EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, September 24, 1996

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[English]

The Chairman: Could we come to order? The finance committee of the House of Commons is continuing its exploration and study of the white paper on legislation affecting Canada's financial institutions.

This morning we have with us Mr. Robert Schultz, chairman and chief executive officer, Midland Walwyn Capital Inc.; Peter Bailey, chief operating officer and secretary, Gordon Capital Corporation; Lorie Waisberg, partner, Goodman, Phillips & Vineberg; and Mr. Claude Bédard, vice-president and director, First Marathon Securities Ltd.

Welcome. We look forward to your presentation.

Mr. Robert Schultz (Chairman and Chief Executive Officer, Midland Walwyn Capital Inc.): Thank you very much, Mr. Chairman and hon. members of the committee. It's a pleasure to be here.

I'm chairman and CEO of Midland Walwyn Capital Inc. With me are two of my competitors, Mr. Peter Bailey, chief operating officer of Gordon Capital, and Mr. Claude Bédard, vice-president and director of First Marathon Securities Limited. Mr. Bédard is also a former chairman of the Montreal Exchange.

We are pleased to have the opportunity to present our views to the Standing Committee on Finance. We've been actively engaged in the Bank Act review process since early 1995 and we are pleased to begin dialogue with the lawmakers in today's discussion.

First of all, let me provide a little context. We came together last year as Canada's major, non-bank-owned, independent investment dealers to seek changes to the Bank Act in order to allow us to compete and to serve our customers better.

Originally there were four of us and we accounted for about 15% of the assets of the Canadian investment industry. Our members have recently diminished, of course, with the striking of a deal whereby Richardson Greenshields, one of the founders of our coalition, is being absorbed by the Royal Bank's investment subsidiary, RBC Dominion Securities.

The purchase of Richardson's is the latest step in the process that began eight years ago when the rules prohibiting bank ownership of investment firms were lifted. In that time bank control of the industry's assets has gone from 0% to 75%. Canadian independents now account for about 10% of the industry, with foreign dealers making up the remaining 15%.

This is the context in which we do our business and the one in which our participation in this review process is grounded.

Like many in the business community, consumer groups, the media and Parliament itself, independent dealers have grave concerns about the gathering power of the new bank-owned financial services conglomerates that have emerged as the ownership rules have been relaxed. We believe that not only the fact of ownership, but the fast-moving internal integration of bank, trust companies and investment activities within these conglomerates, poses a number of threats to the Canadian consumer.

One of the most significant of these threats - indeed, it is a reality - is the phenomena of tied selling, which is the issue we have come here to discuss today.

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The recent white paper of the Department of Finance states that tied selling occurs when a firm requires a customer to buy one product as a condition of purchasing another one. It goes on to state that concerns have been raised that the special nature of the relationship between financial institutions and their customers renders their customers especially vulnerable to coercion and that the market forces and the Competition Act may not provide sufficient safeguards for these consumers.

Independent dealers are concerned with three types of tied selling by bank-loan-financial services conglomerates: consumer tied selling, small business tied selling, and corporate tied selling. I will speak briefly on the issue of consumer and small business tied selling and I will ask my friend Mr. Bédard to address how this activity works in the corporate finance arena.

Simply put, a consumer tied sell occurs when an individual goes to his or her bank for a mortgage and is told the mortgage will be no problem if they transfer their RRSPs to the bank's investment dealer but it will be a problem if they don't. The issue here is not creditworthiness. Either you qualify for a loan or you don't. Nor is it the question of receiving a benefit. There's no positive incentive, just the threat of denial. In our view it is coercive use of the bank's credit-granting power, pure and simple.

A small business tied sell is essentially the same, except the bank has more leverage. A line of credit or a small business loan can be threatened unless the customer's financial dealings are consolidated with the bank and its subsidiaries.

This squeeze-play happens all the time. I know, because the investment advisers Midland Walwyn employs all across this country are at the wrong end of it. Every RRSP season the faxes and e-mails come into my office, telling me such-and-such a customer has had to move their RRSP from Midland to a bank loan dealer or else face the consequences.

The worst of it is that tied selling is not illegal. In the Competition Act there is some measure of protection against anti-competitive behaviour in general, but the hurdles one must clear for a successful prosecution are too high to capture this widespread activity of the banks. That's why we're asking Parliament to amend the Bank Act and make tied selling an offence for the protection of the Canadian consumer.

Now I'd like to turn it over to Mr. Bédard.

[Translation]

Mr. Claude Bédard (Vice-President and Director, First Marathon Securities Ltd.): Thank you Bob, and thank you Mr. Chairman. I will confine my brief remarks to the issue of tied selling in corporate finance, which is one of First Marathon's core businesses.

In a corporate tied sell, the process is essentially the same as with a consumer or small business tied sell. For example, consider the situation of a business which has reached the point where it can go public and issue stock. It seeks an investment dealer to manage the initial public offering. The business has developed a business relationship with a non-bank-owned investment dealer and wishes for that dealer to lead-manage the initial public offering.

One of the reasons motivating the business's management is that the independent dealer employs the best financial analyst in the area of activity of the business that concerns us. Management then considers this factor important since the analyst's opinion will contribute to the success of the issue as such and to the day-to-day progress of the shares in the secondary market. However, the company's Chief Executive Officer receives a call from his account manager at the bank, which holds the company's line of credit, or loans, or whatever.

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The CEO is told that, unless the initial public offering is lead managed by the bank's investment dealer, the line of credit, loans or whatever will be in jeopardy.

Unless the company is a billion-dollar player, the odds are very good that the company will comply.

As with a consumer tied sell, there is no recourse, except the unproductive route of the Competition Act.

I know about this practice because it happens all the time in my business. First Marathon is not permitted under the Bank Act to go into the banking business in Canada. And we get pushed aside in deal after deal by the bank-owned dealers whose bank parents are prepared to abuse that power in order to lever corporate finance business.

