Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 6 - Evidence (Afternoon meeting)
OTTAWA, Tuesday, November 26, 2002
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:10 p.m. to study the public interest implications for large bank mergers.
Senator E. Leo Kolber (Chairman) in the Chair.
[English]
The Chairman: Good afternoon, ladies and gentlemen. We are here to continue the study concerning the public interest implications for large bank mergers. Our witness from the Hong Kong Shanghai Bank of Canada is Martin Glynn, President and Chief Executive Officer.
Please proceed with your opening statement, Mr. Glynn.
Mr. Martin J.G. Glynn, President and Chief Executive Officer, HSBC Bank of Canada: Thank you very much for inviting me to present. I am participating on this call from our head office in Vancouver. HSBC Bank Canada is based here, but we are very much a national bank, from St. John's, Newfoundland, to Vancouver Island. We have 118 branches, 160 offices in total, and almost 6,000 employees. From a standing start in 1981, we have advanced fairly well along in terms of our development. People are aware that we are part of the HSBC Group, which is in 81 countries and territories and is, I would say, a top three financial services player in the world based in London. We have $35 billion in assets. One of our aspirations is to be a very strong player in the NAFTA region. We are in the process of acquiring a Mexican bank that has almost 1,500 branches. We are closely connected with HSBC Bank USA, the tenth largest in the U.S. and very big in New York State. Many of you would be familiar with it.
We consider ourselves in Canada, since we are full-service and very national, a bit of the alternative to the big six, or five, and we have expressed publicly and privately in Ottawa and around the country our desire to grow and be even more of a competitive force in the Canadian marketplace. We consider ourselves being able to add quite a bit of value to Canada in all aspects of business, whether in retail, in the commercial SME market or in corporate.
Just to give you an example of some of the global value we can provide, we are the largest issuer of letters of credit in Canada, which means we are a large force in trade finance, which is, of course, critical to Canada's success.
We are also a big player, particularly in the retail market, in what I would consider ethnic Canada, in some of the communities that are immigrant communities, and we are very proud of that. It is a fast growing part of the country and the demographics within the country.
As far as the merger subject is concerned, we consider it a legitimate and strategic option for Canadian banks. From our point of view, we consider the North American market an extremely important one. In fact, the number one public policy issue facing us from a business point of view is how we integrate more and how we have more access to the U.S. and ultimately the Mexican markets. One of the compelling reasons driving many of the Canadian banks on the merger subject is the desire to get bigger, in order to be a more significant player within North America. Certainly our desire is to fulfil that role, of not only being an excellent player domestically but a facilitator of cross-border banking.
I have no direct comments on the process. It is clearly one that Canada and the government need to define. Clarity and timing are very relevant in terms of where I see progress being made as far as the process is concerned.
As far as public policy issues are concerned, it is all about competition, competition, competition. I know there are other issues, such as jobs and other public policy issues, but I think if we have vibrant and lively competition in the country, all the public policy issues will fall into line.
Where will this competition come from? I will not talk in specifics — you have heard from representatives from smaller banks and the credit union movement. However, from my perspective, competition could come from the insurance sector. I have made comments previously that Canada stands alone in terms of restricting the banks' ability to sell insurance products. Both international insurance companies and the INGs of the world have shown this as an example in Canada. Domestic insurance companies could very well play a role, particularly if insurance powers were granted, and we certainly are an advocate for that.
As far as the foreign bank environment is concerned, we have put up our hand as far as wanting to be an active competitor in the market. There are issues to attract foreign banks, particularly U.S. banks, because of the important cross-border issues that face Canada. We have some barriers in terms of capital taxes and so on, but also if there is room to grow, which I think will be generated by a merger, that will certainly attract more international financial institutions.
There are some thorny issues, such as reciprocity, which I think public policy-makers have to deal with, and that is that Canadian banks are actively acquiring U.S. banks and our limitations the other way.
Fundamentally, from a foreign bank point of view, if it could be made easier, if there is room created, there will be some active interest from a number of players, particularly south of the border.
Finally, the old model of heavy bricks and mortar branches is changing because of the way consumers are dealing with financial institutions. The Internet and telephone and other channels are quickly picking up in utilization. I have expressed a concern before about two areas to do with the ATM networks. Fundamentally, I think competition will come, particularly in the SME market and in the retail market, from institutions and retailers and so on who will be trying to compete without heavy reliance on bricks and mortar, which is clearly a current barrier to entry.
We have advocated that government consider the issues around full functionality, which is the opportunity where all ATMs can accept deposits as well as allow cash withdrawals, done on a cost-effective basis so that you can encourage competition in banking the way you could in the long distance and local telephone area, where the lines were allowed to be made available to all comers at a reasonable price.
A concern I have on that same point is that there is now surcharging being done in Canada, where in fact even the ability to withdraw from another financial institution is being made very costly. I am not talking about the white label convenience ATMs but the bank branch ATMs. We consider that an area of concern from a competition point of view. If new entrants are attracted but there is a huge punitive issue there regarding access to the electronic channels, it will be an issue.
I point out insurance powers and use of ATMs and so on as particular issues that affect smaller institutions and new entrants and that should be part of the policy mix as mergers are being discussed.
Thank you very much for allowing me to make those opening remarks.
Senator Tkachuk: I will follow up with some of the same questions I asked the previous witnesses. In our discussion on mergers, we are always talking about competition and the need for competition. You are a large player in my region of Western Canada. What can the Canadian government do and what can regulators do to make it easier for foreign banks to be players in the marketplace and make it easier for them to operate here? Is there an open-door policy that we could follow that would allow that to take place? How can we foster a larger domestic market of banks or new entrants in the marketplace here so that we can alleviate some of the fears that the Canadian public may feel when mergers do take place?
Mr. Glynn: First, on the foreign bank side, we had a disappointed feeling. When we arrived on the scene, it was because the Bank Act changed in 1981 to allow foreign banks to enter. There were probably 60 or 70 banks that arrived. Many were disappointed. A majority of them have left, some of them because of issues back home. I think there has been disappointment. Some of the business strategies were too narrow. We took a broad one. We said we would compete in the mainstream market on Main Street across the country, and that turned out to be a wise choice on our part.
If branches are made available, if tax regimes and so on are levelled, then I think this would interest foreign banks.
As I said, the opportunity will arise if mergers occur because there will be surplus branches. However, I do not want to focus people's attention on branches because we will see a number of new channels of distribution that will be quite effective and do not require a heavy bricks and mortar process. There are more than 10,000 in the U.S. who have a traditional model, and I see no reason why that cannot come to Canada in some form.
We are over-branched in Canada, so it is not easy to justify spending money building new branches. One of the critical competitive issues is that if mergers take place there will be concentration issues. Perhaps some branches in highly concentrated areas should be sold off to attract new players. The U.S. model is to sell branches as an entirety, including customers and employees, so that the maximum amount of market share is retained in those particular branches.
Smaller, new start-ups in Canada is an issue, where banking to some extent requires size and critical mass as well as customers wanting to feel that their money is safe. It is difficult in this environment to start banks that are very small. We probably will see the majority of competition coming from major players from outside and the insurance industry.
Senator Tkachuk: I should like some further information on your paragraph about ATM machines advocating a regime much like we have in Canada for the use of telephone lines. Would you please expand on some of the difficulties that you have in practical terms. I would also ask you to provide some suggestions on how we can directly deal with that problem and what we could recommend in our report to the Government of Canada.
Mr. Glynn: Again, the market is pretty well saturated in terms of ATM machines. Every store and every bank branch has one or several. The creation of new machines at $80,000 to $100,000 each is not a wise investment. The infrastructure is there.
With the use of cash levelling off because of the use of debit cards, ATMs have become a mature investment for the banks. We are suggesting that these machines be accessible to all players, including retail chains that may wish to get into banking, or even foreign players. We have some requirement that the ATMs be made available to all customers of any financial institution in the country, at a fair price, one that allows the use of these. Therefore, the distribution channel of a new entrant would be widened because people could go to any branch.
When I say ``full functionality,'' I do not mean just withdrawal of cash. There is still a need to deposit.
We have an exchange network with the National Bank, the Canadian Western Bank and the credit union movement, where we allow free use of deposits as well as withdrawals for all customers. That channel is emerging as an effective way for smaller players who are not in every nook and cranny to serve their customers in an efficient way. We are suggesting that full functionality be broadened to cover all of Canada, as a condition of mergers.
Senator Tkachuk: You are saying that if I were to go to my credit union in my province of Saskatchewan I could make a deposit to your bank via the ATM machine?
Mr. Glynn: I believe so. Most of the credit unions in Canada are involved in the exchange. I cannot be sure that every single one is, but I could find that out and get back to you on that. Essentially, the principle is that the members of the exchange network allow use of their ATMs for purposes of accessing other institutions. Therefore, customers would have same-day credit for a deposit. That is an effective way to allow credit unions or banks to extend their reach beyond where they have a branch or an ATM. It is a wise use of existing infrastructure.
If that does not happen, particularly with surcharging, three banks may control 90 or 95 per cent of the ATMs. Therefore, it would be punitive for anyone to bank anywhere other than those three banks because such a high cost is associated with the convenience of using ATMs.
We are particularly pointing out that danger to the Canadian public and decision makers. It could easily be a condition that ATM networks be made available at a reasonable price. That would allow competition to come in, particularly those who do not have access to a broad branch network.
Senator Kroft: It seems like only yesterday that this committee was travelling across the country and hearing testimony about the Mackay report. I remember well the presentation made by your media predecessor and another academic. I am trying to compare some of the arguments and measure progress or change since that time. I was impressed at that time, certainly, that your bank provided one of the best hopes for the entry of new competition with some scale and infrastructure that could make an important contribution in the case of mergers.
Although it was not you in front of us at that time, I would appreciate any general observations you may wish to make about events in the four years since the previous merger applications were rejected. Would you have any observations as to what has changed on the scene? Are things better or worse?
I want to come to the ATM issue specifically, so we can leave that one aside. Do you feel that your position has been advanced by any policy decisions or government issues, or are things the same as they were in 1998?
