EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, September 19, 1996

.1531

[Translation]

The Clerk of the Committee: Honourable members, we have a quorum. In accordance with Standing Orders 106(1) and 106(2), the first item on the agenda is the election of a chairman. I am prepared to receive motions to this effect.

[English]

Mr. Fewchuk (Selkirk - Red River): I nominate Mr. Peterson as chair.

[Translation]

The Clerk: Moved by Mr. Fewchuk that Mr. Jim Peterson be the chairman of the committee.

Is it the pleasure of the committee to adopt the motion?

[English]

Mr. Williams (St. Albert): Madam Clerk, can we debate the nomination?

Mr. Peterson (Willowdale): I certainly would if I could speak.

Mr. Williams: I think it's only appropriate, Madam Clerk, that we have the opportunity to ask the nominee questions before we vote on whether he's an appropriate chair.

The Clerk: Mr. Williams, I am just here to read the motion for you to elect the chair. I am not here to entertain -

Mr. Williams: I would just ask that you permit some questions to the nominee before the vote is taken.

Mr. Peterson: Madam Clerk, I don't want to have to demonstrate my total incompetence for this position.

Mr. Williams: May I proceed?

The Clerk: Mr. Williams, I think you could ask those questions of the chair later, at an appropriate time. We have a load of witnesses waiting for us to proceed with the election.

Mr. Williams: We didn't plan to take a long time at this, Madam Clerk.

The Clerk: Mr. Williams, do you have your substitute form?

Mr. Williams: No, I don't have a substitute form.

The Clerk: Could we proceed? He can't vote.

[Translation]

Motion agreed to

[English]

Some hon. members: Hear, hear!

The Chairman: Thank you very much for your confidence.

We proceed now to nominations and elections of our two vice-chairs.

[Translation]

Ms Dalphond-Guiral (Laval-Centre): I would like to move that Yvan Loubier be elected vice-chairman.

.1535

The Chairman: Seconded by Mr. Bélisle.

Motion agreed to

The Chairman: Congratulations, Mr. Loubier.

[English]

Brenda Chamberlain.

Mrs. Chamberlain (Guelph - Wellington): I'd like to nominate Susan Whelan as vice-chair.

An hon. member: I second the motion.

Motion agreed to

The Chairman: I'd like to welcome new members to our committee. We look forward to working with you in the spirit of cooperation and hard work that we've always brought to our effort.

We begin a major round of hearings this afternoon. Last spring, with the minister before us, we started the hearings into the white paper on the financial institutions legislation. We heard from the department this morning. This afternoon we have three of the most important groups amongst Canada's financial institutions before us.

What was foreseen last year as a battle of the Titans has really become a weigh-in for the title bout, which is to be held at an indeterminate time in the future. The issue of powers has been removed from the direct mandate of this committee, but I suspect we will hear a great deal about it nevertheless.

We are very pleased to have as our first witnesses this afternoon, from the Canadian Bankers Association, its new president and chief executive officer, Raymond Protti; Mr. Gordon Feeney, chairman of the executive council; and Mr. Douglas Melville. Welcome, gentlemen. We look forward to your testimony.

Mr. Gordon J. Feeney (Chairman, Canadian Bankers Association): Thank you,Mr. Chairman. We welcome this opportunity to appear on behalf of the Canadian Bankers Association.

I assumed the chairmanship of the CBA executive council in June of this year, and obviously it is my first time representing the association. It is the first time also for Ray Protti to appear before this particular committee. Ray, as you know, came to the association recently, having had a distinguished career in public service here in Ottawa and elsewhere.

These are important times in the development of financial sector policy in our nation, and I know this committee will play a leading role in that process. We look forward to having useful and productive dialogue with you in that regard. We don't have all the answers, and I suspect we don't have all the questions, but we want to develop the answers in partnership with you and this committee and make the changes that will make Canadians proud of the financial services industry in this country.

For the most part the Canadian financial services industry is very dynamic and competitive, providing Canadians with innovative financial products and services at competitive prices generally lower than those available in other countries. But there is always room for improvement. There is a need for all the players in the financial services sector to continually adapt to the changing marketplace we face. To accomplish this, the regulatory and policy environment in general must also keep pace with the changes.

I'd like to start by noting how banks have helped spur some competition in Canada's financial services sector in the past. At the risk of dating myself and the number of years I've been in the industry, I recall the 1960s, when a car loan could cost as much as four times the then prevailing bank prime rate. As this market was opened up in the 1960s and banks and others became involved in offering a broader array of product, loan spreads declined dramatically very quickly. Today a car loan can be had for a point or two over prime rate.

The same, though less dramatic, story repeated itself in the residential mortgage market, which banks were only allowed into in the 1960s. While in this market prices were more reasonable to begin with, what banks did bring was coast-to-coast uniformity and consistency in pricing, tremendous product innovation, and flexible options to suit the changing needs of Canadians.

.1540

In July of this year bank-financed residential mortgages stood at $192 billion, compared with slightly over $1 billion when we went into that business in the 1960s. At that time banks accounted for 9% of the market. Today banks account for 55% of the residential mortgage market and the six large banks account for 49% of the mortgage market.

I believe banks have gained this market share because they were there to help finance the housing needs of the growing population of young Canadians. Often the previously established suppliers were unable to serve the market, because of its size and its diversity, and in some cases they were unwilling and in many cases they were just unable to serve that market.

More recently, the same competitive vigour can be seen in other markets that have been opened up to greater competition in this country. The mutual fund industry is a prime example. Since 1987, when the market was opened to broader competition, including the banks, the industry has expanded to more than six times its size. There has been a proliferation of new funds and different options.

The securities and brokerage industry is another example. Commission rates have fallen dramatically since 1987, as banks and other institutions, both foreign and domestic, entered this market, bringing innovations such as discount brokerage operations to the marketplace.

A fundamental characteristic of any market is that greater openness and fewer restrictions on who can participate will increase competition, improve the quality of services and products, lower prices, and generally improve access and availability to customers. The examples I've mentioned lend support to this view. It is not just banks that have entered new markets. The financial sector reforms of the past have equally made entry into the banking business easier. So while there have undoubtedly been new opportunities for banks, equally the non-bank sector has obtained banking powers and has increased competition, which is good for Canada and good for Canadians. We welcome this competition and suggest it has been good for consumers and businesses alike. By the same token, consumers stand to lose from any delays in enhancing competition.

One of the strengths of Canada's financial system has been that legislators have generally moved in a timely fashion to eliminate restrictions that impede competition. Periodic legislative changes to banking and non-banking legislation have enabled the emergence of a very strong and efficient financial sector, contrasting sharply with the experience south of the border, with their large number of failures, instability, and generally more costly financial services sector.

In keeping with this approach, Canada introduced some far-reaching reforms governing the financial services industry in 1987 and 1992. However, the forces of global competition and technological change are proceeding at an accelerating place. Therefore significant as our previous reforms have been, we cannot avoid the need to update the regulatory environment continually. This was recognized by the government when it updated the financial sector laws in 1992, setting a sunset provision for the review of that legislation in 1997. As a result, we're now in the midst of another scheduled review, with a broad range of important changes to be considered.

In the discussions before the release of the white paper a number of issues were raised - you're all familiar with them - such as the question of banks' involvement in the sale of insurance, the leasing of cars, and other items, the question of whether insurance companies should have deposit-taking powers or be able to participate more fully in the payments system, whether banks should be allowed to merge or not, whether there is a need for further deposit insurance reform, or whether foreign entry rules should be eased further. Many of these issues are expected to be reviewed through the task force on the future of the Canadian financial services sector and the Department of Finance advisory committee to review the payment system. We welcome both the intention of government to conduct a full review and the commitment to act on the findings of the task force in a timely manner.

.1545

However, our appearance today is to address the immediate issues, the specific proposals that are targeted in the white paper for implementation in 1997. You've received our submission on these issues. Basically, as an industry, we support these proposals. In particular, we share the white paper's objectives of strengthening consumer protection, easing the regulatory burden on financial institutions, and keeping legislation current with evolving trends.

I would like to highlight what we think are some of the more important issues that emerged in the white paper. These highlights are drawn from the executive summary at the beginning of our submission.

The first issue noted is privacy. Protection of consumer privacy is a fundamental cornerstone of banking. The Canadian banking industry has taken a leadership role in establishing one of the highest private sector standards of privacy protection. We're committed to refining our practices to ensure continued high standards of privacy protection in the face of changing market realities and consumer and business customers' needs.

Second is the disclosure of fees and services to customers. It is another area in which we are committed to continually improving. The industry will continue to work with government to determine if additional voluntary measures can be introduced to help customers understand the features and the prices of our financial products and services without limiting the array of products and services that are provided and that are there only to meet the needs of these individual clients.

Access to basic banking services by low-income and disadvantaged segments of the population is another important issue. The banks are committed to continue working with consumer, social and community groups to identify and address the underlying problems so that the banking needs of all Canadians can be fully met. In addition, the industry is planning to meet with all levels of government in the coming months to determine how governments can provide residents with appropriate identification and how banks can provide easier access, particularly for social assistance payments.

The white paper also raised a number of other issues in the area of consumer protection. Our submission has some detailed views on these matters which I'll be happy to elaborate upon during the question period, if you wish.

I would like to raise the issue of our openness to competition in the payments system. Let me state very clearly that the Canadian Bankers Association supports the government's decision to review the payments system in its entirety. We agree that the important issue of systemic risk must be carefully examined and, subject to this, participation should be permitted for as broad a range of players as is possible.

