EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, June 20, 1995

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[English]

The Chair: Please come to order.

The finance committee is continuing its investigation of the potential paper that has been released but not tabled, which I'm sure you have not seen but everybody else has seen. Before us today, again, we have Nick Le Pan, special adviser to the deputy minister; J.R. La Brosse, director of financial institutions division; and Patty Evanoff, senior economist.

Thank you very much for being with us. Are you going to continue taking us through your résumé?

Mr. Nick Le Pan (Special Adviser to the Deputy Minister, Department of Finance): Before we start that, I would like to draw the committee's attention to several pieces of material we have provided that will be distributed for committee members with basic background information about the sector. I'll just mention what they are - I don't think we need to spend much time on them - and respond to a few of the questions that were raised last time.

The first is a piece called ``Information on the Financial Services Industry''. It lists the major institutions by size in each of the banking, trust, life insurance, and property and casualty insurance areas. It also indicates which of the trust companies and life insurance companies are federally incorporated and which are provincially incorporated.

We also provide information on the investment dealers, although it's harder to rank them by size because public information is not always available.

There is also information on the recent liquidations and mergers, as to when they occurred and who was involved.

There is information on the basic CDIC coverage and how it works, because there are separate $60,000 limits for deposits in your own name, trust deposits, joint accounts, RRSPs and so forth. At the back of that there is some information on deposit insurance coverage by size. It indicates, for example, that in the most recent failed institutions since 1992, some 98% of customers were below the $60,000 limit, and it gives some indication of how it breaks down at various levels below that.

Over the years the department has put together, on a reasonably regular basis, simple information pieces on each of the subsectors. There is one on the banks, one on the trust and loan companies, one on the life insurance companies, and one on the property and casualty insurance companies. We provided the most recent copies of each of those to the committee. In some cases the data there is maybe six months to a year out of date, but it could be updated if necessary.

These contain, for example, information on how assets have grown over time, net income patterns of these sectors over the last five years, profitability and capital position. There is some information for the banks, for example, on loan quality.

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For the insurers, there's information on the liability side of the balance sheet. There is five-year comparative information that shows the changes in their liabilities with more movement to annuities, for example, and less to basic life insurance products that we've talked about.

So rather than get into any details there I thought we'd just leave those with committee members. We can come back to them or use them as necessary, or members could ask questions now or at the end of the session.

The Chair: Maybe members could study these overnight and we could have a test tomorrow.

Mr. Le Pan: I don't administer tests, Mr. Chairman. I'll leave that to....

When the 1992 legislation passed through Parliament, the former minister committed that the department would produce a paper on the state of these industries and issues two years after the legislation came into force at the end of 1992.

That paper was going to be looked to as a listing of some of the issues that might be pertinent for the 1997 review and has also been provided. It was released by the department in September 1994 and gives a sense of some of the issues the department saw as issues for the 1997 revision. It also has more recent information about what has been happening in these sectors that members might find interesting.

The Chair: What is that entitled?

Mr. Le Pan: The ``Information on the Financial Services Industry'' gives the largest companies by sector.

An hon. member: We don't have that two-year review.

Mr. Le Pan: Okay. I thought it was transmitted over here. I apologize. It's here? We just have to make some more copies of it.

There is a covering letter from me to Senator Kirby, because the Senate originally initiated the request for this kind of study.

I would like to go back to the material we looked at last time, Mr. Chairman, if that would be helpful.

The Chair: Please.

Mr. Le Pan: I thought we might spend a few minutes on the slide called ``Other Regulatory Measures'', and then pick up the rest of the material on CDIC. I think we've talked about some of it, but we need to come back to it, particularly given the previous questions, and then the PPB.

On the other regulatory measures, we indicated last time that there were some changes proposed in the white paper, largely to influence corporate governance of one form or another. We talked a bit about the fact that financial institutions can't be affiliated with unregulated entities that use similar names.

I wanted to talk about a couple of the other ones on the page. The first one requires that boards of a federally regulated financial institution and an unregulated parent not be identical. The basic requirement in the statutes at the moment is that one-third of the board of an institution be unaffiliated with the institution, and by unaffiliated we mean not a controlling shareholder, not a significant borrower from the institution, and so forth.

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It is, however, possible for the board of the institution and the board of its unregulated parent company to be identical, with the independent people being the same people at the board of the institution and at the level of the board of the unregulated holding company. In normal times this is not a problem. Indeed, having some links between the board of a parent company and the board of an institution is a benefit, because the parent holding company presumably has significant interests in making sure the institution itself is well run and is profitable and is not going to come a cropper.

However, it has been the case that when an institution is in serious difficulties, the interests of the holding company are not always the same as the interests of the institution. The institution, and indeed the directors under the statutes, have some degree of responsibility for the interests of policy holders, depositors, and creditors, and the prime interest of the board of directors of the holding company obviously is in its investment.

It is not necessarily clear that the interests of those two organizations will be the same as an institution comes down to serious difficulties. In the past that has caused problems for the superintendent and we think it's desirable that there be some degree of separation - not complete separation, but some degree of separation - between the board of directors of the parent company and the board of the institution.

Mr. Campbell (St. Paul's): This matter, as I understand it, was debated at great length in 1992, and it was decided not to make this change. What has happened in the intervening years to cause you to make this change?

Mr. Le Pan: We've seen situations where it wasn't clear that the board of the institution and the board of the unregulated parent were operating in a way that was appropriate vis-à-vis the interests of the institution.

Mr. Campbell: So it's not the Confed situation, because there it was a regulated parent board.

Mr. Le Pan: Correct.

Mr. Campbell: I'm concerned about operational difficulties for these companies with that change. I would have thought...and in my experience as a lawyer before coming here...that the best protection, I always thought, was the fact that independent directors would be on both boards - ``mirror boards'', as we used to call them - because that way they could bring to the attention of the holding company board problems in the subsidiary. You are going to make that impossible.

Mr. Le Pan: Not impossible. It's quite possible for there to be independent members who are independent and members of both boards. We would just like there to be some members who are independent of the holding company board as well.

Mr. Campbell: So the situation that exists now in some cases, where you have the same independent directors, is what you're getting at. You want to avoid that situation. So there could be some overlap?

Mr. Le Pan: Yes, there could be two-thirds overlap.

Mr. Campbell: Is this being done by regulation?

Mr. Le Pan: The definition of ``independence'' is in regulations, as I recollect, about what constitutes affiliation, about significant borrowers, and so forth. I believe a statutory amendment will be proposed to bring in the parent companies. I'm not sure...no, those are by regulation.

Mr. Campbell: But you also have in mind a comprehensive review of these issues of corporate governance -

Mr. Le Pan: In the Canada Business Corporations Act, yes.

Mr. Campbell: Why are we doing this piecemeal here when there's a comprehensive review under the CBCA that's coming in the fall?

Mr. Le Pan: Fundamentally, the corporate governance of financial institutions has departed from CBCA provisions for quite some time in a number of ways, fundamentally because of a view that from a public policy perspective there were elements of public trust that were important for financial institutions but that might not have been so important for other corporate entities. That's why, for example, currently and in the 1992 changes there are requirements on boards of financial institutions that do not exist for CBCA companies. This whole notion of unaffiliated independent directors does not exist for CBCA companies.

To some extent the financial institution legislation has been ahead, if you will, of some of the changes in corporate governance that have more recently come to the fore. I look at this as an adjustment - an important adjustment, but an adjustment - to a principle of having independent directors of financial institutions that perhaps the CBCA and others are only now catching up to.

Mr. Campbell: Very quickly back to where I started out, because it was a long night in the House of Commons and I want to make sure I have it.

Mr. Le Pan: I understand.

Mr. Campbell: You are not precluding the possibility of some independent directors at the subsidiary also being members of the board of the holding company.

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Mr. Le Pan: That is not precluded.

Mr. Campbell: What will be the specific provision?

Mr. Le Pan: The specific provision is that one-third of the members of the institution have to be unaffiliated with, in the simple case, the holding company board.

Mr. Campbell: Thank you.

Mrs. Brushett (Cumberland - Colchester): On these four points, Mr. Le Pan, are the institutions able to comply with relative ease, or have we reached that point yet?

Mr. Le Pan: A number of institutions have been worried about this provision. We have had some reaction from three or four specific institutions about this provision, worried fundamentally about the cost of it, because it will require them to have an additional number of directors, potentially, and deal with the care and feeding of those directors, so to speak.

We've listened to those representations and I'm sure when the committee hears witnesses this will be one of the points that will come up from a number of these groups. The government has decided that the need to have a degree of independence, particularly when you come to a problem institution, is an important thing to do. We were not convinced it was impossible, nor do we believe that the representations we've received would say this is impossible. Yes, there will be costs; I totally agree with that. There will be costs. I don't particularly think those costs are prohibitive, but that will be something you can -

Mrs. Brushett: And are they able to comply with the other three?

Mr. Le Pan: Well, let's do the other three on this page one by one; that's probably the best way to answer your question.

Mrs. Brushett: Okay.

Mr. Le Pan: The second one is a new provision and there is no existing provision that is similar to that in the financial institutions statutes at the moment.

As I said the last time, there were three options set out in the white paper. This one I would style as the least intrusive, certainly in terms of the involvement of the superintendent, because it will only apply to so-called troubled or problem financial institutions. Most institutions we have talked to do not expect they will become troubled. That's not in their immediate plan. Most have accepted the principle that if they are in a problem, yes, the superintendent ought to have all kinds of involvement in their institution because they are in a regulated industry, taking depositors' money and so forth in public trust.