Mr. Glynn: From our perspective, it is basically the status quo. We continue to grow, operate and open branches. We are too light on branches. Going from Vancouver east, our number of branches shrinks. From Alberta through the Prairies and right through to Newfoundland, we are under-represented from a branch point of view.
We are opening branches every year, but as I explained, the economics of opening new ones is challenging to us. We have not taken advantage of the holding company powers. I do not know who has.
As you probably know, we have a subsidiary called Canadian Direct Insurance, which competes in the insurance market here. It would be nice if we were able to connect them more with the bank.
I would say the economy has got probably a bit worse, and it is a tougher environment now. It was more benign four years ago. We were in a lengthy period of a bull market. People were more optimistic. It is tougher now to make money.
There has been the Internet revolution. It is quite powerful. There is probably more challenge to heavy bricks and mortar investment than four years ago.
Senator Kroft: At the risk of interrupting you, to be sure I understand what you said in your opening statement, your interest in branches, as you have just said, is still great, but your problem is that which would be called in a different context ``start-up.''
I think you commented with favour on an opportunity to acquire branches where they were, in effect, going concerns. Is that what I understand?
Mr. Glynn: Yes.
Senator Kroft: This morning we had a witness before the committee, a credit union, who talked about having acquired branches from the Bank of Montreal, I believe, on exactly that basis. Is there a policy issue, or is this just a matter of negotiation between the two parties? Are there any regulatory or policy issues about branches being sold on an ongoing, with-the-book-of-business basis?
Mr. Glynn: There is nothing against it. It is just that we have probably been the most active and the loudest-voiced advocate for expansion of branches. To date, no one has called us saying, ``We would like to sell you branches with customers and employees in them.'' We get notices from realtors saying, ``There is an empty branch in this mall; are you interested?'' There is nothing to preclude people from selling branches with customers in them. However, certainly we do not get called.
Senator Kroft: If that opportunity arose as a result of a required disposal of branches under a merger proposal — that is where you are saying you have made it clear. I believe we knew even before meeting with you today that you were an interested party in terms of that type of a proposition.
Mr. Glynn: Precisely.
Senator Kroft: I should like to turn to the ATM issue, because I believe that was very much on your agenda when we last spoke with your bank. I want to be clear on the problems in getting to a basic utility type of approach rather than the obstacles that there are now. Is that just a commercial issue as amongst the parties involved, or are there any regulatory questions or prudential questions involved in that?
Mr. Glynn: I believe it is basically commercial. In other words, if I can control 95 per cent of the ATMs among three people, it is better for me to keep everyone else out, or to charge them so much for the access that it makes it uneconomical. It is a commercial issue. I believe the mergers will trigger conditions, and I believe the conditions will be around how to ensure that competitive forces are at play.
If you were in a strong position controlling key parts of the financial services delivery, you would not voluntarily give that up. Nothing will happen, I do not believe, voluntarily, with Interac or among the major banks unless it is determined that this is a necessary step to preserve competition and encourage competition in Canada.
Senator Kroft: That would be, from your point of view, a very useful direction from the government in the context of encouraging competition, particularly in a merger environment.
Mr. Glynn: Yes. I am actually not speaking for ourselves so much, because we have branches. We have roughly 150 ATMs, and we have the exchange network. I am thinking of new entrants who say, ``We want to compete in Canada in this particular area or in that particular area; how do we get simple banking transactions done?'' Actually, this is more of a general point than specifically for us. We certainly would benefit too, because having access to the thousands of ATMs in Ontario would be better than several hundred.
Senator Angus: Mr. Glynn, is the head office of HSBC Canada in Vancouver?
Mr. Glynn: Yes, it is.
Senator Angus: Do you have subsidiary head offices in Toronto or Montreal?
Mr. Glynn: We have regional offices essentially in Calgary for the western region, which is the Prairies, and Toronto. Our chief operating officer, the number two person in Canada, resides in Toronto, so he runs our regional office there. We have a regional office in Montreal.
Senator Angus: These would not be branches. These are more than branches, are they not?
Mr. Glynn: Yes, exactly.
Senator Angus: Now, is HSBC Canada a wholly owned subsidiary of — I forget the name of the mother or the parent bank.
Mr. Glynn: HSBC Holdings plc is the public company that you can buy shares in and so on. It is the London-based holding company. We go through several steps, but we are wholly owned by them.
Senator Angus: Is the head office actually in London, or is it in some other part of the U.K.?
Mr. Glynn: It is in London.
Senator Angus: It is a widely held bank.
Mr. Glynn: Very widely held.
Senator Angus: Did I hear you say that you are the second largest financial services company in the world?
Mr. Glynn: I do not know if I said that, but in terms of market capitalization, I believe we are number two. Citibank is number one, and HSBC I believe is number two. I believe our market capitalization is around $110 billion U.S., in that order of magnitude.
Senator Angus: I am just trying to get a perspective on this. Because you are wholly owned by what we call a foreign entity, you do not have the same legal status in Canada as, say, the five banks that are talking about mergers; correct?
Mr. Glynn: That is right. We are a Schedule II bank.
Senator Angus: Does it really make a difference? Would you rather be a chartered bank with all the same rights and privilege and obligations that those five big banks in Canada have? Does it make a difference in the day-to-day life of the HSBC?
Mr. Glynn: No, it does not. We basically have the same powers. The principal difference is that, as a Schedule II bank, we can be wholly owned, whereas Schedule I banks have ownership restrictions — 20 per cent by a single owner, I believe. The irony of the Schedules Is is that, while they have restrictions on single ownership, they could be 100 per cent foreign owned. In other words, the Royal Bank is listed in New York, and theoretically speaking, 100 per cent of their shares could be owned by Americans, but the restriction is about single ownership.
Senator Angus: Having established that, then, whether you are a Schedule I or a Schedule II bank, it does not really affect you. Really, you are just part of a much larger bank, in a sense. I am trying to create the analogy here.
Let us say that several of the banks, the Royal Bank, the Bank of Montreal and the TD, were all allowed to merge together. That would put them closer really to what you are in terms of bigness and clout in the international markets. Is that correct?
Mr. Glynn: Yes. I basically say that we do not need to merge because we already have the global scope and the critical mass, the importability of IT and so on. They are trying to be larger.
Senator Angus: Like you.
Mr. Glynn: Which in a sense is like us. They are trying to be like us.
Senator Angus: That is what I thought. That makes you well-placed, then, to answer a question that I asked the ING Bank this morning, because in a way they are similar. I know they have a different business model than you do, but they are part of a larger organization worldwide. They have the staying power and the bigness that some of these Canadian banks are saying they need to compete globally. Is that right?
Mr. Glynn: ING is a very large organization, yes.
Senator Angus: I asked a question this morning, and I think I was happy with the answer, but I just want to ensure that I have not missed anything.
At the end of ING's testimony, the individual said that, therefore, in conclusion, they think mergers would be a good thing for Canada, that they it is important for Canada that they have a domestic bank that is able to compete globally. My question is this: What do you mean by ``compete globally''? What would you be able to do that you cannot do now, and what would be better for Canada?
Mr. Glynn: Did you ask that question of the CEOs of the big six? They really should answer that. I believe, based on reading their strategies and hearing their speeches, that they at least have North American aspirations. I certainly believe that is good for Canada — to have major financial institutions that are players within North America in a meaningful way so that we have seamless banking. In that context, I would say that size is an issue. However, I cannot really speak for the major Canadian banks.
Senator Angus: Well, as a matter of public policy, we get to the situation where we only have the so-called big six that are truly Canadian, if you will. Soon that will be a harder statement to make, I guess, in the nature of things.
However, from a public policy point of view, it is being put to us constantly, as it was in the 1998 hearings. The world has changed and I believe it is a much more friendly environment now for a bank merger than it was in 1998. It may not be perfectly friendly, but it seems to have evolved. The evidence we are hearing, and your testimony, would tend to corroborate that.
Is it really important for Canada's financial services sector to have a home-grown player that can compete with the big guys in London, New York and Tokyo financial centres?
Mr. Glynn: I am expressing only my own personal views.
I believe it is important to try. It would be wrong if the merger process did not allow a Canadian bank to try to be a major player. The Canadian banks have worthy aspirations.
Senator Angus: Mr. Glynn, you said what all of the CEOs thus far have said, that merging is a legitimate business strategy for a major Canadian bank, provided the right proposal is crafted together and there is not some Draconian element that would offend the Competition Bureau or prudential concerns. Given that it is a legitimate business strategy, and everybody seems to agree, what impediments, if any, do you see? Frankly, the senators on this side of the table are going through a bit of a dilemma. We are wondering what we are doing here? The law allows it and it is recognized as a legitimate business strategy — there is a process in place, and we have had these hearings before, the result of which was the MacKay report. Yet, all kinds of money is being spent and effort expended to answer a question that seems to have already been answered.
Am I missing something? You are an expert in the business. What is unclear out there, other than the political will of the present government to approve or not to approve a merger?
Mr. Glynn: I guess I am not really able to respond to that. I do not know what is unclear. It was expressed by the Minister of Finance that clarity was required for the public policy part of the merger discussion. However, I really do not have a comment on the process and why it is so difficult. We are not involved, so I have not paid much attention to it. In our own way, we are trying to build the bank in Canada to be the best that it can be. It is not something that we pay much attention to because we are not involved in the process. We are simply debating amongst ourselves about how we can fill the void, if there are competitive voids. Really, I cannot answer your question the way you have asked it.
Senator Angus: You did answer it, in the sense that you do not see what is unclear, because we do not see it either.
However, Senator Kroft was questioning you on this business of the branches, and you may have answered it. If so, please stop me. We have read in the newspaper that your organization has indicated that if there were mergers and there were a necessity to divest branches, you would be willing buyers. You have acknowledged there are probably too many branches, so you would not think it a good idea to build new ones.
Did I understand that correctly, that you would be willing acquirers, if necessary and if available?
Mr. Glynn: Yes. I would say, yes, that we have grown through acquisition and through building — an organic growth. We are eager to grow more. We declared this early on, that we would like to be at the table or at least invited to discuss the options where we might grow our market share. It is not just in branches, but it could be in cards or in the area of investment, advisers and so on. It is just a broad statement when we say that we are interested in growing, and we have been supported to a large extent in Canada, to date. We would like to build and to grow more.