Another important issue is the regulation of foreign banks in Canada. The participation of foreign banks in our economy is vitally important. After the Bank Act changed in 1981, many foreign banks already here as provincially regulated finance companies converted to schedule II banks while others came in through the establishment of new operations. While these banks initially faced some growth restrictions, U.S. banks have been exempt from such restrictions since 1989, and since January 1995 all other foreign banks have been relieved of those restrictions.

In 1987 when foreign entry was permitted into the securities industry, still more foreign financial institutions established operations in Canada. More recently, you've seen that ING, a large Dutch insurance group, has announced its intention to establish a deposit-taking subsidiary in Canada. This is a prime illustration of how markets change. This will be a totally electronic financial institution or, in the jargon of the industry, a virtual bank.

Despite the fact that greater access has been steadily provided to foreign participation, their overall experience has not been encouraging for them. With a few exceptions, they have not been able to gain viable market share or earn reasonable profits. To some extent this was inevitable, given that the marketplace is extremely competitive to begin with. Nonetheless, while all of the limitations on their participation have been removed and they can operate pretty much as any other Canadian bank, it could be that some additional measures are needed.

.1550

The fact that foreign banks have to come into Canada as subsidiaries rather than as branches is one such issue. While this appears not to be on the table for the 1997 round of changes, it is an important issue that we hope will be studied.

Canadian banks have always supported open markets and measures to increase competition. A vibrant foreign bank presence in Canada, as long as it is achieved under the principle of a level playing field, is vital for the continuing competitiveness of the Canadian financial market and its associated benefits for Canadian customers, as the Canadian customer, the business customer in particular, becomes increasingly global in their reach.

There is the question, however, of foreign unregulated financial services providers. Some of them are very large, such as Ford Credit, with global income of U.S. $2 billion. Surely they should operate under Canadian regulation similar to that of other financial services providers.

Enhancing competition should take precedence over protecting any particular player in the market. So there can be no justification for the view that restrictions are necessary to protect Canadian banks or any other financial institution in Canada's domestic market. Canadian financial institutions, including banks, are up to the challenge and do not need the protection, and certainly do not want it.

The same rationale for encouraging competition applies to other areas, be they insurance, leasing, or the payments system. Canada's banks look forward to working in partnership with all the stakeholders to address the challenges that affect this industry and our ability to meet the future needs of Canadian consumers and business customers as we move into the next century.

That concludes our opening remarks and overview of our submission. My colleagues and I look forward to elaborating on these and the points that you wish to discuss with us this afternoon.

The Chairman: Thank you, Mr. Feeney.

Because unfortunately we have only 45 minutes for each witness, I was going to suggest to members that maybe we could have abbreviated rounds, perhaps one from each opposition party and two from the government party. We can see how that will take us in terms of time. Is that agreeable to members? Yes?

Mr. Solberg.

Mr. Solberg (Medicine Hat): Thank you very much, Mr. Chairman. It's good to see you back in the chair again.

I'd like to welcome the Canadian Bankers Association to the finance committee. I'm going to apologize in advance for not being able to stay for very long because I have to catch a flight. I have one question.

What measures would the CBA recommend in order to encourage more competition in the banking industry?

Mr. Feeney: I would say that basically, as I've mentioned, it's opening up the financial services industry to all the players that can bring a professionalism and a quality and level of service to Canadians, whether they be consumers or business clients. We happen to believe, as an industry and as individual organizations within it, that Canada will win when all the players are given a level playing field.

Mr. Solberg: Specifically, though, what could be done to encourage more competition amongst banks? What could be done to bring some foreign banks in so that they would be able to provide more competition for existing chartered banks?

Mr. Feeney: If we're talking about more competition for banks, that being specific to banks and not other players in the industry, the competition is coming in. The important thing for this committee and the Government of Canada is to make sure that they come in in a regulated environment that protects Canadians who deal with the various new players. We welcome any competition. The ING example is only one of many.

The important thing is to make sure legislators understand what kind of regulation we need, particularly on virtual banks, so you don't walk down the street and see a sign that it's on the Internet, it's on the phone, it's from your home PC. We need regulation around it.

Mr. Solberg: But you could not recommend a specific idea that would encourage more foreign banks to set up shop to provide the competition that you suggested earlier was good and that you welcomed?

.1555

Mr. Feeney: I believe we should take away any restrictions felt to be hindering competition. We don't feel there is very much.

Mr. Solberg: Okay.

Mr. Feeney: I want to make one point and then I'll turn it over to Mr. Protti.

I think one has to look at it the same way in other countries when Canadian banks go offshore, because I think people are often thinking about retail rather than the business side for competition here. There are very few countries where Canadian banks go and set up shop from a consumer retail standpoint. In most of the places - in the Caribbean and certain other spots around the world - we've been there practically as long as we've been in Canada.

I'll turn it over to Ray.

Mr. Raymond J. Protti (President and Chief Executive Office, Canadian Bankers Association): Thank you very much.

One specific thing is an issue I'm certain a task force on the future of the financial services sector will have a hard look at. This, of course, is the issue of a branching status for foreign banks, the issue of whether or not you can set yourself up as a branch as opposed to an independent subsidiary. It is an issue that has been under discussion for quite some time. There were some indications it might have been resolved by now. It hasn't been. But we're fully expecting that the very specific question you put on the table, including the example I've given, will be at the heart of the discussions of the task force.

Thank you.

Mr. Solberg: And you'll be supporting anything that would encourage more foreign banks to come to the country?

Mr. Protti: As my chairman indicated, we are very much taken from a consumer perspective. We're very strong believers in competition, because it is the consumer who is going to benefit from having a competitive and open environment.

Mr. Solberg: Thank you.

The Chairman: Thank you, Mr. Solberg.

[Translation]

Have a good trip!

Mr. Bélisle.

Mr. Bélisle (La Prairie): My question is on a document you distributed entitled part I: the framework. Placed very close to the heading ``Overlap and Duplication Between Federal and Provincial Regulation''. In the last paragraph on page 18, you say that the government has indicated that it is prepared to consider a rationalization approach by ending the federal regulation of credit union centrals. In your view, the government should also advance a stronger leadership position advocating regulatory rationalization in other industries. Could you please clarify that for us? What exactly do you mean when you say ``It should also advance a stronger leadership position advocating regulatory rationalization in other industries''?

Mr. Protti: I will answer in general terms. I apologize, but I will send you a more specific answer in a letter.

We think there could be more progress made in the area of overlapping federal and provincial regulations. There could be closer harmonization of the two governments' regulatory structures.

You asked a very specific question, and, if I may, I will answer it in writing.

Mr. Bélisle: Fine, thank you. With respect to what you have just said, could you give us an example of regulations that affect not only federally-regulated businesses, but also businesses that come under provincial jurisdiction? In your view, does that include the Caisses populaires Desjardins in Quebec, New Brunswick and Ontario? Would the Caisses Desjardins be subject to the Bank Act? Is that what you are suggesting?

Mr. Protti: No, not at all. We need to find ways of harmonizing our regulatory structures better. In our view, the Caisses populaires should not be subject to the Bank Act.

Mr. Bélisle: Thank you.

The Chairman: Mr. Duhamel.

Mr. Duhamel (Saint-Boniface): I have a few questions. First, how do we compare in Canada in terms of regulations with other comparable countries? Are we more regulated or less regulated? This is my first question.

[English]

.1600

My second question is this. We're obviously aware banks desire to be involved in other lines of business, such as insurance, auto leasing, and so on. How is this handled in other countries? I'd like to have some sort of comparative view.

Finally, I'm assuming I heard this correctly. I just want a confirmation. When we talk about foreign banks playing a more significant role in Canada, what I've heard is this is good, this is great, let's do it. I know there was a bit of a condition, the regulatory environment. But perhaps you could briefly speak to this. Also, along with this, are there any conditions you would impose?

Perhaps you could answer those two questions.

Mr. Protti: If I could, Mr. Chairman, I'll begin with the first one. I think Mr. Feeney will answer the second one.

I don't know the complete answer to your question on how our regulatory framework compares with the rest of the world, in particular with the countries with which we compete. But I'd begin to think through the answer, and this is, of course, one of the fundamental issues the task force is going to look at. We have arguably the most stable, most secure, safest financial system in the world. A large part of this is clearly attributable to the wisdom and judgment of governments that have come before this one and regulators who have been in existence in this country for 100 years. Our record of stability and soundness is second to none in the world. So from an overall regulatory point of view, we have an extraordinarily effective and good system.

Now, the question for the future becomes do we have a regulatory system with sufficient flexibility to handle the types of changes my chairman alluded to in his introductory remarks? For example, the introduction of completely new and different types of technology in the future will very much change the face of banking in this country as it will be changing the face of banking around the world.

The third point - and I'll stop at this - is that we are in a continuous search, along with the other players in the financial industries sector and in partnership with regulators, to make sure we continue to have an enormously efficient and effective system. Are there further improvements that can be made? Absolutely, there are improvements that can be made through time.

Mr. Feeney: In terms of the foreign banks making other changes, I think it needs to be understood there really is very little today that is different for a foreign bank coming in, other than the subsidiary branching idea. Of course, banks such as the Hongkong Bank of Canada have been very successful, are tremendous competition and without a doubt have made a difference in the marketplace. They grew in a different way than others who have perhaps tried to come into the market. I think that's good.