[English]

Mr. Schultz: It is for these reasons that we invite Parliament to extend the existing ban in the Bank Act on tied selling of insurance. Subsection 416(5) of the act currently reads:

(5) No bank shall exercise pressure on a borrower to place insurance for the security of the bank with any particular insurance company, but a bank may require that an insurance company chosen by a borrower meet with its approval, which shall not be unreasonably withheld.

The current subsection 416(5) is intended to prevent a bank from directing to any particular company the insurance it sometimes requires in order to extend credit.

Canada's independent investment dealers propose that the principle of this section should be applied in addition, to prevent the direction of business to any particular company; namely, the bank's investment dealer subsidiaries.

We propose that subsection 416(5) be amended to read:

No bank shall exercise pressure on a borrower to purchase or obtain any financial product or service from any particular supplier, but if a financial product or service is required in connection with a loan, a bank may require that the supplier chosen by a borrower meet with the bank's approval, which shall not be unreasonably withheld.

Let me close by saying that the abuse of the consumer is real. It is an unintended outgrowth of the emergence of bank domination of the securities industry. It is easily and reasonably remedied by Parliament, and we ask that Parliament do so in this Bank Act review.

Thank you for hearing us. My colleagues and I will welcome any questions.

The Chairman: Thank you very much, Mr. Bédard and Mr. Schultz.

I have a point of clarification. It is not illegal today for a bank to engage in a consumer tied or corporate tied sell in the circumstances you've outlined?

Mr. Lorie Waisberg (Partner, Goodman Phillips & Vineberg): Section 77 of the Competition Act deals with tied selling. Under section 77 tied selling is an anti-competitive practice, which means that if the director of the Competition Act can be convinced to bring the matter to the attention of the Competition Bureau and establish the four indicia of anti-competitive behaviour, the bureau can make an order prohibiting that. So one instance wouldn't constitute the necessary ingredient.

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The four requirements for a proceeding under section 77 are: that the behaviour constitute a practice; that it be engaged in by a major supplier; that it be shown that the behaviour is likely to impede entry by a firm or have some exclusionary effect; and that the behaviour will result in competition being lessened substantially. Those are four fairly high evidentiary standards, so when Schultz talks about one of his registered representatives calling, that doesn't meet the threshold.

The Chairman: What would be the result if we were to enact your amendment? Would it allow injunctive relief? Would it allow damages as well?

Mr. Waisberg: What we're proposing is simply an amendment to the Bank Act so that it would be a breach by the officer or employee of the bank, and it would be subject to the same remedies to which any breach of the statute is subjected.

The Chairman: Which would be?

Mr. Waisberg: There's a fine imposed by the court up to a maximum of $1 million and the potential for a prison term of up to two years. We don't expect either of those things, those maximums. It's the same as any other breach of the Bank Act.

The Chairman: Would it allow you, as a victim of this practice, to sue for damages as well?

Mr. Waisberg: It's not clear that this is the case.

The Chairman: Are you seeking that type of relief?

Mr. Waisberg: No, we're not seeking it now.

The Chairman: Thank you very much.

[Translation]

Mr. Loubier.

Mr. Loubier (Saint-Hyacinthe - Bagot): When we talked with the representatives of the major Canadian banks about the existence of practices such as tied selling, they denied this was a common practice of the banks. They also said that a simple amended code of ethics for the banks could eliminate the possibility of such tied sales. They say that these sales would be extremely rare.

You seem to be presenting the problem as fairly widespread among the banks. There is a discrepancy between the allegations of the two sides. Do you have tangible evidence that this is a virtually general practice? The banks state for their part that these cases, if they ever do occur at all, are isolated cases.

Mr. Bédard: Are you putting your question to Mr. Schultz or to me?

Mr. Loubier: To one of you four, Mr. Bédard.

Mr. Bédard: Are you referring to consumer or corporate tied selling?

Mr. Loubier: In general. You are familiar with the debate on over-the-counter insurance sales by the banks. One of the arguments advanced by the insurance brokers and insurance companies was the possibility of tied selling. Consumers could be victims of the banks' predatory practices. In their own defence, the banks stated that there is virtually no tied selling, that the practice is very marginal, even in areas where they are already operating. If the banks made an incursion into the field of insurance, they say, there would be no way that tied selling would become a general practice.

We were also told that a simple code of ethics for the banks would be sufficient to eliminate these kinds of pressures on consumers.

Mr. Bédard: Now I understand your question, Mr. Loubier, but I am not in a position to discuss businesses' banking transactions. Perhaps I will ask Mr. Schultz to give you a few examples involving individuals, if he can.

Corporate finance is not only an essential activity for our life together here in Canada, but an activity that can also prove to be extremely lucrative.

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That, moreover, is the reason why, in the past six, seven or eight years, the Canadian banks have taken over a large share of the securities market from which they used to be excluded under the express provisions of the Bank Act. The banks themselves will candidly admit that their incursion into securities has proved to be extremely profitable for them.

As for individual cases, I cannot confirm that this kind of practice is widespread in the case of corporate financings. That's false. However, when a business needs access to the financial markets and is highly indebted to a bank or the principal owner is personally liable to a bank, it becomes extremely easy for the bank to make the connection with the person responsible for the account and to use this significant power to tip the scales in its favour at the time the financing in question is negotiated. It's on this aspect that I am making this presentation here today.

Along with my colleagues here today and my other colleagues at First Marathon, I have personally witnessed a number of cases of this kind of conduct, since we at First Marathon specialize in financing smaller businesses that want to access the equity markets in Canada. This is precisely the niche in which we do business and I can tell you that we very frequently see this kind of conduct. This committee may not be the place to disclose specific names. It would be preferable to stick to generalities because I don't believe this is the forum for examples and fruitless debate.

Generally speaking, when a business is indebted or when the contractor or principal shareholder is personally liable to the bank, the connection is very easy to make in order to influence the contractor's decision when the time comes to seek financing. Does that answer your question?

Mr. Loubier: That's perfect. Thank you very much.