Senator Angus: I believe we talked yesterday about the more than $5 billion in assets of the chartered banks. Is it assets or capital base?
The Chairman: It is equity.
Senator Angus: Where do you rank? First of all, what is your amount?
Mr. Glynn: In Canada, we are around $2 billion in equity.
Senator Angus: Does that place you seventh?
Mr. Glynn: Yes, we are the seventh largest bank. There are the big five and then the National Bank of Canada, which is sixth, and then we are the seventh largest bank. After that it drops, I believe, to Laurentian. That is where we rank in Canada.
Senator Setlakwe: Good afternoon, Mr. Glynn. My question follows upon the question asked by Senators Kroft and Angus. You say that you are looking to fill a void and that you want to move eastward. I am sure you are aware that one of the preoccupations of this committee, and of Canadians generally, is the extent to which mergers will affect retail banking. As a follow-up to Senator Kroft's question, how far will you go to establish branches outside of the metropolitan centres?
Mr. Glynn: First of all, retail is a big part of what we do. In fact, it is probably the majority of what we do. Most of our 160 outlets are focused on retail.
We are comfortable and happy to operate in all centres of Canada. We are in small communities and in large communities. From that perspective, I believe we have a pretty broad commitment to the Canadian market. We are in Campbell River, in Penticton, in Chicoutimi, in Fredericton, in Timmins, et cetera. We have quite a broad reach. That is the focus of our delivery.
Senator Setlakwe: As a supplementary, many foreign banks have tried to establish themselves in Canada. Why have you been so successful where others have pulled out?
Mr. Glynn: We have taken a view that we want to be a mainstream bank. We took the view that we would raise deposits and then lend them, which is kind of an old-fashioned view. We did not build a model that was based on wholesale funding. We looked for opportunities to deal with retail business and with retail customers. We started on that basis and worked our way up. I believe that is a sound strategy, albeit an old-fashioned strategy.
This has been accomplished by building a retail deposit base and providing service to that group on a full range of services. The same procedure is followed on the commercial side. We were also opportunistic when people left the market, thereby acquiring a number of organizations. It was built around customer segments of doing do what is best for the retail customer and the commercial customer and on a very broad basis.
That strategy is different than most of the foreign banks that are either niche players or just in the corporate sector. Having too narrow a view in financial services is not a good thing. A broad perspective of serving the customer very well is the strategy that worked well for us.
Senator Meighen: Senator Angus has concentrated to some extent on the advantages of a merger among Canadian chartered banks and their ability to play in the big leagues with you and other banks of that size. I wanted to look more internally for a moment.
If the situation with chartered banks that we have today persists, and there are no mergers, how do you see the landscape in five or seven years from now? Will it be better for the Canadian depositor or the Canadian borrower, or will it be worse?
Mr. Glynn: That is an interesting question. I have two points.
First, I think their market share will grow in the unconventional areas. In other words, there will be growing pressure on branches to justify their existence. The change will continue in terms of how people use banks. It may be viewed as a negative by public policy-makers that people simply will wonder why branches exist because they are accustomed to dealing on the Internet or with debit cards. You will see that happen naturally, particularly if we freeze the situation the way it is today.
I would also say that North American integration vis-à-vis the economic marketplace, having Canada and the U.S. joined at the hip, so to speak, is a public policy desire. I see that evolving. If Canadian banks do not have a chance to succeed in the U.S. market and be leaders in cross-border business, other people will do it for them.
We have already declared that we think we have a particularly strong position in NAFTA and in the U.S. and Canada. Some of the U.S. banks, particularly when they get over the current issues they are facing, may very well be interested in coming North. You should bear that in mind, attracting banks to come North, maybe under a different model than they came north 20 years ago.
In the U.S., they will recognize that North American economic integration is critical. If the Canadian banks do not do it, I think probably the U.S. banks will.
Senator Meighen: The scenario we are painting then is that if there are no mergers the Canadian banks will not be able to play a significant role internationally. On the other side of the coin, it is increasingly likely that domestically the role being played by American and other foreign banks will increase dramatically. It does not sound like a great scenario to contemplate from the public policy perspective.
If I am correct on that, and I may have been putting words in your mouth as well as my own, it seems that the only way to break this probable scenario is for mergers to occur. If mergers were to occur, then by your evidence Canadian banks would be able to play a more significant role abroad.
Also, the merger would then open up the domestic market to more legitimate competition. There would be sales of branches. There would be sales of business lines, such as in the TD-Canada Trust merger. There would be a shaking up of the domestic market to the benefit of the Canadian depositor.
Am I right in that, in your view?
Mr. Glynn: On the latter point, yes. Canadian banks are very effective competitors. To an extent, mergers create room, which will attract competition. That is probably good. In that sense, I agree.
You were putting words in my mouth a bit. Canadian banks have effectively competed abroad. Their focus is largely North American at the present time, and they have done a number of things in the U.S., so I do not want to suggest that they cannot succeed in their current mode.
They probably could succeed better because size is relevant when you are making acquisitions and operating in the U.S. market. However, I do not want to suggest that their current modus operandi cannot be successful.
Senator Meighen: They have certainly told us that they could do better if they were bigger.
One of the chief complaints heard by public policy-makers in this area is the rather bleak future that some people paint of the rural customer. You have alluded to the fact that Canadians are using remote banking channels, ATMs, telephones and the Internet. Is this the way we are moving for people who do not live in large centres or centres of a certain size? You have said that you are in Penticton and Fredericton. Those are still fairly substantial communities.
What is the future in your view for the person who lives in a rural town or an area of less than 5,000 people? Will it necessarily be remote banking? If we have mergers, if branch systems are made available for purchase, will they be purchased and will a banking institution take them believing that interface with the customer cannot just be limited to electronic devices and that face-to-face encounters are still important?
Mr. Glynn: We use the expression internally ``high-touch, high-tech.'' We are big believers in personal relationships and people contact. If you go into our operations, you will see many people and lots of traditional places to interact. In fact, when people come to branches, they want more meaningful contact than in the past, they where relied on branches for transactions only. We are big believers in people.
The issue for very small communities is that the definition of ``people'' might be in the form of a roving sales force. People would not necessarily be housed in a branch in that community; they may use the post office for deposits or for some ability to transact. There would be people who visit but who are not necessarily resident on a full-time basis.
It eliminates the cost of leases, heat and so on. We are certainly seeing roving sales forces in mortgages and investments. There is an active deposit broker market in Canada to serve small communities. Much people contact will be present, but in a different way than what we are accustomed to seeing.
Senator Meighen: Mr. Glynn, why has that not grown more quickly?
I am familiar with a town of less than 1,500 people in Atlantic Canada. It has one chartered bank in a large, imposing building on the main street. That is it. I wonder why another financial institution would not visit in the same way libraries visit, to conduct the type of banking that I would venture a guess most people in that town want. It is not highly sophisticated syndicates they are seeking to form. People would want to deposit a paycheque, withdraw money from an account, or perhaps negotiate a small loan for a house addition. Those are not terribly complicated transactions. Why could such services not be provided either by a small one- or two-person branch in the local grocery store or, as you have suggested, by means of a mobile bank that travels from community to community?
There are examples of both already, but the concept has not really caught on. Why not?
Mr. Glynn: There is a limit in terms of the economics of doing that. There is an urbanization pressure in Canada, and some small communities are struggling.
There is growth there. Those areas have probably been underserved and there are many opportunities for imaginative solutions. If you have access to ATMs, as I have described, you can use a corner of a grocery store. We have a little agency on Pender Island in the Gulf Islands, between Vancouver Island and Vancouver, where we actually operate out of a realtor's office and dispense cash and make loans.
You can do a lot of these imaginative things in small communities. Pender Island has maybe 1,500 people.
I would encourage more of those non-conventional forms of banking.
Senator Kroft: I have a very specific question. I am interested very much in how banks compete in the marketplace. You said you are by equity the seventh largest bank in Canada. I believe you said in your introductory remarks that you were the largest issuer of letters of credit in Canada. I am fascinated by your ability to do that. I am not sure if that includes accepting or confirming incoming letters of credit or if you are actually generating the letters of credit on behalf of Canadian businesses for the most part. It is a very impressive fact and I am curious how you have done it.
Mr. Glynn: Again, it is an illustration of the fact that competition and an international bank can come into this market and add value. Our 81-country reach gives people the ability to take advantage of our trade services in a way that I think the local competitors, the local banks, have not been able to prove in terms of value.
We have targeted that group. Trade, as I think I pointed out, is critical. We have gone from a standing start to that level, where we added value to the Canadian market that did not exist. In many circles, the big five look quite similar. Their strategies are similar; they look similar; their services are similar. Competition is providing a different value proposition. That is what I think we should encourage more of. People who have unique strengths can come to this market. If one of our strengths is to take Canadians to the world and facilitate their trade, I think that is great. I would hope that out of this process a few others will arrive in Canada, and then Canada will have the best of both worlds.
Senator Kroft: I think that is great, too.
The Chairman: Thank you for your time. It was nice to meet with you again. Good luck in all your endeavours.
Our next witnesses are from the National Bank of Canada. Welcome, gentlemen. Do you have an opening statement?
[Translation]
Mr. Réal Raymond, President and Chief Executive Officer, National Bank of Canada: Mr. Chairman, I would first like to thank you for the opportunity given to the National Bank of Canada to express its views on bank mergers and in particular on the merger approval process.
Let me begin by saying that we consider bank mergers to be a legitimate commercial practice, one which contains risks, as history has shown us time and time again.
Some portion of the distrust of mergers comes from the misconception people have that they cannot lose. In fact, only excessive market power or a substantial weakening of the competition can generate quick and risk-free gains. That is why our brief deals mainly with the conditions for sustaining competition while enabling the banks to act on their ambitions.
We all agree that markets have changed and will continue to change at an accelerating pace. First, the banks are being assaulted by an ever-growing horde of increasingly seasoned competitors. Second, information technologies have opened new channels, enabling individuals and companies to conduct payment, investment and loan transactions at a distance with an extended range of suppliers.