The main thing, I believe, is that we make sure the rules for the domestic players and the foreign players are basically the same when it comes to both regulation and tax. We should be -

Mr. Duhamel: Could I just get a clarification on this? As I look at the profit figures and what have you - correct me if I'm wrong, because I'm not in the banking business - I get the distinct impression Canadian banks have done significantly better overall than foreign banks in Canada. Surely it's not simply because of the banks' subsidiary variables. There must be some things at play that I don't understand. Could you give me some clarification?

By the way, if you did answer the second question about banks involved in insurance, auto leasing, and other services in other comparable countries, I did not hear it. I'm sorry.

Mr. Feeney: I think the main thing in the financial services business in Canada is the delivery network. This is a very important aspect of it. We have a very large country in terms of miles across. We have small communities. We have large communities. To be in this business and compete with the established 125-year-old or 130-year-old banks is the same as going into a foreign country for us. This is a very tough thing to compete against. There are branches on every corner in every community. Many medium-sized communities have four or five banks already competing. It makes it very tough.

.1605

We find it very tough to break into other countries around the world, particularly on the consumer side. I don't think Canada is any different. It's just that we're bigger in terms of our size, and given the nature of the way in which the Canadian banking system has grown over all these years, it makes it a very tough network to compete with. Canadians like to go from Ottawa to Vancouver and to be able to walk into a branch of their bank to get their money from their account here. If you're starting out new, you just don't have that kind of facility available, and that's what makes it very tough. I think it's as simple as that.

The Chairman: Thank you.

Mr. Protti, very briefly.

Mr. Protti: If I could just answer the question on insurance and auto leasing, on auto leasing - and I'll double check what I'm about to say and get back to you in writing - if I remember correctly, in terms of the nations we compete with, I think the only country that, like Canada, doesn't permit its banks to be involved in that particular financial product is South Korea.

On insurance, I think the vast majority of the OECD countries permit their banks to engage in the retailing of insurance through their branch systems.

Mr. Duhamel: You will get back in writing to us on that.

Mr. Protti: I will get back to you, and I'd simply offer the final example that ING, which will be establishing a virtual bank, is a very strong insurance company.

Mr. Duhamel: Thank you.

The Chairman: Thank you, Mr. Duhamel. Much to my surprise, the issue of powers has arisen.

Was the next speaker you, Ms Whelan?

Ms Whelan (Essex - Windsor): Mr. Chairman, I just wanted to ask the CBA if they could be a little bit philosophical for a moment. Could you tell us where you see the banking industry heading in the future? Are we're regulating the right things to meet the needs of the future here today?

Mr. Feeney: I guess it would be premature to say we're not regulating the right things in Canada at this stage. As I kind of alluded to, I think it's important that we keep pace as we look ahead. From a regulatory standpoint, generally speaking, Canada has certainly kept pace better than many countries in the world.

The business is changing. The business has changed. What consumers and businesses expect from the financial services sector - banks and other members of that sector - is changing as well. There was a time when banks were in the intermediation business. They took deposits and they made loans and not much more than that. Then over time it changed and they got into mortgages, etc., but still it was intermediation. Today, and in very recent years, it's been mutual funds.

The market here has not matured as it has in the United States, but it's a very large market and it's growing very quickly. That changes the nature of regulation required. It changes the nature of competition. It changes the nature of relationships between clients and their financial institutions, whether it be a bank, a trust company or an insurance company. What they buy as services from those institutions changes, and I think that's where we collectively, both as an industry and as legislators, have to really keep our eye on the ball in terms of how the playing field is really changing.

I don't want to belabour virtual banks, but what we will have in the foreseeable future are certainly virtual banks within the traditional banks as well. PC banking and telephone banking and banking from your office or your home and doing your brokerage business that way are available basically now. So I think the important thing is that we be very alert to that and get regulation in place so that we don't have any nasty surprises as we go down the road. The industry is really changing in that regard. The channels of delivery are changing daily.

Ms Whelan: Thank you.

The Chairman: As for this whole issue of foreign competition, to me, one of the major issues here is how we use our regulatory regime as it relates to foreign institutions in order to give our Canadian institutions a level playing field or competitive opportunities in foreign jurisdictions. Do you see any opportunity in our current review to look at that particular issue and find ways in which we could expand your opportunities for competing abroad?

.1610

Mr. Feeney: I guess one of the examples could be to look at our closest neighbour, the United States, and the regulatory regime that's there. With the changes in recent years we've seen a number of U.S. firms coming into Canada, where we have a relatively open regulatory environment in terms of the pillars of the past. At this stage that's not so in the United States, not only in the branch banking notion but in the commercial banking and brokerage business, all those legacy regulations that haven't kept up with the times.

The Chairman: The Glass-Steagall law, which is still in effect and which precludes the Americans from granting us the same type of rights as we are now according to American financial institutions in Canada.

I had one other brief question I wanted to ask, but I'll put it off. We have time for one more question.

Mr. Grubel.

Mr. Grubel (Capilano - Howe Sound): I just need some help.

Gentlemen, in my constituency I have innumerable contacts with people saying not to let the banks sell insurance and offer auto leasing, and I ask why not; it would be good for the consumer. They say yes, it might be, but all it would do is increase the excessive power and concentration of the banks and the financial sector generally.

Well, my colleague asked you the question, what exactly would you say would be the measures that you could live with, that you might recommend, and that would allay the fears of those people? For example, let other financial institutions participate in banking activities, share the clearing house network, and a few other things. But you didn't volunteer them. Do you have some others?

Mr. Feeney: I'd like to deal with it in several pieces, but I'll deal with the sharing first.

As I mentioned, we feel the payments system should be opened up to as many players as possible. As I said in my opening comments, the only thing you have to be sure of as regulators is that there is security for the Canadian consumer and Canadian businesses that when a payment is made they're going to get their money. But we truly believe that's a step forward, to open up the payments system, which is the clearing and.... More and more it's electronic, because the paper clearing system is disappearing.

I'd like to deal first with auto leasing. I believe the important thing here is that we're allowing this total market in Canada to be had by unregulated foreign firms. All we're really saying is it should be regulated and it should be open to all players, both domestic and foreign. If the products and the price and the level of service of domestic players, whether they be banks or insurance companies or trust companies or caisses or whatever...then the market will take care of that. If they don't provide the product and the service and the price they won't be in the business. But it should be regulated.

Mr. Grubel: With all due respect, I give the same answer: you're not coming to the questions I asked. Let's assume you're right. You've already made that statement. We don't need a long elaboration. We're running out of time. What exactly would the banks believe I should say to my constituents the banking system is prepared to accept in the policy environment in order to increase competition and reduce the concentration? Or maybe you want to dispute that and say there is no need to reduce the concentration.

Mr. Feeney: Yes, that was the next thing I was going to deal with, this notion of concentration.

In the businesses we're in today in the banking business I think it's important to understand that for just the six large banks - because that's where people focus, not the others - residential mortgages are less than 50%. Only 49% of that market is held by banks. Consumer credit is 68%. Short-term business credit is 80%. Personal deposits are 60%. Mutual funds are 24%.

.1615

I think the important thing to draw a distinction on here is that while the banks hold 60% of Canadians' savings, they lend out 68% of the consumer loans granted in Canada. It's the same with short-term business loans, where 80% are dealt with by domestic banks, the large banks.

My point is that 49% of residential mortgages for six very large organizations who compete against each other in a fairly tough way, as people who have wanted to renew a mortgage in the last few years have discovered to their pleasure, isn't a heavy number. There are many industries where the concentration among the top players in that industry is considerably more, and that includes the insurance industry.

In insurance, the one point I would like to make and clarify is that there is this notion that banks would be selling automobile and residential mortgage insurance through personal bankers in their branches. As it is sometimes mentioned, tellers can't sell insurance. It's a neat little phrase, but that isn't really the issue here. There's much more to insurance than automobile and home insurance.

One of the critical aspects in the insurance business we are talking about is annuities. When people today turn what used to be 71.... It's now coming down into the sixties, and I suspect it will continue to come down as time passes. We have clients, after a 50-year relationship with us, in their late sixties all of a sudden being forced through the regulation in Canada to find a new financial institution. People at that stage in their life are not certain as to how to go about finding a new financial institution to look after their life savings, to make sure it's there as long as they are.

So life annuities are a very important part of the debate, and I believe it gets left off the table. I think we need to think about what we're doing to Canadians.

Mr. Grubel: If I may, I will summarize what I heard from you. I have to tell my constituents that the banking industry is perfectly satisfied with the level of competition they face in Canada because the concentration is not very high, and that all the impressions my constituents have out there are wrong. Concentration is just fine and we don't need more competition.

I asked you several times to give me what you would be prepared in terms of higher.... The only answer I get is that you don't need any because you don't have any concentration problems. That's what I heard you say.

Mr. Feeney: Sir, in my opening comments -

Mr. Grubel: You didn't use those words.

Mr. Feeney: - with all due respect -

Mr. Grubel: That's rhetoric.

Mr. Feeney: I talked about competition many times -

Mr. Grubel: That's rhetoric.

Mr. Feeney: - in I think the last ten minutes.

Mr. Grubel: I asked you for specific examples. You have wonderful rhetoric.

Mr. Feeney: This is not rhetoric, sir. The specifics are that we welcome all competition, no matter where it comes from.