The Chairman: Thank you, Mr. Loubier.

[English]

Mr. Grubel.

Mr. Grubel (Capilano - Howe Sound): Welcome. I have two questions, gentlemen.

First of all, with all these cases that you have in your portfolio, have you ever considered bringing action against these practices under the Competition Act, either collectively or by supporting an individual action?

Mr. Schultz: Let me address that, and because we didn't get to the consumer side, let me just do some follow-up on the previous question.

I have a lot of correspondence in my files relating to these practices of tied selling. I really can't say whether it's widespread from the point of view of the banks or not because they are so large. I do consider it to be widespread in the context of our business, and whether or not other people.... I guess how you define ``widespread'' is open to question.

Let me just say another thing. We are not opposed to cross-selling. If we offer one service and point out to somebody that we offer this other service and that they might want to consider it, to the extent that it might be attractive to a consumer and they opt for it, that's fine. But when it's tied to the lever of the credit-granting power that our organizations don't have, we think it goes too far.

I have letters from consumers who say they really like the service they're being given by the financial adviser there, that they really want to keep it there; however, they require this loan or this mortgage for our business and therefore have no option but to move it. This is what we are talking about.

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About bringing actions under the Competition Act, you have to understand...and I'm sure in the past many of you have been in the circumstances we're talking about. I know I did when I was much younger. Certainly to a large extent you were fearful of the power that credit-granting facility held over you. Nobody wants to come forward in public and say this happened to me, or they're very reluctant, because they don't know what the consequences are going to be. There may be no consequences, but they don't know, and it's a large risk to take. Therefore bringing those actions is very difficult.

If you're looking for some concrete evidence, the only thing I can hold out, and I feel very sure we could get this, is if you wanted to appoint a member or members from your committee to meet with some consumers or whatever on a confidential no-names basis, where nothing would be made public, that could be done. But we're not going to get people to stand up in front of the press or the television cameras and say this is happening. There's just too much risk for them.

Mr. Grubel: I didn't have that in mind.

I'd just like to comment on that. It seems to me we can trust that the Competition Bureau will not reveal names. You can give it to them, and, as Mr. Waisberg has said, if there were enough evidence of significant action the Competition Bureau would be sure to take action and rap the knuckles of banks. I'm surprised you haven't done this.

Nevertheless, let me turn to my second question. It concerns my worry over the cost of doing this kind of thing. I've written this down here for myself. What if, as one leaves a mortgage application office, the manager of that department of a bank hands a little brochure to the client that says, oh, by the way, we also administer RRSPs. Is that a violation of the law, as you suggested it?

What if that individual goes further and says, now, I know you have an account with Investment Dealer X, Y, or Z. Your annual fees are.... We know about these things. Our annual fees are half that. When you come back, please remember and let's talk about that again.

If you are so inclined, you might call that tied selling. I can envision a jury being asked to interpret facts of this nature and in fact saying yes, that is an unethical practice and it should be stopped; it's not in the interest of the consumer.

One could easily cook up lots of ways of behaving that cannot really, on an a priori basis, be classified as anti-competitive or not anti-competitive. So how do we adjudicate this? Are we now going to establish a big bureaucracy in the Department of Finance and link up the courts, tie up court time with complaints of this sort?

I believe we as legislators have to see the potential costs of this relative to the benefits. I just wonder, first, if the cases of this are large enough, and secondly, whether the protection already offered under the Competition Act is not large enough that the consequences will not be as serious as they're made out to be, to warrant costs of this nature. Assure me the costs are really negligible.

Mr. Schultz: Let me just say a couple of things on that. First, in your example somebody goes for a mortgage and they're handed a brochure. As I've just said, we would consider that to be cross-selling. In other words, you're offering a service and there's no compulsion to take the service in order to get the mortgage. So that's fine.

The same with saying, we know you have an RRSP elsewhere and we offer it for half the price. That's competition. If the consumer says, ``Gee, half the price, I'm going to move it'', we have to be prepared to respond to those pricing differentials; otherwise.... That goes on every day in the marketplace and we don't have any quarrels with that.

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If you want this mortgage, you have to move your RRSP - that's where we think the line should be drawn. Obviously, to the extent that you, as a consumer, agree to put your RRSP there because it's half the price, you haven't been coerced, so I don't think people are going to complain in that instance. We're really trying to address cases where they don't want to move and they know there is some remedy under the law to deal with it, if they're forced to move.

Mr. Grubel: Is it actually put in writing that those are the conditions, or is it typically someone coming back after not getting his mortgage and saying he has the feeling that he won't get the mortgage unless he does this?

I don't want to question the truth of the statements made by your witnesses, but if there is nothing in writing, the bank isn't going to roll over and say this guy made a mistake, because it will be one person's word against another person's word. It will increase the cost of doing business because there will always have to be a second person there or a recording of what has taken place. We will have to go to a jury.

I find that solution to your problem totally inferior. I'm still open to evidence from you relative to what you should really be pressing for - that you can also offer banking services. Why don't you go after that?

Mr. Shultz: That aspect is interesting. We are addressing the issue in the white paper, which is specifically tied selling. Last year when we started on this process and met with the people from the Department of Finance and discussed a number of issues back and forth, I finally said I was confused. In the late 1980s, the four pillars supposedly came down, but it appears to me that the four pillars have fallen in only one direction when they should have fallen in all directions. If we want to be a bank we should have the ability to be a bank. However, those types of things did not get into the white paper and we are addressing what is in the white paper.

The Chairman: Thank you, Mr. Grubel.

Mr. Fewchuk, please.

Mr. Fewchuk (Selkirk - Red River): Good morning, gentlemen, and thank you for coming.

For the last three years I have been here, everyone has talked about small business. Going back to your statement this morning, when you're speaking of a loan for a small business, incorporated or unincorporated, what kind of amount are you referring to, and how many employees does a small business consist of? What do you call a small businessman?