I think at the level of concept there is not a lot of opposition to this measure, at least not that I'm aware of. I may say, however, there is a considerable degree of interest in exactly what will be the definition of a problem institution and therefore when this ability of the superintendent to influence the board of directors will click in.

Mrs. Brushett: Absolutely.

Mr. Le Pan: I expect there will be people who would like to perhaps alter that definition. There is no obvious one right answer. We've made a stab at it, as you will see. I'm open to suggestions in that regard.

Regarding the third one, the independent actuary under the statutes has a particular role prescribed by statute that involves some degree of independence from the institution. There are circumstances in which the independent actuary for a life insurance company is required, for example, to produce reports for the superintendent, perform a quasi-whistle-blowing kind of function to some extent. The independent actuary is a very important check and balance within the system, not only for legislative reasons but also because of provisions of a practice set out by the Canadian Institute of Actuaries and so forth.

We believe, and I think it's fundamentally accepted by the industry, that there's a potential fundamental conflict here if the independent actuary is also an officer of the company, particularly if the independent actuary is the chief financial officer, which occurs in some cases.

The industry associations who submitted briefs from the CLHIA and the Insurance Bureau of Canada have agreed in principle. There has been some discussion about whether we were prepared to grandfather existing positions where people hold these two roles. Our tendency at the moment would be not to do that but to allow some transition for companies to rearrange their corporate officers. I'm of the view that, given adequate transition, it should be possible for companies to meet this kind of provision.

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The Chair: Who selects and pays the chief actuary?

Mr. Le Pan: He is paid by the company. He's an officer of the company, so he's selected in the same way as any other officer.

The Chair: But he will no longer be able to be an officer.

Mr. Le Pan: No, he will be an officer, but he cannot be in one of the other officer positions. So he can't be president, CFO.... For the slide purposes, we've shortened it.

The Chair: How does that create any sense of independence that would not be there? I can understand how accountants are selected by the shareholders, theoretically, in order to give them independent advice. If the position of chief actuary is selected by the board and that is in fact an office, then how do you get that degree of independence? Is it not an illusory degree of independence?

Mr. Le Pan: I hesitate to agree to the word ``illusory''. I think the independence comes from a different kind of source, if you will, than does the source you referred to in the case of, say, the auditors and so forth. Here the statute, for example, provides specific duties of this person and a relationship between this person and the superintendent's office, for example. So the independence in part is coming through those specified functions that the actuary has to perform.

The other thing here is that to some extent this is the idea of creating a bit of a check and balance. What happens on the actuarial side? What assumptions are used in the actuarial provisions on the liability side of an insurance company's balance sheet are pretty important in terms of what its capital actually is shown to be. Insurance companies are different from deposit takers in that the whole liability side has a lot more possible variation in it than would be the case of a deposit-taking institution, where the liability side is basically deposits.

The Chair: Just as the accounting profession has GAAP, do actuaries have the same type of standards or codes of conduct that are imposed upon them by their own body in a self-regulatory way?

Mr. Le Pan: There are practice guidelines - I believe that is what they are called - that are set up by the Canadian Institute of Actuaries. So in part this is a check and balance, because, to the extent that the actuary is a person different from the chief financial officer, there is at least some potential for there to be some check within the institution about what's happening.

We've already talked about the last one. In terms of your question, again here there will be costs to institutions to alter names. We would intend some degree of transition here.

Perhaps I could go to the next page and we could talk a bit more about deposit insurance. We've talked about some of this. My next page is on changes to the deposit insurance system.

Mr. Discepola (Vaudreuil): When you take a look at the request by business today in asking governments to get out of their hair, out of their face, what are we trying to achieve when we go down to the level of dictating the content, the composition, of even the board of directors of these organizations? I realize that we're trying to make sure that we have transparency, that there's independent reporting, etc., but are we not going too far? What's the motivation behind actually going to that great detail?

Mr. Le Pan: That's a very good fundamental question.

Let's take a bank or a deposit-taking institution, for example. Essentially, the structure that we have set up is that these institutions can accept the public's money with the backing of the deposit insurance system and can operate at a very high leverage ratio, one that would be, in terms of the ratio of debt if you will, the depositor's money, to capital, far outside what a normal commercial business in the manufacturing sector would operate at.

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We've also given these institutions on the deposit-taking side the charge of participating in and running, to some extent, the payment system, which is a pretty key function in the economy. In exchange for that, we've said there's going to be some regulation.

The issue you've raised is exactly how detailed that regulation needs to be. Historically, the view, and I think it's a valid view, has been that achieving and maintaining public confidence in these institutions, because of their key role in the economy and the payment system, for example, is very important. To that extent I think it's legitimate to go down and look at things such as what the board of directors looks like. We will not prescribe who's on it individually. You still have to leave these institutions to run it. But I think the idea that there's going to be a fair degree of regulation at a fairly detailed level is a reasonable trade, given the importance of these institutions, the importance of public confidence.

I agree with you, the issue is always exactly where you draw that line. But I note in things such as the board of directors effectively what is happening here is the corporate community generally is catching up to some of the stuff that has been in the financial institution statutes for a time.

I think to some extent the public expects that there is going to be a reasonable degree of regulation of these institutions to which they've entrusted their savings and which could cause potentially significant problems in the economy if a large one were to fail. But having spent years going through all the discussions and consultations leading to the 1992 changes...there's no question one has to have some degree of reasonableness here, because ultimately these institutions have to be able to operate and have to be able to make some money. The most fundamental source, if you will, of safety and soundness, to some extent, is to have an environment where they can be profitable, because if they're not profitable...that's the fastest way to erode their capital that I know of.

That's why this is an art, not a science, as to where that line is, and why I'm sure this committee will spend some time as we look at this package, and particularly as you go through the 1997 exercise, on where that balance ought to be.

I don't have any better answer than that.

We had talked about the co-insurance and the risk-based premiums. I'd like to come back to Mr. Grubel's issue when we talk about the PPB and CompCorp -

The Chair: We're not going to see that in the legislation, I understand.

Mr. Le Pan: No, you will not.

Let me spend two minutes on this. Then I'll come back to where we are on CompCorp.

The third item we did not pick up last time was changes to CDIC's borrowing arrangements. The government has proposed that CDIC be allowed to borrow in private markets. Until now CDIC has borrowed only from the Consolidated Revenue Fund. The implementing legislation will allow CDIC to borrow on public markets. It would be the anticipation that CDIC for its new borrowings, for new problems that arise, would borrow in public markets instead of from the Consolidated Revenue Fund. The Consolidated Revenue Fund would be there to deal with a short-term need for a major problem.

Mr. Campbell: We discussed at our last session the basis for assessing premiums on institutions for their participation in the system. What you're saying is that in fact those premiums do not cover the needs of CDIC, and to the extent that they have not covered them there's been a need to borrow from the Consolidated Revenue Fund, but now CDIC will be able to borrow in its own right. Do you have some sense of what the history has been in the degree to which CDIC has had to rely on the Consolidated Revenue Fund and what percentage is covered by premiums, as opposed to what percentage is covered? I'm just trying to get a sense of how big the borrowing requirement could be.

The second question is ultimately the Government of Canada remains on the hook for those borrowings in any event, does it not?

Mr. Le Pan: Let me answer the second question first. CDIC is an agent crown corporation and therefore these are borrowings of an agent. If CDIC were to default in some sense or whatever...yes, they are.

Mr. Campbell: So we're not getting it off the balance sheet through this exercise, if I could use that phrase.

Mr. Le Pan: It depends on how you define the balance sheet. The normal public accounts...to the extent that CDIC borrows from the Consolidated Revenue Fund, the government in its own account, on its own balance sheet, has to go out and borrow in public markets. So for every billion dollars that CDIC borrows, that flows through the public accounts and shows up in debt of the Government of Canada. This will not show up in debt of the Government of Canada, just like -

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Mr. Campbell: It is guaranteed.

Mr. Le Pan: Right, it is guaranteed, but the amount of guaranteed debt is not included in the public accounts. There are notes and footnotes and so forth as to what is guaranteed.

Mr. Campbell: The first question, if you have that information available, just getting some sense of what the....

Mr. Le Pan: Yes, we talked last week. I am not sure we have a CDIC annual report here. We talked last week about the total amount of borrowing that it's fluctuated around. My recollection is it's a little less than $2 billion now, maybe $1.7 billion.

Mr. Campbell: This is an aggregate -

Mr. Le Pan: Yes, that is borrowings outstanding at this point. The premium level annually is about $500 million coming in to CDIC, and what you tend to then see is that CDIC's financings are sort of like this. When they have a particular situation, particular problem institution that they paid off, an institution that's wound up, they borrow a large amount of money at that point and then they slowly start to work it down.

Historically, there have been periods in which CDIC had a surplus - back in the 1970s or early 1980s, I am told - because there had not at that point been significant failures, before the failures of the two western banks.

Mr. Campbell: Thank you.

Mr. Le Pan: I'd be more than happy to provide a short extract to the committee out of the CDIC annual report.

Mr. Campbell: That's sufficient. I can look at the report. Thank you very much.