Mr. Grubel: So do we. Everybody does. Now, how do we do it?

Mr. Feeney: We should open up the total industry to the regulated players to provide the goods and services that people want. Whoever provides it at the best price, with the best quality in the communities in Canada where it's required, will make the sale, and the others won't.

In terms of concentration, my illustration was only to clarify - because I hear the same thing as I travel across the country - that the numbers I quoted are factual, built up over more than one hundred years of being in business, and don't really indicate that the market is cornered by six players.

So I would say yes, we want competition. I can't tell you how to bring in more competition other than to make sure the rules and the regulations encourage people and allow institutions to get into businesses that could be considered financial services to the consumers and the businesses in Canada. We really do welcome competition.

.1620

To give an anecdote, it is as if an ad was in the paper the other day and it said, ``Competition is like cod liver oil. First it makes you sick, and then it makes you better''.

I believe that the goods, products, and prices in Canada are better today because of the competition from foreign banks, because of the competition from trust companies, because of the competition from insurance companies, and vice versa, because of the competition provided by banks to those other players. I guess that's my summing up on competition.

The Chairman: Very briefly, are there any areas in the white paper where you're in disagreement with the proposals? They're in your brief, but I just want this for the record of members.

Mr. Protti: I think our submission was quite complete. The only specific I'm thinking of is where on mortgage prepayment we've pointed out that we would not recommend that an actual prepayment set of formulas should be legislated. I think that's the one specific issue.

The Chairman: I have the impression that probably we are going to have to have you back, closer to the end of our hearings. Meanwhile, I thank you for a very interesting opening presentation to us and for not having delved into any issues that are not in the white paper, such as powers. I look forward to seeing you the next time you'll be back before us.

Thank you, Mr. Feeney, Mr. Protti, and Mr. Melville.

Our next witnesses are from the Canadian Life and Health Insurance Association: Mr. Gordon Cunningham, president and chief executive officer; and Mark Daniels, president.

Welcome, Mr. Cunningham and Mr. Daniels. We look forward to your brief presentation so that we can then go to questions.

Mr. Gordon R. Cunningham (Member, Board of Directors, Canadian Life and Health Insurance Association): Thank you very much for inviting us here today. I am president and CEO of London Life Insurance Company. I am also the immediate past-chairman of our industry association and a current member of its board of directors. With me today is Mark Daniels, who is the president of the CLHIA.

I thought it might be helpful for me to begin today with a bit of background on the insurance industry and our role in meeting the financial security needs of Canadians and others around the world.

If you look at the statistics, more than 20 million Canadians continue today to trust our industry with their futures and with the futures of their families. This industry pays out some $26 billion in benefits each and every year; that's about $500 million each and every week. What's often overlooked in all of this is that 90% of this money goes to living policy owners in the form of annuity or disability benefits, cash-surrender values on policies, matured endowments, dividends, or - and this is a very important component - reimbursement for health care costs. The reality is that this industry touches the lives of hundreds of thousands of Canadians every day, and it does that at times when they most need help.

.1625

Our industry is also highly competitive. We have nearly 140 players who compete aggressively with each other. As you heard earlier, we also compete head-to-head with every other member of the financial sector, including the Canadian chartered banks.

What we try to do is to build long-term relationships with Canadians through meeting their financial security needs throughout their lifetimes by providing products such as individual and group life insurance, individual and group annuities including RRSPs, RIFs and pensions, mutual fund products, and health insurance, a very important component.

We're also significant international competitors, and this is an interesting statistic: almost half of our premium income comes from outside of Canada. In fact, I believe the international success of the life and health insurance industry is one of Canada's best kept secrets in terms of Canadian business.

I also believe that a strong life and health insurance industry competing with a strong deposit-taking industry is in the best interests of Canada and Canadians. In the years ahead our country's aging population is going to have to deal with governments' decreasing ability to maintain social programs.

Mr. Chairman, we believe our industry can and will play an important role in helping Canadians plan for and cope with the changes in the social environment that are going to have impacts on both our health care and quality of life in the years ahead. Our experience in providing life and health protection and retirement savings is going to be important to Canadians and will assist government at both the federal and the provincial levels in dealing with the challenges we face in our country's social policy.

Mr. Chairman, our industry does welcome every opportunity to discuss significant issues in the financial services sectors with you and with members of this committee.

Let me turn to the white paper. We strongly agree with the government's commitment to put revised legislation in place by March 31, 1997, when the current acts expire. The timely passage of this legislation, which improves the major changes that were enacted in 1992, is very important in maintaining certainty and continuity in the financial services sector.

As I said, our industry serves Canadians' long-term needs. We need a stable legislative framework so we can plan our development, continue to improve our products and services, and better serve our millions of customers in Canada and around the world.

We agree with the government that the legislative regime put in place in 1992 is working pretty well and should remain largely intact. Major changes just aren't required at this point in time. We do agree, however, that some fine-tuning is necessary to ensure that the legislation works even better in the real world of everyday business.

Before I turn to some specific comments on the white paper, I'd like to talk about two critically important government initiatives, the task force on the future of the Canadian financial services sector and the advisory committee to study the payment system issues.

We welcome a comprehensive review of the financial sector. In fact, for some time now our industry has advocated a broadly based public examination of the financial system in order to find out just what kind of financial sector Canadians really want for themselves and for their kids in the 21st century. We believe such a task force can provide a valuable opportunity to study what kind of competitive environment is in the consumers' best interest and what kind of regulatory structure will foster an environment that does meet Canadians' needs.

I believe the study should be comprehensive, I believe it should be broadly based, and I believe that the study should form the basis for our national financial sector policy in the years ahead. However, if it is to be meaningful the study must be much more than theoretical research conducted behind closed doors. It just has to seek real world views and involve real world participants.

If it's to be credible it must not reflect just what the banks want or, for that matter, what the insurers want. It has to be an open and extensive public consultation with average Canadians across the country. Why? I think the answer to that is very simple. If we fail to ask consumers what they really want the sector to deliver to them in meeting their financial needs, we risk putting in place a legislative framework that in fact will do a disservice to them and will never effectively meet their needs.

.1630

The establishment of the advisory committee to study payments system issues is also a positive step. We believe the payments system must be reformed so consumers can manage and gain access to their money more conveniently and more efficiently.

In our submission to the Department of Finance in December of last year the industry stated its goal is to participate fully in the payments system. This participation has three fundamental aspects: first, direct access to the payments system, without being forced to use either a subsidiary or a competitor; secondly, meaningful participation in the governance of key payments system components, such as the Canadian Payments Association and Interac; and lastly - and this is very important - a genuine voice in the evolution of the payments system. Our industry welcomes this important and timely review of the national payments system and we commit to participating fully and constructively in the consultations.

Let me turn now to specific comments on the white paper. First, on the proposals to streamline the self-dealing regime, let me state very clearly that our industry strongly supports effective self-dealing rules. We do believe, however, that the amendments proposed in the white paper do not go far enough in streamlining the current rules to create a system that is truly workable in the real world. While the white paper proposals will reduce the number of related parties in the insurance company, the list of related parties remains very broad. Such an open definition makes the determination and tracking of related parties almost impossible, particularly in the case of companies with affiliates at home and abroad.

Our suggested amendments in this regard are very specific in nature and would result in greater clarity and workability for the related-party regime. As an example, we believe the superintendent's discretionary power to allow exemptions from the general ban on related-party transactions should be made more effective. This power is important because it's impossible to foresee and to legislate every kind of transaction that should be permitted, or for that matter prohibited, under the self-dealing regime.

Our industry also recommends improving the flexibility of the regime by removing some of the self-dealing rules from the statute and dealing with them in regulations. This would be helpful, we believe, because as business transactions and corporate structures become increasingly complex, statutory self-dealing requirements can become obsolete very quickly.

The white paper also proposes several amendments relating to corporate governance. The question of corporate governance was thoroughly reviewed in 1992, at the time of the last legislative amendments. That review resulted in major revisions and we do not believe more changes are required at this time.

Take policy-holder rights, for example. They were enhanced significantly after a lengthy analysis in 1992. Our experience after four years shows the new system is working well. We do not believe there is any need to overhaul the policy rights program again after only a few short years of practice.

The white paper also proposes two changes to enhance access to capital for mutual insurance companies. The industry supports the proposal to permit mutual insurers to issue participating shares. We also support the proposal to extend the de-mutualization regime to all mutual companies and to add flexibility, particularly if that flexibility permits a company to select the de-mutualization format that is best suited to its circumstances.

The white paper also sets out a number of technical amendments. We've commented on these in our submission. A great deal of time was spent on developing these technical amendments and we believe they are important to ensure the legislation continues to work well in practical terms. I think it should be said before this committee that our industry feels officials of the Department of Finance and of OSFI have done some excellent work in developing these technical proposals.

Finally, the white paper raises a number of other issues, including a proposal to introduce privacy regulations that are to be the subject of a consultative process in the future. About privacy, the life and health industry has long recognized the importance of protecting the confidentiality of personal information. Back in 1980 the industry was a leader in adopting privacy guidelines. It has made provision for improving those provisions over time. We've also made respect for privacy of customers a condition of membership in the CLHIA. These guidelines have been updated periodically, most recently in 1993, and we have them currently under review again, to determine whether any changes need to be made to bring them in line with the new Canadian Standards Association model privacy code.