Mr. Schultz: That's an interesting question. A small business can probably range from somebody who has nothing more than a business plan to a business with yearly sales of half a billion dollars. It's a pretty broad range of businesses.

Mr. Fewchuk: You also mentioned you had some evidence that a small business would have this problem in its loans. I would like to know from you - no names - what amount he was looking for. Was it a $50,000 loan? Give me an idea of what type of business it was, how large, and where he's coming from with this tied selling problem.

Mr. Bédard: To answer your question precisely would be difficult for me, but let's give you an example. An entrepreneur has a flourishing company and has created this business all by himself over several years. He has sales from $2 million to $4 million and has perhaps five to ten employees. That company needs a loan to purchase new equipment in order to meet the competition, so it goes to the bank. This loan may vary. It could be $100,000, $1 million, $2 million, or $3 million.

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The bank establishes the ratios with this entrepreneur, in order to see if the loan meets the criteria, and comes to the conclusion - perhaps it may stretch the balance sheet a little bit - that it is basically in favour of making that loan. But at that very juncture it can use its credit-granting leverage with this individual, and perhaps other shareholders within the company, to coerce the individual into moving RRSPs, mutual funds, and brokerage accounts to the bank-owned investment dealer. This is what we're referring to.

I don't believe the banks would ever put that in writing. As Mr. Grubel pointed out, it is something that goes on between the bank manager and an individual. If the banker feels he wants to get this loan and this business, he may use that power.

It's very difficult to say whether that power is significant enough when you're applying for a $50,000 loan, a $500,000 loan, or a $5 million loan. We're talking about businesses that may have limited credit-obtaining capabilities at certain points. The bank is using its leverage, and that's as plain as I can explain it. I don't know if this answers your question.

Mr. Fewchuk: It does. There is just a little difference between what you and I call a small businessman on the type of loans. Thank you.

The Chairman: Thank you, Mr. Fewchuk.

Mrs. Brushett.

Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chairman.

To come back to tied selling versus cross selling, is there a precise definition of cross selling that all financial institutions live within when we talk about handing out the brochure, or whatever?

Mr. Schultz: I'm not aware of any. They're both commonly used terms, not only here in Canada but under U.S. law. We offer a wide variety of services and make people aware of all of them, but we don't have any sort of power to say, if you don't get this one.... We're happy to have the business we get on certain things. We'd like to get all of the business if we could, but if they take some of that other business elsewhere.... We're not granting credit, we're providing services - and we're happy to give them. So there's no coercion there.

Mrs. Brushett: I understand that. I guess tied selling is precisely defined, or it is in the act, whereas cross selling seems to be terminology that's loosely used or widely accepted. I come back to this fundamental premise. Can the Competition Bureau not solve problems that are so-called tied selling problems that would be currently illegal problems under the act now? Have you ever utilized the Competition Act to resolve a case?

Mr. Waisberg: Can I respond to part of the question?

Mrs. Brushett: Certainly.

Mr. Waisberg: The differentiation between cross selling and tied selling is the element of coercion - the requirement that somebody buy the services from the provider of the product. As I pointed out earlier, the problem with the Competition Act is that tied selling is not a per se offence under the Competition Act at the present time.

Mrs. Brushett: We understand that one is coercive and one involves freedom of choice, for want of better terminology.

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Mr. Waisberg: Right, but tied selling, as it's regulated in Canada today, is an anti-competitive practice that only becomes bad, only becomes contrary to law, when the competition tribunal has a case before it brought by the directors and the tribunal is satisfied that the four requirements I outlined earlier in the session have been established to the satisfaction of the tribunal.

Mrs. Brushett: But the answer is no, I guess, that nothing has come before Competition and resolved? That's what I'm asking for.

Mr. Schultz: Let me quote a paragraph from an August 30, 1996, letter to the Department of Finance from the Consumers' Association of Canada, where they say:

Consumers are not well protected by the present laws concerning tied selling. A consumer who has been coerced should not have to prove, as is now necessary under the Competition Act, that the particular institution made a practice of coercing its customers, only that the individual was in fact coerced.

Mrs. Brushett: So you're saying the Competition Act is unproductive, the onus shouldn't be on the consumer, and therefore you want the legislation updated so that the consumer has protection.

Mr. Schultz: The Consumer Association goes on to say:

Therefore, CAC recommends that the Bank Act be amended to prohibit coercive tied selling.

The Chairman: Thank you, Mrs. Brushett.

Very briefly, because we have only about five minutes, maximum, Mr. Duhamel.

[Translation]

Mr. Duhamel (Saint-Boniface): Thank you for your presentation.

[English]

I have a couple of questions.

We've been talking considerably of late of negative-option billing. Are there common features, elements, between negative option billing and in fact tied selling? I'd like an opinion on that.

Secondly, I'd like to know how well we compare to the U.S. and what type of bureaucracy, assuming they have better protection for consumers than we do with regard to tied selling, is utilized. That happened to be a concern of one of my colleagues from the Reform Party. Could you perhaps give some opinions, some views, some clarifications, insights?

Mr. Schultz: I've never thought of it in the context of negative-option billing. Off the top of my head, I don't see things that are similar.

Mr. Bédard: To clarify it perhaps, the example I have is the case where the cable companies essentially offered a service. Some people may have decided they didn't want to have that service and therefore did not deem it necessary to subscribe to that service, and it was more or less imposed upon them.

In this particular case, I can't immediately come up with an example where a consumer, with respect to the investment dealers here, would in fact obtain a service they did not want specifically. We will respond to a request if a customer wishes to have a mutual fund account, wishes to purchase and sell securities, that sort of thing. It's voluntarily made by the client, and the client will choose the investment dealer that in his or her mind best provides it.

Mr. Duhamel: But perhaps there is an element of commonality when one looks at.... If you get a package of programs from the cable companies, you might want one or two but you can't get one or two unless you buy the rest. It seems to me tied selling is somewhat similar.

Anyway, I'll go on to the second one or we won't have a whole lot of time. How do we compare to the U.S.?

