EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, August 15, 1995

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[English]

The Chair: Order.

The finance committee is looking into Bill C-100, dealing with Canada's financial institutions, a bill designed to enhance the security of these institutions and to create greater confidence and, hopefully, less capacity for these institutions to fall by the wayside.

Our first witness for these hearings is the Hon. Doug Peters, Secretary of State for International Financial Institutions, accompanied by Mr. Nick Le Pan and Frank Swedlove.

Welcome, Minister. We look forward to your comments.

Hon. Douglas Peters (Secretary of State (International Financial Institutions)): Thank you very much, Mr. Chairman, hon. members and colleagues.

I welcome this opportunity to discuss with you Bill C-100, which, as you stated, is the legislation that will enhance the safety and soundness of Canada's financial system.

Let me say first that I very much appreciate your decision to hold these hearings despite our parliamentary recess and this lovely summer day that is outside. It would be far nicer out there.

The legislation covers a lot of ground. That's because the financial sector is really complex and diverse and a dynamic part of the economy. By starting your review process now, you'll be able to focus on some substantive issues and concerns in a speedy and disciplined fashion when Parliament resumes its sitting.

The measures included in Bill C-100 flow from a series of basic principles, and these were outlined in our white paper last February.

Our subsequent consultations have left me more convinced than ever that these principles and the fundamental shift in philosophy that some of them represent make this legislation a vital and valid turning-point in our approach to regulations.

The four key principles underlying the fundamental shift that I want to emphasize today are these: that ownership of a financial institution is a privilege and not a right; that early intervention in and the resolution of institutions experiencing difficulty should occur; that financial institutions must operate with sufficient incentives to solve their problems in a timely manner; and, finally, that there must be appropriate accountability and transparency in the system.

Underlying these principles is an even more basic assumption. The supervisory and regulatory system is designed to protect the rights of depositors, policyholders, and creditors. The system cannot prevent every failure. If we tried to do that, then we would limit the potential well-being of the financial sector, and indeed limit the growth of the Canadian economy.

The simple fact is that no regulatory system can forestall any institution failure unless it is given the authority and the resources to oversee all management decisions and unless the institutions are severely restricted in loans and investments they can make.

The price of such a fail-safe system, even if it worked, which I don't think it would, would be to strip the industry from contributing to the dynamism, growth, and evolution of our economy.

Our goal is to achieve a balance between the safety and soundness of financial institutions and yet allow the innovation and the risk-taking needed for a productive and growing economy. We also want to ensure that the rights of policyholders, depositors, and creditors take precedence over the interests of shareholders.

In recognition of these rights, the legislation sets out an early intervention policy. This allows OSFI, the Office of the Superintendent of Financial Institutions, to take control of a troubled institution earlier than at present. Under the new regime, the superintendent will be given the authority to close an institution before its capital is depleted.

In addition, the function of the minister will be affected. I will continue to be a key part of the process, but my role will be to determine whether or not it is in the public interest to close an institution. I will no longer have to come to an independent view on the institution's solvency. This is a more appropriate task of the regulator, who is involved in regulating the institution's day-to-day activities.

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I want to make clear that this is a measure that focuses as much on problem prevention as on resolution. Under the proposed legislation, troubled financial institutions will understand that OSFI will take action if its concerns are not dealt with properly.

In addition, OSFI will be backed up by the introduction of a framework for risk-based deposit insurance premiums, which will allow CDIC to vary premiums on member institutions depending on an underlying assessment of the institution's risk.

These measures provide incentives for institutions to alter their course, a change that will strengthen the safety and soundness of the overall financial system. This is the essence of ownership being a privilege and not a right.

This legislation stakes out the clear position that if an institution is facing difficulty, then owners do not have the right to continue in business until they hit a brick wall and cannot pay their liabilities as they come due.

There is an important corollary. If an institution must be closed, then it is far better to do so while there is still value in it so that losses will be reduced. That's why the proposals including in Bill C-100 will amend existing legislation to permit OSFI to obtain a winding-up order sooner.

I want to emphasize that OSFI's role is not and cannot be to micro-manage financial institutions. Nor do we deploy an army of examiners to scrutinize federal financial institutions. This legislation puts the responsibility clearly in the hands of management and boards of directors.

As well, further provisions will provide more flexibility to restructure, under court supervision, the affairs of insurance companies in liquidation. The result will be that the liquidator will have greater scope to enhance value within the estate and improve the recovery on assets, all to the benefit of policyholders and creditors.

This is why we must place constant emphasis on corporate governance. It is boards of directors that represent the ultimate front line of problem prevention and good management. Bill C-100 takes important steps to strengthen the effective, independent corporate governance that is a vital part of a strong prudential framework.

The legislation proposes that the superintendent will have the power to designate certain directors as affiliated for the purpose of the requirement in the present act that one-third of the directors of an institution be unaffiliated.

Secondly, a proposal will prevent the board of a financial institution from being identical with an unregulated parent firm. This will help ensure that there are directors of the institution - that is, the financial institution, the regulated institution - who will focus on the regulator institution's concerns alone.

Finally, the legislation will empower the superintendent to veto the appointment of directors and senior officers of troubled institutions. Incidentally, I would point out that this is the same authority as that which exists in the United States.

I have highlighted just a portion of the revisions of Bill C-100. Other changes include the enhancement of disclosure of financial information by institutions at OSFI and the legislation improving the design and operation of the major clearing and settlement systems to minimize systemic risk.

Before concluding, I want to draw to your attention legislation that is not to be brought before the committee and the House.

As you know, the white paper also addresses the challenge of strengthening protection for life and health insurance policyholders in the event of a corporate failure. There was no question that the industry's CompCorp had done a good job in dealing with the failures of two federally regulated life and health insurance companies. It was also clear that improvements were needed so that those responsible for this vital function had the tools and the resources to deal with new pressures that may emerge in the future.

I was prepared to have the private sector accommodate this challenge rather than introducing a new federal bureaucracy. But I made it clear that a revised CompCorp would have to display a number of different features. These were all part of the policy protection board that we had proposed. These included, first, the revised corporate governance, including a board that is independent from industry; second, greater access to privately financed resources; third, the capability to speedily levy higher assessments if necessary to meet commitments to policyholders and deal with a member firm's failure; and finally, an ability to facilitate going-concern solutions - those are solutions that keep troubled firms alive when possible and cost effective - and to support soft landings that minimize industry and consumer disruption.

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Recent amendments to CompCorp by-laws deliver these changes that we were looking for. I can now announce that there are no plans at this time to proceed with legislation for a government-instituted policy protection board. I would of course be prepared to go forward with such a creation of a government board in the future if it became necessary.

Let me close by putting the legislation in context.

Bill C-100 is being put forward for the continuing success of the supervisory and regulatory system, which must evolve with market trends and respond to current experiences both here and in the rest of the world.

The thrust of the legislation is clearly safety and soundness, and these improvements in safety and soundness will build on our recent experience with financial institutions that have failed.

This underscores why I feel it is prudent to make these changes now rather than to wait until the 1997 review of financial sector regulations, which of course will deal with a broader and more comprehensive range of issues.

I would remind everyone here - I do not think you need to be reminded - that Canada has a world-class financial system, but it is a sector subject to surging technological, economic, and competitive change at home and around the world.

This legislation does not complete the process. There are a number of very important challenges ahead that this committee will want to consider in the broader process towards renewing the legislation in 1997.

In this regard, I have asked for submissions from all interested parties for the end of June on any matter related to the four federal financial institution statutes. So far I have received about25 submissions from industry associations, consumer groups, financial institutions, and individuals. I am currently reviewing these for common themes and approaches. I intend to follow up with discussions with all the interested parties during the fall in order to allow for a full exchange of views.

These consultations will provide guidance for a policy paper, which I intend to release some time early in 1996. The policy paper will be followed by further consultations before we table legislation for the passage of a bill early in 1997.

I wanted to act now, however, on the issues included in Bill C-100, because the legislation enhances the safety and soundness of the system. When steps can be taken to improve on it and diminish risk, I believe it is important to get on with those changes right away.

I believe that Bill C-100 will help Canada's financial sector preserve its world-class stature. The measures we have proposed strike a critical balance between protecting the rights of depositors, policyholders, and creditors and facilitating economic growth.

Thank you, Mr. Chairman. I will be glad to answer questions if you have any.

[Translation]

Mr. Loubier (Saint-Hyacinthe - Bagot): I will give the Secretary of State the necessary time to adjust his earphones though he speaks and understands French quite well.

Before asking questions to the minister responsible for Bill C-100, I would like to explain briefly the problems the Official Opposition and Quebecers have concerning Bill C-100.

Right off the bat I can tell you that...

The Chair: And also Canadians.

Mr. Loubier: ...and the Canadian system, if you want. In fact, we sort of like the Canadian system since we want to have a new agreement, a new economic union with you. So we like you.

So before asking questions to the minister, I would like to explain to you what are the three major stumbling blocks that worry the province of Quebec in this bill.

The first one can be found in clause 162. You heard the Quebec Minister of Finance yesterday explain his concern regarding clause 162 which enacts a payment clearing and settlement act covering all financial sectors including the securities sector.

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I would like to state first that the securities sector comes under the exclusive jurisdiction of the provinces, it is the sole responsibility, in Quebec, of the Quebec Government and therefore the sole responsibility of the Commission des valeurs mobilières du Québec (Quebec Securities Commission).

You are also giving the Bank of Canada unbelievable powers, not only to lead and direct clearing houses but also to give directions to participating financial institutions. Once again, this is a role that belongs to the Commission des valeurs mobilières du Québec and to the inspecteur général des institutions du Québec (Inspector General of Financial Institutions in Quebec) as far as securities are concerned.

When you plan to give supplementary powers to the Bank of Canada, that is to allow it to direct and even to get involved with the Caisse centrale Desjardins, corporations such as Levesque Beaubien Geoffrion Inc., Fiducie Desjardins Inc., and any other organization under provincial charter, I am somewhat surprised especially when I read the answers that the Minister of Finance, Mr. Martin, gives in his letter to Mr. Jean Campeau, the Quebec Finance Minister, in answer to his complaints. In fact, Mr. Martin points out that these new proposals do not impact on Quebec's jurisdiction, whereas we very well know that all these proposals do infringe on Quebec's jurisdiction. In fact, you are clearly encroaching on provincial jurisdiction.

In fact, not only are you encroaching on issues that come under Quebec's jurisdiction, but you are also creating overlaps and duplications, and your government is the first to say that we must eliminate overlaps and duplications. All overlaps and duplications in the field of labour cost at least $250 million. And you are by these proposals creating duplications in the financial institutions sector, more specifically in the securities field. How much will these duplications cost?

The second proposal of the bill which creates serious problems for Quebec is clause 133 of the bill amending the Winding-up Act. You are broadening the definition of insolvency which comes under exclusive federal jurisdiction, but you ignore once again the role of the inspecteur général des institutions financières du Québec.

Under the pretext of trying to enhance the safety and soundness of the financial system, you introduce a new player, and you add move potential challenges for financial institutions which might be found in default by the inspecteur général des institutions financières du Québec. These challenges could go as far as the Supreme Court, which would increase the uncertainty in the financial sector, and that for a long time. Don't make me laugh. If you want to reduce uncertainty, reduce the instability that is found in the financial sector in Quebec and in the whole of Canada, you're going about it the wrong way, because you are creating even more problems.

The third major problem we find in Bill C-100 is created by clause 21. On page 11 of the bill you point out that from now on premiums payable to the Canada Deposit Insurance Corporation will be risked-based and that the CDIC will determine what the risk is. This is an excellent principle, except that once again your are ignoring the role of the Régie de l'assurance-dépôt du Québec (Quebec Deposit Insurance Board) which did not feel the need to set up risk-based premiums and which was never consulted regarding the new system you intend to set up through the Canada Deposit Insurance Corporation.

We have some reservations concerning this rating system. Let's take for example Fiducie Desjardins which holds 95% of its deposits in Quebec and 5% in the rest of the country. The Canada Deposit Insurance Corporation will appraise the risks of Fiducie Desjardins Inc. on only 5% of its deposits. This rating will apply to the whole of Fiducie Desjardins Inc. and not only on the 5% invested outside Quebec. This will therefore become a yardstick used to determine the risk when you do business with Fiducie Desjardins Inc.

Whether you like it or not, this rating will be as valuable and interpreted the same way as the one given by Dominion Bond Rating Service and other groups. It will be a rating in the financial sector, even though only 5% of the deposits are rated using criteria that are foreign to the Loi sur les institutions financières du Québec (Quebec Financial Institutions Act).

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Therefore, these are the three main issues that raise serious concerns in Quebec. I do not know, Mr. Minister, if you are aware of the comments made yesterday by the Quebec Finance Minister who was accompanied by the inspecteur général des institutions financières du Québec and the chairman of the Commission des valeurs mobilières du Québec (Quebec Securities Commission); it was mentioned that your bill creates major problems.

We have been watching very closely what your government has done over the past four months. Everything you do seems to be aimed at increasing conflicts between the provinces and the federal government.

Let us simply mention the health fora; you dared organize a health forum without inviting the provinces. You've done just about the same thing regarding Bill C-76 implementing the Budget proposals. You have given yourself the power to enact national standards, even if the fields concerned come under provincial jurisdiction. With Bill C-88 regarding interprovincial trade, you have once again encroached on Quebec's jurisdiction, and put forward proposals which have a clear centralist design.

Why make things even worse by putting forward a bill affecting a sector that is very dear to us, that of securities? You are intelligent, you must certainly have been aware of the fact that you were attacking head on the securities sector; as a matter of fact, even Daniel Johnson when he was Premier of Quebec implored the federal government, in a letter he wrote to Mr. Massé in 1994, to set aside its centralists aims. I'm therefore asking you the question. Why these encroachments? Why these overlaps? Why insist on impinging on Quebec's jurisdiction through its financial institutions?

This was my first question.

[English]

Mr. Peters: I would like to state first that this legislation is clearly in federal jurisdiction. I'm not sure if all the members have had a chance to see Mr. Martin's letter to Mr. Campeau, but we have copies here and I'll be glad to distribute it if the chairman would like to see the reply to those questions.