Mr. Le Pan: It is also intended that, with CDIC borrowing in public markets, the government would charge CDIC a guarantee fee, which it has not done in the past. CDIC now borrows at the government's cost of funds plus one-eighth of a per cent - 12.5 basis points - and the intention here would be to charge CDIC, on either borrowings in the market or on any borrowings that it does from the Consolidated Revenue Fund, a guarantee fee.

Mr. Campbell: So borrowings from the Consolidated Revenue Fund will not be precluded, but it's simply that CDIC has been given the power to borrow directly.

Mr. Le Pan: My anticipation is that borrowings from the Consolidated Revenue Fund will be for very short-term emergencies. For example, suppose one is closing Central Guaranty Trust Company, which is a good historical example. CDIC is paying off depositors up to the $60,000 limits over the subsequent four or eight weeks. CDIC has to borrow $4 billion, a large amount of money. There is no way that we're going to put CDIC out in the public market. First, we're not going to borrow that kind of money before we close the institution, and, second, I wouldn't want CDIC to have to borrow that short-term amount of public money, because they'd get a terrible price.

Mr. Campbell: But you do not mention -

Mr. Le Pan: They'll borrow from us probably and then they'll pay the CRF back.

Mr. Campbell: But us being Canada, will we not be charging a stand-by fee to stand ready to do that?

Mr. Le Pan: We are basically going to charge them a credit enhancement fee. That's an interesting question, but step one.

Mr. Campbell: For next year. Thank you.

Mr. Le Pan: I don't think we need to talk about the last one. I think we already referred to it briefly. I don't think there's anything else.

On the next page, we'll just spend a few moments on technical legislative changes, repealing the Investment Companies Act.

There is now an act that goes back a long, long way called the Investment Companies Act. It purports to apply to certain holding companies - it dates from the 1970s and days when there were a lot of consumer finance companies and all that sort of thing. It prescribes some disclosure provisions and so forth. It only applies to certain of those entities. It does not amount to full regulation of these holding companies, and there were provisions for exemptions from that statute by discretion and there have been multiple exemptions over the years. We've concluded that provincial securities legislation addresses the disclosure in investor protection issues and so we are proposing to repeal this statute.

The Chair: Does that mean there'll be no supervisory role for OSFI for investment companies, as there was in the past?

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Mr. Le Pan: The statutes in the 1992 revisions give OSFI a right of access to information for all companies including unregulated companies that control financial institutions. That will remain because the financial information of a controlling company may be quite relevant to knowing how much support there is for the regulated institution. There would be no direct regulation of these holding companies by OSFI.

The Chair: This is distinct from what is called an investment company for purposes of the Income Tax Act.

Mr. Le Pan: Correct. It's a different definition.

The Chair: Thank you.

Mr. Le Pan: OSFI did not have much of a role in the Investment Companies Act in terms of direct regulation or supervision. It was fundamentally disclosure provisions related to investor protection, which is the essence of what this -

The Chair: Can you give me an example of an investment company now that will no longer be subject to -

Mr. Le Pan: I believe Trilon was an investment company.

The Chair: Which is now a holding company -

Mr. Le Pan: It's fundamentally a financial holding company.

The Chair: Okay.

Mr. Le Pan: Mr. Chairman, let's turn to the page on the restructuring of insurance companies.

Mr. Campbell: Are you going to deal with technical legislative changes? I have a number of questions on the Winding-up Act. Will you be coming back to that?

Mr. Le Pan: Yes. We are at a fairly high level now and I want to deal with the Policyholder Protection Board and CompCorp because I think there is significant interest among the committee members about that. Then I can come back on technical changes or -

Mr. Campbell: I do have questions, Mr. Chairman, about the Winding-up Act.

Mr. Le Pan: I assume this will be one of a series of sessions and we'll go into greater and greater detail, particularly as we get into it.

Mr. Campbell: Thank you.

The Chair: On a point of order, on behalf of all of us, I would like to thank Ms Stewart andMr. Campbell for the coffee. I think it is the type of thing that other members should feel free to do at any time they wish. If any of our invited guests here who've benefited from our erudite questioning wish to make a contribution to coffee, you're more than welcome to do so. It will not be considered a breach of any ethics that are imposed upon us by the commissioner.

Mr. Discepola: I propose, Mr. Chair, that the last two people who attend the committee pay for the coffee. It would be an incentive to get here early.

The Chair: Do we have a seconder for that? All in favour? Agreed.

Mr. Le Pan: Mr. Chairman, do you want to start on the Winding-up Act now?

On the restructuring of insurance companies, the changes to the Winding-up Act provide more flexibility and more scope for those charged with winding up the court, the liquidators, to enhance the value of the estate of a company and therefore improve the recovery on assets to benefit policyholders.

Some of these provisions in the Winding-up Act date from many years ago and practice has evolved. I draw the committee's attention to two types of changes. They are indicated by the last two bullets on this page.

One provision will make it permissible for a court to approve transfers and reinsurance of the policies that are ``fair and equitable''. I have highlighted the words ``fair and equitable'' because essentially this provides the court with more flexibility to approve different transfers of policies to different carriers and to new carriers without a strict requirement that everybody be treated absolutely equally. It must be fair and equitable to the people being transferred and fair and equitable to the remaining policyholders.

There is a good example of this, Mr. Chairman. In the case of a major life insurance company it is often necessary to move the group business quickly because otherwise it starts to erode as people leave and so forth. It is worth more as a block if you can move it quickly than it is if you have to wait a long period of time.

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It's therefore fair and equitable, including to the remaining policyholders in the estate, to move that block quickly, perhaps at close to full value, because you'll get value back, without being the policyholder, for a certain amount. Somebody is prepared to pay a lot of money to get a hand on that block fast and in total. And yet you may not know at that point what an appropriate sort of realization percentage for the whole estate is - what the assets are worth. A court clearly ought to be able to allow that, with clear legislative basis, to allow some more flexible ``deals'', provided the court is satisfied that there is a net benefit to the estate overall, that the whole realization for the estate will go up.

The last bullet: it is proposed to provide the court with approval to alter policies where there are no material adverse impact on policyholders. Again, you may have policies that were written many years ago that are not ``modern'' policies and where some few changes in the ways the policy works would allow it to be combined with another block and sold as a block. This would be more beneficial to a buyer because a buyer could use their own computer systems on it, and those sorts of things.

Let me go on to policyholder protection, on the next page. The white paper proposed a government plan, meaning it proposed the creation of a non-agent crown corporation. The crown corporation would not be the agent of Her Majesty for borrowing purposes. It would have had several other attributes. It would have had a legislative basis, obviously. It would also have had a board of directors that was independent from industry, and a particular proposal of how that board would work was included in the white paper. It would have had the power to assess the members, just as CDIC does.

The government has more recently indicated that it is prepared to have CompCorp improve itself instead, particularly if there was significant progress in four areas, such that there would be significant enhancement in policyholder protection.

The first one - these are set out in no particular order - is the ability to do going-concern solutions or so-called ``soft landings''. What does that mean? Currently under its incorporating documents CompCorp is permitted to get involved in a problem situation once a company has been declared insolvent or is under the control of a regulator. When we talk about going concerns or soft-landing solutions, we mean the possibility for CompCorp participating, just as CDIC has done, to financially assist sales of blocks of business, whole companies, where that makes sense from a financial perspective.

The Chair: That happens only when the company is deemed insolvent?

Mr. Le Pan: CompCorp basically can only get involved when a company is insolvent, and at that point what it's doing is arranging transfers of policies.

The Chair: What does insolvent mean, that it's not meeting its debts as they come due, or that it doesn't have the capability to pay off all debts?

Mr. Le Pan: There are various definitions. It could be either of those two. It could just be that its....

The Chair: Is it as the OSFI determines, then?

Mr. Le Pan: Ultimately it's determined by a winding-up court. There are various criteria in the statutes, some of which we're altering; we looked at them last time a little bit. Fundamentally when a company is insolvent there is a winding-up order. We're talking about a company that is dead and we're talking about how you pick up the pieces. A soft-landing solution or a going-concern solution is, for example, the possibility of transferring the whole thing to a new bunch of players, who may then turn around and cut the costs, rationalize the business with some of the businesses they're already doing, and so forth. But you have not gone through a liquidation or winding-up process to get there.

The Chair: So CompCorp will come in only when there is an insolvency.

Mr. Le Pan: That has been the case to date.

The Chair: That is the proposal? It's been agreed to with the industry to date as well?

Mr. Le Pan: No. The government has wanted CompCorp to be able to come in before insolvency.

The Chair: And has the industry agreed to that?

Mr. Le Pan: The industry considered a proposal at their annual general meeting to allow CompCorp the power to come in before insolvencies. It has not been formally voted on. My anticipation is that they're going to consider it formally next week.

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Mr. Discepola: What do you mean by ``going concern''?

Mr. Le Pan: It's just a different term for the same thing. A going concern tends to suggest that you take the whole operation and just transfer it to somebody else.

Mr. Discepola: And wind it down?

Mr. Le Pan: No, not in a pure going-concern solution. Look at Toronto Dominion Bank's purchase of Central Guaranty Trust. They purchased fundamentally the whole operation. They didn't wind it down. The customers got TD accounts. The names changed and so forth. Yes, there was some rationalization of the business, but it's not that it got wound down. Basically it got taken over.

A soft-landing solution might be one in which, yes, over time, a new owner takes some of the blocks of business and moves them out to other people because that new owner doesn't want that part of the business. There might be relatively little new business written, for example, in certain areas. So you have an existing block of business that stays intact, but slowly, as people move or die or their group plans come to an end, it might wind down.