Mr. Waisberg: If I can respond, in the United States both the Clayton Act and the Sherman Anti-trust Act regulate anti-competitive behaviour and tied selling in particular. They've been on the statute books in the United States since the first decade of this century. In 1970 Congress passed amendments to the Bank Holding Company Act because they believed, notwithstanding the anti-tying provisions in both the Clayton and Sherman acts, the particular power of credit-granting agencies had to be dealt with.

So there's a specific prohibition in the Bank Holding Company Act that was added to the legislation that regulates S and L's in the 1980s. That legislation prohibits tied selling in credit-granting situations and provides for treble damages. There's been a great deal of litigation.

Mr. Duhamel: Does it cost a lot to administer?

Mr. Waisberg: It doesn't cost anything to administer because it simply provides for a civil remedy.

Mr. Duhamel: Thank you.

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The Chairman: You are not suggesting a civil remedy for Canada, however.

I have three more individuals who have indicated they wish to ask questions, so with your permission we will extend these hearings beyond the 10:15 a.m. deadline.

Mr. Shepherd.

Mr. Shepherd (Durham): Thank you very much.

Maybe I can give a more specific example of what I would call tied selling, something I was confronted with only recently, and that is Green Line financial services. For those who don't know, Green Line is an outgrowth of the Toronto Dominion Bank, and probably one of the few discount brokers, I guess, that exists in Canada. Also, I'm aware of the fact that the capital flows know no national boundaries. In their application they basically make the individual sign that they will be a target for Toronto Dominion Bank services. In other words, one of the conditions of being a customer of the Green Line financial services discount broker is that the Toronto Dominion Bank can sell any of their products and use you as a target. So it's part of the action of signing on the dotted line that they have tied selling.

When I look at that, a lot of people take that as being totally offensive. As an individual, maybe I don't have to borrow money from the bank. Maybe I'm one of those baby boomers now who has lots of money and wants to loan to banks as opposed to the other way around.

I looked at Charles Schwab in the United States, one of the U.S.'s biggest discount brokers. They don't ask these stupid questions.

What is tied selling doing to end maybe the Canadianization of the securities industry itself, in other words, shoving people into the hands of possibly discount brokers and others of American extraction that don't have this problem?

Mr. Schultz: If your question is, does this type of thing potentially push business to foreign organizations, I'm not sure I know the answer to that. But certainly to the extent that there is tied selling, that people are coerced to do business with an organization because of credit-granting, that has a tremendous effect, I think, ultimately on consumer choice, on consumer pricing. If we get down to a very small oligopolistic situation where they can control the pricing of services, there have been a lot of studies done on that effect. But right now I guess there isn't really much competition. In regions there are some, and I think all the banks have discount operations now, but I don't know that anybody has really gone after that business to the extent that Green Line has. So Schwab at the moment is not in Canada, and there are issues for residency in terms of who you can deal with under securities acts and whatever.

Mr. Shepherd: It concerns me that one-stop financial shopping by financial institutions is inherently in conflict with what we're talking about: tied selling. Invariably, if you're going to do it one-stop shop, you're going to have tied selling. That's the whole purpose of one-stop shopping.

Mr. Schultz: If I can say one thing, number one is cross-selling might be an outgrowth of one-stop financial shopping, but not necessarily tied selling.

Obviously, part of a strategy of an organization like ours is to try to get people to do all their financial services business with us to the extent that we can offer those services. It's not just Canadian; it's worldwide in terms of.... There may be people who disagree with me, but I still have a big question mark about one-stop financial shopping and how successful that may or may not be. It's been tried different ways over many years by many different organizations, and I can give you a litany of examples where that hasn't worked out. But that's cross-selling and offering services and other services related to it.

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For example, our business and people in our industry are now allowed to sell life insurance product, but does that mean that somebody who deals with us for other investments does their insurance with us? No, they don't. We don't have any leverage to do that other than to say that we can offer the service. If somebody's well served elsewhere, then they're well served over there. But that's cross-selling. We don't have any leverage on that.

Mr. Bédard: You've said basically what I would have said.

The Chairman: Mr. Solberg.

Mr. Solberg (Medicine Hat): This whole process points to the need to have tackled the big issues first. If we had tackled the issue of investment dealers and others moving into banking, then this might not be the issue that it is today.

This question is a bit hypothetical, but I want to ask it because it points to how difficult getting to a definition of what coercive behaviour actually is. If you had a situation where somebody approaches a bank to ask for a loan and it's a decidedly risky loan and the bank says it will grant you the loan on the basis that you bring your investment portfolio here - remember that the bank is offering to do this person a service - would you regard that as being coercive behaviour?

Mr. Shultz: Yes, I would, if the investment portfolio that was asked to be brought over was in excess of the collateral that they required for that particular loan. Obviously, if they're going to do a loan that's risky, they require some collateral. When we talk about RRSPs, those can't even be used as collateral. We don't quite understand why that would be the case, but certainly to the extent that a portfolio exceeded what was sufficient collateral, yes, I would consider that to be coercive.

Mr. Solberg: But if you're in a situation where the bank is worried about making a decent return - perhaps there are several loans like this where there is a possibility of default and there are costs involved with defaults - wouldn't it be a situation where the bank is actually providing a service? People are willing to enter into this voluntarily in order to get the loan and, because of the degree of risk involved here, it could be argued that this is actually a service and it's simply a condition of the service.

Mr. Waisberg: Wouldn't the risk be reflected in the cost of the loan? Isn't that the way to do it?

Mr. Solberg: Fair enough. That's probably a good argument.

I guess what I'm saying is that there are situations, though, where if somebody goes to a bank they are getting a service. The bank is going to take a risk on them, and the point I want to make is that it's going to be very difficult to determine what is coercive behaviour in some cases and what is actually a service that's being offered.