.1635

Our industry believes that widely implemented self-regulatory privacy codes that meet the standards of the CSA model code will serve consumers' privacy interests well. As an adjunct to all of this, it will be important for the proposals in the white paper to be reviewed carefully to ensure there's no conflict with provincial jurisdiction, or overlap and duplication within the federal sphere.

In conclusion, Mr. Chairman, we believe the white paper is an important step toward the completion of the 1997 review, and our industry looks forward to working with the government and with Parliament to put new legislation in place by March 31, 1997. The industry also looks forward to making an active contribution to the various longer-term consultations, which were announced in the white paper. We're committed to assisting the development of this nation's financial sector policy for the 21st century in a positive and constructive manner.

Finally, Mr. Chairman, I want to thank you and members of the committee for inviting us here today. Mr. Daniels and I are now prepared to respond to your questions.

The Chairman: Thank you, Mr. Cunningham.

[Translation]

Mr. Loubier.

Mr. Loubier (Saint-Hyacinthe - Bagot): I would just like to ask for a clarification in order to understand the brief correctly. You say that you are disappointed that the white paper does not recognize the distinctive nature of the P and C insurance industry in relation to all other financial institutions. What more would this recognition have given you with respect to the review of the Bank Act? That is not made clear in your brief.

[English]

Mr. Cunningham: I'm sorry, I don't understand the question.

[Translation]

Mr. Loubier: Excuse me. It is clear. Thank you.

[English]

The Chairman: Mr. Grubel.

Mr. Grubel: Thank you, Mr. Chairman.

Say you had a wish list in industry that you could take to the government in which you asked: in return for our ending our opposition to banks selling insurance, what would there be as a quid pro quo?

Mr. Cunningham: That's a very interesting question. I guess there probably are a number of components to that. Let me try to deal with a couple of them.

The first thing I would ask is for the playing field to be levelled. We can come back and talk about what would be the components of that.

The second thing I would ask is for the government to complete the process that was put in place in 1992, which gave us powers, for example, to issue credit cards. As for the mechanics of that, well, we have the power under legislation to do that, but the mechanics for dealing with it have never been put in place.

In terms of levelling the playing field, I think there are two areas on which I'd comment. One, of course, would be the difference in treatment, a government guarantee, on retirement savings types of products. Today, you still have in place a government guarantee for the banks and the private sector. It's an industry guarantee system for the insurance industry.

One of the other interesting things is the issue of capital requirements for the two businesses. Today, the insurance industry is required to carry higher capital requirements to support its business than the banking system. If you add to that the requirements of rating agencies, it increases those capital requirements even further.

I suppose the third thing would be to make sure there are inherent issues from the point of view of taxation. Make sure that the playing field is levelled in that respect.

Mark, would you have others?

Mr. Mark R. Daniels (President, Canadian Life and Health Insurance Association):Mr. Chairman, Mr. Grubel, here's the way we've tended to handle this question. It's a perfectly reasonable question: is there some implicit trade-off? The way we've tended to handle it, following Mr. Cunningham's lead, is to recognize that the other dimension we need here is a time dimension.

Before we're in a position to talk of a trade-off.... ``Trade-off'' means increased powers. Before we get there, we need to have this level playing field in the context of the payment system of deposit insurance and so forth. To talk today as if you're going to go from a standing start with more powers and into the door is to array the trade-off the wrong way, I think.

.1640

So you'll see in all our submissions a time sequencing. An interesting feature of that time sequencing is we have said that as we get the playing field levelled, we should also take the opportunity to examine the financial services system Canadians want. It's in that context that we're so comfortable with the task force question. So if you'll allow me to allow the time dimension, there may well come a time when you can put that question out and we will genuinely be able to talk about it as a trade-off at a point in time.

Mr. Grubel: Am I hearing from both the bankers and you that the answer I should give to my constituents who are saying they won't agree to banks expanding their types of activities until they can be sure there is more competition, both of banks with near banks and with all the other financial sectors...? Do I hear you saying there isn't really anything obvious that can be done to increase that competition other than participating in the payment system?

Mr. Cunningham: No, not at all. One of the important things we have said is we would like to hear from your constituents. We'd like to hear what kind of financial sector they would like to see in place in the 21st century. To pick up on the point Mr. Daniels made, this is why we've advocated for some period of time that we do need a broadly based inquiry to determine that.

When Canadians ultimately determine the kind of financial sector they want, that's the kind of financial sector we're going to end up having.

Mr. Grubel: This is really asking a little bit too much of those people. They don't have the same kind of perspective that I know Mr. Daniels and you and the other gentlemen have. So I am still not quite satisfied. Maybe next time we meet you can have some better answers for me.

I have one other question, though. Are you disappointed about the fact that all these really difficult issues with the crucial time element attached are only now going to a special commission of inquiry? They should have been tackled two or three years ago, because everybody knew the deadline for having them finished was 1997. Does that bother you?

Mr. Cunningham: I don't think there's much to be gained by talking about history. The important point here is that now the task force, as we understand it, is going to be constituted. We're going to see the mandate of the task force. I can tell you our industry is going to be an active participant in determining the financial sector of the 21st century, as I expect all other players in the financial sector will be.

Can I come back to one other point? We tend from time to time to give average Canadians too little credit for being able to articulate what they want from various players, whether it's in the financial sector or in terms of government or whatever. I don't think we should be at all concerned about going out and actually asking them some pretty basic questions about what kinds of products and services they want and how they want those products and services delivered in the future. You have to remember that when they decide what kinds of products they want, those will be the kinds that we and the bankers manufacture. When they decide how they want it delivered, that's how we're going to deliver it.

We don't have in place today a career agency system or an independent brokerage system because that's the way the insurance industry wants to deliver products. Historically, with the kinds of products and services we've delivered, the Canadian consumer has wanted the products and services delivered that way. We should not lose sight of that.

Mr. Grubel: Yes, except the banks are saying what they would really like to have is something that you, for example, have not delivered: the ability to go into a bank and say, I want life insurance, term insurance, for exactly 27 days, because that's when some crucial thing is going to happen and I want to protect it during this. You never offered it, right? So maybe a little competition would be good.

Mr. Cunningham: Yes, well, once again, we're all in favour of competition. There might be a question about whether we have or have not delivered that. But I still say to you that what's critical for purposes of the longer-term review here is what kind of sector Canadians want. How many players do they want in it, what kinds of products and services do they want, and how do they want them delivered?

.1645

The other interesting point is that not all consumers want the same kinds of products and services and they don't all want to have them all delivered in the same way. The concept of one size of shoe fitting everybody is just fundamentally wrong, and we shouldn't come to a system that drives people to limited products through a limited distribution system.

My last comment to you would be this: I have absolutely no doubt that as we get out into the next century we're going to have a limited number of major players on the deposit-taking side and a limited number of players on the insurance industry side. Each of those players will deliver more products and services than they do today, and they'll deliver them through different and additional distribution capacities than they have in place today.

Mr. Grubel: I appreciate your confidence in the public. As a politician, I can't say anything else. I do have it. I honestly believe that the wisdom of the public is great.

In concluding, the second thing I'd like to say is indeed what you said: that there is an infinite variety of need for different products that only the free market can provide. The fundamental problem the commission will face is how to, on the one hand, let the market drift and, on the other hand, protect the public by saying that there are certain things you can't do because there may be some spillovers. That will be the eternal problem.

In the past, to prevent the spillover effects and the problems has been to separate the functions. I am basically sympathetic toward the idea that we should remove some of those barriers in order to give the market more free play, and I'm glad to know that your industry is supporting this and that if the crunch comes you will end your opposition to the banks being able to give you some competition.

The Chairman: Mrs. Brushett.

Mrs. Brushett (Cumberland - Colchester): You've made it perfectly clear that you would like access into the payments system and when the advisory commission does its work that you hope to have that as a positive outcome. If it should occur that you are part of that system, what would be the immediate steps that you would take in the marketplace?

Mr. Cunningham: I guess I could speak for my own company in that respect. It's hard to speak for the industry.

As a general comment, if we were permitted access to the payments system as a full participant, clearly it would provide our industry with the opportunity to be able to deliver additional products and services that currently we cannot deliver, despite the fact that in 1992, under the Insurance Companies Act, we got the legislative power to do that, with things like credit cards, for example.

Mrs. Brushett: So would credit cards probably be your priority? Is that what you're saying?

Mr. Cunningham: Once again, it's hard to speak for the industry.

Different companies will probably lead with different products and services, but I think I can assure you that different members of the industry will expand, at different times, the products and services that they deliver.

Mrs. Brushett: My follow-up to that is, looking at tied selling and disclosure, which is a complaint we now hear, that if you buy the package there isn't full disclosure of what each item in the package actually costs the consumer and, if you take one away, whether you can get the other nine. There is not the ability to know exactly what you're buying at what rates of purchase so you can shop around.

What would you do to provide disclosure, for example, in your bigger package of goods to sell?

Mr. Cunningham: There are a couple of aspects here. One is the issue of disclosure and the other is the issue of tied selling.

We've had the concept of tied selling, I think, since the Competition Act was put in in the 1970s. Tied selling means inappropriately using the leverage in your relationship to force a customer to take a product that he or she doesn't want, in order to get access to another product. That's a very different matter from the bundling of products to provide a particular solution to a financial security need provided that the consumer can buy those products unbundled.

.1650

So the issue of tied selling is only one of not allowing a consumer to get access to one product without in effect taking another. That's a very important distinction.