The question is threefold.

The clearing and settlement system is a central bank function. It is a central bank function in every one of the major industrialized countries, and it's clearly a function of the central bank here in Canada to supervise that clearing and settlement system. The legislation specifically states that it is not a part of the securities regulation.

That is in answer to the first point you've brought up.

Secondly, the Winding-up Act is a federal statute that has been in there for a long time. These are fairly small amendments to the Winding-up Act that we propose, and it applies largely to federally regulated institutions.

You also mentioned the deposit insurance. Any Quebec-regulated or Quebec financial institution that operates outside of Quebec already is subject to the rules of CDIC, already pays premiums to CDIC, so there will be no particular change. The risk-based premiums that CDIC will have under this legislation, or the possibility of having them, will apply only to those deposits that CDIC insures. If the Quebec deposit insurance corporation wishes to follow the rules - and I think it would be a good idea if it did - of risk-based premiums, well, it's entirely up to the Quebec deposit insurance scheme and up to the Quebec government to make the changes necessary.

So, on all three of the points, I would say that Mr. Martin's letter and I make it clear that we are not interfering in any way in Quebec. This is a clear jurisdiction of the federal government and it is not part of securities regulation at all.

The Chair: I see that we have very few minutes left if we stick to our schedule. I take it there might be a consensus to extend this session with the minister?

[Translation]

Mr. Loubier: You will allow me to ask questions on a second round? I agree with you, because I have a lot of questions to ask the minister. This is a very important bill.

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[English]

The Chair: I would like to get some indication from members, then, on how long we wish to have the minister appear before us, because we have other witnesses scheduled on a very consistent basis and it would mean rescheduling their appearances before us today.

[Translation]

Mr. Loubier: We need an hour.

The Chair: An extra hour?

Mr. Loubier: Yes.

The Chair: Then we will go on until 11:00 a.m.?

[English]

Mr. Williams?

Mr. Williams (St. Albert): It's fine by me.

The Chair: Mr. Campbell?

Mr. Campbell (St. Paul's): We on this side of the table would like to ask questions as well. I have a number of questions. I don't know if Mr. Loubier was indicating that he needs the entire hour.

The Chair: No, no. He wishes to share.

[Translation]

Mr. Loubier: Yes, I would need an hour just for my own questions.

[English]

The Chair: Mr. Minister, would that be acceptable to you? There's a consensus among members that we have a lot to deal with.

Mr. Peters: Yes, fine.

The Chair: Thank you very much.

[Translation]

Do you have another question?

Mr. Loubier: I will have two more questions to ask.

Mr. Minister, you point out that the Bank of Canada has an oversight role over financial institutions. I will accept that. The Bank of Canada also has the power to appraise the systemic risk in order to avoid domino effects in the financial sector.

However, the Bank of Canada does not have the power to direct the securities market or other sectors or to directly instruct clearing houses or member institutions, especially those which are chartered by the province of Quebec and are involved in the securities market. It is wrong to say that the Bank of Canada has such powers. It does not. If it did have those powers, you would not need a bill to grant the Bank of Canada such powers.

I would like to remind you that the Minister of Finance, Mr. Martin, wrote Mr. Campeau yesterday and said ``I am replying to your letter. Your claim that Bill C-100 is encroaching on provincial jurisdiction is simply not true.'' He is therefore calling us liars, whereas...

Turn to page 76 dealing with provincial institutions. If you look at your bill, in the sections dealing with clearing houses, you will notice that the securities sector is not excluded. You're calling us liars, you're telling the Quebec Finance Minister that he is a liar, when in the bill it is clearly stated that provincial institutions are affected, that clearing houses and member institutions, whatever the field is, will be affected. It's a bit much!

Can you explain why you are saying that the Bank of Canada already has the power to instruct where this very power is given by the new bill. This would mean that before, the Bank of Canada did not have such powers. That would mean that you did not quite say the truth. Can you answer this question?

Secondly, is it wrong to say - and I'm asking you the question - that there are other ways of going about reducing systemic risks, that is domino effects in the financial sector, that there are other ways of reaching the same goal without giving the Bank of Canada the power to clearly encroach in fields of provincial jurisdiction?

Wouldn't the improvement of the clearing and settlement system allow us to eliminate systemic risks and reach the very goals you are setting, without infringing on Quebec jurisdiction and without creating a conflict between the Quebec Government and the Federal Government? Unless you really like that kind of conflict, Mr. Minister, and you'd rather not change the bill. Maybe you simply like the situation the way it is.

These were my two questions.

[English]

Mr. Peters: First, the legislation refers to systemic risk. Systemic risk is the risk to a broad set of financial institutions rather than to any one individual set. It does not deal with the settlement of securities questions on that any more than it deals with the exchange of somebody buying a tractor. If you want to go out and buy a tractor, then you're going to issue a cheque in payment of it. The issue there -

[Translation]

Mr. Loubier: Can you point out to me where exactly in the bill the securities market is excluded from the new powers given to the Bank of Canada? Where exactly? Tell me where the provincial corporations under Quebec Charter are excluded from the bill? Nowhere. In several sections of the bill, corporations under provincial charters are clearly included. And that is exactly the question we're asking you. Tell me. Unless you don't know your bill very well, tell me exactly where the securities' sector is clearly and explicitly excluded.

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Do you agree with the Finance Minister when he says that what we are saying is simply not true? Therefore we are liars. The Minister of Finance and the Official Opposition's critic for Finance are liars.

[English]

Mr. Peters: Let me refer you to page 116, where it says at the very top that in this bill ``Bank'' means the Bank of Canada. On the next line it says that ``clearing and settlement system'' means a system of arrangements for the clearing or settlement of payment obligations through payment measures, and then there are a number of other things.

To my mind, that does not include the stock exchanges. It does not include the exchange of bonds, any more than it includes the exchange of a cheque to buy a tractor. The cheque results from that are part of the payments system.

[Translation]

Mr. Loubier: Section 6 on page 118 states:

Where the Governor of the Bank is of the opinion that a clearing house is engaging in or is about to engage in any act, omission or course of conduct, a participant is engaging in or is about to engage in any omission or course of conduct with respect to its participation in a designated clearing and settlements system, or the designated clearing and settlement system in respect of the clearing house or participant is operating or is about to operate in a way that results or is likely to result in systemic risk being inadequately controlled, the Governor may issue a directive in writing to the clearing house

or articipant requiring it tocease or refrain from engaging in the act, omission or course of conduct, and perform such acts as in the opinion of the Governor are necessary to remedy the situation.

By this section you are therefore opening the door to the Bank of canada to issue directions not only to clearing houses but also to participants.

For Quebec this means Fiducie Desjardins Inc., the caisses centrales Desjardins, Levesque Beaubien Geoffrion Inc. These are all corporations under provincial charter. So you should read your bill from cover to cover. You can't be simply satisfied by giving me a few excerpts here and there. Can you tell me where exactly the securities sector is excluded? Tell me where?

[English]

Mr. Peters: Right at the very point I told you. To be included in the rules that the Bank of Canada may suggest, you have to be a clearing-house within the meaning of the act, and that is the very section on page 116. It is not included in there.

The securities are not in there. The Montreal Stock Exchange is not included in there, and neither are systems that do not deal with a payments system. That is exactly where it is dealt with.

So it does not apply to all of those, unless -

[Translation]

Mr. Loubier: You will agree that Fiducie Desjardins Inc. and Levesque Beaubien Geoffrion Inc. are participants? You do. Therefore, if they are participants, they are affected by section 6. Do you still agree? If they are affected by section 6, it is because the Bank of Canada has the power to issue a directive to these corporations on the pretext that it's trying to eliminate systemic risk. The Bank of Canada could instruct the financial institutions under federal charter to do just about anything, whereas it is the Commission des valeurs mobilières du Quebec (Quebec Securities Commission) and the inspecteur général des institutions financières du Québec (Inspector General of Financial Institutions in Quebec) who have the jurisdiction in that field.

Mr. Peters, you still have not told us if there was any other means to eliminate systemic risks while preserving Quebec's jurisdiction and without creating a conflict between the provincial government and the federal government? I am not asking this question as a proponent of sovereignty. Daniel Johnson, as premier of Quebec, already asked this question of your minister, Marcel Massé. He still hasn't received an answer. We too are waiting for answers, but not answers like those we got from Mr. Martin yesterday. Not answers that show clearly that Mr. Martin hasn't read the bill. He's saying just about anything. Answer my question please.

[English]

Mr. Peters: Your question was, is there another appropriate unit to deal with the systemic risk? I do not believe there is.

The central bank clearly is the unit that deals with systemic risk in every one of the major industrialized countries. That is clearly a Bank of Canada responsibility.

The Chair: Mr. Williams, please.

Mr. Williams: I was interested to note my colleague's comments. I suggest that an economic association would be doing it their way rather than doing it our way, so I think interesting times lie ahead.

Mr. Minister, you have deftly sidestepped the question of co-insurance that has been raised many times by the financial industry and people who watch it. Why are you not introducing the idea of co-insurance through Bill C-100?

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Mr. Peters: We looked at the co-insurance question quite comprehensively when we were developing the white paper. A number of commentators gave the view you are discussing, that they were in favour of co-insurance.

There are arguments on both sides of the debate.

The bill here includes some other measures.

Co-insurance puts the onus on the individual depositors to assess their financial institution themselves. We felt that it would be more appropriate to put the onus on the board's directors and on the management of the institutions.

The way we have done that is with the risk-based premiums on CDIC. By so doing, you send a message directly to the management, to the boards of directors, that they are running a less than riskless institution. That message will go to the management and the board of directors, where I think it is more appropriate than, for example, putting all of the depositors at the chance of evaluating the individual financial institutions.

I know there is a tendency.

The other reason is that the tendency of the consumer is to say that if it is big, then it has to be riskless. With the recent failure of Confederation Life, for example, and other things, we've found out that this is not necessarily true.

The other reason for not going with co-insurance is the tendency to favour the very large financial institutions over smaller ones, which may or may not be riskier, and the difficulty of assessing the smaller ones.

Mr. Williams: I think you are making a mistake in not going with co-insurance. We have to remember that in many cases the large institutions are selling financial instruments that are not insured. For example, mutual funds and investments in their subsidiaries are selling over bank counters.

I suggest to you, Mr. Minister, that in many cases customers will be totally confused and not aware that many of the instruments in which they are investing through financial institutions are totally and absolutely uninsured at this point in time.

There is a great deal of confusion that should be addressed. Co-insurance would go a long way toward suggesting to the public at large that they have a responsibility for managing their own money by taking a look at the financial institution and the financial instruments they are buying.

I am quite sure that, even through the banks themselves, the staff are not always aware whether the instruments they are selling are or are not insured.

Mr. Peters: I am afraid in that sense that it is important for the individual depositors to take on that responsibility.

On the amount of deposit insurance, if you had 90% co-insurance or something like that, I'm not sure if it would make a major difference for the individual depositor.

Mr. Williams: The point I am trying to make is that the same bank or financial institution is selling insured and uninsured investment vehicles. Therefore I would say that there is a great deal of confusion in the minds of the consumer even today as to what is or what is not insured, and you are not doing anything to alleviate that problem.

Mr. Peters: Let me add that we have a project under way with CDIC to make those distinctions much more clear than they have been. That is a problem and we recognize it.

We are doing things to make sure the distinction is more available to the public and more clearly understood by it.

It is a difficulty; you are quite right. But even with co-insurance you would have part of your deposit insured and part not insured. It would not end the distinction. Some things would be totally uninsured, some partly insured, and so on.

Mr. Williams: At least the depositor or the investor would always know that there is a certain amount of risk inherent in every investment vehicle they purchase and that just because it is large, it is not risk free, and that just because it is from a bank or financial institution, it is not automatically guaranteed by CDIC.

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My point is that there is confusion in the marketplace that should be addressed. You are doing that somewhat through your risk-based premium. Is it your intention to make these premium rates public so that I can know that you are charging institution X a higher premium than institution Y?

Mr. Peters: No, it is not. The proposal is to send the message to the board of directors and management. To make these public would, I think, add one further bit of confusion.

Mr. Williams: So if I am a member of the public, then you're going to lead me down the garden path and allow me to invest in what you, as OSFI, deem to be a risky financial institution. You're not going to tell me that I am putting my money in a higher-risk type of institution.

Mr. Peters: I think that you have to understand that the role of the superintendent is regulation and supervision. The role of CDIC is insurance. It is not to publicize its findings. Its role as a regulator would be compromised in some cases if indeed it had to reveal all of the items that it has -

Mr. Williams: Why don't you let the marketplace work and -

Mr. Peters: There are lots of private rating agencies that provide ratings for the financial institutions. It's clearly a private sector job to provide those ratings, and indeed they have. There are lots of private sector rating agencies and they provide a very valuable service. I don't think we need to take it away from them by revealing OSFI's confidential information.

By the way, the confidentiality is a problem.

Mr. Williams: I don't think a premium charged by OSFI and by the Government of Canada to protect the policyholders and the investors should be privileged information. It should be public information. If we want to educate the consumer, then the sooner we get this information out in the public domain, the better. That is the way I think we should be.

You seem to have drawn a line -

The Chair: Mr. Williams, will you permit me a little supplementary question on that, please?

Mr. Williams: Yes.

The Chair: Public corporations would probably have to disclose in their year-end statements the fact that they were downgraded in terms of the risk premiums they have to pay, because that would be a material disclosure that the accountants would have to make. So we will have a system whereby the publicly held companies have far greater disclosure than the private ones in terms of our assessment.

Mr. Peters: If I might just add a bit of information on this, the department has checked with the CICA and I think this is a question you should ask of it. I believe the chartered accountants, the institute, will be appearing before the committee. Will they be?

The Chair: Yes.

Mr. Peters: It is a question of whether the matter is material or not, and I think it's up to the accounting profession to decide whether indeed it is. It might be that it will be disclosed, but I understand that they feel it will not necessarily be.

