, Senator Setlakwe from Montreal, the first thing he raised with us was the whole question of access to capital. He wanted us, as a trade association, to explore that whole issue. It is an ongoing concern for our members.

The second set of relations we have is with respect to the payment system. As the key interface between the consumer and the productive economy, retailers are really essential elements of the payments system. We receive every day enormous flows of payments from Canadians for the merchandise and services they buy and, every day, in turn, retailers make substantial payments back to their suppliers for the merchandise and the services that they have put on their shelves.

We would very much support the provisions in the bill that put a larger role for stakeholders into the Canadian payments system. We simply would ask that the key role of retailing be recognized in that. We suggest that retail representatives be on the Canadian Payments Association board. We would ask that retailers play a role in the stakeholder advisory council as well. We have a seat on the council today in its rather less formal version and we would hope that would continue into the new arrangement.

One concern we have is that some of the legislation wording would seem to indicate that a number of other supplier or related companies to financial institutions would also have a role in the stakeholder advisory committee. We would express a concern that the committee not be set up for users of the financial system to be overwhelmed or dominated by parties that have some kind of ongoing ownership or other arrangement with their financial institutions.

In the third area, tied selling, we strongly support the amendments of the legislation in this area. We believe that is a valuable piece. A number of our members reported incidents where their credit card customers have been told that, in order to qualify for a loan from the bank, they must give up their retailer credit card. We feel that sort of practice should be explicitly prevented from happening.

The second piece that relates to tied selling is what is called the "all cards" rule that exists in many merchant agreements with the two large credit card companies. We suggest that credit retailers be allowed to buy the payment services competitively that they see being appropriate for their business and not be required by two very large suppliers to take the entire package. That allows the retail merchant to pick off the payment services that make sense to their customers and that are a lower cost for them and for their customers. That allows them to have competitive access to some key business services.

Within the submission, there is a long list, extending over two pages, of the various face-to-face interactions that retailers have with their local financial institutions. I must confess that when we started developing this list, I had no idea how extensive and intensive the relationship is between the retailer and their local bank branch. It an essential and critical part of their business on an ongoing daily basis; it is vital to the success of that company.

Our concern here is simply to ensure that when banks start to change the services that they provide at the local level, there is an opportunity for the stakeholders to be heard. We certainly support the changes that require some consultations around branch closures. Our suggestion is that that be extended to include cases where the branch eliminates what they call "services to businesses." That would be commercial accounts or many of those other services that are listed in those two or three pages in our submission.

The key point here is that the financial institutions themselves require the business customer to show up in the branch to get that service. Whether you are running the branch of a national retailer or you are an independent merchant in her own hometown, you have to go to the branch in person to carry out that activity. If that branch is no longer there or if it is not in your part of town - or not in your town at all - it can have a significant impact on your ability to manage your business. You have to close the shop or get someone else in and travel some distance to do the necessary business with your financial institution.

With regard to the merger review guidelines, we again strongly support the directions there. We feel this is a positive step forward. We would ask that, in addition to the consultation around mergers, that where there is a set of remedies negotiated by the merger parties with the Competition Bureau, those also be subject to consultations. In that way, the various players who are affected by those mergers can have some say in the shape of the final package.

Senator Tkachuk: I have a couple of questions on tied selling.

I do not understand the banks ' position, but I fully understand your point about the banks asking people to close their retail credit card accounts rather than asking them to cancel their VISA cards. On the second point, I am a little confused.

Retailers take MasterCard and VISA. Give me an example of what you are getting at.

Mr. Woolford: MasterCard and VISA offer primarily credit cards as payment, but they do offer other non-credit cards. We can see down the road there will be additional innovations. In Western Canada, I believe MasterCard is offering a form of stored value card. The money is located on the card and is drawn down by the customer as needed; that is one form. We have been talking with MasterCard as well about a card that would appear to allow access to an individual's personal account through this particular card. It would appear to us to be some form of debit card. Again, we are saying that the merchant really needs to be able to identify the types of payment opportunities that they want to offer their customers, rather than being required to take all of these.

Senator Tkachuk: Now they tell you to take the whole line or you get nothing?

Mr. Woolford: That is correct. I do not want to use the phrase "tied selling" but we are required to buy a package of services. We would like to see the retailer having the ability to search out the competitively priced payment services that make sense to their business.

Senator Furey: My question regards your comment about extending provisions to regulate against tied selling with respect to closing out of credit card accounts with retailers.

I assumed, rightly or wrongly, when I read that, that the borrowing we were talking about was not general borrowing from a bank but more specific borrowing for individuals who are trying to get their financial affairs in order. Are you saying that this is a practice of banks with anyone who walks in off the street to borrow for any reason?

Mr. Woolford: Obviously we do not know the circumstances of every individual. We have heard from our members of cases where their customers say they must give up this retail credit card because my bank will not lend me money unless I hand it in.

Senator Furey: It would be prudent for the bank to do that if it was a case of someone trying to get their financial affairs in order, would it not? I can see your point if it is just someone walking in off the street to borrow. It would be horrendous of the bank to require that but, in certain circumstances, it would be prudent.

Senator Tkachuk: They will let you keep the VISA card but, by the way, you should cancel the Eaton's card.

Senator Oliver: If a card carries 18 or 28 per cent interest, it is good financial advice to get rid of it.

Mr. Woolford: Requiring the customer to do that is our concern. If the bank is providing some sensible financial advice, we would not have trouble with it. If they say you cannot have a loan unless you eliminate some credit cards, that concerns us.

Certainly, if that kind of advice comes from a credit bureau or an outside, arm's-length party, to a person attempting to get finances under control, we would have no trouble with that. It does disturb us when the advice comes from essentially a competing payments organization.

The Chairman: Our next witnesses are from the Canadian Payments Association in the person of Bob Hammond, General Manager, and Doug Kreviazuk, Director of Policy and Research. Please proceed with your opening statement.

Mr. Robert Hammond, General Manager, Canadian Payments Association: We very much appreciate the opportunity to comment on the Canadian Payments Act - the portion of Bill C-8 that will amend the legislation that established the Canadian Payments Association way back in 1980. We are speaking today on behalf of our some 130 members. Forty per cent of our members are banks, and the rest are trust and loan companies, credit unions, caisse populaires and other deposit-taking institutions. They include both provincially and federally regulated financial institutions.

The CPA is generally very pleased with the proposed Canadian Payments Act and the fact that it reflects many of the suggestions and comments that we made during the consultative and legislative process. We are hoping that the new legislation will be passed this summer so that we can move forward with the implementation of the CPA's new governing legislation.