That's different from waking up one morning and saying to everybody so-and-so company has been placed in liquidation; you will get a letter from the receiver and we will tell you how many cents you get on the dollar.

Mr. Discepola: A subtle difference.

Mr. Le Pan: Quite a difference.

We do not believe CompCorp ought to do this in all cases, just as CDIC ought not to, but in some cases it makes good business sense. A purchaser is more willing to pay for a solid entity that hasn't gone through liquidation intact. You avoid all the costs of liquidation, which can be quite considerable, and you avoid selling assets at what may be low values.

Sometimes it makes sense to do this. It does not always make sense to facilitate one of these soft-landing or going-concern solutions.

Mrs. Brushett: As far as CompCorp is concerned, what's the relationship to the Government of Canada? Have you, as a department, ever considered that they may act as CDIC does?

Mr. Le Pan: CompCorp is funded by assessments from CompCorp on the industry.

Mrs. Brushett: Like CDIC, in essence?

Mr. Le Pan: Yes, but the assessments are set by that organization as opposed to under the authority of Parliament. At CDIC they're set under the authority of Parliament and the CDIC Act specifies the assessment levels and the maximums, but they're set by the board under CDIC.

Your second question was on what?

Mrs. Brushett: The relationship to the Government of Canada.

Mr. Le Pan: CompCorp is a private sector entity, so it is not created by statute. It has a relationship with the federal regulator and certain provincial regulators in the form of agreements as to how they will relate to each other, but CompCorp is more separate from government than is CDIC, because the board of directors of CompCorp is appointed by the industry and so forth. That would be different from what is the case with CDIC.

Mrs. Brushett: Is it ever considered, then, that government take CompCorp over by statute so that it does act as CDIC does, in essence?

Mr. Le Pan: That was the proposal in the white paper. The proposal in the white paper was a proposal to move CompCorp closer to CDIC. It would have been a crown corporation. It would have had a board of directors appointed by government and so forth. The one notable exception is the government was not prepared to advance its guarantee of CompCorp's borrowings. I'll come back to that in a moment.

Mrs. Stewart (Brant): I have a point here. I'm just a little confused as to the impact of the decision of the insurance industry to accept CompCorp's early intervention in activities. If they choose not to accept that strategy, is that deal-breaking?

Mr. Le Pan: Yes.

Mrs. Stewart: So your expectation is that....

Mr. Le Pan: The government's view, after a review of CompCorp and the whole state of policyholder protection, was it was very desirable for there to be an organization that could engineer these going-concern solutions, because that was to the policyholders' benefit in certain cases. If that's not there, and some of these other things -

Mrs. Stewart: I'm just interested that you say we've changed our point of view already, and yet the industry has not accepted the early intervention.

Mr. Le Pan: Did I change my point of view? We're in an evolving situation.

Mrs. Stewart: Oh, okay.

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Mr. Le Pan: I mentioned to the committee last week that we did not intend to table legislation on the Policyholder Protection Board. It is quite possible that we have drafted legislation on the Policyholder Protection Board. If we ultimately had to go ahead with it, we would need to do some more consultation, including with provinces.

Mrs. Stewart: Thank you.

Mr. Le Pan: And we may need to do that in preparation, should some of these things not happen.

Mrs. Stewart: So that is a deal-breaking issue right there - early intervention.

Mr. Le Pan: Yes.

The Chair: Do you anticipate certain circumstances under which OSFI can dictate to CompCorp?

Mr. Le Pan: No, just like OSFI can't dictate to CDIC. The CDIC board is required to consider whether it's in the interests of the corporation, including whether it is a least-cost solution, if CDIC is to participate in these kinds of going-concern solutions and put up guarantees and so forth.

Second, we thought there ought to be an independent board of directors. This is linked to two things. There ought to be better information-sharing, but it's a little hard to share information from OSFI with CompCorp if in fact you have on the board some of the competitors of the company you're talking about. Also, it's a little hard to think of any organization putting together a going-concern solution to aid one of their members who's sitting around the table having to vote on it. I just don't think that dynamic works.

CompCorp has already made provision for an independent board of directors, and they elected one at their annual general meeting two weeks ago.

The third and fourth points concern financing. From experience, we believe the Policyholder Protection Board would have the ability to borrow in public markets because it would be a crown corporation with a legislated right to, if you will, tax the industry or assess the industry. It would be possible for the PPB to borrow to support not necessarily all transactions, but certain transactions up to certain sizes.

We were looking for CompCorp to have that enhanced access to financing if it was to be a private sector solution here.

CompCorp finances itself, in addition to assessments, by borrowing from its members. There are so-called loan assessments. It's like mandatory borrowing, if you will. CompCorp has recently decided to triple the amount of loans it can get from its member insurance companies.

The Chair: How is CompCorp constituted legally? Is it a contract?

Mr. Le Pan: It's a non-profit corporation, in my recollection.

The Chair: Is it the by-laws or the charter that dictate the obligations of members?

Mr. Le Pan: It's a combination of the letters patent for the corporation, its by-laws and its memorandum of operations.

The Chair: Which could be changed by what, a majority vote?

Mr. Le Pan: Most of these can be changed by two-thirds majority, but one of the aspects of these participation agreements between CompCorp and regulators, including OSFI, is that regulators get a right of non-disapproval over the by-law changes.

The Chair: So that's your hook.

Mr. Le Pan: Once they've made the change in the first place.

The Chair: The right of non-disapproval? What is that? I'm not too smart.

Mr. Le Pan: It's a fascinating little difference between approval and non-disapproval. I think the way it works is they send it in and if nobody says no within, let's say, thirty days, then it's okay. It's that kind of thing.

The Chair: Okay. This is really getting complicated.

Mr. Le Pan: Yes.

The last point is the PPB would have had a greater assessment capability than CompCorp now does. CompCorp assesses its members up to a maximum of 0.5% of covered premiums a year. That's about $100 million annually. By covered premiums I mean the premiums on covered products of selected policies - life, health and so forth.

The Policyholder Protection Board would have raised that maximum to give the Policyholder Protection Board more access to resources. We were looking for some further enhancement of CompCorp's assessment capacity as part of this. Again, that is something CompCorp is still considering, but CompCorp has not finally determined what it's going to do in this territory. They do have proposals in front of the members to do this.

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That's where we are on the CompCorp situation. By the way, on this last issue, they have told me they intend to consider it formally at their meeting next week.

The Chair: Do you anticipate agreement?

Mr. Le Pan: I've learned to be careful about anticipation, but we're pretty close.

The Chair: I think it's a positive development that the industry came forward and met your concerns and that we will have an institution that will have more of a self-regulatory aspect to it. I commend both sides on that issue for finding a very creative and positive solution.

Mr. Le Pan: The government has basically said it doesn't have to control this institution. That's the big give on the government's part, because that's the fundamental difference between this and a crown corporation - some element of control.

The reality is, therefore, that it will be up to CompCorp to sort out the problems, to pay off the policyholders and to meet the obligation of protection that they've promised policyholders.

Mrs. Stewart: The requirements we are placing on CompCorp are the same as those we demand of the CDIC?

Mr. Le Pan: They're different. Perhaps it would be useful to go into a few of the main differences in answer to your question.

First I'd like to say the situation for deposit-taking institutions is different from that of insurance companies in one fundamental way. With deposit-taking institutions, you do have this possibility for runs on the bank, so to speak, with short-term deposits. This does not exist to anywhere the same degree as it does in the insurance industry.

The deposit-taking institutions are hooked in to the payment system, as we talked about last time. The need for public confidence to avoid catastrophic runs is the difference between the deposit-taking institutions and the insurance industry.

That's what led the government to the view that it was justifiable to have CDIC as a crown entity with a guarantee backing its borrowings, for example, which the government was not prepared to make available to CompCorp or to the PPB.

Mrs. Stewart: That would also be the reason we may not accept that same kind of CompCorp paradigm for deposit-taking institutions.

Mr. Le Pan: Exactly. That's a real question.

The other aspect of the difference is if you think about the insurance industry, there is a whole spectrum of products. At one end you have a chequing account at a bank, which is not very much of a savings component. It's basically a transaction account. Then you have five-year term deposits at a bank, which are very close to five-year guaranteed investment certificates or five-year annuities and have some savings element to them. Those are offered by both the deposit-taking system and the insurance companies, as we talked about last time.

Then you get into part of the domain of the insurance companies: longer-term savings products that have no analogy in the banking system. They start to have an analogy in the public pensions system, which is really not covered by any of these systems. Some of the elements about whether to run this as a public plan or a private plan are intimately linked with the competitive position of the various sectors, not only vis-à-vis the banks and the insurers but also vis-à-vis other things that are part of this whole system.

Mrs. Stewart: That's right, yes. That's an interesting addition.

Mr. Le Pan: With one of the considerations the government ministers thought about in terms of offering a guarantee to CompCorp, you would be offering a government guarantee to some very long-term savings products that arguably don't compete with the banking industry, and may in fact compete with industries that aren't even in this regulatory system. Is that an appropriate thing to be doing?

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In terms of other differences between CompCorp and CDIC, the governance structure will be slightly different, because the government appoints members to the CDIC board, though that board contains private sector members. It contains the chairman of the Deposit Insurance Corporation, who is of course the chair, but also the Governor of the Bank of Canada, the Deputy Minister of Finance, and the Superintendent of Financial Institutions are on the board of CDIC. So the governance structures are a bit different, but they are both independent from industry.