Mr. Nick Le Pan (Special Adviser to the Deputy Minister of Finance): If I might further clarify, Mr. Chairman, the accounting rules now would require disclosure of something that the auditors, for example, felt was important to affect the well-being of the institution. That might require disclosure of an underlying event of risk that itself had also led to a risk-based premium, but that is the underlying event, not the risk-based premium itself, and only if it was very significant to affect the well-being of the corporation. That is already existing in the structure of accounting rules at the moment.

Mr. Williams: Following in that particular vein, if there is a need to increase the premium, then by your definition, Mr. Le Pan, there has been an underlying risk problem and therefore we are going to see it in the financial statements by the auditor, or mentioned by the auditor. The next question by the general public is whether OSFI is charging a higher premium.

What do you say, Mr. Minister?

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Mr. Peters: If there was something based, then it would be up to the company to answer that question to its shareholders. They're responsible to their shareholders. If the shareholders at the next annual meeting said, ``Are you paying a higher premium?'', then I imagine that the company would have the obligation to answer them.

Mr. Williams: You have drawn a distinct line between banks and insurance companies, one with CDIC and one with the PPB. The banks of course, through CDIC, have access to the consolidated revenue fund, but that is being denied to the insurance industry. Why?

Mr. Peters: All deposit-taking institutions are covered by CDIC or the Quebec insurance corporation.

That has a separate item because of systemic risk. The payment system itself is a clear, separate item.

Deposit insurance has two facets. First, it is the consumer protection, and both the deposit insurance and CompCorp have that aspect of it. CDIC deposit insurance has an additional aspect of stemming systemic risk, and that's the reason why the CDIC has access to the consolidated revenue fund.

Mr. Williams: Can you assure us that the resort to the consolidated revenue fund will only be in payment of a systemic pay-out problem, rather than to bail out any financial institution covered by CDIC? Since the insurance industry is being left to carry its own losses, can we be assured that the banking and the financial institutions will have the same rules?

Mr. Peters: The same rules are clearly there. The CDIC premiums and the costs of CDIC, including the interest costs, are all paid by the deposit-taking institutions, all of them.

Mr. Williams: I am talking about losses and pay-outs.

Mr. Peters: Absolutely. All of the losses are covered by the premiums of the deposit-taking institutions. There is no government subsidy here. It is only that in a payment situation where you are part of the payment system, it is essential to get that payment done right away, whereas insurance is a different field. It's true that there are certain payments in insurance, but it's not the demand payment that you have in a deposit-taking institution. Therefore you need to get the thing cleaned up and done right away. That's CDIC's job, and that's why it borrows and has to have access to borrowing from the consolidated revenue fund.

As for your insurance policy, you are not going to collect on it - at least I hope you're not - immediately. In most cases the liabilities are very long term, so you have considerably more time to work things out. That's the difference between CompCorp and CDIC.

Mr. Williams: I still don't think we need to have recourse to the consolidated revenue fund through CDIC.

You anticipate that OSFI will have the opportunity to step in and take control of a financial institution even though it is still solvent, perhaps just marginally so. Isn't OSFI therefore assuming a liability on its own to, in essence, say that it's its responsibility to resurrect this company? What responsibility are they taking upon themselves if they drive down into liquidation where the board of directors felt that they had a plan to rescue the company and bring it back to financial health? What liability is it for OSFI?

Mr. Peters: Under this act, there is none. If OSFI exceeds its authority, then the company can ask for a review of it. That's always there.

Mr. Williams: Who is going to grant the review?

Mr. Peters: When a company goes into receivership, there is always a substantial difference between the going-concern value of the assets and the receivership value. So if OSFI sees the direction there, then either it stops that direction and issues warnings.... If the warnings are ignored, then OSFI has to step in sometime before, when the capital is not fully depleted. If it doesn't, then the losses to depositors, to creditors, are going to be very much larger.

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The point is that we should try to keep the losses to a minimum, even if it means stepping in a little bit early. I doubt very much whether it would be a question that would arise, because -

Mr. Williams: Is this going to be made public?

Mr. Peters: - the real reason is that the ownership of a financial institution carries those obligations with it. It is a privilege to own a financial institution, not a right.

Mr. Williams: But are we going to know publicly whether OSFI has stepped in and started issuing directions to management or taking control of management?

Mr. Peters: It depends on what exactly is done; but, yes, it will be public.

Mr. Williams: So if OSFI starts issuing directives to management because of its opinion that the company is in problems, then we will know about that?

Mr. Peters: No. If you look in the white paper, there are levels of compliance set -

Mr. Williams: But we're talking about transparency and we want to get these things out in the open. Everything seems to be done behind closed doors for OSFI. They're protected by the veil.

Mr. Peters: Let me put it to you in this way. If you made it public that you had issued an order to a financial institution, then that would close it down. It could very easily cause the problem that you're trying to avoid. What the superintendent is trying to do is to have the company address the problem, answer the problem, and then come back so that CDIC doesn't have to issue an order to wind up.

Mr. Williams: Surely the first indication to the public is a small increase in the risk-based premium, saying, ``We see a minor problem here, and if it continues to escalate, the premiums will continue to rise''. Finally, OSFI can step in and say, ``Management, we think you're doing a poor job. Let us tell you exactly what you're going to do''. Surely it's an escalation of events, and if it's done within the public view, then the public can take the appropriate action themselves.

Because it's their company and their shareholders that they're answerable to, that would force management to say, ``We had better fix this, or our shareholders are going to be replacing us''. It lets the market forces dictate and put pressure on the financial institutions, whereas we're leaving it all to OSFI and regulators and bureaucrats behind closed doors and we don't know what's going on.

I don't think that's the way to proceed at all.

Mr. Peters: Let me answer that in this way. You previously stated that it's the consumer that should be able to evaluate the company and that there are private rating agencies that have things available and that it will be their onus to find those things out. In his supervisory role, the role of the superintendent is to get the thing corrected. That's the key, and he works very closely with that.

Mr. Williams: What if he steps in and takes over an organization that is still solvent, even though marginally, and decides that his plan is better than management's plan? He's putting himself in a liability position, and in a direct conflict of interest position as well, by saying, ``I know better than you''.

Shouldn't his role be to replace management rather than to step in - because who's going to control OSFI while it is running financial institutions?

Mr. Peters: The legislation provides a veto on the part of the superintendent on senior management and boards of directors, so there you have some clear indication that OSFI can take that kind of action. But that's not the kind of action you would take first -

Mr. Williams: I appreciate that.

Mr. Peters: - unless there was some clearly drastic problem.

Mr. Williams: I still say that OSFI is putting itself in a direct conflict of interest position by stepping in and managing and controlling and running on a day-to-day basis institutions that are still solvent. That's why I ask why you wouldn't tell OSFI to have the management replaced, rather than having OSFI take direct control of the organization.

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Mr. Peters: OSFI is not going to take direct control of the organization. OSFI will wind up the organization before the capitals deplete.

Mr. Williams: You have stated that you, as the minister, will determine in the public interest whether or not to close an institution. What do you mean by ``public interest''?

Mr. Peters: I guess that's a lot of things. One is whether the closing down of such an institution would cause major problems for the country. Certain areas might happen at that time. I would not think that would be used very often, if at all.

Mr. Campbell: Mr. Minister, I have a number of questions. This is an omnibus bill, I guess it's fair to say, containing numerous changes, and it's inevitable in a piece of legislation of this nature that many issues and questions will arise. Indeed, as I think you suggested earlier, some of these are perhaps best left to a more comprehensive review, which we'll be entering upon shortly as we head into 1996 and 1997.

It has been pointed out to me by a number of people in the financial services sector that while the goals are mostly applauded, and certainly from my perspective laudable, some of the technical provisions lead to some perverse results that might work against some of the goals. I want to raise a couple of issues. I've raised two or three with your officials, some of whom are here today.

Just to let you know what they are in case there have been developments.... You reported on one development with respect to CompCorp, and that was welcome news.

With respect to the changes proposed to the Winding-up Act, I've noted, and discussed with your officials, inconsistencies in definitions in the proposed amendments, inconsistencies with definitions of identical or very similar terms in other legislation, notably the Canadian Business Corporations Act and the Bankruptcy Act, which went through its own comprehensive review and set of amendments.

I wonder, first, if you or your officials could comment on why those inconsistencies exist. Won't they add confusion rather than simplify matters?

Mr. Peters: We appreciate your help with those items. We have been discussing those with the private sector and will be looking at them very carefully in the consistency between the various acts. It's a bit difficult with the three separate acts, because they're in three separate areas too.

Mr. Campbell: Speaking as a practitioner, sometimes on the periphery of this area, it is very difficult to advise people on the outside when you have inconsistencies in legislation.

I appreciate that response.

The next issue concerns the matter of unaffiliated directors. I've brought that up, also. While the goal there is laudable, I question whether the result will be the opposite of what you intended. By requiring that unaffiliated directors on the board of a regulated institution not serve on the board of the unregulated parent, will it in fact lead to organizational and operational difficulties? It is simply very difficult to recruit qualified directors in the environment we face today. It is difficult to staff committees. In fact, I would have thought that it is helpful in a parent-subsidiary relationship to have unaffiliated directors serving on both boards so they can have the background and transmit information back and forth to the extent that's permissible.

Do you have any comment on the rationale for that change?

Mr. Peters: The question is not that they cannot serve; it is that there must be some on the regulated board who are independent of the parent company. If you have two identical boards, then there is a question as to whether the parent, which is unregulated, would supersede its views on the regulated entity. So just having some of the directors of the regulated entity independent of the parent is one way of ensuring that there is a view of the regulated institution separate from its parent. That's the only point. It doesn't prevent there being a number of directors from the parent on the subsidiary.

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Mr. Campbell: I misspoke. I understood that. But the fact that there is a limit flies in the face of the difficulties that entities have in recruiting directors. It makes it that much more difficult.

In any event, I thought the essence here was that we were talking about independent directors. So I wondered what the danger in the overlap is if we're talking about independent directors.

Mr. Peters: The danger is that the view of the parent is going to supersede any independent view of the subsidiary, that no one will be sitting on the subsidiary board who will take an independent view of how that regulated subsidiary is operating and that the view of the parent will be superimposed on the other one.

Corporate governance is always a difficult question. This doesn't ensure that they'll be vastly independent, but it does give it a move in that direction.

I realize that getting good directors is more and more difficult - largely because the responsibilities are now being realized more and more, which is a good thing.

Mr. Campbell: With respect to early closure powers now going to the superintendent, what was the rationale behind not providing a right of appeal when the superintendent exercises those powers? I think I'm correct in saying that when an entity would be able to make representations to the minister, the minister could intervene, but there's no formal right of appeal as I think currently exists.

Mr. Peters: The current legislation requires that I, as the minister, come to an independent view as to the solvency of the institution. As you can well imagine, that's rather difficult and basically fairly inappropriate. The superintendent, who deals with the regulation of the institution on a day-to-day basis, is clearly the only one who can make that.

The minister's role in this is only to take the public interest into account, and if there is a clear case of public interest, then the minister can make an exception to the superintendent's rule.

The other thing, of course, is that the corporation can always apply for a judicial review in a federal court if they wish to do so.

Mr. Campbell: I have two other quick questions, both really relating to the same issue, which is whether the changes in 1992, the changes in this omnibus bill, and the changes that we'll look forward to in 1997 all add to competition in the financial services sector or they inadvertently, or perhaps intentionally in some cases, go in the other direction.

I raise first the issue of access to capital, particularly with respect to mutual insurance companies. There were changes in 1992, which have not turned out to give those entities the opportunity to raise capital through either demutualizing and issuing common shares or issuing constrained shares. I wonder if you were speaking to the industry with respect to those changes and whether or not other changes might have been considered in this bill to enhance the access to capital for that sector.

Mr. Peters: Yes. Demutualization and the access to capital from the mutual companies are clear issues that are going to be part of the 1997 revisions. We're looking carefully at that; we are in consultation with the industry on those matters.

Mr. Campbell: To conclude, I have another question related to competition that I'm particularly concerned about, and that is access to the payments system, the Canadian Payments Association in particular. I've been told by entities in the financial services sector that are not chartered banks that they're precluded from membership in the CPA. That precludes them from joining the Interac network, which has repercussions on their ability to market their products and on access for their policyholders, their customers.

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Do you have any comment on the status of that restriction on other players in the sector?

Mr. Peters: That is clearly something that has been put forward in the briefs that we have received for the 1997 revision. We will be carefully considering all the points of view on those briefs.

Sure, industry has access to the payments system through subsidiary trust companies. They are allowed to own a subsidiary trust company, so that method is available right now - but not directly, any more than the banks have access to selling insurance directly. They can own an insurance company as a subsidiary. That is the way in which the 1992 legislation was set up.

Mrs. Stewart (Brant): I would like to follow the line of questioning we were discussing when we were talking about the differences between the CDIC as a protection arm and CompCorp. You very logically and practically responded to Mr. Williams' concerns identifying why the CIBC should have access to CRF funds.

The difficulty I have with that is that despite the logic and the theory there, the public perception still is that banking or deposit-taking institutions have access to government-backed support but the insurance companies do not. It is this public perception that essentially creates the potential issue of unfairness, for lack of a better word.

How can we deal with that in terms of explaining the logic for the difference and to ensure that the insurance companies feel that there is parity there?

Mr. Peters: The insurance companies have a very long history. Indeed, take a look at the rankings of the insurance companies. They are ranked very highly in safety and soundness.

What you have seen over the last few years, especially with the Confederation Life failure, is that some questions were raised about the insurance companies. It was very similar to the time in the mid-1980s when there were the first bank failures. Some serious questions were raised about the banks and deposit-taking institutions at that time. That is the kind of thing we are seeing right now.

The insurance companies have sets of liabilities quite different from those of the banking institutions. They are not part of the payments system. Their risks are of a different nature.

We need consumer protection, which CompCorp is providing and has provided quite adequately; but you do not need the resolution of those issues nearly as quickly as you do for a deposit-taking institution.

A deposit-taking institution has the other aspect of systemic risk that the insurance companies do not have.

I know that is a very strong question being raised by the insurance industry on not being fair. We have briefs on it. We will be considering those very carefully in the context of the 1997 revision as well.