Mrs. Brushett: I appreciate that, but I believe there is some continuity and linkage here in consumerism as you come to look at what you're going to buy at your financial institution. I don't think you can make them as distinct as you indicate - whether or not it's through the bundling of services - in looking at what it's actually costing the consumer to know what you're paying for.

Mr. Cunningham: Just to address the issue of the cost of credit disclosure - and I think this is really the principal issue - our industry supports increased disclosure to the consumer of the cost of credit or the cost of other services for products that are being delivered.

Mrs. Brushett: I thank you. I guess it's a word of caution coming from a woman who's spent a lot of years buying a lot of goods and services by being in the manufacturing business. A lot of times, we try to make a better stove, and an example is the microwave that will actually microwave while at the same time producing conventional heat waves. If you try to do too many things with the one product, you usually do less service of any of them. This has been the experience in manufacturing, so I'm wondering how we can get the best service that we can with the fuller packages. That's all.

Mr. Cunningham: Once again I'm not entirely sure I'm addressing your question, but if you take a look at the financial security needs of the average Canadian, they're really reasonably basic. Our industry has met those needs for a period of time - its protection against untimely demise, its protection against disability, its programs for retirement and for the education of kids. Once again, each of the components of those packages can be bought individually, but you can also have that package put together in a financial security program that can be adjusted, adapted, expanded, shrunk to meet changing needs throughout lifetimes. That's really what the industry has been about.

Now, the need the make sure the consumer understands exactly what he or she is getting and the cost of that and the long-term benefits of that are incredibly important issues and need to be addressed. Today, in the main, I think they are in place. If there is a need to strengthen the system, however, our industry clearly would be supportive of that.

Mark, do you want to add to that?

Mr. Daniels: If I may, Mr. Chairman, I think I understand the question you're driving at. We have, of course, been very mindful of the concerns of Parliament that have been expressed very vigorously about questions that get variously labelled as tied selling and so forth, and about consumers' right to know. We believe our practices are currently open, and as far as we know, we're not involved in situations in which you can't sort out what you pay for particular pieces.

I'll also say something more broadly. Anybody who's looking at the situation right now and isn't paying attention to consumers' concerns and to Parliament speaking on behalf of them is clearly making a big mistake. It is evident that these issues are out in the public eye, and we are satisfied that the legal and regulatory framework is in place. The fact is that anybody who deviates from the practice and intent is clearly going to be making an error.

Mrs. Brushett: Thank you.

The Chairman: Thanks, Mrs. Brushett. Mrs. Chamberlain, please.

Mrs. Chamberlain: I'd just like to make a comment on that last remark. There's no question in my mind that since I became a member of Parliament, the biggest issue I faced was the cable issue. Believable or not, that's the truth. People were so angry because they couldn't get one particular piece rather than having to take a whole bundle.

.1655

So I certainly agree with your premise that you have to be able to sell them individually. That's what the consumer wants. If you don't do that in this day and age, they're surely going to let you know that very quickly, because they surely did on that issue and I don't think this is a whole lot different.

Mr. Cunningham: We noticed.

Mrs. Chamberlain: You were watching.

The Chairman: You've had an opportunity to hear the presentation by the Canadian Bankers Association. Were there any areas in that presentation you disagreed with?

Mr. Cunningham: Maybe we should start, Mr. Chairman, by telling you about the things we agreed with. We think we're all in agreement that the legislation should be put in place by March 31, 1997, to make sure we have continuity and stability for our sector. We certainly agree competition is incredibly important. We certainly agree the interests of the consumer have to be put first. We certainly agree all Canadians have to have access to products and services, no matter at what income level or in what place they live.

Perhaps another thing we agree on is that the financial sector in this country is something we should all be very proud of. Today we do have a deposit-taking sector that is operating well. We have an insurance sector that is performing well. I guess our plea is that before we make fundamental change in the rules that govern either one of those sectors we should go out and see the task force complete its work, to have Canadians determine the kind of sector they want, because once you make changes in rules you can't roll the clock back.

The Chairman: Mr. Cunningham, you're talking about changes in the rules down the road, as contemplated by the task force study and the advisory committee study on the payments system.

Mr. Cunningham: Right.

The Chairman: In terms of the white paper and the narrow issues - and let's admit they are fairly narrow and discrete issues in there - do you have any differences with what the bankers said, or do you have any major differences, other than those you articulated, with what is in the white paper itself?

Mr. Cunningham: No, we are generally very supportive of the white paper. In our submission we've commented on some of the technical amendments we think need to be tinkered with, but we're very supportive of the white paper proposals.

The Chairman: And you talked earlier about related-party transactions, and you're not in favour of any changes other than those made in 1992 to the corporate governance provisions.

Mr. Cunningham: Right. We have suggestions on some of the comments in the white paper on policy-holder rights. We've made suggestions in our brief. I'd be happy to go through them with you.

The Chairman: No. I just think it's very useful, certainly for committee members, and maybe for Canadians as well, to have an idea about whether major differences are going to be arising out of this particular white paper or whether the major issues we are really going to face as parliamentarians and Canadians are down the road.

Mr. Cunningham: We see no major issues in the white paper. In fact, as I said, we'd like to see it moved ahead and completed. Then we'd like to see us move on to some of the bigger issues, namely what this sector is going to look like for our kids.

The Chairman: Are there any other members who wish to ask questions of Mr. Daniels and Mr. Cunningham?

All of us are aware of the tremendously important role your institutions play in our financial sector and in the lives of all Canadians. I suspect we will probably have to have you back here before the end to respond to other things that come up from other witnesses. In the meantime, on behalf of all members, may I thank you for having been with us today.

Would members like to take a five-minute break before our next witness?

.1659

.1706

The Chairman: Order.

Our next witnesses are from the Insurance Bureau of Canada: Mr. George Anderson, president; and Mr. Alex Kennedy, vice-president of the legal division. They are representing one of the largest of the financial sectors in Canada.

We welcome you and look forward to your presentation. Mr. Anderson.

Mr. George Anderson (President, Insurance Bureau of of Canada): Thank you,Mr. Chairman. It's a pleasure for us to be here. Over the last few years I think we've built up a pretty productive relationship with this committee. We look forward to working with you as you enter the next phase of looking at the financial services legislation.

With me today is Alex Kennedy, our vice-president and general counsel. Mr. Kennedy is here primarily to talk about privacy legislation, some of the technical amendments to the legislation we're contemplating.

As you know, the Insurance Bureau of Canada represents property and casualty insurers. Last year in Canada we paid about $13 billion in claims to repair losses and damaged cars, homes and businesses across the country and to rehabilitate injured accident victims. We have about 240 companies actively competing in this area in Canada, and we employ over 100,000 Canadians.

I'm sure through the course of these hearings you're going to hear a lot about competitiveness. It won't surprise me if many of the people appearing here talk about that. It's a theme that clearly plays into a large part of the discussion you'll be having about the reform to our financial system.

Certainly most of those appearing before you will make the case that competitive markets are markets that best serve the Canadian consumer. We support that view. On the other hand, we think it's important for policy-makers to ensure that competition serves a very defined end. It's not simply to make some institutions bigger at the expense of others, or to satisfy some vague notion that bigger is better. Rather, it should be clearly demonstrated that through competition, tangible benefits accrue to consumers, and jobs are created and maintained in Canada.

Today we'd like to address four subjects: first, the March deadline for the legislation; second, the task force that's about to be set up; third, a bit about the regulatory burden in this country and issues of regulatory efficiency, because when we talk about privacy I think we have to look at it in that context as well; and finally, a bit about some technical amendments that we think are important.

In terms of the March deadline, the original intent of this current round of legislation as announced by the minister at the time was to conduct an interim and limited review of the 1992 legislation. It was not intended to be an opportunity for segments of the financial sector to resurrect these old debates about business powers. Consequently, we support the view expressed by the government in the last budget and in the white paper that the 1997 changes will be modest reforms to assist them. On the whole, I think, this appears to be working well. I think most people who come before you will say that.

What is needed now is not more distracting and adversarial debate about these issues. What we really need is some legislative certainty and stability so that we can all get on with putting the focus where it should be - that is, putting our full attention on improving products and services for consumers and lowering costs. To do this, we urge you, along with others involved in this process, to drive it to meet the March 1997 deadline and to constrain those who may wish to push the debate beyond that deadline.

.1710

With regard to the task force, we argued in the course of the last year that too much of the last round of debate focused on a rather narrow question of the incremental powers for banks and not enough on the larger questions we have to face in going forward.

I suggest to you that some of those larger questions are: how we add value in financial services for Canadian consumers, how to keep our institutions competitive and viable in the new world economy, and how to create and maintain employment in Canada. For example, it might be instructive for the task force to look at how the products, services, prices and degree of customer satisfaction in each of our financial sectors stack up when you look at them in the context of the G-7 countries.

Are there no limits to the economy of scale concept that economists are fond of talking about? Do diseconomies of scope eventually overwhelm economies of scale in financial services? Are all the elements of financial services so similar and so interchangeable that efficiency techniques in one sector are automatically applicable to another? And how does the balance of market power of our Canadian institutions stack up against the domestic competitive situation in the other G-7 countries?