The assessment process will be somewhat different. Even if there are to be higher assessments as per the fourth bullet, CompCorp has indicated that if it was to have special assessment powers to deal with problem institutions, a special additional assessment above the 0.5%, then it would want to have the ability for those extra assessments to be vetted, approved by industry, perhaps on a very short turnaround basis, before they were implemented. So the capability of the board to levy assessments may be somewhat different between the two. The 0.5% is a similar thing.

When you compare the assessment levels on competing products, there are some potential differences. If you say, ``Some of these products compete head to head in the marketplace; are the assessment levels similar?'', some are and some aren't. It depends on the term of the product, because CompCorp's assessments work differently from CDIC's. CompCorp's are on the annual premium -

Mrs. Stewart: And they still have the flexibility to determine what they want to do on the CompCorp side -

Mr. Le Pan: Yes.

Mrs. Stewart: - to deal with the competitive aspect of that.

Mr. Le Pan: Yes. CDIC has flexibility up to the amount set out in the statute.

Mrs. Stewart: And the flexibility will still be part of that?

Mr. Le Pan: Yes. It is still going to be partly there.

So they are similar organizations, but I shall highlight for a moment the one area in which there are significant differences. CDIC has the authority under its statute, for example, to issue standards of sound business and financial practice, and it has done so. In the insurance industry those will be the white paper proposals, that those will be issued by the superintendent, not by CompCorp. CompCorp has a significant input into those and there is a joint task force ongoing between CompCorp and the regulator to develop those.

Under its statute CDIC has the capacity to terminate the insurance of a particular member. When CompCorp enters into agreements with regulators, it gives up that right. So CompCorp has less, if you will, of a direct supervisory role, of a regulatory role perhaps.

Those are relatively minor differences. They are important, but they're relatively minor compared to the broad cut of things we're talking about here.

The Chair: Have you finished your presentation?

Mr. Le Pan: Yes.

The Chair: Mr. Campbell.

Mr. Campbell: Returning to the Winding-up Act, is it correct that we're not engaged in a comprehensive review of that act, as we did with the Bankruptcy Act?

Mr. Le Pan: Correct.

Mr. Campbell: Not to be critical - this is not meant as criticism - but we're going to do a piecemeal revision of that statute through these initiatives.

Mr. Le Pan: Yes. The way I tend to look at it is that there are some aspects of the Winding-up Act that are directly related to primarily federally incorporated financial institutions, that apply directly to those.

As an aside, provincial institutions can be closed under the Winding-up Act at the option of the provincial supervisor or at the option of the provincial company itself, but this is used fundamentally for federal financial institutions.

Those provisions are unique to financial institutions, and it's fundamentally those provisions that we're altering.

There are other provisions of the Winding-up Act that would apply to financial institutions but would also have a direct analogy under, say, the Bankruptcy Act for other entities, non-financial institutions, and where they ought to be the same.

So we've traditionally operated on a sort of two-level basis. Suppose there is a change in the Bankruptcy Act that is something that affects non-financial entities but also ought to affect the financial institution: you ought to have a consequential change in the Winding-up Act at that point.

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But, for example, if we're dealing with environmental liability or something like that, I think that the Bankruptcy and Insolvency Act process ought to drive that kind of thing, and make a change to the Winding-up Act, if it's necessary to apply it to financial institutions, because it's not something that's inherent to financial regulation, if you will. What we have in this package is the stuff that's inherent to financial regulation.

So I don't at all rule out that the broader picture could also make some changes to the Winding-up Act to ensure that it's the same, because it ought to be the same as it would be for, say, industrial enterprises.

Mr. Campbell: That leads me to my second question. It's been pointed out to me that a number of the changes that are proposed, particularly a number of the definitions that are to be included as a result of the changes, are not consistent with similar provisions in the Bankruptcy and Insolvency Act.

Why is that so? You can give me examples, if you wish, but it would seem that tried and true, or tested, provisions in the Bankruptcy and Insolvency Act definitions should find their way into these revisions to the Winding-up Act.

Mr. Le Pan: I have two points. Generally, I would agree with you, with the exception that there's a fair amount of experience of winding up a regulated financial institution. We've built on that kind of experience in altering the winding-up provisions.

Second, if there are particular ones in which there is some concern, I'm happy to go into those in some detail.

Mr. Campbell: I've been provided with a list of several that people are puzzling over.

The Chair: Could we wait until it's tabled?

Mr. Campbell: Yes, I was going to say, Mr. Chairman, that I'm at a bit of a disadvantage, as are my colleagues. This has been pointed out to me by practitioners in the field who have had the benefit of seeing the provisions of the Winding-up Act. They have seen sections of it, or an earlier draft, as I think you pointed out, whereas we have seen none. I'd like to raise it at the appropriate time. I don't know when that will be.

The Chair: I wanted to spare members the difficult task of reading through that Winding-up Act.

Mr. Campbell: How will I then get my question addressed, Mr. Chair?

The Chair: I'm going to suggest that we wait until we see the legislation. Then, when we're going through it clause by clause, perhaps we could look at the precise wording of it.

Mr. Campbell: That would be fine. I have about a half-dozen examples of points at which the two acts digress. People have said to me that they're puzzled about those, which have caused me to be puzzled about the differences.

The Chair: I'm sure the minister probably addressed those concerns and changed it before tabling the amendments today.

Mr. Campbell: Undoubtedly.

Mr. St. Denis (Algoma): Thank you for your helpful presentation. Maybe I'm going back a little bit to some earlier topics, but I think we have time to do that.

As for the notion of early intervention, the way it is, the way it will be, and the notion of quantifying problem companies now and in the future, do you see that agreement is possible with the industry in finding ways to quantify that so they meet the objectives, or will it always be qualitative? I'd like to understand better, I guess, how you do it now, and how you foresee that this might be possible in the future if we are to improve security in the system and recognize the interests of the private sector as well?

Mr. Le Pan: Let me start a little bit with how it is now without getting into all the details of how the office of the superintendent operates.

Fundamentally, the office looks at a number of indicators of the state of an institution, which are based on its annual exams and monitoring and so forth. It also looks at things like the capital level of the institution.

There are regulations and guidelines as to what constitute adequate capital. Some of those come from international agreements on the bank side. A bank has to have at least 8% of its assets weighted by their risks in capital. So its capital has to equal 8% of some computation of a total of their assets, but adjusted for their various risks.

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There is a similar set of computations for the trust industry and overall maximum leverage ratios. For example, a trust company might expect normally not to operate at a level of assets more than 20 times its capital. Some trust companies will have slightly different leverages based on their diversification or their lack of diversification.

Look at capital. Look at asset quality. Is this an asset book that's got a whole bunch of non-performing loans in it, or not. Is it diversified? Management expertise is a factor that gets into this.

Again, it's judgmental, but look at earnings. Does an institution have a strong earnings base, or not?

What about liquidity matters? Some institutions will have much greater liquid assets that they can use to withstand a temporary problem compared to other institutions.

So the superintendent looks at all of those kinds of things. Obviously, some of those are very quantitative. In a couple of cases, there are sort of numerical targets, as I've indicated in the capital level.

We looked very strongly at the United States system, which was put in about four or five years ago, I guess. The United States had the big failures and costs to taxpayers of the savings and loans situation. That wasn't just a cost to the industry, but it was actually a cost to taxpayers as well. The United States put in a system that has quite a lot of explicit numerical triggers in it that cause action by the supervisory authorities. Often those triggers are related to capital levels of hitting certain numbers.

We basically concluded that, while that system was understandably useful in the U.S. context, it had a lot less usefulness here. Just to put some perspective on it, the U.S. has some twelve thousand or thirteen thousand deposit-taking institutions. Here, if you include all the foreign-bank subsidiaries and all the trust companies, we're maybe up to something over a hundred, but it's not in the thousands. We concluded that a system with a fair amount of discretion was still appropriate rather than having lock step, forcing actions to occur from particular figures.

Mr. Fontana (London East): Because they are so few, you could monitor them more readily.

Mr. Le Pan: They are so few you could monitor them. Inherently, in a system with specific numerical triggers, you want to set the trigger level such that you have a very low chance of error. The result is that you're going to take cases that probably you ought not to get into. You're going to force them to take action that may not be appropriate.

So if you put up triggers that are set high enough to cover the greatest number of problem cases, then you're going to have to give yourself discretion to depart from them anyway. Otherwise, you won't have a sufficiently competitive environment for industry. Ultimately, we thought the discretion was an appropriate thing to maintain.

Mr. St. Denis: What about the future then? Will any of this change, or will it still be the same notional type of oversight?

Mr. Le Pan: There is some enhancement of the quantitative aspect of this. For example, we talked last week about the risk-based premiums. If you're going to levy premiums based on risk, you can't just do that because somebody at the Canada Deposit Insurance Corporation thinks that this number is the right number.

So CDIC is in the process of developing a kind of grid system that will have some criteria and numbers in it. It will have to say that if you're in these kinds of ranges, then this is the kind of additional premium related to risk you're going to have to pay.

So there is some degree in this new proposal of movement toward more quantitative guideposts or numbers that have consequences. But I do not believe we will get into a situation, nor is it proposed, in which fundamental decisions about when you close that institution will be driven by a numerical formula.

Mr. Fewchuk (Selkirk - Red River): Here we go again. We're in favour of the banks again, and we're not worried about the taxpayer. It's always for the banks. That's all we hear.