Mrs. Stewart: Following on that, one of the topics we discussed in our briefings earlier was the issue of stacking. I notice that in the legislation we have not really addressed the opportunity that exists for people to increase their protection by depositing funds with affiliated companies.

Why is this? Is it because we feel that it is really not the government policy that has allowed that to happen and that it can be managed through CDIC administration? Is it because we don't see that it has an impact in actuality?

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Mr. Le Pan indicated to us that the average level of saving was about $20,000, not close to the $60,000 that is insured. Further to that, if that is the case, was there any thought of reducing the level of protection at this point?

Mr. Peters: Let me address the first question.

The reason why we dropped the stacking we originally had in there was that we found that the consultations with CDIC, with the industry, would be administratively difficult, that the consumer would be confused as to what was and was not insured. He is confused enough now, without adding to his confusion. He would then have to know exactly who the subsidiaries of this company were and whether he had a deposit in this one or that one. That was questioned.

There was another reason why we left the $60,000 limit. There were people who said that it should be much higher. If you will think about it for a few minutes, the transitional arrangements would be very difficult. You would have a $60,000 deposit insured as of today. If you changed it to a maximum of $30,000, then how would you treat the transition with your account? It is not a proposition that is easy to consider.

I do not think that $60,000 limit poses a major question. After all, in the U.S. it is $100,000 U.S., which is probably $130,000 Canadian, which is roughly double what ours is.

Mrs. Stewart: I am desperately fascinated by the process of intervention. We will probably have more detailed questioning with the witnesses from OSFI.

We talk about the before part, but what about the after part? When we have barriers, as you admit there will continue to be, what about the value of post-mortems, of audits of barriers? Where do you see that level of review being done more often, more effectively? As we talk about the process and the role of the superintendent, I wonder if that has come into your line of thinking.

Mr. Peters: I think some of the most effective reviews of that have come from the parliamentary committees. Both this committee and the Senate committee have very effectively asked questions of those and have brought that out widely in the public. That is the most effective.

Mrs. Stewart: So you would see it continuing to be the role of this committee?

Mr. Peters: Absolutely. The chairman can call anybody he wants to appear before it.

I suggest that some small trust company failure is not going to be of public interest, but some major ones will indeed be of substantial interest.

[Translation]

Mr. Loubier: Minister, I would like to come back to a question I asked earlier. Why add to the complexity, duplication, overlap and number of players involved in the present clearing system, for instance, when you already have the Quebec Securities Commission, the Ontarian Securities Commission, the Quebec Inspector General for Financial Institutions, the Canadian Payment Association as well as other organizations that are already there? All you're doing is adding to the cost of what's already being done, and well done, by the Quebec and Ontario commissions, when you have no expertise. You are out of your jurisdiction. And in response to the question raised byMr. Williams earlier, provincial jurisdiction should be respected and waste should not be encouraged.

Don't tell me that the Reform Party is now encouraging waste. This is what I'm getting at. Minister, why are you adding unnecessary costs, when we already have very efficient players in this area? That is my question.

[English]

Mr. Peters: Absolutely not. We're not adding anything. As the lender of last resort now, the Bank of Canada has the responsibility for the systemic risk in the system. This is not adding a new layer; it is making the clearing system a more viable and better operating one and providing for bringing Canada's payments system up to international standards in the large value transfer system that is being developed.

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Mr. St. Denis (Algoma): I apologize that my flight didn't allow me to get here sooner. If you've already dealt with this, then I'll be pleased to defer.

On the question of the superintendent's authority to close an institution before capital is depleted, on page 4 of your notes, will the superintendent have in the future or has he now...? I realize that it's a very subjective thing to decide in a given situation what action should be taken, if it is needed. Are there benchmarks? Are there rules or formulas that would guide a superintendent in making a decision on closing or getting involved with an institution?

Mr. Peters: Yes. I think you've seen our white paper. There is a schedule of intervention in it. It gives some clearer indication - much clearer than ever before - as to exactly what will happen when certain areas are breached. So it's much more transparent than it has been in the past.

But when you get down to it, when the last days are there what you need is a superintendent who is experienced, who is competent, and it's a judgment call. You rely on his questions at the end. That's all you can say. You've got to have the best guy there whom you can get. That's the key.

It's always a judgment, whether it's closed before, after, or when there's any capital left.

Mr. St. Denis: It's helpful to know that it's much clearer for the superintendent under Bill C-100.

The other question has to do with the proposals for risk-relating insurance premiums. One of the arguments I heard against this is that it would skew the system against the smaller firms, where necessarily actuarial compilations might indicate that there is higher risk in a smaller institution. Is that a concern?

Mr. Peters: The premiums on most deposit insurance are a relatively small amount of the total expenditures of a firm.

Yes, it does skew it - against the firm that is riskier. Whether it's a big firm or a small one, ones outside of the acceptable levels of risk will have to pay a higher premium. This is as it should be. The message will be there clearly to managements and boards of directors: get your house in order; this is a message for you to bring your company back into the main line of risk-taking.

Mr. St. Denis: So smaller firms shouldn't be more concerned that their assessments will be higher just because they are smaller.

Mr. Peters: Not necessarily. The riskier firms will.

Last year we had the Confederation Life failure, and that was certainly not a small firm.

The Chair: Now that these acts have been opened up, would it not be wise to consider the possibility of including the remedy of shareholder oppression in the legislation? It's a remedy that applies under most corporations acts in this country.

When a minority shareholder is being oppressed by the majority, does that not impact to a certain degree on the financial stability of the institution itself?

Mr. Peters: That's another area that would be useful to look at for the 1997 review. It's not included in this section because we wanted to get the changes in supervision through quickly, that's all.

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The Chair: Is it something that could be added very quickly to this, or is it beyond the scope of this bill to consider such a thing at this time? If there is a consensus that this would be a useful addition to the legislation, is it something with which we could proceed immediately?

Mr. Peters: I would want to have some consultations with various industry participants and have a clear view from the stakeholders and others. I think it is something we could examine with the 1997 review. It would be rather difficult to put it in this bill without that kind of open review to the stakeholders.

The Chair: Perhaps our committee testimony will be able to provide some light on that issue, and perhaps the stakeholders could get back to your office very quickly to see if they have any objections to our proceeding with that type of recommendation at this time.

Mr. Peters: We'll be happy to listen to it.

The Chair: Minister, thank you for being with us. Thank you for doubling your period of testimony before us.

We, as parliamentarians, were faced with a very difficult situation when Confederation Life went under. When financial institutions go broke, a tremendous number of Canadians suffer.

You've responded. You have obtained a consensus, through what I think has been a very valuable process, from the major stakeholders in the country, and you have acted on it and you have buttressed the protection for policyholders in a number of areas. As you can see from the testimony here, these are all grey areas and probably no perfect line can be drawn. But you have taken the legislation forward a long way, with the consensus and concurrence of the majority of the stakeholders. It doesn't mean it's perfect. It doesn't mean that we, as parliamentarians, will ever achieve perfection in what we undertake, but from what we've heard it is a valuable step. We commend you and thank you for appearing before us today.

Mr. Peters: Thank you very much for listening to me.

The Chair: We shall take a two-minute break.

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PAUSE

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The Chair: Order.

Members, we are one hour behind our proposed schedule, but these issues are important. I apologize for this delay, but I know that with your support we'll be able to hear all the witnesses and give them their due regard.

Our next witnesses are from the Office of the Superintendent of Financial Institutions of Canada: the new superintendent, Mr. John Palmer, and André Brossard, director, legislation and precedents.

Mr. Palmer, this is your first appearance before our committee. We welcome you and we look forward to working with you in the future.

Mr. John Palmer (Superintendent of Financial Institutions of Canada): Thank you very much, Mr. Chairman.

I have a brief opening statement, which I would like to go through, if you wouldn't mind, and then I'll be available for questions.

I am very happy to meet with you and members of your committee this morning to discuss Bill C-100. As you have noted, I am accompanied by my colleague Mr. Brossard, who has been very much involved in the development of the proposals you find contained in Bill C-100.

Given the committee's timetable, I thought I would briefly describe this morning what I see as being the main benefits of Bill C-100 from OSFI's point of view.

Many of the legislative proposals contained in Bill C-100 were developed in response to recommendations put forward by various parties, including parliamentary committees. These recommendations responded to past experience in working with existing financial institution legislation and a perceived need for change in a number of areas.

One of the issues, which has been addressed in the legislative proposals you are examining, is the role of OSFI in protecting the interests of depositors, policyholders, and creditors. Bill C-100 contains a new purpose clause for the OSFI Act, which notes that the role of OSFI as a regulator of financial institutions is to contribute to public confidence in the Canadian financial system.

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That purpose clause is followed by a proposed mandate or set of legislated objects for OSFI, which has four main sections.

The first notes that OSFI supervises financial institutions in order to determine whether or not they are in sound financial condition and in compliance with legislation and other supervisory requirements that apply to them.

The second section addresses the issue of prompt action. In cases where deficiencies are identified through the supervisory process, OSFI is promptly to advise management and the board of directors of the institution. Depending on the circumstances, OSFI will then ask or require the management and board to take action to deal with the situation in an expeditious manner.

The third section of the proposed mandate sets out the role of OSFI in promoting the adoption by management and boards of directors of policies designed to control and manage risk.

The final section of the mandate deals with the role of OSFI in reviewing issues or events that may have an impact on the financial condition of financial institutions.

There are additional proposals that help to interpret OSFI's mandate. They reflect two fundamentally important principles.

The first is that OSFI must focus on protecting the interests of depositors, policyholders, and creditors of financial institutions while at the same time recognizing that financial institutions must be allowed to compete and take reasonable risks.

The second principle is that management and boards of directors, not the regulator, are primarily responsible for the well-being of institutions and that in some circumstances financial institutions may fail.

The proposed mandate establishes a standard against which OSFI can be held accountable. OSFI can help to ensure that institutions are able to absorb shocks through measures such as requiring the maintenance of adequate capital.

OSFI can also help by working with management and boards of directors in an effort to ensure that institutions are following good management practices and instituting best practices where appropriate. At the same time, it must be stressed that these actions will not always ensure that institutions will not suffer losses or will not experience a degree of financial difficulty that will prevent them from continuing to operate. In these circumstances we will act to close the company in order to minimize the losses suffered by depositors, policyholders, and creditors.

I would also like to touch briefly on the new closure regime, since it relates to the ability of OSFI to carry out its mandate effectively. The new closure regime gives OSFI more flexibility to close institutions without having to prove insolvency. Currently, OSFI has more scope to close an insurance company before it is insolvent than it has with respect to a deposit-taking institution. The new regime allows additional flexibility to take control of all types of federally regulated institutions and applies the new framework for closure to all institutions.

This does not mean that closure is necessarily the right answer to every institution's problems or that previous problem-company situations would have been managed very differently if these powers had been available in the past. However, where it is appropriate, OSFI will have more flexibility to act early and decisively to protect policyholders, depositors, and creditors.

Other measures in Bill C-100 are also important. Legislative authority to appoint an external actuary for an insurance company at the company's expense is one useful supervisory tool, since it gives OSFI more scope to obtain additional information on the condition of an insurance company.

For deposit-taking institutions, OSFI already works closely with the Canada Deposit Insurance Corporation to obtain adequate information on CDIC member institutions.

While I'm on the subject of coordination with CDIC, I will mention the emphasis that Mr. Grant Reuber, the chairman of CDIC, and I, with our colleagues in the two agencies, are placing on improving the working relationship between OSFI and CDIC. I think we've made real progress over the last few months and that progress will continue.

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One example of this is the guide to intervention that was prepared jointly by OSFI and CDIC for the deposit-taking sector. A separate guide for insurance companies has also been released by OSFI. These guides will help institutions to understand and expect a range of supervisory activities should their financial condition deteriorate.

In addition, OSFI is developing, in consultation with the Canadian Life and Health Insurance Association, standards of sound business and financial practice for life insurance companies. These standards are modelled on the standards that now exist for deposit-taking institutions, with changes as necessary to recognize the unique features of life insurers.

The development of standards for the property and casualty insurance sector will follow.

Bill C-100 also contains provisions that allow the superintendent to designate certain directors as affiliated and to veto the appointment or election of directors and senior officers of problem institutions. I can assure you that these powers would be used carefully and sparingly. However, good corporate governance is too important a substitute for more detailed supervision not to consider some additional powers in this regard.

I'll conclude by noting that there are other aspects of Bill C-100 that I consider to be beneficial, such as establishing the framework for more disclosure of information about financial institutions. There's a process under way now, triggered by provisions of Bill C-100, to ensure that more information on the financial condition of companies makes its way into the public domain.

For example, I've been noting in other venues the importance of making more information available on key actuarial assumptions that are used to develop the liability side of a life insurance company's balance-sheet. This is one area that the public knows little about but that determines the largest number on an insurance company's balance-sheet.

I should emphasize that the new framework for disclosure provides for more disclosure of information originating with the financial institutions. The disclosure may be via releases from the institutions themselves or through OSFI using data submitted to OSFI by the institutions. But it is data from the institutions themselves.

We are not planning to disclose publicly OSFI's own evaluations of financial institutions, nor any regulatory actions that are being considered or that may be under way. There are valid public policy reasons for this.

First and foremost, the regulator is in a position of knowing more about the institutions it regulates than anyone other than the principals of the institution itself. As such, the regulator is in the unique and powerful position of being able to cause an institution's demise by almost any sounding of the warning-bells. This power must not be abused.

In the majority of circumstances, institutions experiencing some financial difficulty have been able to turn themselves around. One important function of the regulator is to encourage this possibility and not to set in motion a self-fulfilling prophecy that leads to the end of the institution.

A fundamental issue that bears on this is the way in which financial institutions differ from other commercial or industrial enterprises. Financial institutions are highly levered. When I talk about highly levered, I'm talking about 20:1 versus 1:1, by way of example. So the difference is dramatic, and that creates very different conditions and very different behaviour patterns within those institutions.

It makes financial institutions highly vulnerable to runs or rapid withdrawal of funds. Inevitably, those who first move money out of financial institutions in response to worrying news are those who are the most sophisticated or those whose money is not otherwise locked in for an extended term, leaving behind the least sophisticated or those who are locked in by longer-term vehicles, and their loss will be greater as a result.