In spite of all these developments, we submit to the committee that a physical presence is the basis of the primary relationship between the banker and his client. The institution with the primary transaction account of an individual or an SME almost always benefits from a good portion of that client's other investment and credit products.
In fact, proximity and flexibility are decisive factors in the choice of a primary institution. The competition to obtain this special relationship occurs at the local level. The branch is where the most significant efforts are made to offer personalized, quality service, in order to attract and retain clients. It is this local competition that has to be preserved in the merger process at any price.
We believe that maintaining a high level of local competition through the physical presence of a sufficient number of institutions strongly committed to delivering quality services largely resolves the public interest concerns. Sound local competition is the best guarantor of easy access to varied sources of quality financial services at a competitive price for individuals and SMEs.
What service guarantees do we need if consumers have several different options for obtaining these services?
Preserving competition at the local level is the main challenge posed by mergers. That is why they are probably accompanied by divestitures of physical service points to individuals and SMEs.
We think that these divestitures can occur by being proactive, with the firm intention of maintaining a high level of competition, and where possible, attracting new players to provide a credible counterweight to banks that would otherwise achieve excessive market power.
As an illustration of this view, let me offer the merger of Fleet Bank and Bank Boston. The divestiture occurred in favour of Sovereign Bankcorp of Pennsylvania which used the opportunity to penetrate new markets. Corridors with excessive concentration of branches were drawn and all the branches of only one of the two banks were sold off. These included: a block of 90 branches of Bank Boston in Rhode Island and Connecticut and a block of 196 Fleet branches in Massachusetts and New Hampshire. Strict non-solicitation measures were applied. In short, Sovereign has been able to make a significant breakthrough in a new market by acquiring a real franchise and has become a credible competitor to regional giant Fleet.
We think that this is the approach that should be emphasized. Hence our proposal to apply the American approach, which is to say: in a given territory, divestiture should provide for the presence of groups of branches and SME loan offices of just one of the two banks, and not an amalgamation of service points — often the smallest or least profitable — of either of the two banks.
The territory so covered must be sufficiently extensive, either a whole province or, in the most densely inhabited provinces, a continuous geographic area that has a population of 2 to 3 million inhabitants and reflects one socio- economic reality. This approach would be of real interest to regional banks like ours that want to expand their presence in other markets. It would significantly resolve the public interest concerns. The buyer would preserve the essential, if not all, service points and employees, including regional management infrastructure and — why not — regional centralized basic office centres. Accessibility to services would be assured for both individuals and SMEs.
In fact, for these large regions, it would be as if the merger had never taken place. The National Bank has the resources and the desire to act as facilitator in the case of mergers between large banks. Our capitalization is excellent. For a large-scale transaction, C-8 allows us to open up our capital to a partner, up to 65 per cent.
Finally, our strategy is clearly focused on growth in Canada. Over the last 25 years, one of the constant concerns of public policy governing the financial markets has been to favour the emergence of new sources of competition for the big Canadian banks. For this purpose, legislative and regulatory incentives and accommodations have been made for trust companies, insurance companies and foreign banks.
One cannot say that these initiatives have been marked by enormous success. The main reason for their failure is the enormous difficulty involved in building a network of physical service points from scratch, since access to such a network is the only way to establish diversified and sustainable relationships with individuals and SMEs.
The purchase of existing networks as part of the mergers of two big banks could succeed where all other approaches have failed.
We need a clear and unambiguous framework for the approval of potential mergers that would leave the least possible room for arbitrary decisions.
But we also need mechanisms that would promote the advent of new competitors in situations where mergers would cause too much risk in terms of lost competition.
[English]
Senator Tkachuk: It seems as though some of the banks outside of the big five talk to each other, because everyone seems to be covering an area different than what we have heard from someone else. That is refreshing.
Divestiture is a concern because of the area I am from, which is the Prairies. What was intriguing to me was your idea that the Royal Bank hooks up with the Bank of Montreal, then all the Royal Bank or all of the Bank of Montreal branches will go up for sale.
In the previous testimony this committee received, from HSBC, the witness spoke about the fact that HSBC was open to buying new branches. However, by the time the news reached them, what was available was a piece of real estate, the landlord calling and asking whether they wanted to rent an empty old bank branch. Yet we were told about the credit union being able to buy a bunch of Bank of Montreal branches.
In terms of how this would work, my guess is that they would rather sell to a non-competitor, so to speak, like a credit union. However, a credit union can also be a monopoly. Everyone talks about credit unions, and they are good operations. However, in Saskatchewan, if you do not wish to deal with a credit union, you may like to have a choice between a credit union and a branch.
When it comes to public policy, what process do we use to ensure divestiture is fair so everyone has a shot at it and that it is a true way to ensure competition in the marketplace? How do we put that forward in our recommendations? How does it work in practical terms with you being a potential purchaser?
Mr. Raymond: I agree with you. With the way it is structured today, remedies for potential mergers where assets would have to be disposed of are coming at the end of the process and not at the beginning. Therefore, my first suggestion is that you put that at the beginning of the process and not at the end of it.
It does not mean that it has to be negotiated, because you need some competition to ensure that those who are disposing of those assets receive a fair price for it. What is important is having a clear definition of what is for sale. Is it for the buyers or the acquirer? Does it have potential to be a real, long-run competitor, making sure they will be in a position to keep the clients, not just a way of getting rid of the problem locally and then two years later all the customers returning to their former bank.
This is where it should be similar to the U.S. They have thousands of banks, but they have a clear process. At the beginning of the process, they establish the concentration, which side of the mergers will be put for sale. Then they engage, in some cases, in auctions and, in other cases, negotiated deals.
Therefore, if we were part of the discussions right at the beginning, knowing exactly what we would get access to, obviously there would be more potential buyers. It would speed up the process. It would reduce the uncertainty for the clients. Potential buyers would know right at the beginning that they have a choice. Instead of saying, ``Well, if the two banks merge, I am out of choice,'' they would know right at the beginning of the process, before the hearings and before the other steps, that there is a potential competition in place for them.
Senator Tkachuk: When you say ``at the beginning of the process,'' is it because the banks that are deciding to merge know the percentages that they can own in a particular market share or they know the market share ahead of time, or is it because the regulator would say, ``If you two merge, you have to dispose of this much,'' or is it a combination of the two?
Mr. Raymond: It is a combination of the two. Locally, you can look at the merger of two banks and know very well what will be disposed to make sure that you are not concentrating the market too much. Those rules are well-known, so that is not an issue.
However, the issue is what will be for sale. If you reach, for example, 38 per cent of market share in Edmonton, it does not give the buyer any certainty in terms of what it is the two banks will dispose of. They will not let go of their best branch. However, if there a process is in place either with the Competition Bureau or the Superintendent of Financial Institutions, and if they want to go further in the process, carving out what it is they would have to dispose of, then the process would be much clearer and much easier. Then credit unions and banks like ours would be in a position to assess the risk and decide whether to step into a particular transaction.
Senator Tkachuk: Let us use the city of Edmonton as an example. Suppose two banks decide to merge, the result of which would be a 55 per cent market share. Suppose the Competition Bureau said that 55 per cent is too much, that they have to get it down to 30 per cent, minimum. Imagine that a process followed whereby the banks were told they could not cherry-pick. To achieve the goal, one bank would have to get rid of all its branches, or the other bank would have to get rid of all its branches. Is that what you are trying to say?
Mr. Raymond: Absolutely, not only branches, but commercial centres that are servicing the commercial clients. It would be the same process.
Senator Meighen: Just so I understand, is that the only solution, all or nothing?
[Translation]
Is there not a third way where negotiations surrounding the purchase of branches would be done within the Competition Bureau? If it is deemed fair for the parties involved, one of the parties could get rid of a certain number of branches and the other one as well. That much would be understood. The result would be a mix of excellent or not so excellent profits. At that stage, everything would be made public.
What would the role of government be after the Competition Bureau and the Office of the Superintendent had done their part? The major issues would have been settled. All that would be needed is the authorization to go ahead.
Mr. Raymond: I am in complete agreement with the last part of your statement.
Senator Meighen: What about the first part?
Mr. Raymond: It is a matter of competition and the ability to retain clients. The more computer systems and personnel coming from two organizations you have, the harder it is for a competitor to successfully merge the two and provide ongoing competition to clients. The more uncomplicated it is, the more regional offices and personnel from the same organization you have, the easier it is for clients to deal with the situation. Clients are used to dealing with the people in place. It is easier to deal with one entity rather than amalgamating two.
Take Edmonton, for instance. If there are 12 branches up for sale, if you take the Royal Bank or the Bank of Montreal or other Royal Bank branches —
Senator Meighen: The good and the bad ones?
Mr. Raymond: Yes, not only the bad ones, both. That does not amount to much competition. This process allows for an improvement in the quality of competition.
Senator Setlakwe: I would like to congratulate you for having kept open two branches in Thetford Mines. This reflects your good judgment. Not only do you want to maintain a local presence and provide significant flexibility in Quebec regions, but you also want to expand outside of the province. It seems you also do not fear the arrival of international competitors on the Quebec and Canadian markets.
This does a good deal to address one of our major concerns despite what some of our colleagues across the table have said; some have said they do not know what the point of these meetings are.
Senator Hervieux-Payette: They know and so do I.
Senator Setlakwe: One thing people are extremely concerned about is maintaining services in outlying areas.
We may have changed our attitude since the mergers of 1998 because we feel reassured by some of the things the banks have said, but nevertheless it is a major concern.
In my view, you have access to a market which is seeking additional financing. In Quebec, financial institutions are directly or indirectly accountable to the provincial government. The constant concern I hear from the business people I meet with is whether new businesses or individuals who need priority financing will get it from charter banks. You are probably aware of this because people talk about it every day.
If banks are allowed to merge, what kind of effect will that have on small and medium-sized businesses and individuals in view of the ensuing lack of competition.