In particular, the CPA supports the government's policy to open up the payment system to life insurance companies, money market, mutual funds and securities dealers, and we are looking forward to welcoming new members.

However, the legislation provides that the more detailed requirements with respect to membership are to be set out in the regulations. Given that these regulations are not yet generally available, it is difficult for potential new members to make a decision as to whether or not they want to join the CPA. It is also difficult for us at the CPA to establish procedures for dealing with membership applications. Consequently, our staff, our members and our potential new members are very much looking forward to seeing the regulations.

Turning to another matter, we are very pleased to see that the legislation will enshrine the existence of our stakeholder advisory council. We support the objectives that are proposed for the council. CPA established the stakeholder advisory council in 1996 to provide the board with advice on payment system issues and the CPA's consultative process. Council members currently include 16 representatives of payment system users and third party service providers. They also include two CPA directors, which is an indication of the board's commitment to the council and its desire to ensure a two-way flow of communication between the board and the council. The council has worked very well. We are very pleased with how things have evolved. In fact, it has evolved to a point where many stakeholders are now participating on CPA working groups and committees.

Turning to matters relating to governance, the CPA welcomes the addition of three new directors to the board who must have no affiliation with CPA members and whom the minister will appoint.

We are also pleased that the new CPA members will have the opportunity to elect directors, just as our existing members do. The allocation of the number of director positions to the various classes of members will be set out in regulations, so again our members and potential new members are looking forward to seeing these regulations and having the opportunity to discuss them.

Moving on to the last issue, oversight of the CPA. We do not object to the two new oversight powers that have been given to the minister. The first is the power for the Minister to disallow any new rules or any amendments to rules. The second is the power for the minister to issue a directive to the CPA to make, amend or repeal a bylaw or a rule if the minister deems it is in the public interest to do so.

We doubt that the minister will ever have to exercise these powers, and we say that for three reasons. First, stakeholder advisory council representatives are actively involved in most processes that lead to board decisions regarding rules and bylaws. Furthermore, we believe that the broad representation of payment system users on the council should ensure there is no conflict between the CPA's proposals and the public interest.

Second, the new legislation imposes a duty on the CPA to reflect specific public policy objectives set out in the legislation in carrying out its activities. In other words, there is a duty on the CPA to respect these public policy objectives that are newly set out in the legislation.

Third, the minister has a statutory obligation to consult with the CPA board before issuing a directive.

We think these three things together will help ensure that the minister will not have to exercise those powers. However, having said that, we would have preferred that the legislation stipulate that the minister's power with respect to the disallowance rules must be exercised in the public interest, as does the legislation with respect to the minister's directive power.

Also, with respect to the directive power, we would have preferred that the legislation permit a stay of directive pending the final disposition of an application for a judicial review.

In summary, Mr. Chairman and senators, we are generally very pleased with the legislation and we look forward to welcoming new members and to implementing the other aspects of the legislation. However, to achieve early implementation once the legislation is passed, we think it is important that the draft regulations be released as soon as possible.

Senator Oliver: My question relates to the issue of regulation. You are not the first witness to come before this committee to talk about the extremely important and influential role that regulations to this Bill C-8 will have on individual members of the financial services institutions. It seems to me that you could almost have government-by-regulation since there will be so many regulations and they will have such an important impact. Perhaps it would be useful if organizations such as yours could come before a committee such as this or the House of Commons Finance Committee once the regulations come out and have an opportunity to discuss them and debate them in great detail, and not just read them as gazetted.

Would you like to comment on that? Is there any merit in having the opportunity to come forward and discuss the regulations at great length in view of their particular importance to this bill?

Mr. Hammond: In answering your question, Senator Oliver, I should say that we do have a good relationship with the Department of Finance. There have been some preliminary discussions about the contents of the regulations, but they are not yet available to distribute to members or potential new members.

Senator Oliver: Do you mean you have seen a draft?

Mr. Hammond: We have not seen complete drafted versions. However, we have seen some material and we do have confidence that discussions will continue as they continue to work on these regulations. We think it important that we reach a stage where our members and potential new members and, indeed, the public have an opportunity to comment on these regulations. We are saying that from the perspective that we are anxious to implement this legislation once it is passed. We are anxious to get on with welcoming new members, et cetera, and it is hard to do that without knowing some of the details.

If the Senate held hearings on the regulations, we would be glad to participate in them. I am not saying we think that is really necessary at this point in time.

Senator Oliver: It may not be necessary for your organization.

Mr. Hammond: No.

Senator Oliver: What about other stakeholders and groups and individuals that will be impacted by these potential regulations?

Mr. Hammond: They may indeed welcome the opportunity. The regulations have to be published in draft form in the Canada Gazette, and the whole purpose of that is to get reaction and comments. Certainly we will be glad to provide comments. I am optimistic that we will be able to work out any issues that raise concern - but you never know until you see the final version.

Senator Tkachuk: I have a supplementary. We have heard that quite often from witnesses. Everyone talks about the regulations and how important they are to what will happen in this bill. However, regulations do not only impact on the person regulating them. They impact more on the public. In other words, the regulations may be good for you but not for the country - do you not think that it would be better that these regulations be tabled before parliamentary committees?

Mr. Hammond: I can certainly understand that point, Senator Tkachuk. The regulations that have raised concerns on our part, however, are the conditions for membership. In other words, the bill proposes that life insurance companies, money market mutual funds and security dealers be allowed to be members, but subject to the requirements that will be set out in the regulations. It is important to know what those requirements are, and I think that would affect those institutions more. I guess the public would have an interest in it, too, but it depends what those regulations say.

The other issue we have raised is the structure of the board of directors. For example, under the existing legislation, the banks have five seats on the board, the non-banks have five seats on the board, and an officer of the Bank of Canada, who must be Chair, holds one position. The board will be expanded under the new legislation, but how the seats are to be distributed among our members is not determined. That is an issue that would most affect our members as opposed to the general public.

Senator Kroft: I should like to pursue a point I raised with the representatives of the banking industry when they were here earlier. My question arises from testimony we received last week from representatives of companies that are in the business of bill payment and facilitating payroll. During their presentation, they described a problem that had to do with an exposure risk in the gap of time between the receipt of their money and the payment of their money. This gap worked against them and the cost of covering it by guarantees or something else was excessive. I raised this question with people from the banking industry and they see no reason why it could not be handled by the payment system, particularly when I mentioned the large value transfer system, and that I should raise it with you. That is what I am doing. The business of these people is paying out enormous sums of money in payroll every week. Why can the system not accommodate the risk entailed in that? It would appear the trail has led to you.