Mr. Le Pan: I beg your pardon?

Mr. Fewchuk: There's always protection for the banks.

Mr. Le Pan: No. It's protection for their depositors.

Mr. Fewchuk: It seems to always go in favour of the banks.

Mr. Le Pan: No, I'm in favour of protecting depositors, ultimately. That's who we're protecting here.

Mr. Fewchuk: Okay. Thank you.

Mr. Le Pan: The issue is how to do it.

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The Chair: In the last two pages of your presentation, you go through four stages in the intervention process. At what stage does the public become aware of your intervention? You have the early warning, a risk, a very serious risk, then the insolvency. When does the public get wind of this?

Mr. Le Pan: I don't think there is a rule here as to when the public gets wind of this. My experience has been, over the past four or five years, that by the time you start to get into stage three, it becomes public knowledge that an institution is looking for capital or a new strategic partner. It starts to show up on the front pages of business sections. Sometimes it's more prominent than that.

The Chair: Have you found, in your experience, that there is probably a reason not to disclose the early warning difficulties?

Mr. Le Pan: Yes.

The Chair: That's because it allows the company to restructure without creating a panic in the public.

Mr. Le Pan: That's the key element here, Mr. Chairman.

The Chair: I understand that the bill you're bringing forward will contain nothing dealing with shareholder oppression.

Mr. Le Pan: Correct.

The Chair: Can I go into that very briefly? A lot of the corporate law statutes and provincial statutes contain provisions such that minority shareholders in financial institutions or other companies cannot be trod upon unduly by the majority. To be a shareholder, even a minority shareholder, is to have certain rights.

I know you've looked at this issue. It has come to my knowledge that in the case of one particular financial institution, the bickering between the majority and minority shareholders could be at the point at which it is causing certainly operating difficulties. Maybe because of that, this could ultimately lead to a lack of financial viability perhaps.

Do you have any advice for us as to what we should be looking at in terms of this particular issue? Or do we just go back to the old OSFI thing, such that it's either solvent or not?

Mr. Le Pan: The oppression issue was looked at in 1992 because, as you're aware,Mr. Chairman, normal corporate statutes provide a right to shareholders to go to court to try to convince that court that they've been oppressed in one form or another.

When we looked at the corporate law aspects of these statutes in 1992, our starting point was to try to include everything from the basic corporate law, except if there was a good argument about why it should not be included.

The argument of why it should not be included for financial institutions was one that basically said you could end up with a court granting a significant settlement coming out of an oppression case that would pull a large amount of capital out of a problem institution and cause problems for everybody else. That was inappropriate.

I'm aware of cases in which that concern would not really apply, at least as far as I understand the situations, but I could imagine situations in which that concern could apply.

I'm happy to go back and look at this. This might be a 1997 issue. It might be something we should look at earlier. I don't really know. I was convinced in 1992 that there was a reasonable case not to put it in, but, with recent experience, maybe it's something we ought to have a look at.

The Chair: If there is oppression, would the settlement moneys come out of the corporation itself or the majority shareholders?

Mr. Le Pan: Quite often, they'll come out of the corporation itself.

The Chair: Okay.

Mr. Le Pan: Then you could set up the situation in which a court says that x tens of millions of dollars should be paid, and the superintendent might be sitting there saying that in fact this will put the company below its required minimum capital. What do you do then? So you have to sort that kind of thing out.

That was the kind of imagined situation that led us to not put pressure on everybody in 1992.

The Chair: If you have an insurance company, say it's casualty or general, that is 51% owned by another insurance company or insurance agent, would it be appropriate for the 51% shareholder to take certain business away from the corporation itself?

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Mr. Le Pan: I'm not certain what you mean by take certain business away. There are self-dealing provisions in the statute.

The Chair: Are there self-dealing provisions in the statute coming forth that are not there already?

Mr. Le Pan: No.

The Chair: Could you just outline those to me very briefly. I've been told there's a situation where a majority shareholder is capable of taking very profitable insurance premiums into its own organization as opposed to leaving them in the major insurer.

Mr. Le Pan: Let me first say that I don't want to really be seen to be or imply that I'm commenting on the details of a particular situation. I don't think it would be appropriate nor do I totally know the situation.

The Chair: Nor do I.

Mr. Le Pan: But, generally, the self-dealing provisions govern relations, say, between an institution and its controlling shareholders, and they would ensure that either certain of those transactions just cannot occur, that certain transactions are banned, if you will, between an institution and its controlling shareholders or controlling owners, or that there are others that are permitted, which generally would have to occur at fair market value, so that if certain business that originated in a regulated financial institution is then being transferred somewhere else, it would have to occur at fair market value terms and conditions. There is a range of what would constitute fair market value.

But I might say also, Mr. Chairman, that the self-dealing provisions, to the extent that there are transactions that could occur in a corporate group in a variety of places, aren't going to say that they have to occur here, if in fact as a matter of law it's possible to have them occur in different places. The self-dealing rules are not going to say where you have to put them. There's a simple kind of example. If you end up having a corporate group, of which there are many, with several financial institutions in them, there may be different ownership percentages in those different institutions. Self-dealing rules are not going to say where you have to put the profitable transactions.

The Chair: But then if we allowed minority shareholders a greater right to blow the whistle or to have their say, maybe that would be a good safeguard as minority shareholders go about protecting their own interests, to make sure that the insurer itself is not unduly prejudiced by any of these dealings. Therefore, there's an argument for putting oppression rules into the statutes.

Mr. Le Pan: Yes, the argument for oppression is that the oppression remedy in corporate law is a check, if you will, on the majority. It's a market-based check. I don't think a priori you could argue that the oppression remedy is always wrong in a financial institution, but there are certain specific issues that arise in a financial institution that don't arise elsewhere. So I think those would have to be somehow taken into account.

The Chair: Would you urge us to look further at that possibility?

Mr. Le Pan: It's happened. I'm happy to look at it.

The Chair: Are there any further questions?

Did you want to have some closing words, Mr. Le Pan?

Mr. Le Pan: There was one thing I wanted to come back to, Mr. Chairman, which is the disclosure thing. I wanted to pick up the issue of when people know an issue. We had some talk about that in the committee last time I was here and we got into it a little again here.

The one thing I want to emphasize here is that vis-à-vis disclosure we have a system where there are various channels for disclosure. At the same time, we have deliberately taken a decision that we are not throwing open the books on the whole regulatory system and the judgments that a superintendent has to make and needs to make, and the communications that person makes vis-à-vis the board, the auditors and so forth of an institution.

Why have we not done that? Because, fundamentally, they are real issues of trust and confidence in these institutions. I agree it's a judgment call about when you start having disclosure, but we've come to the view - and it has been a long-standing view, and we looked at it again and we're still there - that it's important to maintain that confidence in the ability of the superintendent and the institution to deal with their problems in a way that solves their problems without having the risk of confidence problems that can become self-fulfilling. These are institutions that operate at very high leverage ratios.

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The possibility for self-fulfilling confidence problems is very high. I know the result may be therefore that from time to time, yes, people will have losses. There's a problem with that; I understand. But at the same time, we do not believe the answer is just to take the whole process and turn it into a totally transparent process. It's a question of degree.

The Chair: On behalf of all members, again, may I thank you for a very lucid tour into this very complex and difficult area. As we struggle along with this and become more and more familiar with it, I know we will have to have recourse to your knowledge and expertise again.

On behalf of all members, may I thank you for what has been a very excellent overview of the issues we face.

Mr. Le Pan: Thank you, Mr. Chairman. We'll look forward to coming back.

The Chair: Thank you very much.

Members, we have some other business we wanted to look into.

Mr. Campbell, you had a motion that you wanted to -

Mr. Campbell: Mr. Chairman, just before we turn to that motion, I wonder if I might inquire as to our plan with respect to the bill that we have been told this morning will be tabled today. Will we discuss it again this week or come back to it? Do you have any information?

The Chair: We have been informed that members of the industry do not want to appear before us until they have had a chance to look at the bill. For them to appear without it would have been just simply going over the white paper, which they've already looked at.

I would suggest that, if and when the industry gets hold of this bill, the clerk be asked to consult with them as to when they would be prepared to appear before us and how much lead time they need. This raises the question of our not sitting next week.

I have had preliminary discussions with Mr. Loubier, and we talked about the possibility of coming back some time in August, maybe sandwiching various caucus meetings that the parties might have. Of course, I think one of the major issues we face is how do we do this very complicated bill - or very interesting and important bill maybe - at the same time as we're trying to do the pre-budget consultations, which I think by consensus we felt started too late last year.

So that probably leaves us in the position where, if we were to deal with it effectively, we should perhaps meet some time in the summer. But I'm certainly open to suggestions from members.

[Translation]

Mr. Loubier, do you have a suggestion...

Mr. Loubier (Saint-Hyacinthe - Bagot): I think we said that it would be possible to start work at the beginning of August and to accelerate the process. I'm quite prepared to look at various dates. We're going to hold a two-day caucus sometime in August, and you probably will do the same.

The Chairman: Yes.

Mr. Loubier: We can then choose dates accordingly. I'm quite comfortable with that.

[English]

The Chair: The other possibility is to come back the first week in September after Labour Day, and start right then, and try to finish this off before we get into our pre-budget, but I guess -

Mrs. Brushett: Just try to work around caucus.