Mr. Raymond: I was listening to what Mr. Glynn was saying with regard to the new players who have entered the Canadian market. That is a fact. HSBC is a good example. That organization has been successful because of their expertise. They entered the market by buying up existing banks or existing bank branches. Their approach was successful, as opposed to that of other players who had to start from scratch, which is a very difficult thing to do.
As for the accessibility of services — you referred to SMEs in particular — my concern with foreign competitors is that they specialize in niche markets. MBNA only sells credit cards to a certain segment of the public; they are not interested in anyone else. GE provides leasing and financing services for certain clients, which is totally legitimate, but those services do not necessarily meet the needs of outlying small and medium-sized businesses. Only established Canadian banks which provide a wide variety of services will be able to meet those needs. Because of our market share, we can provide both services efficiently to SMEs in Quebec. It is a role we are familiar with and one which we can play in other markets since we already know what it is all about and have developed a certain expertise in that area.
The issue is not foreign competition, but rather what their goals are for the Canadian market. If they are only after the biggest bang for their buck, it does not address the problem of competition.
Senator Setlakwe: That partially answers my question. It is a major concern. If banks close their regional branches, you will mainly operate in Quebec. Fortunately, there are also the caisses populaires. Out west, they are called credit unions, but my colleague, Senator Tkachuk, pointed out that western credit unions had bought Bank of Montreal branches. However, this does not translate into more competition. In fact, there is less!
Mr. Raymond: We did the same thing in Quebec by buying 17 regional Bank of Montreal branches.
Senator Setlakwe: There is a closed one in Thetford Mines.
Mr. Raymond: We already had two.
Senator Angus: Thank you very much for appearing before our committee. To begin, I remember that there used to be a bank in Quebec called the Banque provinciale du Canada. Did you merge with the Banque provinciale?
Mr. Raymond: The National Bank was created from the merger between the National Canadian Bank and the Banque provinciale.
Senator Angus: When did this happen?
Mr. Raymond: In 1979.
Senator Angus: Did the merger unfold well?
Mr. Raymond: Yes. It took time, but it worked out well.
[English]
Mr. Raymond: It is not an easy thing to do, you know.
Senator Angus: No, no.
Mr. Raymond: However, we are there, and we are growing.
[Translation]
Senator Angus: Today, the bank is held by shareholders. Is it widely held? How many shareholders do you have?
Mr. Raymond: Our bank is in a similar situation to that of Canada's major banks, which means that it is a charter institution, regulated by the federal government, and about a quarter of our operations are outside Quebec. But because of recent acquisitions, that figure is now closer to 30 per cent. We have approximately 540 branches and 800 instant tellers. In fact, that should be 1,300 automatic tellers, because we joined the Exchange network, as did Mr. Glynn's organization, outside Quebec in order to provide more services to our clients. This means they have access to 1,300 automatic tellers.
Senator Angus: You are listed on the stock market. How many shareholders do you have?
Mr. Raymond: There are 185 million shares in circulation. There is no controlling shareholder, as is the case for all of Canada's banks. No shareholder is allowed to hold more than 10 per cent.
Senator Angus: What is your current market capitalization?
Mr. Raymond: About $6 billion.
Senator Angus: Are you ranked sixth in terms of shareholder equity?
Mr. Raymond: Yes, sixth.
Senator Angus: How much do you have?
Mr. Raymond: We are in the second category, that is, banks with a book value below $5 billion. In fact, our book value stands at $3.8 billion which, under the current legislation, would allow us to eventually team up with a partner who could get up to 65 per cent of the bank's equity. This may be an additional option in the case of a merger, if the transaction is so large that we need a partner to support us. But that is already provided for under the law.
Senator Angus: Do you have any foreign shareholders?
Mr. Raymond: Yes.
Senator Angus: How many?
Mr. Raymond: It depends. Between 15 and 25 per cent of our equity is held by foreign shareholders or funds.
Senator Angus: That is a lot.
Mr. Raymond: Historically, we are probably one of the banks which is most widely held by foreigners. That is understandable because we operate under a business model which I define as being a super regional bank. This model is very widespread in the United States. It is a model which American bankers are extremely familiar with, because it would represent a bank which has market share in a specific market it is familiar with. This model is very successful in the United States. So when they assess the National Bank of Canada, they often end up buying into our organization.
Senator Angus: You say that you do not have a single shareholder with more than 10 per cent equity. Do you have any who hold close to nine per cent?
Mr. Raymond: Once in a while we may have a shareholder with under 10 per cent equity; otherwise they would have to identify their share.
Senator Angus: Is the Caisse de dépôt one of your shareholders?
Mr. Raymond: I do not know if it is a shareholder, but the Caisse de dépôt probably owns shares of practically every bank in Canada, since it is a fund manager. It probably holds some of our shares. There is no control mechanism and the Caisse de dépôt does not sit on our board of directors.
Senator Angus: I understand, but could the Caisse de dépôt hold close to nine per cent?
Mr. Raymond: At times, yes, that figure would be accurate. I cannot give you an answer today.
Senator Angus: Do you have an idea?
Mr. Raymond: I have not checked today. They have the right to buy and sell. If they sold yesterday, then I do not know.
Senator Angus: Am I right in saying that Fidelity, the Americans fund, is one of your shareholders?
Mr. Raymond: There are large funds, including Fidelity. It is certainly one of our shareholders on a regular basis.
Senator Angus: A major shareholder?
Mr. Raymond: Yes.
Senator Angus: You say that approximately 25 per cent of your shareholders are foreign. Are they primarily in the United States?
Mr. Raymond: Primarily, yes, but I am not talking about just one shareholder, several American funds have invested in Canada and bought shares in the bank.
Senator Angus: Do you agree with what Mr. Glynn, who testified just before you, said?
Mr. Raymond: Yes, I do. I believe that, in the event of Bank mergers, the HSBC Bank Canada could be part of the solution, it could be among the asset acquirers who ensure that competition continues to exist in Canada. The National Bank could do the same.
Senator Angus: So you do not disagree with anything that was said earlier?
Mr. Raymond: No.
Senator Angus: You do not like abusive regulation, in fact, you do not like regulation period. A few weeks ago, you made a speech which I very much liked. You said that you would rather that the private sector, in other words the commercial markets, manage mergers and the other issues that we are discussing. Did I understand you correctly?
[English]
Mr. Raymond: The less political aspects there are in potential mergers in this country, the better all the stakeholders will be — employees, shareholders, everybody. Perhaps I am a dreamer, but in looking at the developed countries most of them have mechanisms in place that are well designed and well defined, and in most cases they are avoiding the political aspects.
The role of the government obviously is to put forward legislation to ensure that the financial institutions are working in a good, sound environment.
Senator Angus: With a minimum of interference from Big Brother.
Mr. Raymond: Yes. However, since we are a fiduciary, we are not dealing with our own money, we need solid regulators that follow us carefully, and I am all for that.
Senator Angus: Where necessary.
Mr. Raymond: Yes, that is right.
If there are mergers in this country, and if the decision is to add additional legislation to the burden of the players, I do not think it would be productive, either for the shareholders or for the clients. That is my position.
Senator Angus: Right. In that respect, you said in your brief that every layer of regulation and control that is brought in will weigh more heavily on institutions like the National Bank than on the bigger banks. I am wondering if you could elaborate on that, please.
Mr. Raymond: It is just a matter of having people taking care of that, adding to our cost structure. In Canada, there are 11 securities commissions and the Office of the Superintendent of Financial Institutions. There is the CDIC. That is fine, but we have to deal with these gentlemen. There is also provincial legislation that comes into play. There is a lot already.
Add to that the burden of responding to all the requests, the surveys, the meetings, all of which adds to the cost of doing business. Unnecessary regulation just adds to the cost of doing business in this country, and if you are a smaller company, of course your base to absorb additional costs is less.
Senator Angus: It was in that regard, then, that the burden is greater for you, being smaller. Simply put, it is the red tape.
Mr. Raymond: That is right.
Senator Angus: The infrastructure that you require.
Mr. Raymond: Absolutely.
Senator Kroft: I should like to get to the process and the structuring of transactions. I was most interested with your description of what you thought the ideal approach to a deal structure would be.
Let me take you through what has become apparent to most of us here as the present situation. It was made very clear in some remarks from Mr. Clark from TD-Canada Trust yesterday that, under the present situation, whether people want it, whether any two parties wish to merge or not, the major banks are sitting out there feeling pressure to be somehow in the game, almost defensively, with the fear that if they are not, someone else will be. You have to have a deal front and centre, ready to go, because after one is done, then the competitive aspects change, and you may be adversely affected by what is then a shrunken field, and you are up against a different set of rules. I think he has succeeded, certainly for me, in bringing a great deal of clarity to their position. In one way or another, most of the CEOs who were with us yesterday explained this.
In the interests of structuring this in a constructive way, Mr. Clark made a proposal that I will put to you. You may have seen his remarks from yesterday, or not, or you may have heard them on another occasion. He suggested that in establishing a fair process, we eliminate, as he described it, the first-past-the post system, so that one proposal coming forward would trigger an opportunity to any other parties who had a transaction to bring their propositions forward. The decision makers, and I guess this would apply to prudential, competitive, as well as political, would have all these potential transactions in front of them and could make a judgment, fully informed in fairness to everybody on a level playing field.
I was intrigued by that idea, and it certainly dictated a certain amount of fairness. It could suggest a true marketplace operating, because everyone is equal. On the other hand, I asked him whether he thought this was maybe very interventionist, because all the deals would then be getting dictated. I was curious. He left me with the concern as to how these processes would work in real time. I was just interested in turning his ideas over to you for your comments on this process.
Mr. Raymond: It is an interesting concept. Practically, I do not see how it could easily work, though. Le me see if I understand you properly, because I have not read the Clark presentation. You are saying that if there is a merger proposal on the table you would freeze that and see if the other players come up with a different point of view or a different structure to address the same merger. Is that what you are saying?
Senator Kroft: Right, or whatever ideas they may have about it.
Mr. Raymond: It is an interesting concept, and one that could work if the rules were known beforehand. Counteroffers would have to come within a very specific time frame, let us say 30 or 45 days. It would have to deal with the public interest, obviously, and the local competition aspect of it. It is similar to the public market, where one company is going after another. It comes back to the point I made, which is that the market will proceed for the best interests of the shareholders and the clients.