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Another consideration is how the regulator's ability to obtain thorough and timely information would be impacted on if institutions expected that confidential information about their institution would make its way into the public domain forthwith. I would be very concerned about any regime that would effectively restrict our information-gathering ability.

Having said that, I think there are additional ways to ensure that the system works to the benefit of policyholders, depositors, and creditors, and Bill C-100 has made progress in this regard.

An important step is to get more information on the financial condition of institutions out into the public domain. Bill C-100 and its related activities will bring us further along in this area.

Second, the new OSFI mandate and the new closure regime will push us to resolve uncertainties as to the fate of troubled financial institutions more quickly and decisively when circumstances warrant.

Given my promise to be brief, I will not elaborate any further at this time.

I would like to say in closing that I believe the provisions of Bill C-100 and the related measures that are under way will help enhance the safety and soundness of Canada's financial system.

I would also note that I am aware of a range of briefs that have been submitted to your committee containing a number of suggestions that are worth considering. Some of these suggestions could potentially be addressed through amendments to Bill C-100, while others may take more time to consider and could be addressed through the 1997 review of the financial institution statutes.

My OSFI colleagues and I are at your disposal to assist you in weighing the various suggestions and the practicality of dealing with them earlier rather than later, as you wish.

Thank you for providing me with this opportunity to appear before you this morning. I look forward to your questions.

The Chair: Thank you, Mr. Palmer.

[Translation]

Mr. Loubier, please.

Mr. Loubier: Thank you, Mr. Chairman. Welcome, Mr. Palmer and Mr. Brossard. I have two brief questions for you. They really are brief.

Here is the first one: I would like to have your opinion on this. Bill C-100 enhances the power of the superintendent general of financial institutions in Canada through an extension of the notion of insolvency, which is exclusively within the federal authority.

That being said, when you examine the list of additional powers granted to the superintendent, you notice a potential overlap of the duties of the inspector general of financial institutions in Quebec and of his opposite number in Ontario, in particular.

In an overlap situation, there is the possibility of an appeal for an institution identified by the inspector general of financial institutions in Quebec as a candidate for restructuration, bankruptcy or more license withholding of permit. Some claim - and there is a real danger there - that the institution may be tempted to challenge the role of the inspector general of financial institutions in Quebec because as the superintendent general of Canada, your powers have been increased and your duties overlap with those of the Quebec inspector.

So, I would like you to give me more information on the matter, to reassure me if you can, because no one has reassured me up to now. Instead of mitigating the uncertainty and the potential of instability in the sector, you're creating them, which can only have middle-term prejudicial impact on the Quebec and Canadian financial sector.

That is my first question.

[English]

Mr. Palmer: Thank you for your question. I do not believe that there is any significant overlap between the federal and the provincial financial institution regulators except perhaps in the securities area.

Even there the overlap is not extensive and tends to arise because of the growth of financial conglomerates that have within their operations activities, some of which fall within the domain of the federal regulator of financial institutions and some of which fall within the domain of provincial securities administrators.

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For the most part, we have financial institutions that are incorporated either under federal jurisdiction or in provincial jurisdiction. In those cases, there is virtually no overlap. The federally incorporated institutions are supervised by the federal regulator, my office. In the case of, for example, an institution that is incorporated in Ontario or Quebec, they are supervised by the provincial regulator. So under existing legislation there is no significant overlap.

The new legislation, which, as you accurately point out, gives the superintendent the opportunity in the case of troubled financial institutions to act a bit earlier than might be the case under existing legislation, does not in any way add to the relatively small amount of overlap under existing legislation.

[Translation]

Mr. Loubier: Mr. Palmer, in both your answers, you recognize that there was overlap, however insignificant. There was a new player in the area of exclusive provincial jurisdiction, that could allow additional appeals for an institution targeted by the Quebec Inspector General of Financial Institutions.

Secondly, you recognize - contrary to what the Secretary of State responsible for the bill said this morning - that there could be an overlap in the securities area. This sector happens to be under the exclusive jurisdiction of Quebec, and it is to Quebec's Inspector General of Financial Institutions who must intervene in that area to use the additional powers that the bill aims at giving you. So, far from being satisfied I am even more concerned by your answers, Mr. Palmer.

My second question is the same as the one I asked the Secretary of State, this morning. To reduce or eliminate systemic risks, more commonly called the domino effect in the financial sector - that is the risk that a player may not honour his obligations and that another related player be placed in the same situation, creating a domino effect and the possibility of a crash in the financial sector - are there other means than giving you more jurisdictional powers in Quebec and in Ontario, as well as enhancing the powers of the Governor of the Bank of Canada? The latter enjoys considerable powers, among others, the authority to issue directives to reduce systemic risks at the level of the clearing houses already regulated by the Security Commission of Quebec and Ontario, as well as at the level of the participating institutions in these clearing houses. Are there other means, apart from what offers Bill C-100, to eliminate systemic risks?

[English]

Mr. Palmer: Dealing first with your follow-up remarks upon my previous answer, I have to tell you that you have misconceived the answer I gave you. There is no new player as a result of this legislation.

OSFI existed under the previous legislation. OSFI exists under the new legislation. It is not entering into the provincial domain in any respect that did not previously exist.

I did tell you that an interesting phenomenon is developing in the area of securities legislation, but that is not by virtue of any legislation. It is existing by virtue of trends within the marketplace as a result of the formation of financial conglomerates.

We find ourselves with big organizations, multi-faceted organizations that have banking operations, security operations. My office is responsible for regulating the banking operations. The provincial securities administrators are responsible for supervising the securities operations. The two levels must work together to ensure that nothing falls between stools. Indeed, it is not so much a question of overlap as it is a question of making sure that something is not missed as a result of the two jurisdictions.

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My office works extremely well with the securities administrators. We have signed memoranda of understanding with the various securities administrators and we have very effective cooperation with them. So I do not think there is any case to be made that there is overlap, duplication, of a dysfunctional nature in this area.

There is some concern about something being missed in the two jurisdictions, but the administrators and my office work effectively to minimize the chances of that occurring.

I think your follow-up question must be corrected in that regard.

[Translation]

Mr. Loubier: I was just repeating what you said, Mr. Palmer. You said earlier that if there is overlap, it is minimal and in the area of securities. I simply repeated what you told me. I would like an answer to my second question on the systemic risks. Is there another way than that provided for in Bill C-100 to reduce or suppress the systemic risks for the Canadian financial sector?

[English]

Mr. Palmer: That is a question that would be better put to the Governor of the Bank of Canada, since it is really the bank that would be asked to play a role in dealing with the systemic risks arising from these large payments.

I am not sure I can help you with that particular question.

[Translation]

Mr. Loubier: But, to your knowledge, there are no other means used somewhere else? Have you ever heard that there would be a way through consultation, real consultation between the provinces, or through bettering of the existing systems to reduce or suppress systemic risks?

[English]

Mr. Palmer: In other countries it is the central banks that handle this responsibility, so the only precedents of which I am aware are those from other countries in which the central banks play this role. That is not to say that there are not others, but I am not aware of them.

Mr. Williams: I see that OSFI is going to have the power to veto the appointment of directors. Are you going to be given the power to remove directors?

Mr. Palmer: No.

Mr. Williams: Why?

Mr. Palmer: First, I should clarify your question. We are being given the power to veto the appointment of directors of problem financial institutions, so we would have this veto power under the legislation in very limited circumstances.

The second part of your question was why we do not have the power to remove directors. I suppose that the short answer is that we did not ask for this power.

We did not ask for it because we were concerned, frankly, about our ability to exercise it in all circumstances. There may be many situations where there are directors who, unknown to us, are not fully qualified to be exercising their responsibilities as directors. Unknown to us, there may be an inappropriate relationship between a director and a chief executive officer of an institution.

I do not think we could ever practically gather the resources to exercise that power effectively. Once that power exists, there is the expectation that we shall use it. We feel that the power to veto the appointment of directors for troubled institutions is enough to reduce an area of risk in the system that we have identified.

Mr. Williams: It was rather strange to me that in an area of a troubled institution that has got there by virtue of the management and the board of directors, you would not want to have the power to remove those whose mismanagement you are trying to correct.

Mr. Palmer: The institutions get into trouble for a variety of reasons, not only because of mismanagement. There can be circumstances in the marketplace that arise and are unforeseen. We are talking about a rather complex issue. I do not think it follows that we would want or should have the power to remove directors in every situation.

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There is another issue that underlies this. That really is the question of who is responsible for managing and directing the affairs of financial institutions.

The philosophy that underlies Canadian corporate legislation, Canadian financial institution legislation as it exists now and as it would exist under this bill, is that directors are ultimately responsible for the management of financial institutions.

If OSFI went in and fired the directors, then it is OSFI who is managing the financial institution. But OSFI does not have the capability to do that, and I am not sure that philosophically that is the correct stance.

Mr. Williams: That answer seems to be in direct contradiction to what the minister was just telling us, that when OSFI sees an institution that may be close to being insolvent, yet still is solvent, OSFI will go in and take control and manage and direct it. That is the impression I got from the minister: that you would be going in and telling the directors and management to step aside because ``You are going to do it our way''.

My point is, is your way guaranteed to be better than their way? I see no reason why it should be.

Number two, do you not have an inherent conflict of interest and a liability if you are going to start directing management on how they are going to run that institution? Yet you do not feel you should have the power to remove directors.

There seems to be a lack of thought going into the legislation as to how you are really going to address OSFI's role in an institution that is close to being insolvent, yet is solvent, that might have a complete turnaround plan put forth by the board of directors that you might not find to be plausible in your eyes. Yet you are going to say to them, ``You shall do it our way''. You are going to direct them in how they are going to run their institution.

It seems to me that you have taken a very direct, clear role in the management, yet you are saying that is not your role.

Mr. Palmer: You are making a fundamentally incorrect assumption, if I may say so. You are assuming that the new legislation gives OSFI the power to come in and manage the institution. OSFI will not do that, and it does not do that. If OSFI takes control, then it will be doing so with a view to shutting down the institution.

Mr. Williams: Only?

Mr. Palmer: Virtually only. There might be limited circumstances in which it might be attempting to precipitate a restructuring and selling off of divisions, but the whole thrust of this legislation is for OSFI to step in and take control when it looks as if the directors, the director-led team, cannot pull the troubled institution out of its descent into bankruptcy.

Mr. Williams: Even though it is still solvent?

Mr. Palmer: Solvency is a rather complex item. My guess is that even though an institution at the point OSFI goes in and takes control may well still meet the legal test for solvency, it is probably, when all the final returns are in, not solvent. There are difficult issues of evaluation, what you can fetch when you sell off assets. ``Solvency'' is a rather difficult term in this context.

I want to clarify this. We would not be coming in to run institutions under this legislation. We would be taking control only when it was clear that the institution no longer had a future as a going concern and it was necessary to close it down in the most effective way in order to maximize the assets available, to satisfy claims of depositors, policyholders, and creditors.

Mr. Williams: In the interests of giving the others a chance to question, I will stop there. If there is an opportunity to ask more, then I would appreciate it.

The Chair: Thanks very much, Mr. Williams. I appreciate your gesture.

Mr. Walker.

Mr. Walker (Winnipeg North Centre): On the question of the risk premium and the confidentiality of it, how do you ensure from the company's point of view that it will not have to be released, for example, at a shareholder's meeting so that people will get a signal that something is going on? Is it a confidential arrangement that is signed so that people will not figure out exactly where they fit in the company in which they have a holding?

Mr. Palmer: There is no guarantee of this. OSFI certainly will not be disclosing the existence of risk-rated premiums. Nor indeed will CDIC, to the best of my understanding. So it is really a question for the company's management and directors to decide.

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The auditors will look at the whole range of issues that might be disclosed, the ability of the organization or the institution, for example, to continue in existence for one more year and whether there should be a going-concern qualification in the auditor's opinion. Management will look at whether it has a responsibility to disclose this kind of information in the management discussion and analysis section of the financial statements, but I would have thought that there is no compulsion to disclose the existence of a risk-rated premium in and of itself. It's a judgment that management, the directors, and the auditor would have to make in the context of a variety of other issues that affect the health and well-being of the financial institution. It's simply one more fact.

Mr. Walker: I wasn't worried about the compulsion as much as about the obligation. Would you assume that if a shareholder stood up at a meeting, they would be obliged in that context?

When you write a letter indicating what the premiums are, is the risk assumed or articulated?

Mr. Palmer: If a shareholder wrote to the chairman of the board and said, ``Please tell me what category of CDIC premium you are paying'', then I assume the chairman might want to respond to that. So there is that issue.

But OSFI and CDIC themselves will not be disclosing these premiums.

Mr. Walker: When you write the letter, it will indicate the category. That's part of my question.

Mr. Palmer: Please understand that this is a CDIC premium; it's not an OSFI premium.

Mr. Walker: Does CDIC indicate the category?

Mr. Palmer: I assume they would.

Mrs. Stewart: Probably we would all agree that there are no silver linings to be found in the winding-up of Confederation Life and Central Guaranty. However, given the proximity of their demise to the introduction of this legislation, I assume you have taken the opportunity to look at the staging process and your intervention strategies and overlay that onto the actual story of Confederation Life, and perhaps Central Guaranty.

I'm just wondering, if in fact you have done that, what you think might have happened had you had the power and the authority that will be granted to you under Bill C-100. Can you talk about where stage two happened, where stage three happened, whether in fact you could have intervened in a way that might have effected real change in the outcome? It's a live example that gives us an opportunity to test the process of intervention, and I would be interested in your comments in that regard.

Mr. Palmer: It's a good question. I don't really think I'm in a position to talk about what might have been in the case of past financial institution failures, but I will make a couple of points.

One, we certainly did look at past experience in putting together our wish list of changes to financial institution legislation, much of which was reflected in the bill you see before you. So we have been very much influenced by past experience in formulating these recommendations.