Mr. Hammond: I would be glad to answer that question. In fact, the representatives of the three companies came in to see us after they appeared before this committee, so we know them well. We have been having discussions with them.

It is important to understand how they handle their business. Let us deal with the payroll companies first. The payroll companies put a debit through our system, using our AFT - Automated Funds Transfer - system. They bring in the money from the employers who want them to pay their payrolls. In fact, the CPA is a customer of one of those companies. They put a debit into our system. Through that debit, they obtain the funds that they then use to pay the employees of our organization and other organizations. That is our AFT system. That system is intended to handle a large volume of payment items on a bulk basis through a data-transmission arrangement.

There are two things that do not happen here that usually happen in other payment systems. The authorization of the account holder is not verified for each transaction. The money is simply taken out of the account. For example, CPA's account would be debited but no check is made to see whether we authorized that debit.

There is also no check made for sufficient funds. The process is automatic, like writing a cheque. When a cheque is presented to the clearing and settlement system, provisional credit is granted but, if the institution on which it was drawn rejects the cheque as NSF, then the cheque is returned through the clearing.

The same thing can happen with the AFT-type system. If the debit arrives and the account has insufficient funds, the debit is returned, which takes several days. The debit goes through the system and arrives at the financial institution from which the funds are being drawn. The institution checks with the branch to ensure the funds are there. Our rules say that, once the debit arrives, they have one business day to make a decision on whether to return it through the clearings.

Time to clear depends on how many institutions are involved. An indirect clearer operating through a direct clearer should return debits in two days. It may take three days. The organizations that are worried about this describe this as settlement risk. It is not really settlement risk. It is insufficient funds risk. If the funds are not there, then the debit gets returned through the clearings. That is their concern.

The Chairman: I do not get the difference.

Mr. Hammond: Let us use the example of Bank A and Trust Company C who are participants in the clearing and settlement system. At the end of the day, if Bank A owes Trust Company C a significant amount of money and cannot pay that money, we call that settlement risk. The other transaction with a possible NSF cheque is not necessarily called settlement risk. We call it insufficient funds risk. There may be insufficient funds in the account to honour the payment. That is the way the system works.

As the senator mentioned, a Large Value Transfer System has been developed. That became operational in 1999. It is an electronic system with a number of major risk controls and backed by collateral. The system does two things. It provides certainty of settlement. Even if, for example, a bank or a trust company on which the payment was drawn fails and if that payment has gone through the risk control test, the settlement for that payment will occur. Also the payment will be final. In other words, it cannot be revoked for any reason at all.

That system operates well and has been very successful. We clear about $120 billion per day in our clearing and settlement systems. The LVTS system accounts for $100 billion per day. While it is successful, it is a very complicated and complex system because of the risk controls. Certainty of settlement and sufficient funds must be confirmed on the account responsible for making the payment.

That protected system costs money to run - about $3 to $4 per payment. The participants in the system must also put up collateral to ascertain payment settlement and finality of payment. Major businesses want those benefits of final payment and certain settlement, and they are prepared to pay the cost.

Senator Kroft: Mr. Hammond, are you saying that the system as described could accommodate this request but there is a cost question?

Mr. Hammond: Let me explain. There is no reason why Ceridian or ADP, the payroll processing companies, should not be able to get their corporate clients to send in payment using LVTS. If they do that, the funds that reach Ceridian's account or ADP's account are final and certain and cannot be called back.

One of the advantages of LVTS is quick access to the funds. Once the payment goes through the electronic system and passes the risk control test, the funds can be accessed on request, that same day.

Senator Kroft: You said they went to see you after they saw us. By the time they finished with you, were they satisfied? Do they still have a problem? They have not yet come back here.

Mr. Hammond: There is a question of cost, as you say.

Senator Oliver: Who pays, the client or Ceridian?

Mr. Hammond: I am sure it would be a combination. If the client must pay more to get their money to Ceridian for Ceridian's convenience, then they may ask for a lower price from Ceridian.

Senator Kroft: There is nothing inherent in the legislation or the structure contemplated by the legislation that fundamentally creates an obstacle to servicing the needs of this industry? It is simply a question of you and they arriving at a price that is worthwhile to them and covers your needs?

Mr. Hammond: We do not set the prices.

Senator Kroft: There is no legislative or regulatory barrier to you serving them?

Mr. Hammond: No. There is a system now that would accommodate the needs for finality of payment. It would enable Ceridian and ADP to know that the funds received from the employers are theirs and cannot be reversed.

With respect to tele pay where they are dealing with individuals, the cost of having the desired level of protection may be prohibitive from the point of view of consumers.

Senator Oliver: Is there a minimum size or amount required before you can use LVTS?

Mr. Hammond: No, sir. Anybody can use it if you are prepared to pay the cost but there is a cost to using it because of the collateral.

Senator Oliver: If a company's weekly payroll is $20,000, is it worth their while to use LVTS?

Mr. Hammond: It would certainly be worthwhile to Ceridian and ADP if they are worried that the current debit system allows a debit to be recalled because of insufficient funds in the employer's account.

Senator Kroft: Is your fee set on a cost-recovery basis or do you operate for profit?

Mr. Hammond: We operate on a cost-recovery basis and our members pay dues based on the number of items they send through our clearing and settlement system.

Senator Kroft: You would attempt to relate the fee that you charge them to the actual cost of providing the service?

Mr. Hammond: It is related to the actual cost of our service. Of course, the cost I was quoting does not include the cost of the back-end services that the participants in the system would have to cover. It does not cover the cost of the collateral that they have to put up with the Bank of Canada; that is an opportunity cost.

Senator Oliver: What percentage of collateral is required? Is it 100 per cent?

Mr. Hammond: No. The risk controls operate on a bilateral and multilateral netting system. It is a significant amount of collateral but it is not 100 per cent. The risk controls are such that the payment is final and settlement is certain.

Senators may be interested in more detailed information. It is a very complex system, so we could provide something in writing. It is too complicated to explain orally.

Senator Angus: Mr. Hammond, welcome to the committee. I had a chat with you the other night at a reception. It was obvious you are quite enthusiastic about the new regulations and the new set-up for the payments association, and I learned a lot from talking with you briefly.

If you sit around here a little longer this evening, you will hear from the ING Bank. They will speak with us a little later. Have they met with you at all concerning this bill?

Mr. Hammond: They have not met with me personally concerning the bill. I know that the ING Bank is certainly a member, and we have had some conversations with them. At one time, they were concerned about some aspects of our rules, but we think we have amended those rules such that they are happy with them now.