Mr. Peter A. Bailey (Chief Operating Officer and Secretary, Gordon Capital Corporation): I think it's the crux of our whole argument. To take the RRSP, for example, it cannot be used as collateral. So if you go to the bank and it says it will give you this high-risk loan, it has adequate collateral in itself. The RRSP can't be collateral, but they say you must bring your RRSP for additional revenue to the bank. That's exactly what our case is. That is what tied selling is, and that's what we're trying to prevent, because we can't make that loan go in any other way. All we're asking for is a level playing field. We don't have that. That's the crux of our whole problem.

The Chairman: Mr. Pillitteri.

Mr. Pillitteri (Niagara Falls): In reality, what has happened in the last decade? Is it increased tied-house selling? Has it increased, or is it on a down trend?

I ask you this because, being a businessman, I live by practical means sometimes. In the 1970s and in the 1980s of course everything was going up and up and we never knew what we were really worth. Then coming into the late 1980s and the 1990s we sort of faced some reality. Many of us, being in business, had different portfolios. You could have had RRSPs or investments and so on. But in real-world business all of a sudden we find that possibly we were down 20% to 30%. We were no longer worth the amount we figured we were worth. All of a sudden we found ourselves in re-mortgaging and reinvesting. Some of us possibly see the realities of getting rid of some portfolios in order that we'll be in the real world and real loans.

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Do you think those individuals would have made those decisions in the businesses, let's say, that they could no longer afford a portfolio, and they would have gone to the banks and re-mortgaged...that there was coercion in that part, there was tied selling in that part? And tell me, has it really gone up or down in the last decade?

Mr. Schultz: I don't know about the last decade, but clearly on the consumer side it has become much more pronounced in the last couple of years. What we had in the late 1980s was banks buying dealers. I think for a time they went along as separate entities. Now we're getting more and more integration. That has occurred probably in the last two, three, or four years. To the extent that we have more integration, we're seeing more and more examples of tied selling. Certainly we see people coming forward a lot more than we did two, three, or four years ago. So I really believe it's much more prevalent today than it was.

On the corporate side it's difficult to say. Ten years ago or eight years ago or whatever commercial banks were offering loans but weren't offering investment banking services. They've integrated. That may be more and more the case.

Mr. Bédard: The fact that the commercial banks now own very large investment dealers allows them to have a degree of influence over Canadian business they did not have previously because the Bank Act did not allow them to do so. Now that they have this power...and it's not only a legal power, it's a financial power. As Bob pointed out earlier, the bank-owned dealers represent just about three-quarters of our industry now, whereas ten years ago they were not there. So to the extent that these banks use this power to their advantage, yes, it has gone up, definitely, because the banks are now a much larger part of the landscape than they were ten years ago.

[Translation]

The Chairman: Mr. Bélisle, please.

Mr. Bélisle (La Prairie): My question is for Mr. Schultz or Mr. Bédard. Your brief mentions that the banks' control in the industry has gone from zero percent to more than 75 percent. Consequently, independents represent only 10 percent, and you are in that group, and foreign dealers 15 percent.

Are the foreign dealers that hold this 15 percent share completely independent or do they belong to large financial groups or banks?

There is currently great pressure to buy the remaining 10 percent of which you hold a share. Is the pressure in Canada today great and what kind of pressure is being brought to bear on your industry? I imagine the banks' objective is to control the entire sector.

Mr. Bédard: If I properly understood your first question, you want to know whether the 10 percent of our industry that is controlled by foreign organizations is controlled by banks. Did I correctly understand your question?

In some instances, yes, there are dealers operating in Canada that are subsidiaries of foreign organizations, including the Hongkong Bank of Canada, which is a foreign bank with brokerage operations here in Canada.

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But this 10 percent is not generally controlled by foreign dealers. I am thinking, among others, of Morgan Stanley & Co. and Goldman Sachs & Co., which are not banks as such. The Morgan Trust Bank Ltd. is also doing business here in Canada. Part of that 10 percent held by foreign dealers doing business in Canada is not controlled by banks.

Mr. Bélisle: In reality, the banks' control in the industry could be greater than 75 percent and reach 80 or 85 percent through ownership of foreign dealers.

Mr. Bédard: Exactly. I nevertheless believe that the independent dealers are strong enough to be able to compete with the banks. However, the financial power of the dealers owned by the banks is very great in our industry and this figure could ultimately rise even further if absolutely nothing is done.

Mr. Bélisle: I also asked you what kind of pressure was being brought to bear on your industry to lead the banks to increase their percentage. What kind of pressure are you currently experiencing from the banks?

[English]

Mr. Schultz: Let me address that last one. Our organization, Midland Walwyn, is a public company like First Marathon. Certainly, the last integrated independent firm was also a public company. There is a lot of speculation in the press about how we may be next. It certainly is our strategy and our desire to continue on as an independent organization, not under bank ownership.

Would anybody make an offer to a widely publicly held company in that regard? I don't know. There aren't a lot of examples. If you like, those things tend to get done a little differently than they would with an industrial organization because you have to get the people onside in that type of transaction. But there certainly is a lot of speculation in that regard, although I've never had a direct overture or offer in that regard. So that remains to be seen, but certainly there is a lot.

On your first question, I'm not quite sure what the point is. If your point is that there are foreigners here to provide competition to the banks and bank loan firms in the industry, my only response would be that it's a competitive level that you can't necessarily count on. I don't know anything in terms of going through the future, but I do know that if you look at the history, some major financial institutions - the Merrill Lynches, the Prudential Baches, the Dean Witters - have been in and out. I can cite other examples of people who enter the market here. They see market activity turn down and they go out. So you can't count on them being here for the long term.

[Translation]

The Chairman: Thank you, Mr. Bélisle. Lastly, Mr. Silye.

[English]

Mr. Silye (Calgary Centre): Thank you, Mr. Chairman.