The Chair: If we did it in August, we might get an idea of how long it might require. If we're going to require more than a couple of weeks of hearings, then we would have the time to do it. By starting earlier, we do get that knowledge.

Mr. Discepola: Have you looked at the possibility of splitting it up between subcommittees?

The Chair: If anybody wants to, I'm open to suggestions. I would like to be on that subcommittee looking at financial institutions, if it's going to be a subcommittee of....

Mrs. Stewart: From my perspective, I see this as a good basis for our review of the 1997 requirements that I would see happening after the pre-budget consultations. I don't know if we have an indication of how many witnesses will want to come before us on that, on the bill, but if we could wrap that up in August, it would make sense.

The Chair: It would be maybe a dozen, so far.

Mrs. Stewart: So we could do that in the course of a week, really, or a few days around the caucus -

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Mr. Campbell: The first week of August might dovetail nicely with plans on this side of the table for the time we're going to spend together as a caucus.

Mr. Discepola: We're meeting on August 9 and 10.

Mr. St. Denis: That's a Wednesday, Thursday.

The Chair: Well, we could -

Mr. Campbell: Do it Monday, Tuesday, and Friday.

Mr. St. Denis: Mr. Chairman, Mrs. Stewart's point I think is a good argument for not doing it as a subcommittee; for doing it as a whole committee. I think that's a good point. This is good preparation for the 1997 review.

Mr. Fewchuk: I want to question Mr. Walker. What day are we travelling to Thompson with the Manitoba caucus?

Mr. Walker (Winnipeg North Centre): We haven't decided yet.

The Chair: Perhaps the clerk would be good enough to consult with Mr. Loubier andMr. Speaker to set the best time. With ten to twelve witnesses, it looks as if we might be able to do that in three days of extensive sitting. Then if there are wrap-up witnesses after that, who I'm sure will come out of the woodwork, we could maybe do that in early September or something.

Mr. Campbell: It's anticipated to hold these meetings in Ottawa and have people travel to us.

The Chair: I don't see the point in travelling for twelve witnesses.

Mr. Campbell: No, I was only thinking these witnesses would be based primarily in Toronto and perhaps Montreal, so it makes sense to be here, I would think.

The Chair: It makes sense to be here.

Thank you very much. Good point.

Mr. Campbell: Mr. Chairman, I believe this has been discussed only in the steering committee, not in the full committee. I'd like to ask for the support of the committee on a motion that has been handed out. I'll dispense with reading it. In essence, the effect of the motion would be to reconstitute the subcommittee on international financial institutions. There was such a subcommittee of the finance committee in the past, although it had rather limited activities in the past.

As I've discussed with representatives of the other parties, Canada is a participant - stakeholder, if you will - in each of the multilateral development banks and of course the International Monetary Fund. I've had the pleasure of being involved with the foreign affairs and international trade committee in the work of the document they did, which I commend to your reading, on revitalization of those so-called Bretton Woods institutions. In discussions with the chair of the foreign affairs and international trade committee, we came to the realization that, given Canada's involvement in these institutions, some parliamentary oversight would be appropriate.

Indeed, Canadian officers at those institutions welcome parliamentary oversight. If you attended last week's session with Mr. de LaRosière, who is now the president of the European Bank, he pointed out that we are the only parliament that has taken such an initiative of actually taking an interest and inviting officers to come and discuss the workings and operations of those institutions.

It seemed appropriate to create a subcommittee for that purpose and for that subcommittee to work with a subcommittee of foreign affairs and international trade, because there's not just a dollar issue here, there's a foreign affairs issue. So the foreign affairs and international trade committee will also be creating a subcommittee, and it is anticipated that from time to time we will meet jointly, hear witnesses from various institutions as they are in Ottawa and, as appropriate, report to Parliament.

One thing we have before us immediately is the follow-up to the G-7 summit and some of the initiatives we took as a country on revitalization of those institutions. The foreign affairs committee had a very extensive report and there will be need to follow up on some of those ideas and initiatives.

What I've tabled before you is a motion. An identical motion will be presented to the foreign affairs and international trade committee. It will create a subcommittee on IFIs, as they're called, composed of five members: three members from the Liberal Party, one member from the Bloc, one member from the Reform Party. But I don't think, Mr. Chairman, it has to be so formal. That will be the formal composition of the committee, but of course all members are welcome to participate as their interests exist or develop.

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The only change I would make to what's been presented before you is that I think I would eliminate the last paragraph, which talks about presenting a report to the committee by a certain date, because I see this subcommittee presenting reports to the full committee as required or as appropriate. So I would just delete that last provision and ask for a seconder.

The Chair: Do we have a seconder for this motion? Mr. Loubier?

Mr. Loubier: Pas de problème.

The Chair: Could I make another suggestion for a change to the third paragraph, second line? It reads ``five other members''. I'd delete the word ``other''. Agreed?

Some hon. members: Agreed.

The Chair: Well done. We commend you in these efforts.

There's another little order of business: pre-budget consultations. Are there any suggestions as to what you want to do and how to do it?

Last time we waited for the minister to place before us two papers, which was mid-August. We were terribly strapped for time considering that we had to have our proposals in before Christmas. Perhaps the consultations will not take as long this time; I'm not sure. I believe we heard over 600 witnesses and received over 150 reports. I want to get a sense from you as to how you would like to see this go.

There was some consideration of the fact that maybe we would like to put out specific questions. The minister gave us some last time as to whether we agreed with his economic assumptions specifically and what our alternatives were for getting there. Do we want to throw out some specifics? When do we want to start? What type of notice do we want to give to people? Do we want to travel? We should look at all of these things very quickly, because if we're going to do it before the House comes back we will have to have a meeting to approve what we're going to do.

Now, we could await our meeting in August on the financial institutions to have specific proposals, but I'd like to get some sense from you as to what you foresee us doing.

Mr. Walker.

Mr. Walker: Jim, I think you've raised all the essential questions. From my own point of view, I think we should begin more quickly than we did last year. A number of issues were raised in the last year in front of the committee, questions on tax expenditures and on the social transfer, for example. We could begin to hear witnesses or research if the minister is not quite ready, which is often the case because of the budgetary cycle.

I will indicate to the minister that we'd like to start. Perhaps, through you, there can be a request to the minister for any specific questions he would like to see addressed in the pre-budget consultations. Also, if Mr. Loubier has any questions the opposition wants to ask directly, we should hear from him over the summer about these questions and then we can make sure they're part of our mandate.

The Chair: C'est une bonne idée.

Mr. Walker: I would also like to hear from the opposition. I sense that on the government side we liked the format of the round tables as we travelled the country. We found a lot of interaction, and the members of the opposition found they had enough opportunity to pursue their interests in that framework. I'd like to see us continue that style, but I'd like to make sure everybody is on side for it.

The Chair: Did anybody object to the interference in our deliberations of the parliamentary secretary during the last hearings? Obviously not.

Mr. St. Denis.

Mr. St. Denis: I have two points, Mr. Chairman. On Mr. Walker's point about the round tables, I certainly think those are a really good idea. We tried a couple of times what might be called a hybrid, where we had two groups, maybe on opposite sides of an issue, that jointly appeared. So it wasn't a round table, but you had both views represented concurrently, allowing questioners to go either way and even providing for some degree of debate between the participants. I thought that was helpful, so if we could pursue that -

The Chair: The World Wrestling Federation format.

Mr. St. Denis: Yes, with the agreement of witnesses, of course. They'd have to know ahead of time that was the scenario and agree to it. I think it would be helpful.

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The other question to Mr. Walker is will we get, at some point during the fall, a statement or statements similar to what we received from the minister last fall? We may start, but at some point will we get a further charge?

Mr. Walker: I assume so, but to be blunt, the fall agenda is not clear to all of us as parliamentarians.

The Chair: It would be helpful if we had an update on the state of the economy as the minister sees it.

Mr. St. Denis: We'll keep Yvon out in B.C. all fall.

Mr. Campbell: I have a couple of problems, Mr. Chairman. First, I'd like to echo what the parliamentary secretary said with respect to the format. I think, to the extent possible, we should have round-table discussions so that stakeholders have to confront and deal with each other; it's very helpful for us as well. It leads to more creative outcomes, I believe.

A second point is that I think it's essential for the minister to frame our discussions and set us off on a path that is relevant towards his own internal deliberations towards the production of the next budget as part of the cycle. I think the starting point has to come from the minister giving us some direction, raising a number of questions. That doesn't preclude our adding additional questions. I do think it's essential for the purposes of witnesses that they be asked to respond to specific questions. I know some are reluctant to do that. They're going to want to come and appear before us or participate in a round table and talk about whatever they want to talk about. But if we're going to produce a product that's useful, it has to begin with some direction from the minister and have witnesses responding to those questions.

The last point is with respect to timing. I agree we were awfully rushed. We don't want to ever be accused of stifling discussion and not giving people adequate time to respond, to learn about our efforts. As this becomes an annual exercise, people will anticipate and be ready.

It seems to me that we should be ready as soon as possible after the return in mid-September to get under way with this and to have our timing such that we have a report tabled in good time for it to be useful to the minister.

Those are my points, Mr. Chairman.

The Chair: Thank you. Mr. Discepola.

Mr. Discepola: Mr. Chairman, I would concur with starting as soon as possible. I think you should contact and consult the Bloc Québécois to ensure that we do it just prior to the referendum. In my opinion, you should start somewhere in the middle of September or something like that.