The second point - and this might be not what you're driving at, but it's important to make it anyway - is that a lot of the changes will not deal with the issue of whether a financial institution fails or not. They really address the issue of how to maximize the return for depositors, policyholders, and creditors; if failure occurs, if failure is inevitable, how we can ensure that the losses for these groups of stakeholders are minimized.

To put it in another way, I don't think there's anything here that would have significantly enhanced the ability to survive of the companies you've named. The changes have really been directed at making sure there is more left at the end for the depositors and policyholders.

Mrs. Stewart: Does that suggest that once companies get to perhaps stage two, stage three, very rarely is there an opportunity to return to health?

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Mr. Palmer: I would separate stage two and stage three in that respect. We've got quite a number of examples of stage-two companies returning to health throughout the last recession. At stage three it's becoming a longer shot. I could probably think of some stage-three companies that came back as well, but your risks are getting longer at that point.

That's really the crux of this bill: the need for OSFI to make some very tough judgments about the ability of the institution to make it, the ability of the directors and management, who we can assume are working very hard to deal with the problems with which the institution is wrestling. Will they make it? What's the balance of probabilities? What this bill does is say that OSFI has to give the institution perhaps less of the benefit of the doubt than might have occurred in the past, balancing the interests of the shareholders on one hand and the interests of depositors, policyholders, and creditors on the other.

Mrs. Stewart: I was struck by some words you used as you were wrapping up, saying that this bill allows us to make progress in this regard in terms of responding to the interests of depositors and policyholders and that it moves us further along. They seem like tentative words or they seem to indicate that you have some things that you would like to see in addition to what we have in Bill C-100. If you could just comment on what those things might be, they might be of value to us as we proceed in future discussions as we review the acts for 1997.

Mr. Palmer: You picked up an important nuance. In using those words, I didn't mean to suggest that I'm satisfied with the disclosure regime that is put forward. In using that slightly softer language, I was recognizing that the extent of desirable disclosure is something that many people have views about. Some people would like to see almost every aspect of an institution's activities publicly disclosed; its strategic plan, its very confidential competitive information they would like to see on the table. There has to be a compromise between the need of the public and the people who serve the public, such as financial analysts and rating agencies, for information and the need of the institution to maintain the confidentiality of important competitive information, and also just the whole question of cost.

Distributing information is costly and often requires modification of information systems, so we need to come up with something that is cost effective.

So what we're putting forward here, the disclosure regime that will follow, triggered by this particular bill, is a compromise that attempts to balance what we think the public need - indeed, what the public and their representatives have told us the public need - to help monitor the health of the financial institutions in which they invest and place their money and the issues of cost and the issues of competitive information on the other hand.

Mr. St. Denis: A moment ago you mentioned the importance of balancing the interests of depositors, creditors, and shareholders. Is it a fair assumption, though, that the interests of depositors would be paramount, that as you do the analysis their interests would come first, because of the nature of the relationship of the institution to the marketplace?

Allowing that shareholder interests still are important, when you make a decision to close an institution, at the same time, concurrently, can you stop public trading of shares if that company happens to be publicly traded?

Mr. Palmer: I understand your question. The short answer is yes. Our focus really is on protecting deposits and the policy obligations rather than on protecting the shareholders. The shareholders are really protected by securities legislation in the case of public companies and by corporate legislation in the case of private companies.

Indeed, for us the share capital of a financial institution represents a cushion or a buffer to protect the depositors and policyholders. A good deal of our effort indeed is focused on making sure that the organization is adequately capitalized, that they have enough shareholders and enough share capital from each.

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With respect to cease-trading orders and things of that nature, those are really within the purview of the securities administrators in the stock exchanges and are not a function of what we do, although if we step in and seek a winding-up, for example, the cessation of trading is an automatic event.

Mr. St. Denis: It's concurrent?

Mr. Palmer: Yes, but it is not we who would do it.

Mr. St. Denis: Do you consult? To simplify it, would somebody call up the exchange and say, ``Look, we're doing this at noon today, so get ready''? Even though it's a different set of rules that governs the trading, is there cooperation there? I imagine that if there was even a couple of hours of delay, it could cause tremendous confusion on the share capital side of the business.

Mr. Palmer: My colleague says that the answer is yes.

Mr. Fewchuk (Selkirk - Red River): Do you have a veto power to remove the chief executive officer?

Mr. Palmer: Of a company?

Mr. Fewchuk: Yes.

Mr. Palmer: No.

Mr. Fewchuk: You don't. Just the directors?

Mr. Palmer: Under this bill we would have the ability to veto the appointment of a new director to a troubled financial institution. We would not have the ability to remove a director, nor the chief executive officer.

Mr. Fewchuk: So in some cases that's where the problem lies, but you don't have that power.

Mr. Palmer: We have other powers. Our most important power - and it's very important to recognize this - is moral suasion, the ability to sit down with the directors, who are very conscious of their legal positions in managing the affairs of a company, and explain to them that we have very serious concerns about the financial institution that they serve, that they oversee, and in some circumstances to tell them that we have very serious concerns about the behaviour of management. We have expressed those sorts of concerns and action has been taken in many circumstances.

Notwithstanding all of these changes, I believe our most important power is Teddy Roosevelt's bully pulpit, just the ability to make our views known in a very strong and forceful way. We get most of our action in response to that kind of activity.

The Chair: Not unlike our finance committee.

Mr. Williams.

Mr. Williams: I still have serious concerns, Mr. Palmer, about the role of OSFI. When I asked you the question, you said that it's basically to step in and wind up an institution if you felt it was in that bad a situation, even though it may still have some solvency or equity left.

You've just stated that moral suasion can go a long way, which says that when you sit down with a financial institution and say, ``We have serious concerns about your ability to manage. Why don't you do it our way?'', you're stepping in and giving direct, specific advice on the management of a company, and it's all done under the veil of secrecy.

Wrapping up the two questions I have, your direct role in the management of troubled companies, as you define it, is that if you feel a company is in trouble you will step in with moral suasion, discussions, specific directions, and finally closure if you feel it's serious. But it's all done within this veil of secrecy.

I know that CDIC sets the insurance premium rates, but we if were to be able to get out in the public domain that CDIC saw a slight variation or increase in the risk, and hence increased the premium, then the public at large would not be caught totally unaware when you or CDIC make the announcement that a company's going to be wound up.

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I am concerned about the veil of secrecy, and I want you to address why you need it, why you didn't seek the power to remove people from the board or from management, and the conflict you have by giving direction to management in saying that it's got to be done in your way.

The Chair: You have 30 seconds to reply to those three questions.

Mr. Palmer: In quick succession, then, and in reverse order, we don't tell management that things must be done in our way. At no point do we step in and manage the institution. We give advice, we give suggestions, but very rarely do we step in and exercise the overall powers of management, unless we are going to shut the company down.

I've missed one here.

Mr. Williams: The veil of secrecy and the removal of officers.

Mr. Palmer: I've really dealt with the removal of officers. But in summary, we aren't seeking that power, because, first, I don't think we have the capacity to exercise it effectively, and second, I believe it would undermine the fundamental principle of corporate governance that exists in our country.

On the issue of disclosure, I'll put it to you simply. If we lifted the veil of secrecy and we announced publicly, for example, that we had marked institution X down to a category 2 institution, and we've got four categories of troubled institutions.... So this is a category where there are some serious concerns, but the institution has a good chance of working itself back to health. As I replied in answer to an earlier question, our past experience says that in most cases those institutions do come back to financial health. If we were to announce that publicly, then what's likely to happen? The public knows that OSFI is concerned. The most sophisticated depositors will rush for the exits, or those who are fortunate enough to have very short-term deposits, 30-day money or demand money. The depositors who have longer-term money are not able to get out as quickly. The less sophisticated depositors won't understand the significance.

In any case, the amount of institution money pouring out of the institution, given its relatively low level of capital, will be enough to sink it.

Who's left holding the bag? It is the least sophisticated and the longer-term depositors, and their losses may well be a lot larger than would be the case if we were allowed to work with the institution quietly to encourage it and and its management to work it back to health.

It is a tough issue. I understand the difficulties, but I feel very strongly that we need to continue to work on a confidential basis with financial institutions.

Mr. Williams: The junk bond industry was all financed by sophisticated investors who were prepared to accept a higher premium in return for a higher risk. Therefore I am not sure that I agree with Mr. Palmer's assessment.

The Chair: This is an issue on which there will be legitimate disagreements as to exactly where the line is that will work in the best interests of all Canadians, depositors and policyholders in particular. I think this will be the legitimate concern of us as we sit down to write our report.

Mr. Palmer, the minister said that really the key to this increased intervention and surveillance and working with the industry to prevent failures is going to be the Superintendent of Financial Institutions, and we are very pleased to have met you. We wish you well, and we look forward to working with you in the future.

Thank you very much.

Mr. Palmer: Thank you, Mr. Chairman. We look forward to working with you.

The Chair: Our next witness is the Canadian Institute of Actuaries: Marc Fernet, president; and Luc Farmer, vice-president.

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Welcome. Mr. Fernet, would you be good enough to introduce those who are with you. We look forward to your presentation.

[Translation]

Mr. Marc Fernet (President, Canadian Actuaries Institute): My name is Marc Fernet and I am the current president of the Institute. I am accompanied, on my right, by Claudette Cantin, who is an elected member of the executive board of the Institute and fire insurance, accidents and miscellaneous risks consultant. Claudette also sits on the task force mandated to prepare the brief that is presented to you today. I am also accompanied by Moe Chambers, the chairman of that group and past chairman of the Institute.

The brief we are presenting today identifies five aspects of Bill C-100 that, according to us, could be improved: the removal of the appeal process from certain sections of the Insurance Companies Act, the separation of the actuary function from a society, the disclosure, sections 72 and 74 of Bill C-100 and the mention of re-insurance in the changes to the Winding-up Act.

We were hoping that our brief would be ready soon enough to be distributed earlier. Unfortunately, that was not the case. Therefore, I will ask Mr. Chambers to give you a short summary of our brief. Mr. Chambers.

[English]

Mr. Morris W. Chambers (Chairperson, Task Force on Insurance Legislation, Canadian Institute of Actuaries): As Mr. Fernet has indicated, we've really addressed five essential elements of Bill C-100.

The first is the removal of the appeal process with respect to actions taken by the superintendent.

In respect of that, while we strongly support the increase in the powers of the superintendent, we are concerned that those powers should go so far as to be not subject to appeal in certain instances. Consequently, we feel that certain clauses of Bill C-100, in particular clauses 71, 75, 85, and 94, should be removed from the bill.

The Chair: If every action taken by the superintendent is subject to appeal and cross-appeal, all the way up to the Supreme Court, then how can the superintendent ever act?

Mr. Chambers: The superintendent can and does do lots of things that are not subject to appeal. Our concern is with respect to the specific items identified in these clauses of the bill that are not subject to appeal. In other words, I think at least in one instance - and I haven't got these memorized - the matter of the decision to close a company down is not subject to appeal.

Now, we are not suggesting that -

The Chair: If that is subject to appeal, then, in your experience in these things, how long will it take from the moment you file an injunction to when it is finally determined by the Supreme Court of Canada?

Mr. Chambers: I don't have a lot of experience in these things. Thank goodness, there haven't been a large number of instances.

The Chair: No. But in terms of getting through the court process?

Mr. Chambers: It will take a very long time, but there have been appeals with respect to actions taken by the superintendent that are in the courts today. My understanding is that there is a possibility that the removal of these sections of the act may well remove those actions from the courts; in other words, bring about a retroactive move with respect to certain items that are in the courts today.

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Essentially, we're saying that it is beyond the pale of natural justice that actions of the superintendent cannot be questioned. We consider it to be in the public interest that the orders and directives issued by the superintendent not be exempt from review or appeal. We would expect that, generally speaking, the superintendent's actions would not be appealed, but it seems to us that the simple fact that there is a right of appeal will introduce a measure of control into the decisions taken by the superintendent.

The Chair: The question is, do you want the superintendent regulating a wind-up or do you want the courts to do it?

Mr. Chambers: The superintendent.

The Chair: Okay. Thank you.

Mr. Chambers: In the current act the appeal is to the Minister of Finance, and that's the appeal that's being removed, not the appeal to the courts. I'm not a lawyer, but it's my understanding that even if you leave these elements in the act there would still be some element in the court process by which the appeal could be taken. I'm sure there are lawyers who will correct me if I'm wrong.

To continue, the second element we're dealing with is the separation of the function of actuary of the company. Specifically, the bill is suggesting that an individual should not be both the actuary of the company and the chief executive officer or the chief operating officer or the chief financial officer at the same time.

With respect to the chief operating officer and chief executive officer, we agree that this is not appropriate, particularly because of the existence of section 369 of the current act. An actuary of a company has a responsibility to identify impending adverse circumstances in the company that require correction and to inform the chief executive officer and suggest ways in which those adverse circumstances can be rectified. Our feeling is that in circumstances where the chief executive officer, as the leader of the company, is the one who may well have created the adverse circumstances, it's hardly likely that the same individual, when they sit at their actuarial desk, will suddenly realize that they have been misguided. So in the circumstance where section 369 should be invoked, where the actuary is also the CEO, realistically it just would not be invoked.

On the other hand, the bill suggests that the chief financial officer also should not be the actuary of the company. We feel that there are circumstances in which that may well be a good way to organize the company, and we've identified a couple of reasons why or circumstances wherein that would be the case.

At the same time, we have provided some modification of the wording. While we're talking about section 369, we've suggested a small correction that could be made to subsection 369(3) of the Insurance Companies Act in that where an actuary has suggested that changes be made and those rectifications have not been undertaken, the actuary is currently required to inform the superintendent and to advise the directors that the superintendent has been so informed. We suggest that at the same time the auditor should be informed. It's certainly hardly appropriate that the auditor should be kept in the dark.

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We've provided some wording whereby the superintendent would still have the power, in circumstances where he feels that it is not appropriate for the chief financial officer also to serve as the actuary of the company or for the actuary of the company to at the same time serve as the chief financial officer, to separate the functions where he feels that in a specific circumstance this is necessary.