I believe competition is the best guarantee for customers; I agree with that philosophy. You have to be careful that one-stop shopping doesn't become a monopoly. Coming from the oil and gas industry in Calgary, I know there's been evolution within the major oil companies. When I first got there in the 1970s they had small outfits - shot-hole drilling rigs, geophysical contractors, seismic processors - and then they decided to take it all in. Why pay at arm's length? They brought it all in and consolidated. But they got big and they got inefficient. Now they're back to decentralizing it and letting everybody do their thing.

The concern I have here with tied selling is that, as you know, you're always negotiating in the financial sector. You should always be encouraging people to go to that institution or that place that can give them the best deal. You have competition amongst yourselves. How flagrant is tied selling in your industry, where you feel and believe that you can prove that RRSPs are being shovelled over to those banks that have investment dealers because it's a condition over and above an equity requirement, over and above qualifying and putting up assets for a loan? If that's the case, there's no problem with tied selling. That's cross service, which I think is beneficial to consumers.

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Do you have proof that the loans are on condition that you bring this over, even though it's not a requirement to fulfil a mortgage, for instance? For example, you have enough income, you have a good job, the mortgage is the proper amount, and then they say, ``Oh, by the way, we'll only give it to you if...''. I think that would be wrong. I think that would be not in the best interests of customers. But if it's not for that, if it's equity, it is.

What proof do you have? If you do, how many dollars do you think your industry is losing - as a ballpark figure - in this kind of thing? Why do you need this legislation?

Mr. Schultz: First of all, in terms of the proof, I have many letters on file from customers, written either directly to myself or to their financial adviser, saying they have been pleased with the service they have had and saying they would like to keep their business with them, but they're required to bring it over in order to get credit facility. There are a number of those on file.

Mr. Silye: But it's not an equity requirement?

Mr. Schultz: To the extent of the correspondence that I have on this, yes, absolutely. I haven't necessarily talked to these people myself directly, but....

There are a lot of those. In terms of quantifying the dollars lost, it's very difficult to say how much. We don't know how many people submit without even saying anything. They just move it. What we have are examples of those people who have said they don't want to do it but they have no choice. I'm sure there's a raft of that going on that we're not even aware of. That's the reason it's happening.... It's very difficult to quantify. On the corporate side, it can be very significant. You're not going to get issuers to come forward and say that, but I have lots of examples. I'm sure Claude has, too.

Mr. Bédard: If I may interject here, to make an analogy, on this side of the table - and those that we also represent by coming here today - when we get the business, we earn the business. We go after it and we use our best resources to attempt to earn. Whether it's an individual or a corporation, we want the business, we'll put out the resources, and we'll compete one against the other.

There shouldn't be the availability to simply rely on a banking relationship and to assume that you can easily obtain the business without having to earn it. I think that's a concept we can all relate to, and to the extent that banks may use this credit-granting power to coerce a corporation to deal with their investment dealers, it is wrong. That is the point we're trying to make for you today.

Mr. Silye: Are you alleging that this is happening or do you have proof that it's happening? You're asking legislators to pass a law and we don't even know how much money you're saying is involved here.

Mr. Schultz: Let me address that. I said earlier that obviously people are not prepared to come forward in public and say, ``This happened to me because...''.

Mr. Silye: The bank might cancel their loans, right?

Mr. Schultz: Yes. But if you appoint one or two people from this committee to meet with them on a no-names, off-the-record basis, we can do that.

In terms of the quantification of this issue or problem, let me say that the three of us, formerly four of us, have worked on this for over a year now, and we are not spending our time on this because it is peanuts. In our estimation, we believe this is extremely important to our businesses, and if it weren't, I don't think we would have put the time and effort that we have into this particular issue.

The Chairman: Thank you, Mr. Silye.

[Translation]

In response to the question Mr. Bélisle asked, I would note that, within 10 years, we will find ourselves with few independent Canadian dealers.

[English]

A difficult question that came out of the commentary today was this whole question of how banks deal with small business. I have put it to bankers in the past that a small business loan of $50,000 or $100,000 cannot make money for the bank. It costs them a great deal to do that loan and then monitor it. But they say they want to be into small business because there are other things that come to them from it. There are RRSPs, mortgages, etc. So there is a tremendous economic incentive for this cross-selling, which questions have shown can very quickly become tied selling.

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I would be interested in hearing later, perhaps from you, Mr. Waisberg - we won't do it here - why we would not want a civil remedy attached to it. I know that is not necessarily the way of the competition law.

But on your request to us to create an explicit offence of tied selling in the Bank Act for banks, while I feel we must reserve final opinion until we hear back on this from the banks, I think you have made a very compelling case before us today.

On behalf of all members, may I thank you for a very important presentation to us on behalf of a diminishing but I believe still important aspect of what remains of the four pillars, which can do a great deal in the future to help us be entrepreneurial here in Canada. Thank you very much.

We'll take a five-minute break now, members.

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[Translation]

The Chairman: We are starting again.

[English]

Our witnesses are from the Canadian Real Estate Association: Pierre Beauchamp, chief executive officer; Shirley Taylor, manager of external relations; and Martin Laplante, specialist consultant, policy research.

[Translation]

Welcome. We are anxiously waiting your presentation. Mr. Beauchamp.

Mr. Pierre Beauchamp (Chief Executive Officer, Canadian Real Estate Association): Thank you very much, Mr. Chairman. As you have already introduced my colleagues, I will start immediately.

[English]

The Canadian Real Estate Association owns the trademark ``Multiple Listing Service'', which represents a cooperative listing system of properties for sale in every part of Canada. That system, as many of you would know, is better known as MLS.

In 1995 MLS accounted for the movement of over 250,000 properties, worth $38 billion. The people who drove those transactions are realtors - that is, members of this association - who do their business in 115 local real estate boards. Currently in Canada we have just about 70,000 members.

I mention this by way of introduction simply to underline for you that our members are very close to a huge number of home buyers and housing transactions on a daily basis. They are completely familiar with mortgage financing in all its aspects. They are in a position to know if there are problems and often they are called on to assist a prospective buyer in arranging financing for his or her property. They hear from consumers, and from financial institutions, all the time. Their experience leads them to draw two conclusions. First, the consumer is generally well served by the mortgage marketplace today. Second, the consumer is poorly served by an outdated federal Interest Act.