Senator Angus: One of the things that I understand they are not 100 per cent clear on is whether or not they will have direct access to clearing independent of the main-line banks.

Mr. Hammond: As you know, we have operated on a system where we have direct clearers and indirect clearers. There are two requirements to be a direct clearer.

One requirement is that you have a settlement account at the Bank of Canada. That is something that the Bank of Canada decides. We have no control or jurisdiction over that. It is up to the Bank of Canada to decide whether or not they are prepared to provide the institution with the settlement account.

In terms of the requirements in our bylaws, ING was concerned about a volume requirement. In the bylaw, it stipulated that to be a direct clearer you had to account for one-half of one per cent of the total volume of payments going through our clearing and settlement system. At the current time, we have I think 13 or 14 direct clearers.

When you look at that requirement, you have to realize that it was established way back in 1980 when the CPA was established. At that time, we were clearing almost entirely paper items. Now, 65 per cent of the items that are cleared and settled through the CPA are electronic items. To be able to deal with the clearing and settlement of paper items, you need quite an infrastructure. It was sort of a practical issue, too, in the sense that the sorting machines would not accommodate having everyone being a direct clearer and having a settlement account at the Bank of Canada in those days.

Those days are gone now. Most of our payments are now electronic, so we think the reasons for having that volume criteria have disappeared. In fact, we are working on our bylaws now, and we are proposing to remove that criterion, so that would no longer be there. I think that is the criterion that has raised the most concern for ING Bank.

In fact, ING was invited to participate in the discussions relating to our clearing bylaw. I think they are aware of what is going on.

Senator Angus: As I understand it, one of the goals of the government with this legislation is to engender more competition and encourage new entrants into the system. The ING Bank and other small banks are telling us that the restricted access, if you will, to your association or to the direct clearing is a definite barrier to the entrance.

I am rather reassured by your answer. You are saying that at the moment there is probably a restriction, but you see that that may be an anachronism and are working towards removing that barrier to entry. Would that be a fair summary?

Mr. Hammond: That is exactly right. We are looking at all our bylaws in the context of the new legislation. We have gone back and looked at all of them, and we are working on revising them. As I indicated, the current plan is to remove the volume restriction.

Senator Angus: Are you not aware of other restrictions to direct clearing by them or people like that?

Mr. Hammond: No.

The Chairman: Thank you for your time, gentlemen.

I would like to welcome, from the ING Bank of Canada, Mr. Paul Bedbrook, President and Chief Executive Officer, and Mr. Michael R Bell, Director. Please proceed with your opening presentation.

Mr. Paul Bedbrook, President and Chief Executive Officer, ING Bank of Canada: Thank you, Mr. Chairman and senators, for the opportunity to present at this committee. As you can hear, I am not a native Canadian. As a foreigner, I welcome this opportunity.

Senator Angus: You are not Dutch either.

Mr. Bedbrook: No, but I bring a Canadian with me, a resident of Ottawa and former diplomat, Mr. Michael Bell, so we can get all points of view.

You have our submission, which hopefully you can read as I am talking, but I do have a few opening comments.

The submission outlines the major issues for us, but I say at the start, for fear that our submission may sound otherwise, that we do welcome Bill C-8 and are generally supportive of the measures it is trying to progress in the Canadian financial services industry. We have two points that I will expand further, and these are the main issues from our point of view.

We are a relatively new retail bank in Canada. We are competing as aggressively as we can with the existing banks and having success at giving a better deal to Canadians in retail banking. However, I think it is clear that the legislation frankly does very little for ING Direct or ING Bank of Canada as far as our trying to progress those benefits to Canadians in the marketplace.

If we look at the basic measures, the efficiency of growth of the sector and fostering greater domestic competition, most of the issues there are not applicable to ING, as I read the summaries of the legislation. It more affects the existing large players and the restructure within the existing industry rather than promoting new players.

The Chairman: Could you clarify what you mean by "offering retail services"?

Mr. Bedbrook: ING Bank of Canada offers retail-banking services to the public in Canada. We are not a corporate bank as such. It is savings, deposits and retail loans.

The Chairman: Do you have branches?

Mr. Bedbrook: We do not have branches, no. ING Bank of Canada trades as ING Direct. It is a retail bank. It does not have branches. It has offices through electronic channels: through the Internet, over the telephone and through ABM machines. We are known as the virtual bank or the "branchless" bank. In fact, we do have a branch at our office in Toronto, and there is one in Vancouver. That is really to give customers comfort that we are real and not purely virtual.

We have roughly 400,000 customers. We grow at $100 million deposits per month and 10,000 customers per month. We are arguably the most successful new retail bank in the Canadian environment. I am speaking as a new player, a Schedule II retail bank, trying to enter the Canadian market and be successful in this particular market.

The first point I make is that, as we read the legislation, there is not a lot in there for us. That is fine. We are only one business in the marketplace. It should not be just for us. However, if you are trying to foster new entrants into the market, what is in here for them? I will expand on that later.

Also, the ING is based in the Netherlands and is a very large list of financial institutions - three times as large as any of the major banks here in Canada. As they look in, and as I look in as a relatively newcomer to Canada, the legislation looks more a "catch-up" than it does getting Canada to a leading position in OECD countries for financial services legislation. If we are trying to get Canada to the forefront, I suggest that the legislation looks to be catching up.

I will give two quick examples on that. First, I do not see a national regulatory regime. When we do mutual funds, we still have to go to provinces. We do not go to a federally regulated body. Where is the one national regulatory regime which, with all modesty, now exists in my home country of Australia where the states - that is, the provinces - are branches of the federal regulatory bodies? Therefore, you deal with just one institution. It is a maze here for us.

Also, where are the explicit guidelines for new entrants? We wanted to get to the same level playing field as the major competitors, but many of the criterion that we had to achieve were not explicitly stated to us. I will elaborate on that in a moment.

Before going on, given that I am relatively new to the country I will ask a few questions that I asked when I first came here. First, why our consumers of banking services so annoyed with the industry generally? It is a global phenomenon, so Canada should not feel too bad about that. It is even worse in Australia, and the press are worse to the financial services sector there than they are here. It is a global problem and cannot be solved with one piece of legislation.

The reason, primarily, is that it is very hard to change a bank. The service is relatively low. You give your money to an institution and they charge you fees. That is a fundamental mindset. The premise of ING Direct is that you give us your money and we do not have banking charges and fees. This is obviously a mindset that the customer likes. We do get positive feedback on that.

We ask ourselves: If we are trying to set a framework that is conducive to doing business, why are consumers so annoyed? Does the legislation help that? More important, why are there not more competitors for ING Direct in the marketplace?