In addition, we've suggested that in section 624 of the act the chief agent of a foreign company currently could also serve as the actuary, and we feel that is almost as inappropriate as the chief executive officer of the company. Certainly, if the company is organized in a way that would have the two functions under the single individual, then that should be subject to the approval of the superintendent.

With respect to disclosure, we've simply made reference to some suggestions that we had made in earlier submissions to the Senate standing committee on banking and commerce and to the Department of Finance. We recognize that disclosure is an important issue. We support the provision of additional disclosure to the public, because it is in the public interest.

However, we are concerned that without a judicious consideration of these matters, simply presenting a lot of numbers or a lot of information that will mean very little to them is unfortunately likely to misguide people more than to guide them. So we have offered to the Office of the Superintendent to work with them - and to Finance Canada, by the way - to find ways in which to disclose, in particular, meaningful information with respect to the actuarial liabilities of the company. In fact, we have established a special task force that will be bringing forth an initial draft report, I believe, at the end of this month.

I'm not part of that group, so I can't comment on how much interchange there has been between OSFI and our organization since we made that offer. I'm aware of some limited contact, but I don't know how much further it has gone.

Clauses 72 and 74 of the bill make reference to ``shareholder of a mutual company'', which sort of set us back on our heels, because by definition a mutual company does not have shareholders, at least common shareholders. We're simply suggesting that some definition of what is meant by those expressions should be provided in the act. Or if they're referring to preferred shareholders, then let's get down to brass tacks and call them that.

With respect to the Winding-up and Restructuring Act, we're concerned about the possible confusion and subsequent potential legal problems that arise from the almost simultaneous use of the terms ``transfer'' and ``reinsurance'', which are very technical terms but seem not to have been used in their technical context in the bill or in the existing act.

The Chair: On the two points dealing with the wording and the technicalities, have you already had discussions with OSFI and/or the minister's office on this?

Mr. Chambers: Not with respect to transfer and reinsurance.

The Chair: But on clauses 72 and 74 you have?

Mr. Chambers: No.

The Chair: So this is the first time.

Mr. Chambers: That's right.

The Chair: I'm sure they'll be amenable to this.

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Mr. Chambers: We got approval by our powers that be to release this only early last week.

The Chair: We will certainly bring it to their attention, but will you also undertake to bring these technical amendments to their attention?

Mr. Chambers: I believe there is now a copy of this submission in the hands of members of the office.

The Chair: Thank you very much.

Mr. Chambers: That is a quick, although perhaps less quick than you would have desired, summary of what we have presented. Also attached to it are a number of submissions that we made over the past year to Finance, to OSFI, and to the Senate committee.

I am aware there are a lot of pages there, but we are willing to respond to any questions you have.

The Chair: Thank you, Mr. Chambers.

[Translation]

Thank you, Mr. Fernet.

Mr. Loubier, do you have any questions?

Mr. Loubier: Not for the moment.

The Chair: Are there any other questions?

Mr. Loubier: We will read your brief very carefully.

[English]

The Chair: One of the big issues that I see coming before us, with which we are going to have to come to grips, is the issue of disclosure. Mr. Palmer pointed out that it can be very damaging to the future prospects of a financial institution if bad news is made public. There can be a run on that institution.

You have brought out the issue of saying that you cannot really trust the public - maybe that is not a fair way to put it -

Mr. Chambers: I hope not.

The Chair: - in understanding actuarial figures, and this is why you have undertaken to come up with a way of describing an actuarial position that will be meaningful to the public.

Mr. Chambers: We hope it will.

The Chair: We appreciate this type of effort.

Mr. Williams, who was here earlier, was saying that we should be disclosing most things, including the risk-rated premiums that will have to be paid to the CDC by financially weaker institutions. I'm not sure where we should draw that line. It is a very difficult one to draw.

Mr. Chambers: I absolutely agree that it is a very difficult line to draw. At the same time, I certainly speak personally - and I believe I can speak for the organization - in saying thatMr. Palmer is exactly right, that you certainly do not want to be making certain information public. The regulator in particular, and certainly actuaries, do not want to make public information that is of a cautionary nature but that, because of its becoming public, creates a disaster that need not have happened.

The Chair: What could be more cautionary than paying a higher premium to the Canada Deposit Insurance Corporation?

Mr. Chambers: If people understand the issues around that premium.... It is not paying a higher premium, but, rather, paying a different rate.

My expectation is this. I am involved in the life insurance industry and not in the trust and loan or the banking industry, but you are probably aware that CompCorp is also considering development of a risk-related premium.

The Chair: Surely these are going to be made public in a number of cases and they are going to be very ``cautionary'' signals, as you have pointed out, to the public that somebody who is important and has power thinks they are a poorer risk than others.

Mr. Chambers: Companies face a lot of different risks.

If I can use the life insurance industry as an example, because that is the one I know, my expectation is that a particular company might be taking risks in this area and lesser risks in that area and normal risks in another area and the result will be a premium that relates to all of those and ultimately comes down to a number. What would be published is the amount of the premium that is being paid. I expect that the fact that a particular product involves a higher premium and another product involves a lower premium relative to the competitors would not generally be made public.

The Chair: Having been involved in politics for at least two years, I have to assume that everything one does will become public.

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First, it could be required to be disclosed by the accountants if you're a public company. It's something that the government or OSFI will not be responsible for disclosing, but certainly employees could disclose it.

Should we impose an oath of secrecy around this?

Mr. Chambers: I don't think that's so much the issue; the issue is that the risk-related premium is intended, I believe, to be a control mechanism in respect of the actions of management.

Let's face it, the levels of premiums are the be-all and end-all in the marketplace, and if a company has a higher risk-related premium for its own coverage with the guarantee corporation, then it's going to have to build that into the prices it charges the people.

The Chair: So exposing that type of weakness will not be fatal to these financial institutions?

Mr. Chambers: I wouldn't call it a weakness. I don't think that a higher risk-related premium is necessarily an identifier of weakness. If the company has three times the capital it needs, then it can afford to take some risks.

The Chair: The question is, do we require disclosure of that in the interests of -

Mr. Chambers: Disclosure of...?

The Chair: The higher premium that they're paying, the fact that they are paying a higher premium.

Mr. Chambers: I would prefer to reserve any comment until we see what form the premium will take.

At the moment, the maximum CompCorp premium is 0.5% of the premiums received on covered business; that is, the business that is subject to the guarantees that are provided. Under a risk-related formula, it will be much more complicated than that. It won't be simply: oh, this company is paying 0.75% rather than 0.5%. I expect that it will relate to the various products and it will be product specific.

The Chair: On behalf of the members, may I thank you for your very useful and practical presentation to us, for the suggestions for improving the legislation and your offer to undertake to find standards so we can report actuarial understandings in a way the public can understand. We look forward to your continuing involvement in this process.

Mr. Chambers: Thank you.

As I said, there is a lot of material here and I expect, if you want to read it, that you will have questions. We're certainly open to hearing those questions, by mail, by telephone, or whatever.

The Chair: We'll take a one-minute break.

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PAUSE

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The Chair: Order.

Before we continue with our next witnesses, we have a very distinguished guest with us,

[Translation]

His Excellency Tep Darong, of the Kingdom of Cambodia. Mr. Darong is an adviser to the council of ministers and Secretary of State. I welcome you to our meeting and I hope that our discussions will be helpful.

[English]

Our next witness is no stranger to us: the Governor of the Bank of Canada, Gordon Thiessen. He is accompanied by Robert Turnbull and Clyde Goodlet.

Welcome. We look forward to your presentation.

Mr. Gordon G. Thiessen (Governor of the Bank of Canada): Thank you, Mr. Chairman.

As you say, I indeed have with me Clyde Goodlet, who is an adviser in our monetary and financial analysis department, and Robert Turnbull, from our legal affairs group.

[Translation]

I am very pleased to appear before you today as part of your examination of Bill C-100.

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In my opening statement, I would like to focus on that part of the bill with which the Bank is most directly involved: the proposed Payment Clearing and Settlement Act.

[English]

The provisions in this part of the bill are designed to contribute to the development of sound clearing and settlement systems in Canada. Clearing and settlement systems really are at the heart of our financial system. They provide the means whereby transactions of all kinds in our economy, from ordinary payments by cheque or credit card to large purchases and sales of securities and currencies, are completed.

The Bank of Canada is centrally involved in these arrangements because final settlement among financial institutions of these transactions takes place through transfers of funds between the deposit accounts that these financial institutions hold with us. The bank has a particular interest in the security and soundness of clearing and settlement systems because of our responsibility as lender of last resort in the Canadian financial system. Weaknesses in clearing and settlement arrangements have the potential to disrupt the operation of financial markets and create severe problems for participants in the financial system, and that can have wider spill-over effects for users of financial services, and indeed for us in our implementation of monetary policy.

[Translation]

Like other central banks around the world, the Bank of Canada has watched some concern the massive increases in the value of transactions flowing through the financial system, and the expanded linkages between domestic and foreign financial systems. The potential for problems in one area of the financial system - here to spread elsewhere has increased. This potential is what we refer to as systemic risk.

[English]

Here in Canada there have been some particular areas of concern. Until recently, most of the arrangements for handling payments and other financial transactions have been based on paper cheques, security certificates, etc., and this has meant that the processing of these transactions takes time. This time-lag raises the risk that a participant to a transaction or a financial institution may fail before the settlement of the transaction is absolutely final.

Take an example in our paper-based payment system, which is very efficient. There is a lag of at least one day before the recipient of a payment can be certain that the payment has been processed and the funds that he or she has received are absolutely irrevocable. For payments that are big enough to be crucial for the recipient, the resulting risk can be great.

Canada is the only major industrial country without a system that provides finality for same-day large-value payments.

Because of the risks inherent in the lags in paper-based systems, the bank has been an enthusiastic supporter of initiatives to establish automated systems in Canada that speed up the handling of financial transactions. In the case of securities transactions, there is the initiative of the Canadian Depository for Securities to establish a system that permits the immediate electronic transfer of and organizes the payment for Government of Canada securities, and ultimately may cover other securities as well.

In the payments area, the Canadian Payments Association has undertaken to design and operate a system to handle large-value payments for same-day settlement - the LVTS, as it's known. Also, in the foreign exchange area there are a couple of private sector initiatives that aim at improving and reducing risk associated with the clearing and settlement of foreign exchange transactions and payments.

However, these initiatives, which speed up the settlement of financial transactions and thereby reduce the risk associated with transaction lags, have the effect of concentrating large numbers of transactions in a single automated system. Thus, it is important that the operating arrangements for these systems are robust enough to handle other potential risks, particularly the possibility of the failure of a participating institution that could in turn cause the failure of other participants, and indeed of the clearing and settlement system itself.

The Bank of Canada, in conjunction with the Department of Finance, the Office of the Superintendent of Financial Institutions, and the Canada Deposit Insurance Corporation, has worked with the private sector to develop appropriate risk control mechanisms for all these initiatives. Because of our central role in the payment system and because of our involvement in the discussions with other central banks around the world in this area, the bank has taken a lead in this work.

The proposed payment clearing and settlement act in Bill C-100 would give the Bank of Canada a more formal and explicit role in the oversight of clearing and settlement systems, with the objective of controlling systemic risk. This formal oversight responsibility would mean that private sector operators of those clearing and settlement systems that potentially pose systemic risks would be required to obtain the approval of the bank regarding the arrangements in their system to monitor and control risks.

To carry out this responsibility, the act would provide the bank with information gathering powers to determine where there is potential for systemic risk, and for those systems where that potential exists it provides the bank with the capacity to ensure that the system is operated in a safe and sound manner.

[Translation]

It is important to note that the legislation aims to only supervise the systems with potential systemic risk, and does not seek to regulate any associated financial market. Thus, a clearing and settlement system for securities could come under legislation without implying federal regulation of the securities markets.

In addition, the proposed act would provide the Bank with the capacity to become a direct participant in these systems and to provide services to them. Two powers worthy of special mention concern the ability of the Bank to provide a guarantee of settlement to the participants of designated systems and the ability to pay interest on special deposits accepted from the clearing house or from the participants in the clearing and settlement system.

[English]

This guarantee would be provided only to the LVTS system being developed. This system is being designed to meet the internationally agreed standard that it must be able to withstand the failure of its single largest participant without putting other financial institutions in the system at risk as a consequence.

However, there does exist an extremely remote possibility that more than one financial institution could fail during the business hours of a single day. This is unlikely in the extreme; nonetheless, it's necessary to deal explicitly with this possibility to permit the financial institutions participating in the LVTS to offer their customers absolute assurance that an LVTS transaction cannot be reversed, no matter what happens.

To facilitate this outcome, the legislation proposes that the Bank of Canada should provide a guarantee that the LVTS will settle all transactions, even in the exceedingly improbable event of the failure of more than one participating institution during the time when the LVTS is open for business.

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A claim on this guarantee would occur only to the extent that the losses on the LVTS exceeded the major commitment to cover losses by private sector participants.

This guarantee would benefit the payment system as a whole, but would not provide support for failed financial institutions.

It is also important that this new system for large-value payment should be available to a wide range of users in the community at a reasonable cost. To minimize the costs of the system, to minimize the costs of the collateral required for a properly risk-proofed LVTS, the legislation proposes giving the Bank of Canada power to create a special form of collateral. This would consist of special one-day deposits held by participating financial institutions at the bank, on which we would pay a one-day rate of interest. The benefit of these deposits is that they would be available to back-stop the commitment of participating financial institutions to cover losses on the LVTS.

Let me conclude by reiterating that the Bank of Canada strongly supports the federal government's initiatives in Bill C-100 to bring about well-designed clearing and settlement arrangements in Canada. Such arrangements have the potential to strengthen the efficiency, soundness, and stability of our financial system.

Other countries have recognized the problems with their existing arrangements and are moving rapidly to develop better payment, clearing, and settlement systems. It is important that we in Canada do not fall behind and thereby impede our ability to compete in an increasingly international market in financial services.

[Translation]

The Chair: Thank you, Mr. Thiessen. Mr. Loubier, do you have some questions forMr. Thiessen?

Mr. Loubier: Certainly. I have many questions for him, but as usual, I limit myself to just a few.