I would suggest that it is a good idea. It has to be controlled in terms of time frame and in terms of how many players would be part of it, obviously.
Senator Kroft: Now, in terms of how many players would be a part, in the merger discussion, the focus tends to be on the five banks, as we have gotten into it in the last 24 hours.
You spoke earlier about your ability to play a different kind of a role, a facilitator role that brings parties together. Under this kind of a formula, do you think that it would give you and others a greater opportunity to play that role if you had more or less a perfect marketplace in terms of sharing of information?
Mr. Raymond: The real difference for us would be that we would be at the table negotiating a proposal with parties that we like. In that sense, it makes sense for us. It would be much easier, because you would work out with another party what you are willing to do. Then you reduce the anxiety and the unknown part of the proposal.
For example, if I say to Ed Clark, ``Let us sit down together to see if we can do better regarding a particular transaction,'' then each party will know very well what it is they can do. They can then put a price tag on it and come up with an offer. In that way, the uncertainty around that transaction, at least for the National Bank and the TD Bank, would be obviated. That is positive. Then I would suggest that the National Bank could play a very positive role if such a process were to take place.
Senator Kroft: In that same context of that process, do you feel that the public interest concerns could be accommodated and protected more effectively as well?
Mr. Raymond: Probably, yes. If there were two or three proposals, it would be easy for, say, the Senate Finance Committee or OSFI or the Competition Bureau to judge which proposal makes the most sense vis-à-vis the public interest. In that sense, the answer to that is yes.
Senator Kelleher: The main thing that the government, through Mr. Manley, has asked us to do in this investigation is to look at what ``public interest'' means. When Mr. Clark was here yesterday, he seemed to suggest that we are over- regulated at this time and that the last thing we need is a new set of regulations. This has been touched on to a certain extent. He was not sure that it was necessary for us to delve into this matter. I was wondering what your thoughts were on that aspect of it. Do we need clarification of what constitutes a public interest?
Mr. Raymond: I agree that we do not need more legislation or more rules. There are a lot of rules in place.
What is unclear to some extent is the matter of subjectivity surrounding what the public interest is. I do not know what it means exactly, quite honestly. If I do not know what ``public interest'' means, how can I put forward a merger proposal when I am unclear about the length of the process, or whether I have covered the public interest? I am not totally sure what it means.
It should mean to me that there is enough competition in place to service the Canadian clients. That is the end of it, as far as I am concerned. If you cover that issue and put that definition in place — and I am saying ``definition,'' not rules — and make it clearer, then you do not need more legislation to cover the rest of it because the public interest would be covered.
What is the public interest? It is being served properly and having choices. The fact is that that is not totally clear. There is a level of subjectivity already. I read the public interest concept. However, at the end of the day, the Minister of Finance, after you go through all the steps, can still veto the transaction. It is adding to a great deal of uncertainty for the players, the bankers and the clients, and for our employees.
Can you imagine the pressure, the anxiety and the cost of going through a year-long process? If we can narrow the definition, so that everyone understands the process, the timing, the definition of competition, having a clear understanding right at the beginning of the process, if two banks are merging, what is it they are going to have to dispose of, then you can play very quickly.
Even those who have to play the game of getting together and disposing of assets will know the rules by negotiating with the OSFI or the Competition Bureau, or the two together, not waiting until the third step of the process, which is just before the Minister of Finance says yea or nay, to decide the remedies that have to be in place to allow such a merger. If you could clarify that more accurately, that is all we need.
The Chairman: Senators, I am just wondering about a matter. I am concerned that we are limiting our questions on public interest or what is in Canada's best interests, I would not say only, but largely to what is good for the people who need access to bank branches. Surely, there must be a larger context to this matter, and I would hope we could get to that at some point, somewhere.
[Translation]
Senator Hervieux-Payette: Without wishing to play the devil's advocate, can I ask exactly what it is that Canadians are unhappy about? Last time, it was the same thing. Perhaps people are unaware of the advantages for Canada in moving forward with this. Is it up to us or the banks to inform people that this is in Canada's interest? I think that it is up to those who are trying to sell the project.
My colleague and I often receive complaints from small businesses saying how difficult things are for them. I am going to put you in hot water. The same bank lent money to Canary Wharf but the project did not work out. You and several other Canadian banks lost several million dollars. Yet small businesses maintain that when they want to borrow $50,000 you impose all sorts of rules. It is harder to get a large loan than a small loan. You say that it costs just as much to grant a small loan as a large one. That explains the interest in granting large loans. I would like that information on variable rate loans, for example, to be given to the public. If the risk is greater, the rate will be 15 per cent.
It seems to me that some services are not being offered or, at any rate, people believe that they are not being offered. Foreign banks do not offer them and Canadian banks do not offer them. This is a source of irritation. People are saying that they have no desire to allow banks to get bigger simply so that they can provide services abroad while we do not even have the basic services.
What measures are bankers taking to explain to Canadians that their own interests are being carefully studied? Is it only your own clients who are privy to this information? It seems to me that there is a shortage of information regarding the services that can be expected from banks which, after all, are there to serve the SMEs and individuals from whom they make such a healthy profit.
Mr. Raymond: Has the industry done a good job in explaining why mergers are necessary in Canada? Probably not. We could do better and must get all participants involved in better explaining our role and the advantages of mergers.
One such advantage is North American integration. It is not a matter of saying yes or no, integration is underway. It has strengthened several industrial sectors, pulp and paper, forest products, oil and gas. I could list several sectors where the relative size of businesses is undergoing significant growth. Canadian banks have to keep pace with this growth.
Secondly, it is often said that SMEs experience difficulty in getting access to financing. This is rather odd. My colleague Houde is responsible for receiving complaints from individuals and big businesses. I was a member of the board of directors of the Canadian banking ombudsman. If only you knew how few genuine complaints we receive from businesses saying that they have not been adequately served. The figure is very low.
Senator Prud'homme: Perhaps they are afraid of complaining.
Mr. Raymond: I do not see why they would be afraid. You have to bear in mind that a bank is a lender, not an investor. Unfortunately, it is often the case that, in small businesses' financial structures, the distinction between a capital investment and a loan is not always made. Our role is not to invest in businesses. That is why, in spite of all our explanations, confusion persists. Good ideas are not enough. You need a solid business plan and some capital to support it.
Banks have to evaluate the situation. Banks have to consider individuals who have made personal deposits and who want to be paid when their investments reach maturity date. Banks are not investors who are willing to take capital risks. They place money safely. We have to respect our role as trustees. It is not only an issue of price. The price/risk ratio has to come in to play; it is our responsibility to ensure that we cover our risks by charging the correct price. However, at a certain level, it is not an issue of price but, rather, of knowing whether it is a question of equity or a loan. This causes great confusion amongst small businesses and has to be part of the explanation we give to better help SMEs draw up their business plans and find capital. That being said, the National Bank, like several others, meets its investment responsibilities as well. It is involved, amongst others, in the regional fund in Quebec and in all major regions. This allow SMEs to gain access to capital if they come up with a viable business plan. Small businesses are not necessarily looking for financing from the banks. Once the capital is secured at a reasonable rate, there is enough competition in terms of financing.
Senator Hervieux-Payette: Take the average citizen whose service charges are rising. Previously, services were provided for free or at a lower price. What we are seeing here are adhesion contracts. This is frustrating because when a client receives a few services from the bank his hands become tied. If he does not want his hands to be tied he has to change everything simply because he is not happy about the recent service charges. He has no choice. I am talking about people who have a small amount of money and who want to carry out bank transactions. I am talking about ATMs which are becoming increasingly expensive. In the beginning, they did not cost much, but now, there are charges for many services. People often withdraw small amounts of money. Yet for $100, they are paying an extremely high percentage in charges.
These are sources of irritation. People are saying to themselves that banks are making enough money at their expense, and they worry that if, on top of that, they want to break into foreign markets, the banks will take their money and use it elsewhere. You have to correct this misconception.
I made a little speech in Toronto on guidelines for the Office of the Superintendent, who in passing, was not very happy with my remarks. These guidelines are already too cumbersome and should be reexamined. They impose a way of management, as in the case of contracts awarded externally. Everything is regulated and done ahead of time.
The average client does not know that you have to cover all of these costs due to the demands that we make of you. It is very important for you to get that information out, and in the case of service charges, for people not to have the impression that they are captives of your system.
Mr. Raymond: The new legislation in place has a comprehensive mechanism for covering increases in service charges and requires financial institutions to offer more services for a minimum base cost.
Secondly, we cannot increase service charges without advising people ahead of time. Clients have an opportunity to make changes, at not cost, if they are not satisfied with what is being proposed. Rates can change at no cost and they can use other types of services.
However, I will bear in mind what you say about improving the way we communicate, and that will undoubtedly help us to market our ideas. Our goal is to serve individuals and SMEs. Bear in mind that integration is underway in North America. If you want a Canadian financial system that continues to support businesses effectively, we must have clear rules that will help us play this role.
Having said that, the role of the superintendent is important. We are the trustees of the funds entrusted to us. It is important to have a regulator that carries out his role. In the United States, that role is played by the Federal Reserve System. We need one in Canada. ``Over-regulation'' is what would not be productive, not regulation.
Senator Hervieux-Payette: We must do our share. Since it is an objective — you can explain it to citizens — you can facilitate our task in preparing recommendations. You have considerably more means than we do to make the public aware of this.
This morning, the head of ING said that they had 600,000 clients. We found that quite impressive. They have succeeded thanks to extremely simple advertising and highly attractive service charges for clients. Everyone understood that. They penetrated the market relatively quickly. When the message goes to consumers, it is in the interest of Canada and Canadians to support our companies. For example, Bombardier is developing worldwide. You can participate in the consortium that will help finance the company. It is important for this information to come from you.
Mr. Raymond: Duly noted.
Senator Prud'homme: Senator Hervieux-Payette touched on an important point. I have not been a member of the Committee on Banking, Trade and Commerce for very long, so I am coming with a curious mind. I have told all bank presidents whom I have never met that:
[English]
They do a lousy job of explaining to Canadians what the banking system is all about.