These are just a few questions that we think the task force should address when it convenes to consider its mandate. With the right mandate and the right membership, we think the task force can serve as a prime opportunity to examine how we want to structure our financial services sector in the years ahead. However, the opportunity to provide that guidance will be lost if the task force is manoeuvred into another unproductive dispute about business powers. Moreover, it's our firmly held view that the work of the task force should feed into the next round of legislative review scheduled for 2002 and should not become another window in which to make interim ad hoc policy changes.

Mr. Chairman, in a brief look at the regulatory environment, last year when I appeared in front of the Senate banking committee I characterized Canada's regulatory landscape - perhaps somewhat unfairly - as eleven solitudes, with ten provinces and the federal government all claiming sovereign power to govern business activity.

In the new world in which we all live and have to operate, it is time, and I think indeed it's almost past time, to ask how we can most effectively manage the regulatory requirements of our governments and stay competitive. We are pleased to see that the government has made this a priority. But as one group that recently tried to bring positive change in this area in Atlantic Canada, we remain skeptical about the ability of public officials to move with any real political will on this file.

A study released in 1995 showed that in Atlantic Canada four regulators in a region with a population less than that of Metropolitan Toronto - five if you count the federal regulator - were administering four separate but very similar insurance acts and charging insurers and their customers at the provincial level almost $4 million a year in compliance costs. The study clearly showed that a harmonized regional system in Atlantic Canada could reduce those costs by at least 25%.

Despite initial enthusiasm for this study in government circles, there's been no real action to date. Indeed, fifteen months later the body that is supposed to coordinate this process isn't even appointed. As we have seen, political will can move mountains, but lack of it builds them.

Let me give you some other examples having to do with federal regulation. The federal Office of the Superintendent of Financial Institutions collects $37 million a year from financial institutions to fund its continuing operations. This is in addition to the costs of provincial compliance, which, for the property and casualty industry, are considerable. Some 22% of that $37 million comes from the property and casualty industry. These insurers, however, account for less than 3% - indeed, I think it's closer to 2% - of the assets of the financial institutions licensed by the superintendent. At the very least, it would appear there is a prima facie case to ask if this sector is over-regulated in relation to the systemic risk it represents.

.1715

For example, we would maintain that the frequency of OSFI audits should be on a par with those in the other G-7 countries. At present the superintendent collects information from us every quarter, collects an audited annual statement and conducts a detailed examination at least once every two years. In other G-7 countries annual reports are required by regulators in all the major international markets, similar to what we do here, and quarterly statements are expected in several countries, although not in all. Our preliminary data show that on-site examinations of well-run companies in other countries are rare when compared with Canada. In the United Kingdom, France and Germany, detailed examinations only take place when the regulator has statistical information indicating that an audit is necessary. In the United States all insurers are examined at least once every three to five years, not every two years.

We would welcome an opportunity to work with the government to determine what an appropriate regime would be for Canadian insurers. In a meeting we had recently with the superintendent, he indicated a willingness to at least start down this path, and that's encouraging.

I will now turn to privacy and turn to my colleague Mr. Kennedy. Before I do, though, I'd like to observe that while the generally announced intent of the white paper is to reduce the regulatory burden with respect to privacy at least, it proposes to increase that burden.

We realize there is a broad concern among Canadians about how private information is handled, and for that reason we understand why governments have a high interest in this area. We don't oppose measures that provide all Canadians with proper privacy safeguards. The challenge, I think, will be to do this without making the process excessively burdensome.

We believe it is important for regulators to understand that protecting individual confidentiality is fundamental to the operations of insurers. The greatest sanction that can happen comes not from government regulation but rather from the loss of customer confidence and business if it were ever to become public that privacy information and concerns were not being respected.

When one looks at the real situation as opposed to the theoretical one, we submit that there may be a demonstrated need for privacy regulations in some fields, but it cannot be demonstrated that there is a strong case to be made in the property and casualty industry. Nevertheless, we think we've taken some very aggressive steps to enhance our performance in this area. My colleagueMr. Kennedy will discuss these now, along with some concerns we have with technical amendments to the legislation.

Mr. Alex Kennedy (Vice-President, Legal Division, Insurance Bureau of Canada): In order to provide Canadians with the insurance products they want, property and casualty insurers require consumers to provide them with personal information. Protecting the confidentiality of their customers' personal information is of the utmost importance to these insurers.

With that in mind, IBC developed its own model privacy code in 1992, and the majority of our companies have signed on to it. It's based very closely on the 1981 OECD guidelines as adapted to the business practices of the industry in Canada. We continue to believe that there is no demonstrated need for government intervention in the area of privacy and that the industry can in fact regulate itself.

IBC has been an active participant in the recent development of a code on the protection of personal information under the auspices of the Canadian Standards Association. The CSA implementation committee, on which we are represented, is currently discussing appropriate options to ensure compliance with the code. To the best of our knowledge no other country in the world has developed a voluntary privacy code, so there are no precedents to be followed in this area.

We all acknowledge that the development of implementation options, including oversight mechanisms, is crucial to the acceptability and success of the CSA code. The CSA code states that it can be tailored to fit the business practices of a specific industry, and guided by our privacy committee of our chief executive officers, IBC has tailored the code to suit the requirements of our industry. In doing that, we haven't made a single change to any of the ten principles in the code. The only changes that have been made are to the commentary on the principles, and that's something the code allows.

.1720

In June of this year our board of directors approved the wording of the new tailored code, and we've recently submitted it to QMI, Quality Management Institute, which is a division of the Canadian Standards Association, to get an opinion from them as to whether our code actually meets the national standard.

To further consumers' understanding of privacy, we're developing a pamphlet that will set out the type of information that's required by the industry to underwrite policies and to settle claims and the persons who would have access to that information. The intention is that this brochure will be very widely distributed.

As part of the oversight process and to protect the privacy rights of consumers, we also intend to expand our consumer centre role in monitoring privacy issues. We have five regional consumer centres across the country, and they will ensure that privacy issues are recorded and directed to the appropriate person within each insurance company that's been designated to deal with privacy issues.

I would now like to say just a few words on the issue of self-dealing and on some of the other technical amendments.

Like the other financial institutions, the property and casualty insurance industry finds that in many respects it's difficult, if not impossible, to comply with the current self-dealing provisions.

We're pleased with the general thrust of the amendments. The proposal that the role of the conduct review committee be refocused from reviewing individual transactions to establishing appropriate internal procedures is a positive recommendation and one that should help to reduce the burden on the committee.

The white paper appears to acknowledge that the present definition of ``related party'' is in fact too broad, and we are pleased with the recommendation that the definition will be narrowed by treating only the most senior offices of an entity as related parties. Obviously the definition of ``senior officer'' is going to be critical.

Currently the legislation provides that an entity is a related party to a financial institution if an individual who's a director or officer of the institution has a substantial investment in the entity. The white paper proposes that the entity be a related party only if controlled by the natural party, and that certainly is welcome.

The current rule deeming a person to be a related party for one year after the person has ceased to be a related party was presumably intended to prohibit any effort to design arrangements to avoid the self-dealing regime. The narrowing of the definition to delete the one-year deeming provision certainly seems justified, on the basis that it remains within the jurisdiction of the superintendent to designate a person in any particular case as a related party for the purposes of the regime.

In our submission we've suggested some ways in which some additional relief could be provided. We believe it's unreasonable that all transactions falling below materiality thresholds still have to meet market terms and conditions. We agree that officers or employees of the company, in entering into a transaction, should have to satisfy themselves that the transaction is in the best interests of the company. However, they should not have the added burden of trying to determine how what is a very restrictive and at times difficult definition applies.

We suggest that if a transaction falls below the materiality threshold as approved by OSFI this should be sufficient and that the requirement for market terms and conditions be deleted.

We comment also on some of the other technical changes. We support the concept of best practices for corporate governance, we're very pleased that the statutory duty of the audit committee is to be clarified, and we particularly welcome the decision to permit written directors' resolutions in lieu of meetings.

We're also pleased with the clarifications proposed for section 254. That section, however, raises another concern. While a transfer of business is permitted from a provincial company to a federal company, a transfer from a federal company to a provincial company isn't permitted, and that's something that in our view should be allowed.

.1725

We strongly support the user-pay concept, under which companies that require additional supervision and examination will pay for the additional services rather than the costs being spread across the industry.

Finally, we trust that the proposal to allow the life insurance companies to write creditors' loss of employment insurance doesn't mean it cannot continue to be written by P and C insurance companies.

Thank you very much.

Mr. Anderson: To sum up, we agree with the broad approach taken in the white paper and we are going to actively work to support the work of the task force. We urge the government to meet that March 1997 deadline.

Thank you.

The Chairman: Thank you, Mr. Anderson and Mr. Kennedy.

[Translation]

Mr. Bélisle, please.

Mr. Bélisle: Before you, we met with some representatives of the life and health insurance companies. I would like to ask you a question that may apply both to them and to you, the P and C insurance companies.

The previous witnesses state at page 14 of their brief that a federally-registered insurance company cannot sell a block of business or shares to a provincially-registered insurance company. The opposite is true as well. The provincially registered insurance company can sell shares to a federally-registered insurance company.

I assume that what applies to life and health insurance companies applies as well to your sector, the P and C insurance companies. Would you agree with the life and health insurance companies when they say that a federally-registered insurance company can sell a block of business or shares to provincially-registered insurance companies.

[English]

Mr. Kennedy: I'm sorry I can't respond in French.

Certainly we fully support the concept that the transfers should be able to go in both directions, federal-provincial and provincial-federal.