Welcome Mr. Thiessen, Mr. Turnbull and Mr. Goodlet. I am very happy to see you once again appear before the Standing Committee on Finances to talk to us about the changes brought to the financial institutions legislation. I have several questions, but I will limit myself to three.

You say that you are happy to see that the Bank of Canada will inherit new powers, especially as regards the regulations concerning clearing houses and also payments. Wouldn't you agree that up to now, the securities commissions have well managed the systemic risk particularly in Quebec and in Ontario and that the Bank of Canada, as an added intervener that has to manage the systemic risk is encroaching on a provincial jurisdiction and that you are only adding another intervener who has no significant effect at the end of the day as far as certainty and stability of financial markets are concerned?

Mr. Thiessen: I do not believe so, Mr. Loubier. I think we're talking about a new responsibility for the Bank which is very limited.

First of all, we are dealing with payments. The Bank has been involved in the payment system for a long time, and we are only talking about payment clearing and settlement.

It is all a matter of systemic risk. We are really dealing only with payments. Suppose there is a problem in the payment clearing and settlement which would prevent for instance financial operations on a given market; the situation could create a real cash crisis and it would be up to the Bank of Canada to try and solve the crisis.

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It would really be up to the Bank of Canada to try to solve that crisis.

If I understand correctly the role of securities commissions, their responsibilities include ensuring the proper behaviour of markets and protecting consumers and users of these markets; they do not include matters of payments and cash, if they were to be a problem in the payment system for financial transactions.

Mr. Loubier: Mr. Thiessen, allow me to disagree with you. You said in your statement - and you just repeated it one moment ago - that the new powers that will be given to you will not be very significant but will serve only as a means to make official your present responsibilities.

May I remind you that the bill gives you very significant powers page 118. You are even given the power to control not only clearing houses but also any participant. Under section 6 - directives - the Bank may issue a directive in writing requiring the clearing house or the participant to... It is not just any minor power nor only power to recommend something. You are given the power to require which is a real power and a very coercitive power:

...issue a directive to the clearing house or participant requiring it to cease or refrain from engaging in the act, mission or course of conduct, and perform such acts as in the opinion of the governor are necessary to remedy to the situation. Those are major powers and not only as you submit in your statement, page 3: ``It is important to note that the legislation aims only to supervise the systems with potential systemic risk, and does not seek to regulate any associated financial market.'' I'm sorry, the way the legislation is written contradicts what you said.

The bill gives you considerable powers and allows you, for instance, to require the Caisse centrale Desjardins, the Fiducie Desjardins or Levesque, Beaubien Geoffrion which are provincial institutions coming under the authority of the Inspecteur général des institutions financières du Québec and the authority of the Commission des valeurs mobilières du Québec, to perform certain acts or refrain from engaging in certain acts which according to your expertise constitute a systemic risk or acts that could increase systemic risks.

The power that you are given is enormous within the Quebec jurisdiction and within a field that is already occupied by the securities commissions not only in Quebec but also in Ontario. I am of the opinion that the powers conferred to you are enormous and that it would be too simple to state that you are only given the power to supervise. I do not call this supervision. I call this giving you the power to direct.

This is my second remark, Mr. Thiessen.

Mr. Thiessen: I disagree, Mr. Loubier, because we are dealing only with a system, with a clearing house within a clearing and settlement system which is a system in which exists the possibility of a systemic risk. I believe that the given definition is rather narrow.

Mr. Loubier: But Mr. Thiessen, unless I'm mistaken, the systemic risk depends on your own analysis and it gives you empr,pis powers. If you believe that a systemic risk might be increased, and that certain actions by institutions that are members of the clearing houses or that their own behaviour could create a domino effect, you will make a decision based on your own analysis of the situation. Consequently, if you have the power to a direct - the bill refers to the issuance of directives to member institutions in Quebec or elsewhere - you are given extraordinary powers that duplicates those of the Quebec Securities Commission.

I would still have a third question to ask, Mr. Thiessen, since we could go at length on the same matter as long as these aspects of the bill will not have been clarified. Anyone who would think a bit about it would come to the same conclusions as I did.

My third question will be the same one that I asked this morning to the Secretary of State responsible for Bill C-100. Is there a way of reducing or of eliminating as much as possible all systemic risks other than the one proposed in the bill which gives you extraordinary powers and gives the superintendent of financial institutions extended powers?

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The minister answered this morning that there was no other way of reducing or eliminating systemic risks within the financial sector.

As for myself, I went back to a speech that you had given on June 29, 1995 to the Canadian Payments Association. As a matter of fact, you repeated this morning some elements of that speech, except for a few thoughts which you totally left aside and to which I will come back in a few seconds.

In dealing with the limitation of risks within the large clearing and settlement systems, you stated that Canada needed a large value transfer system that would be well designed since Canada is falling behind many other industrialized countries in this area. In such a system, Canadian financial institutions would go on running risks and would also see their competitivity reduced. You were therefore happy that the Canadian Payments Association - which you were addressing - has made a call for proposals to build a large value transfer system, as you mentioned a moment ago in your opening statement.

However, You left aside this morning a part of your speech in which you suggested that the improvement of the LVTS system would eliminate all risk. You stated on June 20 last that, according to the suggestions made by the Canadian Payments Association, the improvement of the LVTS would suffice and that no other interventions would be necessary since all systemic risk would have been eliminated. You added that the system would give financial institutions a certainty of settlement, that is it would eliminate the risk that exists in the present process.

You left completely aside that part of your speech in your opening statement but you added however that the improvement of the LVTS would not be a panacea and that you would need added powers such as those that are suggested in the bill.

Could you explain to us this change of heart? On the one hand, you state that by improving the LVTS it is possible to eliminate the systemic risks whereas in today's statement, you state that it would not be enough and that you would need the powers given to you by the bill in Schedule 1, section 162, on page 115. Can you explain to us this change of heart between June 20 and August the 15th?

Mr. Thiessen: It is true that a large-value transfer system will greatly improve the systemic risk that is inherent to our present payment system. But the idea behind the bill is to give the Bank of Canada the power to supervise constantly the payment system. Even if we were satisfied with the system, it would be necessary to supervise it, since new risks can always arise and change the process. We must be able to ensure that the system remains efficient and that it does not bring about any systemic risk to our financial system.

We are talking about the ability to supervise the system continuously in order to ensure an improvement of the systemic risk.

Mr. Loubier: We are not talking about reinforcing your supervisory powers. We are talking about real powers, those of issuing directives to clearing houses and other participants.

On June 20 last, you stated that by nevely improving the large-value transfer system it would be possible to reduce... You even go further than I do. You talked about eliminating the risk that exists in the present process whereas today, you are saying that that would not be enough. Today, you say that you would also need the provisions of the bill that would increase the powers of the governor of the Bank of Canada and would allow him to issue directives to clearing houses or other participants.

Let me repeat that I asked this morning the Secretary of State if there were other ways of reducing or of eliminating the systemic risk, since I had a feeling that what you said on June 20 was rather strong. But he answered that there were no other means.

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We have the blues and we could check...

There are two questions that come to my mind. The first one is why is there a difference between your speech in June...

The Chair: You already asked it.

Mr. Loubier: No, it is the same question.

The Chair: You still have two questions.

Mr. Loubier: No. One moment, Mr. Chairman. I have two small questions that deal with this. First, why have you changed your mind since June 20 on the way the large value transfer system can be improved? Secondly, why did the minister try this morning to confuse the issue by telling us that there were no other means of reducing the systemic risks except to give you more powers and to give extended powers to the superintendent of financial institutions in Canada, that is to override Quebec's jurisdiction? Is it really worth it to create all this confusion within fields that are exclusive to provinces if it does not even allow you - if I understood you correctly - to improve the situation whatsoever given that two months ago, you were saying that it could eliminate completely the systemic risk? Is it really worth it to give all those powers to the Bank of Canada if the simple improvement that you were talking about two months ago could do the job all by itself?

Mr. Thiessen: We want to make sure that the clearing houses and the settlement systems will remain solid. The only way of eliminating completely the systemic risk is by making sure that in the future all systems such as the payment system that is being designed are well managed and that the risk control is manageable. We must think of the future; even if we are satisfied with the present process, we have to think of the future and the bill does exactly that.

Mr. Loubier: And does the future require that you override clearly defined fields that are of provincial jurisdiction within the financial sector, that you override an expertise that has been developed in the last 35 years in Quebec and in Ontario and which is that of the various securities commissions and various inspectors of financial institutions? Does it require that you be given more powers? You stated that you were not given extended powers, but this creates enormous confusion in the relationships between Quebec and the federal government. However, if you really believe that it is worth it, then that is another matter.

Mr. Thiessen: I must remind you that we are dealing here with payments and as far as I know correctly, securities commissions are not involved in payments.

Mr. Loubier: Participants are mentioned...

Mr. Thiessen: That is really within the realm of the Bank of Canada.

Mr. Loubier: Mr. Thiessen, participants are also mentioned and also the power to direct and to issue a directive.

Mr. Thiessen: But Mr. Loubier, that is only if there are no clearing houses I believe. If I understand the bill correctly, it is only when there is no clearing house that we must intervene and issue a directive to the participants.

Mr. Loubier: Mr. Thiessen, that is not what the bill says.

[English]

Mr. Campbell: I want to pick up on some things Mr. Loubier was suggesting.

First, to us in Ontario it's no problem whatsoever that the Bank of Canada wants to bring greater stability to the payments and settlements clearing system. That's a laudable goal, which I think all Canadians throughout the country support. I want just to go on the record as saying - and I wantMr. Thiessen to confirm my understanding - that it is a quite normal role for a central bank to play, as central banks' roles are evolving throughout the world.

Second, you can't have it both ways. If you're going to be a player in the system, if you're going to participate in the system - and even separatists say that they want to be part of the Bank of Canada - then you have to have some control over the entities, the players that participate in the system. You have to have some ability to say that you're in or you're out or there are certain ground rules, or else the counter-parties and transactions are just not going to work out.

So please just confirm that these are quite normal things that central banks do throughout the world.

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Mr. Thiessen: Yes, I'd be pleased to confirm that.

In fact, it's quite remarkable that at the meetings of central banks in the industrial countries that occur regularly in Basel, Switzerland, at the Bank for International Settlements, a remarkably large proportion of our time has been focused on clearing and settlement systems and payments issues. I think central banks around the world regard these as being very worrisome. The size and number of transactions have been growing, and one's constantly looking for systems to make those transactions work more efficiently. That tends to concentrate them all in these highly efficient electronic systems. Then you want to make absolutely sure that those systems are going to work at all times, because if they don't, it can completely seize up a financial market. That causes liquidity problems, and who then is left to worry about how you're going to sort through that but the central bank.

So, yes, central banks are very concerned about this and very involved in it.

Mr. Campbell: Would you agree, then, that in order for Canadians to continue to be players in the international economy and to continue to have the advantage of relationships with other financial institutions abroad, we have to have a certain standard of stability in our payments and settlements systems, and that's the goal here?

Mr. Thiessen: Absolutely. What I ended up with in my opening statement is that it really is important in Canada that we should have a set of systems for clearing and settling financial transactions, for settling the payments, and that those should be robust enough to handle the risks that are out there. I say this because if people regard us as being a risky place to do business, they will move their transactions elsewhere. Absolutely.

The Chair: Mr. Governor, the thing that shocked me most in your presentation was on page 2, where you said:

Canada is the only major industrial country without a system that provides finality on the same day for large value payments.

It is shocking that we are so far behind the rest of the industrialized world.

Maybe I can't think in terms of what these large-value amounts are, but let me give an example of where a small business person is my riding accepted a cheque for the sale of goods in the amount of, say, $10,000. He didn't know that the cheque was not going to be honoured. He deposited it. It went into his account. He thought that everything was copacetic. So seven or eight days later he made some more sales, this time for horrendous amounts, over $100,000. Only after he had sold these goods and accepted these further cheques and had really committed himself to this customer did he find out that these cheques were no good. A payment system for that small business person that would have given him same-day notice that the cheque for $10,000 was no good would have saved him $200,000 down the road.

If that applies to the small business person, then surely it is even more important for our nation to have this type of system. Do you agree?

Mr. Thiessen: I agree with that. If you think about the way in which financial transactions work these days, you can have a business person making a sale that takes place over a period of some months, and there may be various arrangements for financing that. In turn, the financial institution that may be financing that feels it has a risk here with which it's not very comfortable, so it lays off that risk with somebody else. Somebody else may in turn lay off some of the risk. So around a single economic transaction you can have a multiple of financial transactions, all of which are designed to make the players comfortable with the risk that they feel they're in.

If one of those transactions ends up not being completed, then you've left all these other people having made other commitments and you've left them in an impossible situation.

That is why, given the importance of all these financial transactions, everyone has moved and is moving to these large-value systems where you settle on the same day.

[Translation]

The Chair: Mr. Loubier, for two seconds.

Mr. Loubier: Yes. I just want to complete a comment.

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To come back to what you asked to the governor of the Bank of Canada, it is not necessary that he gets the new powers established in the bill. The only requirement is to set up an electronic system of settlements that will allow him to know that the money is available when the payment has to be made. And setting up such a system is the responsibility of the Bank of Canada, but the issue of systemic risk is not. That was a wrong argument you used to try and justify this bill.

Mr. Thiessen: But you want this settlements system to be strong enough, not only today but also tomorrow and for many years, because the situation might change...

Mr. Loubier: You know that Mr. Chrétien uses the same argument to say that we have to make sure that federalism is strong enough and centralizing enough for the future. It is the same thing with this bill.

[English]

The Chair: Could I ask you one final question? What will the bank rate be at 2 p.m.? Any answer you give here is privileged.

Mr. Thiessen: Would you be prepared to clear the room, Mr. Chairman?

The Chair: In the past we've cleared it with far less important questions than that.

On behalf of all members, may I thank you again for your very lucid presentation.

On behalf of members on at least one side of this committee, I encourage you to do everything possible to implement this system as expeditiously as possible. You will have our support.

Thank you very much. We look forward to seeing you again.

Mr. Thiessen: Thank you all.

The Chair: We will take two minutes before our next witness appears before us. This meeting is adjourned.