[Translation]
I was a member for 30 years and I have been in the Senate for 10 years, so that makes 40 years of public life. Each time data comes out on bank profits, it is impossible for that to become a demagogic campaign to which no one responds.
Banks employ 232,000 people. What are they being asked to contribute to their well-being? I do not see them doing very much, to be honest. This is perhaps because relations between the employer and employees are not harmonious, but I doubt that. Perhaps it is because there is a lack of vitality on that side. You can see that I want to remain positive.
I would like you to comment on what I am about to say. For all of the reasons mentioned by you and by all of the other bank presidents — such as uncertainty and the like — if this committee were to recommend that for the next two years, or until January 1, 2005, we should forget about bank mergers, how would you react?
I will repeat my question. How would you react if our report's first conclusion were to abandon the issue of bank mergers and if, secondly, our recommendation sought to establish ground rules stating that there would be no favouritism?
Mr. Raymond: No favouritism and clear rules is what I came here to present to you. I agree, therefore, with your comment. As for having a set date, a process and legislation are already under way. In my opinion, it should not be linked to a government or re-election or an election. In principle, the rules that are contained in an act or in legislation do not cover what may happen a year before a re-election or six months after a re-election. So I do not have a position on that. It is clear that if the government were to decide that there were to be no opportunities for mergers, that would at least make matters clearer. But it would be a bit little inappropriate on the part of the government to act that way, in my opinion.
Senator Prud'homme: You know, the government will continue to surprise you.
Mr. Raymond: There is no doubt about that.
[English]
The Chairman: Gentlemen, thank you for being with us.
Ladies and gentlemen, our next witness is Ms. Sue Lott, who is with the Public Interest Advocacy Centre.
Ms. Sue Lott, Counsel, Public Interest Advocacy Centre: Thank you for the opportunity to provide some input to this committee on several of the major considerations that should apply in determining the public interest. I should particularly like to thank the clerk, Denis Robert, for fitting me into this process at the last minute.
It is important for the committee to hear from a range of voices with respect to the interpretation of the term ``public interest,'' not just from the industry itself, but also from the consumer or the customer.
First, let me explain who we are. The Public Interest Advocacy Centre, or PIAC, is a non-profit organization. We provide legal services and research to Canadian consumers and organizations that represent them. We work primarily on important public services, which would include telecommunications, broadcasting, energy, financial services and public transportation.
We also represent coalitions of low-income or vulnerable consumers before regulatory tribunals such as the Ontario Energy Board and the CRTC on the telecommunications side. Also, through the contributions program for non-profit, consumer and voluntary organizations through the office of Consumer and Corporate Affairs, a subsidy of Industry Canada, we provide research on consumer issues that affect the marketplace. That does include financial services.
One of the recommendations of the MacKay task force, in fact, was that this kind of funding be provided for research on financial services for consumers. We have done a recent publication, which we just released, in which we surveyed users of the alternative financial services sector, which includes the cheque cashing outlets and the payday loan phenomenon.
We have a history of involvement on this issue. We have made submissions to the MacKay task force, prior to my time, and to the House of Commons Standing Committee on Finance with respect to Bill C-8. We also liase with Consumer and Corporate Affairs and with the Financial Consumer Agency of Canada.
I will now speak briefly to the considerations that were put forward in Ministers Manley and Bevilacqua's letter to this committee and to the other committee. I should also like to speak to the guidelines from which you operate in terms of assessing public interest in respect of bank mergers.
In that letter, the ministers talk about access and choice, among other things. Price of services was not mentioned in the letter, but it is very much present in the Competition Bureau's guidelines with respect to mergers; it is mentioned on page 2 of those guidelines. You will also find it in the Department of Finance's merger review guidelines. That comes under the contents of this public interest impact statement that they have to put together. That is at bullet number two.
First, with respect to the issue of access —
The Chairman: Excuse me, if you are referring to the ministers' letter, should you not talk about the four points mentioned in that letter?
Ms. Lott: I will focus on access, choice and price.
The Chairman: Will you not be talking about the future economic benefit to Canada?
Ms. Lott: Perhaps I will, but I had not planned to.
The Chairman: I am not telling you what to say, but if you refer to the letter —
Ms. Lott: I will refer to points in the letter that are of interest to consumers.
The Chairman: In other words, the part of the letter that interests you.
Ms. Lott: I will refer to the part that I think is relevant to consumers. The public interest is made up of many considerations.
The Chairman: All right. You referred to the letter so I would suggest that you cover the whole letter. Go ahead.
Ms. Lott: You have heard from the industry side, which probably addressed many of those other issues, so we will concentrate on the issues that are of concern to consumers.
The first one is access. I wanted to talk about access to basic banking services as well as access to branch locations — two aspects of this issue of access, which is important. It is particularly important for low-income, disabled and rural consumers. The MacKay report actually made reference to the issue of access to basic banking services for low-income Canadians — what they saw as a serious concern.
In terms of looking at that issue, you need to have standard low-cost bank accounts. It refers simply to the ability to be able to cash a federal government-issued cheque. It can also refer to issues around obtaining lines of credit, overdraft protection and short-term loans. We know that the federal government will be introducing regulations in some of these areas, in terms of access to basic banking services, and we think that is a good thing. We also found, in our study of the alternative financial services sector, when we surveyed customers of places such as the Money Marts and the short-term loan places where you can cash cheques, that banks are not meeting the short-term financial needs of consumers. Consumers are turning to these higher-cost alternatives that have high cheque-cashing fees or they are accessing payday loans.
Our question would be: How will bank mergers address these access issues? How will divestiture of core services and other entities, such as foreign-owned or non-deposit-taking institutions, protect vulnerable consumers with respect to improving or ensuring access?
On the issue of access to bank branch locations, we have seen branch closures and replacements by ATMs. We know this was identified as a concern in the report of the MacKay task force. Our concern is that this further removes customers from any direct relationship with a bank. Our questions would be: How will mergers, in the inevitable resulting rationalization of services, improve access to branch banking? How will they prevent a further deterioration of the relationship between banks and their customers? How will mergers ensure that low-volume areas, particularly rural areas and the regions, will continue to have access to bank services?
Our concern about the Department of Finance's merger review guidelines is that, at bullet number 3 under public interest impact assessment, PIIA, there is the implication that branch closures are a given, and the focus only becomes the issue of timing and socio-economic impact.
Our second focus is the issue of choice. We would agree with the Competition Bureau's bank merger endorsement guidelines in which they identify the main objectives. I will quote from page 2 of the guidelines. It says, in part:
...to maintain and promote competition within the Canadian economy in order to provide consumers with a wide variety of high quality products that are competitively priced.
Our question would be: How will mergers promote competition and choice? Our concern is that, regarding the Department of Finance guidelines, they will focus on remedial or mitigating steps, such as divestitures. That is mentioned at bullet number 7 of the guidelines. Our concern about this is what it means. On Monday, I was listening to the testimony of officials from the Department of Finance. They used an example in response to a question about what was meant by ``divestiture.'' They said that it referred to ``new entrants'' such as foreign banks. I believe the example they cited was Toronto-Dominion's acquisition of Canada Trust and the divestiture to Citibank.
That raises the issue of the loss of Canadian control of financial services. This is an area about which the MacKay task force concluded that retaining Canadian control of financial services should be a public policy objective. If this is to change, I would suggest that this requires an open and public debate with Canadians. One of the surveys provided as background to the McKay task force by EKOS found that 80 per cent of Canadians said it was important to have Canadian control over domestic banks.
The last issue I wanted to focus on was price. Mergers will likely mean a reduction in the number of banks, resulting in a further increase and dependency on electronic banking. We have already moved into that sector. We now have bank ATMs and no-name, or white-label, ATMs. These are the result of this 1996 decision by the Competition Tribunal to open up the ATM market to have non-deposit-taking financial institutions providing ATM services.
This has produced more competitors. There certainly is a proliferation of ATMs available to consumers, and that is certainly convenient; however, as one of the senators mentioned before, the costs have not gone down. There are now increased bank charges associated with the use of white-label ATMs.
There is a third tier of surcharge on top of the Interac fee as well as the service package you buy, depending on the bank account transaction fee.
I guess our concern in this respect is that as banks enter this no-name market through subsidiaries competition will be reduced because banks will probably replace their own branch ATMs with their subsidiary ATMs. I noted that Mr. Godsoe, who gave testimony on Monday, described ATM charges as minor irritants. I would suggest that, for many Canadians, these charges and fees describe their daily experience with bank transactions.
Finally, I wanted to comment briefly about the guidelines of the Department of Finance and the Competition Bureau. We applaud the existence of these guidelines, and we think they need to be reinforced, not watered down. However, we would only suggest that clarifications are needed with respect to protections around access, choice and price to customers. The guidelines are good because they identify the important public interest considerations that affect consumers, such as costs and benefits to consumers, impact on branches, availability of financing, price, quality and availability of services.
We are concerned about the implication that branch closures are a given. We are concerned about the reference to alternative service delivery without a reinforcement that such delivery should be at no greater cost to customers. They should be able to access alternative services that are reasonably priced. We also have concern about references to divestiture without an assurance that the Canadian financial services sector would continue to be Canadian controlled.
In conclusion, from the testimony I have heard from the banks before this committee, the driving force behind this is the banks' desire to grow and expand outside of Canada, but banks still provide retail banks services to millions of individual Canadians. Our concern is that mergers might mean an increase in non-banking, foreign-owned banks and ATM delivery of bank services at a greater cost with less Canadian control, and therefore, less protection for consumers. This, in our view, would not further the public interest.
Senator Tkachuk: When you talk about control, are you alluding to ownership or are you alluding to control?
Ms. Lott: I am referring to the definition that the MacKay task force used when they looked at it in their report.
Senator Tkachuk: Did they get it wrong?
Ms. Lott: They said it was where the sector is made up primarily of firms that are themselves primarily Canadian controlled.