[Translation]

Mr. Bélisle: Thank you. That answers my question very well.

The Chairman: Thank you, Mr. Bélisle.

[English]

Mr. Grubel.

Mr. Grubel: Thank you, Mr. Chairman.

Mr. Anderson, you are very much in favour of deregulation, right?

Mr. Anderson: Well, since I know there's another question coming, Mr. Grubel, I have to be careful how I answer the first one.

Some hon. members: Oh, oh!

Mr. Grubel: Let me then just bring my point out anyway. You saw the Fraser Institute publication that came out. The cost of over-regulation is just horrendous.

Mr. Anderson: Yes.

Mr. Grubel: We know from theory that it's all because of the asymmetry of the risks afflicting the bureaucrats and politicians who enact them. If they over-regulate, they don't have to bear the costs, but boy, if they under-regulate, they really have their feet to the fire.

Anyway, I agree we should do something about this, but the strange thing is there is a regulation that banks must not sell insurance. That one is okay?

Mr. Anderson: Oh, yes. In fact, I strongly support that.

Mr. Grubel: Oh, I see.

Mr. Anderson: But I never made the statement that all regulation was bad.

Mr. Grubel: No. I didn't say that either. It's just we have a lot of over-regulation. I heard you say that.

Mr. Anderson: There's no question about that, but in that one respect we have a commendable regulation.

Some hon. members: Oh, oh!

Mr. Grubel: Thank you.

The Chairman: Thank you, Mr. Grubel.

Ms Whelan.

Ms Whelan: I just want to ask two quick questions.

At the bottom of page 4 of your brief you say:

IBC disagrees with the conclusion of the White Paper that increased concentration since the 1992 reforms were introduced has not had a negative impact on the state of competition.

Can you explain that?

Mr. Anderson: Yes. We think if you look at the degree of concentration of financial power in Canada since this act was instituted, you will find in fact in the major sectors, particularly in the investment dealer area and in the trust area, fewer competitors and less innovation, because institutions in those areas are disappearing almost daily, the latest being Richardson Greenshields. They're being swallowed up by the banks.

.1730

The banks, for all their evident advantages to Canada, and there are many...one of them is not innovation. So we believe competitive factors are being hurt because of the size of these institutions.

Now, there are other offsetting benefits, which I'm quick to acknowledge - for example, the degree of security and stability of our system.

Ms Whelan: Wouldn't we also be very concerned...as we move further into the global economy and the global market we're in, the size of our institutions is important. We know in the banking industry, for example, we've gone from being in the top twenty to being in the fiftieth or sixtieth rank, depending on which institution you're talking about. So I'm not sure I'd necessarily agree it's the 1992 reforms that have caused businesses to change. I think a lot more has been going on in the global economy to cause things to change. The 1992 reform has reacted to the global economy.

I wanted to pick up on another one of your points, the privacy issue. You seem to believe there is no necessity for regulations in the privacy area. I'm a bit concerned about that, because I'm not sure how many average Canadians would realize the way.... You've focused a number of times on how you are disappointed the white paper didn't differentiate among the different types of insurance, but I know for myself my life insurance agent and my auto insurance agent are one and the same. So how do I ensure my privacy is protected between my life insurance policy and my auto insurance policy?

Mr. Anderson: I think we'd be misunderstood if we were understood to say we don't think there should be safeguards. There should be safeguards. We are concerned that there'll be an attempt to micro-manage this in sectors of the economy that do a good job of protecting personal privacy as it is, and we represent that we do a good job of that.

So I wouldn't want to be understood as standing in the way of this. I'm realistic enough to know there's going to be federal regulation in this field some time in the future. I am concerned that we not get into some of the horrendous paper compliance exercises we've seen in other areas, exercises that really don't serve a useful purpose and target everybody the same way out of a concern for perhaps a few high-profile situations. Our appeal is for balance and an appeal to look at our sector as it is and not how theoretically it might be. If you look at how we operate on a day-to-day basis, I think we do a good job here.

I'd like to come back to the first point you made. I don't disagree with your observation. Our observation had to do with what's happening in the domestic economy. That has nothing to do with global pressures. It has everything to do with the market power of Canadian banks and the domestic economy. They are able to sweep aside other institutions quite easily. History shows that.

I want this task force to demonstrate that you have to be huge to compete in the world. I don't think that's necessarily the case. I think when you adjust the banks' assets for the devaluation of our dollar, their fall from grace among the world's top twenty may not be quite as dramatic as they would have you believe. A lot of facts that attended this debate the last time around have to be examined by some neutral body, because when we get into this argument or this discussion we sometimes proceed from a perception that isn't quite the same for everybody. We're very keen to see the facts get on the table. I would say some of the assertions that have been made are challengeable when you look at them carefully. That issue of size is one that I think is challengeable.

Ms Whelan: There's always a tendency to suggest that size is very important in a lot of industries, but there are a number of different industries in Canada that are going through major change, and there are often times when there are amalgamations or mergers between small and large or between medium and large or medium and medium to become large. In my opinion that's just an evolution of what's going on in that particular market. You can look at a number of different industries. Customs brokers are a good example. Today you still have small, medium, and large broker firms. So I think we have to look at the different trends that are taking place.

I guess we will disagree a bit on this one.

.1735

The Chairman: Thanks, Ms Whelan.

Would you be good enough to summarize for our benefit where you see the major differences among you, life and health insurers, and the banks in terms of the white paper itself.

Mr. Anderson: Mr. Chairman, we'll do that, but I'd be reluctant to try to do that now, for one simple reason: I haven't read the life brief yet.

The Chairman: Okay. I think that's fair.

Mr. Anderson: But we'll submit that to you.

The Chairman: In terms of the white paper itself and the specific points contained therein, do you have major differences, in any of the areas outlined, with the government recommendations?

Mr. Kennedy: I think it's fair to say, Mr. Chairman, there's a great deal of agreement. The various financial institutions, CLHIA and ourselves among them, did put in a joint submission to Finance at one point.

The Chairman: I'm impressed by the degree of consultation that has taken place already to produce this white paper. I certainly have the position that maybe in terms of some of our witnesses, at least, we are only fine-tuning it. But we're also quite aware of the fact that this is just the weigh-in for a very major bout in terms of whether the banks can expand their powers into the insurance sector.

Mr. Anderson: If I may say, Mr. Chairman, I hope the question we ask is different from that question. That, to me, is a question that falls out of a much broader analysis of the health of our financial service sector as a whole, the balance we have, the desire to maintain competitiveness and jobs in Canada and how we stack up with the rest of the world. Falling out of that, there may be some need to discuss business powers, but I hope and pray that for quite awhile we won't get into this subject about whether banks can retail insurance.

The Chairman: No, that's not our role right now in terms of this committee. We're looking strictly at the white paper.

One other thing arises. You've made a very cogent argument for getting our act together as Canadians, the provinces and the federal government. This is just one more example of where businesses, large and small, consumers and taxpayers suffer because we insist on having too many regulatory regimes. No one can tell me that one benefits by having these multiple regimes. It's up to us as politicians to find ways to coordinate, cooperate and eliminate. You've made a very cogent argument to us. If you have more details on this, I would very much like to have them.

Mr. Anderson: We'd be happy to do that. We've actually decided to launch some test cases, the Maritimes being one - I mentioned it earlier - along with a couple of others, to see how far we can get when you make a cogent case, as you put it, to change regulations. Can it be brought about?

The Chairman: Are you getting full cooperation from federal officials in this area?

Mr. Anderson: Yes. There's no lack of desire to move ahead, it seems. It's just that when you get down to it, things are very slow.

The Chairman: Can we help you put the light of day on these negotiations so that Canadians can see where their politicians may be foot-dragging for reasons that don't stand the light of public day?

Mr. Anderson: Perhaps eventually. Certainly at another time we can come back with how far we've gotten on a number of these things. We would certainly welcome your help and support to move them ahead. I think I'd like to give this a little more time.

One thing we're learning that I think is very important is that governments have other priorities than disentangling regimes they've already put together. This is not exciting stuff for elected people to be involved in, so it tends to drift to the back of the pack unless industry itself continually reminds government to get on with the job. I think we have a responsibility there not to let things drift. We're going to try to do that, certainly with our little experiment with Atlantic Canada over the next few months, and in our discussions with OSFI. I want to emphasize again that the superintendent has been very cooperative on this. If we don't see progress, we'll be back talking to you about it.

.1740

The Chairman: Mr. Anderson, I think I speak for all members here - at least, I hope I do - that if you feel this committee could be a useful instrument for trying to push these efforts to harmonize laws in various areas and regulations, then I would welcome that opportunity. I think this is a tangible benefit we can bring to the Canadian taxpayers, to our competitive environment, without costing people. It will save them. We will all be winners without spending money. This is what is so appealing about it. So I welcome the efforts you're spearheading. If we can be of assistance, please count us in.

On behalf of all members, might I thank you for an interesting presentation today. We look forward to working with you in the future.

Mr. Anderson: Thank you very much.

The Chairman: Before we adjourn,

[Translation]

I've a brief announcement to make. I have just learned that Roger Pomerleau, a member of Parliament for the Bloc québécois and a member of the Standing Committee of Finance is in the Civic Hospital. He suffered a heart attack last Tuesday, and had an angioplasty today. He is doing well and we look forward to his return in a few weeks.

[English]

The meeting is adjourned.

Return to Committee Home Page