One comment I want to make is to try to have a vehicle whereby we cam get into some of the nuts and bolts of some of the key issues. I found that last year we talked very often in generalities. One example that comes to mind is the RRSP issue, for example, on which we felt as a committee we had to get into more detail.

There are three or four other issues like that; I don't know how you would address them in the context of this budget preparation in order to get into the details of them so we could make concrete recommendations. That might be something we might want to look into this year if we have the time. As a general committee we don't seem to have the time to get into the details of some of the proposals that we wanted to come forth with.

The Chair: Mr. Discepola raises a very interesting point. We recommended last year that we not proceed with any issues touching retirement income until the paper on aging is down.

My understanding is that Mr. Axworthy wants all of that, the whole retirement income issue, to be handled by the human resources development committee. We're going to have to straighten that out, as to which committee is going to deal with it.

Mr. Discepola: Also group insurance benefits, dental benefits, for example, and some of the tax expenditures.

The Chair: Those are nice non-controversial issues.

Mr. Campbell: Let's open that one up.

The Chair: I think we as a committee have to decide whether we're going to deal with retirement income, and whether it's really a social issue, or whether it's a financial issue. Perhaps the parliamentary secretary would like to explore with the minister what his feelings are on that.

I guess my problem is this. How do we stop people coming before us and talking about it when actually it relates to the budget? Even if we said this is going to be handled by the HRD committee, does that mean people will not raise it before us? So I welcome your suggestions on that as well.

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Mr. St. Denis: Your last point relates to what I was going to raise, Mr. Chairman, having to do with the witnesses.

I know we can't and we should not be controlling witnesses and what they say to us. At the same time, I think most of us will agree that there were numerous witnesses last fall who veered a long way off the point and you were constantly reminding them to come back to the questions.

I wonder if there is some way, without impeding the freedom of witnesses, to have them focus better on the issues at hand, maybe in prior consultations with the clerk emphasizing that point, so that as the years go by a greater discipline evolves within the witness community to help us do our job.

The Chair: So if any witnesses stray from the point or are irrelevant, it's a fault of the clerk. I've always felt that.

Mr. St. Denis: I am thinking over the long run as this process becomes institutionalized, so as not to lose relevance, that the witnesses also become accustomed to what we're doing - a certain discipline, focusing on our objectives.

The Chair: In other words, not also having to always repeat the self-evident in everything we've always heard and all the understandings -

Mr. St. Denis: Let's move the whole thing to a higher -

The Chair: Come to the bottom line very quickly in terms of what they want.

Mr. Campbell: Mr. Chairman, it might be interesting for colleagues on both sides of the table to know that the - I can never remember the institution, but across the river there's an institution -

Mr. St. Denis: The City of Hull.

Mr. Campbell: In any event, there was a one-day think-tank or consultation on consultations. Representatives from the public service -

The Chair: Only the government could consult on consulting.

Mr. Campbell: But in any event, in the one-day session - and there were members there from all parties - we compared the consultation that was conducted by this committee, pre-budget consultation, with the consultations done by other committees.

The conclusion of outside participants in the discussions - their unanimous view - who had been observers of the various consultations that took place last year, was that we had the most effective consultations, notwithstanding how compressed the timing was, because we had framed the discussion, because we had sent letters to witnesses and said these are the questions we want addressed, and because we kept bringing witnesses back to those issues.

So I want to report that to colleagues, and that should give us encouragement to continue along those lines.

Mr. Walker: Mr. Chairman, I have one small point, because I think this is interesting. We ran into the problem a couple of times last year where people began to read their presentations and not just present them. As I understand it, tentatively, we did not have the right at the time to say, treat it as being read into the record.

The Chair: It's very expensive to put a report into the record. Maybe you could explain that to us and why we didn't do it.

The Clerk of the Committee: Usually it's because it's treated as an appendix and it creates problems at the printing level. But now that the format has changed, I don't see the difference between us wasting twenty minutes reading a piece of paper and.... So maybe it should not be put as an appendix, but just at the beginning and then questions to follow.

Mr. Walker: Mr. Chair, I would encourage you to explore this through the clerk as to what it means, because we might indicate in our letters that they could consider their briefs as having been read and get into the discussion. The point especially that other people have here is that the first ten pages is often old issues and old fights, and let's get on with it.

Mr. Discepola: You would have to ensure that they provided us that brief in advance. Otherwise we wouldn't have a chance to.... The average is a ten- or fifteen-minute brief.

The Chair: My experience is that these are never read before the meeting by 100% of all members and that members use the time of their presentation to read the brief and skip through it very quickly. This is not to say that members don't work extremely hard. It also means that witnesses don't always get things to us beforehand early enough to have it translated.

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Perhaps the clerk could come back to us in our August meeting to give us advice on the costs and the best way to handle that. But I like the idea of less reading and more discussion...and how we can get witnesses to keep their presentations to ten or fifteen minutes so we can really have good discussions.

Mr. Campbell: It worked in the round tables. People understood because there were a lot of people together. They had only five minutes at the front end and then we got into discussion. We had some object to that. In fact, in some cases some insisted on meeting us by themselves.

Mr. Pillitteri (Niagara Falls): Mr. Chairman, last year, since we were going to different cities in pre-budget hearings, we had a lot of repetitious...chambers of commerce from the city of Calgary and from the city of Saskatoon, with the same presentations. I think we could do with a lot less of that. Once it's been presented by that province and maybe from the city we are in, I doubt very much we should be accepting those presentations from the next city. They become repetitious and say the same thing.

The Chair: Good point.

Mr. Campbell: That's right.

The Chair: We could get umbrella groups to appear before us in Ottawa and then not hear them in the....

Is it agreed we will travel to every province and territory?

Some hon. members: Yes.

An hon. member: Let's split up.

Mr. Campbell: Let's ask for the guidance of those umbrella organizations, as we did in our work earlier this session. Do we need to hear from the local social planning council, the local union, the local chamber?

The Clerk: Yes, they will tell you they have specific points to make, or varying points.

Mr. Campbell: Some organizations do. But as we travel, I worry about crowding out people who don't normally have access to a committee such as this to hear yet again from the local of a union whose national has presented the same brief to us.

The Chair: On the travel, will we split into two, as we did last year, or travel as a full committee?

Mr. Discepola: Split it into two or three.

The Clerk: A full committee is easier for me, but....

The Chair: We split into two last time because of time constraints.

Mr. Walker: In the round tables, Mr. Chair, it's much easier for everybody to have half the group there than to have fifteen people.

Mr. Campbell: If the full committee is travelling for a period, half of us are with you.

[Translation]

The Chairman: Yvan, what do you prefer?

Mr. Loubier: I am under the impression that we are far more efficient if we split the committee into two. We meet a diversity of people and a diversity of regional realities. I really appreciated, last year, that we split into two groups and that we had time to visit in particular each of the Maritime provinces.

The Chairman: I remember that that was an issue for you. Could we split into three? You would have prefered to have two Bloc MPs in each group.

Mr. Loubier: It goes without saying that to be with Ray Speaker and especially Herb Grubel is a bit boring. To travel with Herb is not very interesting.

Mr. Discepola: This year, we may share the same bedroom.

An hon. member: Oh!

Mr. Loubier: I would not bet on it.

[English]

The Chair: Should I ask the clerk, then, maybe to prepare a motion for us in case we want to travel?

Mr. Discepola: Do you have any idea when?

The Chair: When would you like to do it? During the referendum?

Mr. Discepola: Just before the referendum. Yvan may have suggestions.

The Chair: Why don't we wait until we find out when the referendum is going to be, because that's going to affect a lot of us.

Mr. Discepola: Yvan, do you know when it's going to be?

[Translation]

Mr. Loubier: If there is a referendum, we will change the prebudget tour into a referendum tour.

[English]

The Chair: Okay, we will wait.

Mr. Discepola: Let me just speak to that, Mr. Chair. The way things stand, there is the enumeration that's being done in the province of Quebec at the beginning of September. I think Bill-40 has just been deposited and approved. I'm not sure of the exact date. I think it's September 3 to 9. Then there will be roughly 35 to 40 days of campaigning. So if we do it some time in mid- to end-September, we would be okay.

Mr. Campbell: Mr. Chairman, I don't believe the referendum is going to dictate or ought to dictate the timetable of this committee and the budgetary process of the Government of Canada.

Mr. Discepola: I wasn't implying that. But I don't think you want to visit Quebec or Montreal in the middle of a referendum.

Mr. Campbell: We have work to get on with and we'll visit Montreal or Quebec or any other part of the country as required to get our work done.

An hon. member: Right on.

The Chair: Is there anything else you want to bring up?

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[Translation]

Mr. Loubier: If we end up in Montreal or in Quebec in the middle of the referendum debate, we run the risk of a problem with the Act on Popular Consultations. The money that we will spend on the Quebec territory may create more problems than you think.

[English]

Mr. Campbell: I don't want to get into a constitutional argument, but we're still the federal Government of Canada and we're entitled to be there whenever we choose to be there.

An hon. member: Those that want to come, fine. Those that don't want to come stay home. It's simple.

The Chair: We'll look at scheduling later on when we have....

Is there anything else members want to raise?

Mr. Discepola: Will you be chairman in September?

The Chair: Before you arrived, parliamentary secretary, we passed a secret motion saying that I was going to be chairman for life. My name is now Chairman Mao.

Thanks, everybody. It's been a slice. See you in August.