Senator Tkachuk: Canadian controlled. When you talk about competition, are you talking about three, four, five, six or seven major players in a particular marketplace? Exactly what do you mean by that? We are trying to get our heads around a set amount. Perhaps it should be 20 per cent, which would mean no one can own more than 20 per cent? Should it be 25 per cent or 30 per cent? We are not sure.
Ms. Lott: Do you mean in order to ensure that Canadian control remains?
Senator Tkachuk: We already have a means to control our chartered banks. We control all our banks here, even though we may not own them all.
Ms. Lott: Right.
Senator Tkachuk: They are publicly held. Their shares trade on the New York Stock Exchange. Foreigners could own all the shares. They are not all foreign owned, but they could be. We cannot stop that unless we pass legislation to stop it, and that is protectionist. That is a problem for us.
More important, from a consumer advocate point of view, what do you see as fair and reasonable competition in a marketplace?
Ms. Lott: I can only look at it from the perspective of what results from that competition. If it results in high quality and low cost, reasonable choices at a reasonable cost for Canadians, then that is competition.
Senator Tkachuk: Do we have that today?
Ms. Lott: We do in some areas. However, we have people who are falling out of the financial services sector and using higher cost alternatives, such as white-label ATMs or cheque-cashing outlets.
Senator Tkachuk: What is the charge when an individual cashes a cheque? I have no idea.
Ms. Lott: There are standards fees. Some of them do it in percentages; some of them do it in flat fees.
Senator Tkachuk: How high? If someone wanted to cash a CPP cheque or an Old Age Security pension check of $350, what would it cost?
Ms. Lott: It might be $5 or $10.
If people do these payday loans, which are short-term loans of between 7 and 14 days, they can get a certain percentage of their paycheque. Let us say an individual get a $100 loan; in many places, that will cost $15.
Senator Tkachuk: For two weeks.
Ms. Lott: For a two-week loan, that is right. The annual percentage rates of interest are very high.
Senator Tkachuk: You talk about the white-label ATM machines.
Senator Meighen: What does ``white label'' mean?
Ms. Lott: They are also known as ``no-name ATMs.''
Senator Tkachuk: They are an adjunct to the banking machines. We still have all the Royal Bank, CIBC and the Green Machine ATMs.
The marketplace for white-label or non-banking machines is bars and places like that, where people have an emergency need for cash. There is protection for a bank machine. There are people to look after it. They can offer that low-cost service. However, white-label machines are in places that are not secure and are difficult to service. They charge a little more, but I do not think that charge that much, do they?
Ms. Lott: Banks are now entering into the no-name business. There are more white-label ATMs in the country than there are bank-owned ATMs. There is a competition to enter that market because they proliferated, as you say. You can find them in gas stations and most mini-marts.
They are expensive because there is a third tier of fee, a surcharge, which is on top of the Interact fee. Under the Interact Associations requirements, it is mandatory that white-label ATMs disclose that third-tier fee to customers. As well, because generally one gets a limited number of free transactions a month, potentially, if an individual has exceeded his or her free transactions, another fee could apply to that white-label ATM transaction.
There is also confusion because some of the major banks are now introducing convenience fees as well. Some of them are introducing them not only at these off-premise white-label ATM machines, but also at their branch locations.
Consumers are confused and where fees are charged and why they are charged in certain places and not in others.
Senator Kroft: I would like to focus on the issue of mergers, if we could.
As I listened to this discussion, it leaves me with the impression that you go from the idea that if there mergers take place then the charges on the white-label machines will go up. I am not sure of the link.
You expressed a fundamental concern about the control of Canadian financial institutions. It is probably at the core of the argument, whether articulated or implied by most of the proponents, that mergers and the strengthening of organizations and their ability to build a larger capital base and be more effective internationally is, in fact, a way of our maintaining control of our financial institutions rather than have them weak and vulnerable to either direct takeover or suffering from other kinds of competition. What kind of weight would you give to that argument, because I take from your tune that you see mergers as a threat rather than as an opportunity?
Ms. Lott: I appreciate the comment. I would weigh that. However, I am also concerned because the guidelines specifically raise the possibility of divestiture of services or an aspect of bank services, which raises an alarm for me in terms of who it is being divested to.
Senator Kroft: Of course it is important as to who is being divested to. However, the line of reasoning that I have been persuaded by and that others have pursued over the last couple of days is that divestiture, in fact, provides an opportunity to combat undue narrowing of competition. Divestiture could be to credit unions, as we have heard them buying branches of the Bank of Montreal, it could be to new entries, for example, HSBC, who are saying they are ready to buy; it could be any number of commercial entities who choose to add banking. As well, it could be insurance companies because of their entry into the payment system and all of the things that were done and recent changes.
Therefore, I am trying to change the tone of this, that either consolidation in the industry or acquisition by a broader base of owners is somehow a dangerous or threatening thing. I am working on the assumption that an institution that is allowed to carry on a banking business or acquire existing branches would be required to meet prudential tests and public interest tests, et cetera.
I am trying to cast a positive light on this, rather than it being so threatening. Am I gaining any ground?
Ms. Lott: Yes, I believe you are, a little bit. I believe the issue for us, again, would be that ensuring that service quality and service price are there for consumers, that they do not experience a difference, that there is truly a benefit of competition. As I said, we are concerned because we have not seen that benefit with the 1996 decision of the tribunal that increased the proliferation of ATMs. It makes me concerned that there seems to be a problem with competition producing lower prices somehow in the financial services sector.
I should like to be persuaded by what you say, because that is certainly what we would look for.
The other issue would be ensuring that there are consumer protections in place as well, that they have places they can turn to and that it is clear that these entities would be subject to whatever regulatory mechanisms would be in place. For example, it is not clear to me that there are voluntary codes that the banking industry must practice in terms of debit card transactions. It would be important, if non-deposit-taking institutions were entering into these fields, to ensure that they are included in these voluntary codes and that somebody is looking out to ensure that they are.
Senator Kroft: We would hope that they would be.
Senator Meighen: Ms. Lott, I want to pursue this business of the price levels as a result of the proliferation of ATMs. There are two types of proliferation. Are there not more regular ATMs, leaving aside the —
Ms. Lott: What do you mean by ``regular''?
Senator Meighen: I was going to define it. Non-white label, non-no name.
Ms. Lott: Bank operated and owned ATMs?
Senator Meighen: Yes. Are there more today than there were four years ago?
Ms. Lott: There probably are. I have not done the research to tell you what the exact numbers are, but in some cases these are being replaced by no-name ATMs.
There was an anecdotal story by Susan Riley in The Ottawa Citizen yesterday, about how she went to her usual bank location machine in a west end shopping mall only to find it gone and replaced with a white-label ATM. That is only anecdotal. However, my impression is that —
Senator Meighen: I wanted to ensure that I understood the argument.
Are you opposed to or do you find it wrong or against good public policy that the convenience of me being able to access money when I want to at midnight in a bar should not cost me more than doing it at a location in a bank, for example?
Ms. Lott: Do I agree with you on that?
Senator Meighen: Do you think that I should not pay more?
Ms. Lott: I believe there has to be a charge. Certainly there has to be a cost involved in maintaining those machines and producing them. However, I am not as much persuade, because as I said earlier there are some major banks that are introducing this surcharge, this convenience fee, at in-branch banking locations. Others are not. Therefore, it is not clear to me as to what the fiscal rationale is for why these are being adopted by some banks and not by others.
Senator Meighen: Is that not competition? If I do not wish to pay the fee, under your example, could I not go to another bank, one that is not charging a fee?
Ms. Lott: If you can find another bank that is not doing it.
Senator Meighen: You may have indirectly alluded to this, but I did not hear it. Notwithstanding legislation that has been adopted, are consumers at the low end of the income scale having more difficulty or less difficulty in opening an account at a chartered bank?
Ms. Lott: Well, certainly the MacKay task force identified this as a problem in 1998. As I said, the federal government is now introducing regulations to address this concern. We think that is a good thing. They will be looking at what kind of identification is required and what would be too onerous.
Senator Meighen: If that goes through, then, surely, regardless of one's income level, one's access to an account at an established financial institution rather than a bar would be well established, and I would not have to have recourse, if I were a person with a low income, to the white-label machines.
Ms. Lott: The white label is premised upon you being able to access your bank account. Therefore, that assumes that you have —
Senator Meighen: That you have an account.
Ms. Lott: Yes. That is right.
Senator Tkachuk: They have built no machine yet that you can just get money out of.
Senator Meighen: If that is the case, then I have difficulty working up sympathy. If that is the case, and I have to have an account at a regular bank, I have difficulty working up sympathy for the proposition that I should not have to pay more in a bar or at a racetrack to access money than in an established financial institution. I want to get my money before I go to the bar.
Senator Hervieux-Payette: I think your preoccupations are a bit similar to mine when it comes to the regular consumer.
Hen you refer to guidelines, would you please specify which area of guidelines you would like to reinforce? We would appear to be totally on opposite sides. As far as I am concerned, when it comes to protecting the senior citizens and the welfare people, I would side with you — and I was very supportive of giving them a package for a minimum amount of money.
However, when it comes to what you want to reinforce, could you at least, if not tonight, send us more specific recommendations? I would be willing, if there are practices that are hurting low-income people, to support your group. We cannot support reinforcement of the guidelines when we know that it is covering a 1,000-page document.
Ms. Lott: I was actually referring specifically to the Ministry of Finance's merger review guidelines in my comment.
Senator Hervieux-Payette: Even with those, which one is more specific with relation to the low-income people? You are not there to protect, necessarily, big business.
If we are going to create jobs and expand our economy, and if we need to be accompanied by big banks, we need financial institutions that will be able to meet the demand of the market. I am not inventing that. Your predecessor, Mr. Raymond, referred to companies becoming larger and larger and the fact that they need financial institutions to accompany them in their growth.
It is important for you to be more specific than saying, ``Reinforce all the merger guidelines of the Ministry of Finance.'' There must be some specific points that would affect particularly the low-income people.
Ms. Lott: I will be preparing a written submission, and I will follow-up to be more specific.
Senator Hervieux-Payette: I would be willing to support it, provided that I know exactly what it is that I am supporting.
The Chairman: Thank you very much, Ms. Lott.
The committee adjourned.