Our major competitor would be the CIBC associate, President's Choice Financial. Once you go past us and President's Choice Financial, a very small group of players are trying to compete and institute the new way of doing banking here in Canada. I ask myself why that is.

We have a fair idea of why it is. First, it takes a lot of money, so you have to be prepared to put the money up front. However, it is part of the framework and environment that we are operating, and in some ways obviously the oligopoly situation. You may not be aware that 85 per cent of retail deposits are with the major banks. Ten or 15 years ago, that was under 60 per cent. There was a greater choice of places for people to put their money. It appears that the regime has gone backwards over that period of time, and that is confirmed with the CDIC.

In Australia, there are more entrepreneurs in the niche areas. In retail mortgages, individuals and corporations have won 5 per cent to 10 per cent of the market from the major banks while undercutting and being niche players. We do not see that here in Canada to the same degree. I do not have the answers, and I am not sure that a piece of legislation can answer that, but if we make it an easier place to do business with fewer costs, you will get those players coming into the marketplace.

The major issue for us is the level playing field that we think we do not have here in Canada. In our submission we give a simple example. OSFI allows us, as a bank, a certain multiple of assets to capital. If we have $300 million in capital, we are allowed to gear it 18 times. The major banks can gear it 20 times. When we started here it was 14.5 or 15. Then it went to 16 and then to 18. The more you can gear your balance sheet, the less capital you need per dollar of assets and the less capital tax you pay per dollar of asset per customer. We have to do our dues to get that. It has never been explicitly stated to us what we have to do to get to that level playing field. There is a regulatory barrier that makes it harder for us to do business.

Capital taxes are clearly an issue in the sense that, globally, capital taxes are not a common thing amongst all the OECD countries. Our parent company asks why it is more expensive to do business in Canada. It is partly the capital taxes and our deposit insurance premiums. They currently compose roughly 20 per cent of our non-marketing operating expenses. That is not the case with other ING Directs. We face a higher cost regime.

Similarly, with our insurance premiums through CDIC we have to jump over certain hurdles. One of them, for instance, is five years average profitability. We have only been here four years so we can never achieve that one, and there are certain criteria that make it very hard for us to achieve everything to get to the top tier; that is, the lowest premium and therefore the lowest cost.

The first one is the level playing field. We have to go through all those hoops to get there and we are not there yet, although we have been here four years. We are owned by a company that is regulated by the Dutch Central Bank. We have to comply with them as well as with the local regulator here. There is double regulation for us, but the regulation in Holland is not acknowledged here in Canada. We are a stand-alone entity and we are treated as such. We are a new boy and we have to do our dues over time. However, that does not reflect our ability to pay or the security of our business and its ability to meet the depositors' demands.

The other point is the regulatory burden. There is a section in the bill to try to improve the regulatory environment, which we would welcome, but, although you may not be aware, we do 20 returns per annum for OSFI. We do endless returns for the CDIC, the banking ombudsman and the Canadian Department of Finance. We have staff constantly doing those. We are not like the Royal Bank and the other big banks that have departments to do all these things. This adds a cost to our business. At the bottom of page 5 of our brief is a very short summary of the degree of regulation that we have to go through. On one level, if safety first is the aim, that is fine. However, if you want efficient business, if you want to bring players in, and if you want better customer value propositions in the market place, this is not the way to do it because it is adding costs to our basic structure of doing business.

There are other aspects on which I have commented. The previous summary from the CPA is correct as far as our position is concerned on the payments. Our head of operations is a member of a committee on that. It has been a volume issue for us previously on the payments association. Going forward I understand that that will generally be cleared away and then we will have the choice on what we will do.

Our point in this paper is to allow specialist clearers to enter the market, that is, people outside the banking industry who might want to set up a clearing business and bring a whole lot of players together to compete with the existing players in the clearing system.

Mr. Chairman, I will take questions.

Senator Angus: I think some of my colleagues agree with me that it is refreshing to have a little break in the love-in that has been going on here.

One of the senators across the table indicated that you may have written my speech for me, or vice versa. You are expressing the exact concern that I have about this legislation. Everyone sees a lot of good in it, that it is the fruit of long and arduous work in the process here in Ottawa, and that it is best to get it on the books and then try to improve it.

The points you make are ones that this committee heard during our hearings on the Mackay task force report and on the bank merger proposals of several years ago. I was disappointed that this bill did not contain the framework that I felt would encourage smaller players, such as the ones you have mentioned, to come into Canada and increase the competition.

However, this is where we are today. I believe you said, and I wrote it down, "Although our brief sounds otherwise, we do see some good." I wish you had not said that.

Mr. Bedbrook: Some progress is better than the status quo.

Senator Angus: I know you folks are very creative. I got a direct mail piece from you the other day, the best direct mail piece I have ever seen. I will ask you about it in a moment.

Is there any amendment that could be made, without ruining this legislation or causing any long delays, that you feel would address your points?

Mr. Bedbrook: I would have to come back with detail on something that we would like to see. To me it is more the global nature.

Senator Angus: I realize that. That is why I asked the question the way I did.

Mr. Bedbrook: The specific regulatory issues are in some ways outside and below the legislation and are handled by bylaws, though the legislation does speak to them.

On page four we spell out completely why it is harder for us to do business in this market. Off the top of my head, you could acknowledge the regulatory framework outside Canada under which we are acting. Of course that acknowledgement cannot include every country in the world. However, I would have thought the Dutch and some other European or OECD countries are legitimate and that their rules could provide a level of comfort or a guarantee that would exempt their subsidiaries from going through the same hurdles that every stand-alone, start-up company in Canada must meet. Clearly, foreign companies do bring benefits. It is not all negative. Not all money is leaving the country. ING Direct has not made any money yet to repatriate. So far it is a one-way street for Canada.

Senator Angus: You say that, several years ago, only 60 per cent of retail business was done by the big chartered banks here. Now it is 85 per cent. Are you referring to the exit of those Schedule B or Schedule II banks like Lloyds Bank?

Mr. Bedbrook: There was a rationalization in the late 1980s and early 1990s.

Senator Angus: Why did they go in your view?

Mr. Bedbrook: Partly, it was mismanagement. We over-reacted and over-regulated. We have become so safety conscious now that it is hard for new players to come in. If the nationalization of the credit unions occurs following this bill, that will be a positive thing for us as competitors. At the moment, because the credit unions are all regional, they are tiny in relation to the marketplace.

Senator Angus: I referred to the direct mail piece. Do you know the one I am referring to? It has a striking comparative graph showing a huge percentage benefit over the present banks. What was that?

Mr. Bedbrook: I think you are referring to a bar chart showing how much more interest you would earn if you had left your money with ING Direct for a certain period of time, versus leaving the same deposit in one of the major banks.

Senator Angus: Why is that?

Mr. Bedbrook: Most at-call money in major banks earns less than 1 per cent interest. It is a very important part of their deposit pace. It gives them a larger margin. They usually pay off in one-quarter per cent or one-half per cent. We pay at the moment 4 per cent on every dollar that is with us. Clearly, if you have money sitting in a major bank earning less than 1 per cent, it is just dead money. Some bank accounts may pay more interest if you keep a minimum $5,000 balance, for example. With 4 per cent, we are providing a service that you cannot get anywhere else.

We provide a benefit that Canadians would not otherwise have had if we were not here. I suggest that other foreign players might do the same if they saw it was conducive to come here. We obviously saw it conducive to come here because we are here. The oligopoly is an opportunity for new players because it is so polarized and perhaps the industry does not know how to react to new competitors coming in. There was an opportunity. It is not all negative.

Senator Angus: Regarding the regulatory burden, I am grateful to you for bringing these points to our attention. However, is it not true that even if this bill passes as is no new legislation would be required to change the regulatory burden on you? The enabling legislation will be on the books such that if it becomes the policy of our government - as communicated to our regulators - that burden could be reduced? Am I wrong?

Mr. Bedbrook: A lot of the regulations are obviously based on the regulators' own recommendations, on their own work and on their own feel for doing what they do. Others may see a greater sense of regulation than you might think is normal, but the regulators will see themselves as the experts and act accordingly. There is no reason not to give us the maximum multiple right now, but they are clearly going through a checklist.

Senator Angus: Is this for so-called prudential concerns?

Mr. Bedbrook: Yes. They want to ensure that we are committed to the marketplace, that the parent company is committed. They are seeing capital and profitability come forward in the business model that we are using, for instance. Clearly, it is their decision.

Senator Angus: Is it unreasonable in your view?

Mr. Bedbrook: Yes, I think it is unreasonable. We have shown a business plan to them. We have met the business plan. Clearly, we have a parent that is very responsible and itself operates under a very tight regulatory regime. Our ability to pay and honour our commitments has nothing to do with the hurdles we are going through. Clearly, the regulators need to get comfortable with us and so they say they must treat us as a stand-alone business and ignore our parent.

Senator Angus: I was taken by the way the Payments Association issue is being reconciled. They are accommodating your point about volume. They acknowledge the anachronism and have offered to fix it to get your business. You noticed some resistance in the philosophy of the Department of Finance. Yet they seem to hold you folks up as a good example of a good company coming in to make money. Do you detect at least a warming up of the water?

Mr. Bedbrook: I think it is warming up. The more they get to know us and the longer we are here, there is a warming. We presented here in November, 1998. That was a different world. There was resistance and skepticism. Clearly, the Big Six - as it was in those days - did not really want us here. The payment system was important for us. Royal Bank is our clearer. They saw a business opportunity. We are doing business with them and that works fine at the moment. With OSFI and CDIC, yes, the relationship is warming as time goes by, but we have had to pay our dues now over four years.

Senator Angus: The points set forth in your testimony and your brief have been made as well to OSFI and to CDIC?

Mr. Bedbrook: Yes. They are well aware of these points. They are well aware that, every year, as quickly as we can, they will get applications from us to allow us to get to the same level as the major banks.

Senator Angus: Maybe when you are at that same level, you will be telling us not to change anything, that you do not want others coming in. I hear you and I am very pleased you have made these points.

Mr. Bedbrook: All the new players grow the new sector. As long as you are a leader in the new sector, you will do fine. That is our business view.

Senator Angus: Good luck to you.

Senator Kroft: On the subject of regulation, I think we all have a general sense of over-regulation. Statistics that we have seen, at least on the surface, show huge regulatory responsibilities.

I want to compare Canada with some other countries on the question of recognizing the regulations of your home country. That brings up the question of subsidiary or branch. How would you compare the present regime in Canada, as contemplated under the new act with the requirements for regulatory approval, to the regimes of other countries? Is your home regulation more accepted elsewhere? Can you give us some examples?

Mr. Bedbrook: Canada is not alone as far as regulation. Europe, as we are all aware, is a fairly bureaucratic place in which to do business. I cannot say that Holland is the easiest regulator in the world. They certainly have rules, and you have to abide by them. I think you would find in the U.K. and certainly Australia and parts of the States that it would be a more progressive regime.

Part of it is not the rules; it is how quickly you get through them and how explicitly stated they are. You know precisely what it is you have to do to get to Point X. It is not vague. Here, it is vague. We do not know precisely what we have to do to get to the 20 times multiple, which is generally the maximum multiple allowed to capital.

Partly it is the people that are sitting in the regulatory seats. Do they have industry experience? Do they know the practical issues associated with running a business and driving things through?

I think the States would be an example where they have people who generally understand that. In places like Australia, they have had a bit of a "big bang" solution and have driven these things through. Presumably with New Zealand that would be the case, and the U.K. would be more progressive. Here, I would say it is the same direction, just happening slower. I do not know whether that helps you or not.

Senator Kroft: It is a bit fuzzy for you. I was wondering if you could give any example of other countries. You are talking about the application of the policies themselves - the fact that you qualify with the equivalent of your OSFI and whether that would leap you over a hurdle you have here. Are there countries that do not have the hurdles, or are you saying you would get through them easier?

Mr. Bedbrook: You would get through them easier. I think it would be very unusual to say that other countries acknowledge the parent company's regime. Most countries try to keep it local. If you are a locally licensed bank, that is what you have to do. If you want to be a branch, that is a different thing. You are just a branch of the parent. I would have to come back to you with a specific example.

Senator Kroft: What about the European community? Are any of these barriers now dropped if you are operating in France? Has the phenomenon of the community made it easier for those countries within each other's markets?

Mr. Bedbrook: It is becoming easier, but it is a very slow process. It has not been an overnight revolution, but you can clearly see that they are heading in that direction. Even though it is, as we know, the one currency and what have you, ING is not big in all of Europe. It is mainly big in the Benelux. You would expect every country now to be intertwining in Europe. It is happening, but at a very slow pace.

Senator Taylor: I want to follow up on your unfair treatment in putting up some money in spite of your having a very rich parent. You say are you treated as a newcomer in the market.

I know newcomer banks maybe have to be treated fairly tough because I was involved with Canadian Commercial Bank and unfortunately on the wrong side of it when it collapsed, so I think there has to be some watching that goes on.

In your case, you say you have a good parent, but I do not quite understand. Are you trying to get by with the federal government because you have a good parent? Has the good parent signed an unconditional guarantee for you? In other words, there is a difference when Little Johnny goes out there without his Papa's note on him and buys a car compared to when Little Johnny goes out there when the old man signs a note.

In other words, have you people tried to be treated equally by having big daddy guarantee?

Mr. Bedbrook: We certainly have a letter of comfort from our parent company.

Senator Taylor: A letter of comfort from a bank is not much of a comfort.

Mr. Bedbrook: It depends on which lawyer is reading that as to how strong it is and whether it is an explicit guarantee. Yet it certainly is something, and there is certainly a history to go on in a large organization like ING. You can look at precedents and what has happened in that organization. We want to stand up on both in a business that is successful here. Clearly it is a question of prudence and whether we will meet our liabilities. That is the issue here. There is no doubt that ING is a company that would honour its obligations here in a country like Canada. There is no question.

Senator Taylor: Is that in writing? That is what I am trying to get at.

The Chairman: Could I interrupt? Obviously it is not in writing, Senator Taylor. I think what you are trying to say is that because of the stature and size, there is no earthly way that ING could walk away, because that would finish them in the rest of the world.

Mr. Bedbrook: That is right. It would be a negative connotation. However, there is a letter in place, but it would be open to interpretation as to whether that is the watertight guarantee you are after, Senator Taylor.

Senator Tkachuk: You are hit twice with capital taxes. First, you have a lower multiple, 15 rather than the bank's 20, and then you have to pay tax on what capital that you have. What is the percentage that you would pay in capital taxes?

Mr. Bedbrook: The percentage is currently about 14 per cent of our total non-marketing operating costs.

Senator Tkachuk: Tell me what that is. How much money?

Mr. Bedbrook: That is currently around six and a half, seven, eight million a year.

Senator Tkachuk: You pay that just because it is there.

Mr. Bedbrook: Just because it is there, that is correct.

Senator Tkachuk: You say it is not in many other OECD countries. Do you know whether there is capital tax in Holland?

Mr. Bedbrook: Not in Holland. I am not aware of what the situation is in every OECD country, but I assume it may exist somewhere else. The majority would not have it. I think that is a fair statement.

The Chairman: Just to wrap up, on page 6 you talk about the Canadian financial services. If I read your statement correctly, you believe that the joint forum should be allowed to make their recommendations.

Mr. Bedbrook: That is right. There is currently a banking ombudsman. If there is going to be one for the entire financial services industry, there should only be one.

The Chairman: Most legislation seems to be partly fuzzy.

Mr. Bedbrook: It does.

The Chairman: There is a forum at work, I am told. I think they have only met once, but there is a forum to try to come up with solutions. I think you are suggesting - and some of us probably agree with you, although I can only speak for myself - that the forum should be allowed to come up with their recommendations.

Mr. Bedbrook: Yes.

The Chairman: Before the government does anything?

Mr. Bedbrook: Otherwise, you might have a situation where it is unclear you are going forward because you have this new ombudsman and the existing banking ombudsman. It will be unclear.

The Chairman: Thank you very much for your time.

The last witness, Maria Neil, is from the National Council of Women of Canada. Please proceed with your opening statement.

Ms Maria Neil, Convener of Economics, National Council of Women of Canada: Inasmuch as the National Council of Women of Canada is made up of consumers, then I represent another voice to counteract the love-in that you were talking about earlier. We are pleased to present our comments on Bill C-8.

We were founded in 1893. The National Council of Women of Canada is a non-profit organization of women representing a large number of citizens of diverse occupation, language, origin and culture, reflecting a cross-section of public opinion. It is currently composed of twenty local councils, five provincial councils, two study groups, and twenty-seven nationally organized societies.

National Council policy is created by means of local council initiative. Policy additions and changes are proposed, circulated and voted upon by the general membership. Council members speak only on policy that is established in that way. To that end, comments come from the united voice the membership of the National Council of Women of Canada. We have consultative status with the Economic and Social Council of the United Nations. The National Council is a federated member of the International Council of Women, which was founded in 1888.

We write this brief from the point of view of consumers. We do not pretend to be experts in banking or even in economic matters. By its constitution, the National Council of Women is committed to working for improvement in the status of women and their families, as well as for the general betterment of conditions in society. We believe that a strong, credible banking and financial sector is essential to the prosperity of Canada, and we favour a strong role for the federal government in financial matters. National Council policy supports equitable distribution of financial resources.

Our remarks follow those we presented in October 1997 to the task force on the future of Canadian financial services and in October 1998 to the Standing Senate Committee on Banking, Trade and Commerce on the report of the task force. Commenting on the proposals in Bill C-8, we will reiterate many of the comments that we made to the House of Commons Standing Committee on Finance regarding Bill C-38 in the Thirty-sixth Parliament. We note that the details will not be known until the bill has become law and regulations have been written.

The Council of Women has long been asking for disclosure of profit and loss records by financial institutions regarding the cost of doing business and how bank charges are calculated. For instance, we would like to see a demographic analysis by neighbourhood of loan applications and how they were treated as well as the rate of default among large borrowers, given that small businesses, particularly women's, find it so hard to get loans.

A community reinvestment act, similar to that in the U.S., would hold the banks accountable by requiring disclosure of these items of information. We note that the recommendation by the task force for the creation of such an act has been largely ignored. In Bill C-8 we can find only a requirement to report on a national level, that being that a bank with equity of $1 billion or more shall annually publish a statement describing the contribution of the bank and its prescribed affiliates to the Canadian economy and society.

Our members acknowledge that financial institutions are privately owned and shareholders expect to make a profit. To be legitimate in the eyes of the public, these institutions must ensure ethical practices, be financially viable and be good corporate citizens. They must gain and retain the public's confidence to conduct business and should contribute to the well-being of their communities. This can be achieved by providing accessible, affordable banking services, and investing time and resources in projects in their local communities. By investing in the local communities, financial institutions can contribute to a more equitable growth, thus helping to remove some of the disparity between rich and poor.

The National Council of Women supports the principle of granting loans based on sound business practices. Nevertheless, we have advocated an equitable lending policy that benefits small borrowers - as in the practice of micro-credit - low-income Canadians, women, projects designed to benefit local communities and people with ideas about innovative technologies.

Therefore, we commend the minister for proposing that no minimum deposit or minimum bank balance is required in an account, that an individual may request a low-fee retail deposit account, and that an individual does not have to be a customer of the bank in order to cash a cheque. We commend the minister for providing protection from coercive tied selling and for providing that a bank intending to close a branch must give notice and hold a meeting with interested parties in the vicinity. Although we note, with dissatisfaction, that there are circumstances in which such notice is not required at all. Further, Bill C-8 contains no requirement for supplying information on profit and loss.

The National Council of Women commends the minister for proposing the establishment of the agency and the office of the commissioner. National policy has long favoured the creation of a federal government agency independent of financial institutions for regulation of compliance by financial institutions. We are pleased, therefore, with the recommendations for the requirement that the commissioner promote consumer awareness about the obligations of financial institutions. We are also pleased with the recommendations for a procedure for dealing with complaints against a bank, whereby a bank shall provide prescribed information on how to contact the agency if a person has a complaint.

We approve that the commissioner shall prepare a report respecting the number and nature of complaints that have been brought. We are pleased that the commissioner must ensure compliance by the banks as set out in the clause stating:

The commissioner, from time to time but at least once in each calendar year, shall make or cause to be made any examination and inquiry that the Commissioner considers necessary for the purposes of satisfying the Commissioner that the applicable consumer provisions are being complied with and [...] shall report on it to the Minister.

With respect to this last point, we strongly recommend that these reports be made publicly and not only to the minister.

We recommend that codes of conduct be written into Bill C-8. The proposal in the bill is that the agency is to monitor the implementation of voluntary codes of conduct adopted by financial institutions. We question the effectiveness of voluntary codes in the protection of the interests of consumers.

We recommend clarification and an increase in the recommended fines for violations. It appears to us that the fines are inordinately small. We see in the bill, "The maximum penalty for a violation is $50,000 in the case of a violation committed by a natural person, and $100,000 in the case of a violation that is committed by a financial institution."

The National Council of Women strongly supports the establishment by the government of a consumer-funded and directed financial consumer organization. In Bill C-8 we find no mention of this important measure recommended by the Task Force on the Future of the Canadian Financial Services Sector, your own Standing Senate Committee on Banking, Trade and Commerce, and the House of Commons Standing Committee on Finance. Those were very strong recommendations, gentlemen.

The creation of such an organization publicized periodically by a flyer in banks' mailings to their customers would provide consumers with a place independent of government dedicated to serving the interests of the public.

National Council recommends that the new act define more precisely "reasonable return." In view of the very large profits currently enjoyed by banks - which further lower the levels of public confidence in banks - we are concerned about the vague nature of the following wording:

The directors of a bank shall establish and the bank shall adhere to investment and lending policies, standards and procedures that a reasonable and prudent person would apply in respect of a portfolio of investments and loans to avoid undue risk of loss and obtain a reasonable return.

We would like more definition of that "reasonable return."

We recommend that financial institutions be required to have consumers represented on their boards. Members of the National Council of women believe strongly in the need to make financial institutions accountable. In past presentations we have suggested that consumers sit on the boards of directors of the various financial institutions.

We recommend that financial institutions be required to report the results of a gender analysis of the effects of policies and strategies of their human resources departments. Of prime importance to our members is gender equality. We remain concerned that women are still under-represented at the executive levels of financial institutions.

We recommend that the government permit no further mergers between large banks. Members of the National Council of Women are concerned about the section on relationships between Canadian and foreign banks and the World Trade Organization. In our previous briefs, we requested greater Canadian control of all financial institutions and suggested increased protection for Canadians in relation to transactions with or competition with foreign banks. We do commend the government on measures for additions to requirements for the disclosure of information, particularly by foreign banks trading in Canada.

On the other hand, we are concerned that the regulations for bank mergers still do not go far enough. The minister personally reserves the final discretionary power to accept or dismiss any proposed merger. Also, we note that we found numerous instances where the Governor in Council is permitted to create exemptions. In short, there remains considerable leeway for financial entities to acquire similar institutions, to be acquired or to amalgamate. The Canadian public has clearly shown its distaste for such occurrences, knowing the danger that large banks would pose should they get into financial trouble. As the task force pointed out, Canada already has a concentrated banking sector, where the five biggest banks control 81 per cent of the assets. In the year 2000 in the Netherlands, the figure was 75 per cent, 40 per cent in the U.K. and 19 per cent in the U.S.

We recommend that the government retain the boundaries between banks and those companies selling securities and insurance. The National Council of Women regrets the relaxation of regulations during the 1980s of measures to ensure the separation between the banking, leasing, securities and insurance sectors. We note that a blurring of the lines between those sectors is still permitted.

We recommend that the government retain the rule that no person may own or vote on more than 10 per cent of any class of shares. The NCWC agreed with the task force about the importance of retaining the rule that no individual can own more than 10 per cent of any class of shares in a bank. However, we see that the proposal in Bill C-8 is to raise that percentage to 20 for the purpose of voting:

At a meeting of shareholders of a bank with equity of $5 billion or more, no person and no entity controlled by any person may, in respect of any vote of shareholders or holders of any class or series of shares of the bank, cast votes in respect of any shares beneficially owned by the person or the entity that are, in aggregate, more than 20 per cent of the eligible votes that may be cast in respect of that vote.

That is much too high.

We recommend that the phrases "significant interest in a class of shares" and "major shareholders" be more clearly defined. These phrases occur in several sections of Bill C-8.

We note with regret that no provision has been made to deal with excessive credit card interest rates. Also, bank tellers will still be able to reject arbitrarily some account applicants.

The Chairman: Thank you very much for your time. I wish you every success in your endeavours.

Senator Taylor: You mentioned you wanted statistics published. You did not like the idea of a general one on the failure of loans because they are published nationally. You said you want smaller areas. I wonder if you can be more specific. Are you talking about a province or half a province? What if they were released provincially?

Ms Neil: Local banks, senator. There is no reason why local banks cannot publish their demographic results, the population that they serve, as well as the loans that they have granted or not granted and why.

Senator Taylor: You mean that in a city like Edmonton or Toronto, where there may be dozens of banks, each bank would be publishing that.

Ms Neil: It is all available very easily on computer. It can be printed out and posted in the banks or made available by mail or e-mail banking. It should not be difficult.

Senator Taylor: It is an interesting idea. I worked for a few years in the United States in a small local bank. Some of them are small enough that they can publish things so you can tell what is going on in an area. You can tell whether the money is being siphoned out of an area and invested in another area. I suppose that is what you are after. I just wanted to know about that.

The Chairman: I am confused by the answer. Where are there are dozens of banks in Edmonton? Are you suggesting that each branch publish it individually?

Ms Neil: Certainly.

The Chairman: Thank you for your time. It has been interesting.

The committee adjourned.

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