Our association has supported amendments to the Interest Act since 1984, when the Trudeau government introduced amendments only to see them die when a general election was called. Roy MacLaren, who was Minister of State for Finance at the time, introduced the bill by saying ``The experiences of home owners during the past few years suggest that this legislation is urgently needed''. He issued a news release stating:

Consumers who found themselves locked into mortgages and unable to prepay under any circumstances are understandably upset. Some claim that a lack of information provided by the lender when they took out their mortgage led to a misunderstanding of their rights.

The 1984 proposal would have legislated a right to prepay and a maximum penalty that could have been assessed by the lender. Unfortunately it died on the order paper when a federal election was called. But it was not the first time a Liberal government addressed these issues.

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Back in 1976, the government also introduced amendments. Tony Abbott, then Minister of Consumer and Corporate Affairs, said, and I quote:

the penalties currently in use in cases of prepayment of mortgages are often excessive and unnecessarily restrictive.

This bill also provided a right to prepay and maximum penalties, but it suffered a similar fate as the 1984 bill.

Over the years, nothing has been done by way of legislation, but the issue won't go away. Last year we, as an association, wondered whether we should continue to raise it. Through our real estate boards we asked members to rate the importance of the Interest Act amendments and to give us the benefit of their experience.

Even we were surprised by the feedback. Last year and again this year our members rated it the number one issue to discuss in meetings with members of Parliament. They also provided us with a large file full of their experiences with respect to prepayment rights, the cost of prepayment, disclosure as well as other related issues.

Nineteen years after Mr. Abbott said prepayment costs were often unduly excessive, our members gave us many examples of excessive prepayments. Realtors ranked the lack of any right to prepay a mortgage and the penalties for prepaying as far and away the biggest problems. It was clear to us that, after showing concern once in the 1970s and again in the 1980s, government may have tuned out. But the problem remains very real for consumers in Canada.

Feedback reported that clients had been refused outright when they tried to prepay a mortgage. Others were allowed to prepay by a variety of penalties. Some were offered a choice of paying three months' interest or the interest rate differential, whichever was more. Others had been given no choice but to pay the interest rate differential, which worked out to several thousands of dollars more than a penalty of three months' interest would have been.

We commissioned an expert survey of the policies of six financial institutions, as they would disclose them to the consumer. We have made copies of this survey available to the committee.

We used an identical example with all six institutions at local branches here in Ottawa. We took the example of a $100,000, five-year mortgage with 25-year amortization, fully prepaid after two years without the sale of the house or transfer of the mortgage. We found the interest rate differential penalty was calculated differently by every financial institution.

Before members conclude this is the marketplace working as it should, let me emphasize these differences were not factors of healthy, open competition between bank A and bank B. The formula for calculating the penalties was not spelled out in the mortgage documents, and it is certainly not spelled out in legislation. In some cases it is hidden inside computers so local bank officers are unable to disclose it.

The differences in the method of calculation represented a spread of more than $1,000 from the lowest penalty to the highest, this supposedly using the same formula. That's an undisclosed hidden cost to the consumer.

We were initially criticized by the Canadian Bankers Association for not going to their head office to obtain the information we required, but that misses the whole point. We deliberately put ourselves in the position of the consumer, and as you well know, the consumer walks into a neighbourhood branch, not into the head office in Toronto.

Our position is that the right to prepay should be legislated and that a standardized method for calculating the prepayment penalty should also be legislated.

Initially our members proposed extending to all mortgages the penalty of three months' interest that applies under some National Housing Act mortgages. Discussions with the Canadian Bankers Association a year ago convinced us that its members would not accept such a penalty on the grounds that the compensation would be inadequate. But the CBA did indicate that it would support the interest rate differential. At that point we set about developing a proposal that would be fair to both the lender and the borrowers.

As our survey shows, there are many different ways of calculating the IRD, and we believe this may be the major point of contention. Our research shows that one method of calculation is fair to both lenders and borrowers. It is the interest rate differential determined by using the net present value calculation, based on a payment stream where the borrower is able to take advantage of all repayment options provided by the lender. These are typically in the range of 10% to 20% in the third year.

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Under this IRD, I emphasize, the financial institution is not worse off than it would have been if the mortgage had remained in force. I would also emphasize that our proposal does not reward speculators.

When the Senate banking committee aired this subject briefly in the summer, the suggestion was made that the only time anyone would want to prepay a mortgage would be when interest rates are dropping. This is indeed a common reason for prepayment, no doubt. The consumer sees the market forces are working in his or her favour and wants to refinance. But there are several other reasons for prepayment, and they apply regardless of interest rate calculations. They include death, marital breakdown, job loss, and job relocation. I suggest to you that public policy is bad policy if it ignores these common realities of life in the Canada of the 1990s.

Nor are we talking about micro-managing financial institutions. I said at the outset the marketplace is working well. All kinds of mortgage products are on the market, as you well know. But the market is public. Terms and conditions and incentives are public. The consumer can see them and make judgments. Financial institutions offer a wide variety of prepayment options and incentives to attract new mortgage customers. They do not offer prepayment rights or focus on prepayment penalties for consumers as part of their competitive environment.

At the time of negotiating a mortgage, consumers intend, in good faith, to keep it for the full term. Before signing, the average consumer will not ask too many questions about how to break the contract. But circumstances change and sometimes contracts must be broken. Our formula provides full and fair compensation to the lender. Why should lenders exact a penalty significantly greater than if the contract remained in force? Repaying a mortgage is not a competitive issue; it's a fairness issue.

Under these conditions lenders can hardly claim that a standardized method of calculating prepayment penalties is interfering with their competitive environment. Government can hardly claim that in the interests of public policy it must leave consumers at the mercy of lenders.

We are not talking about imposing a new regulatory regime. We are talking about reforming an existing one, an inadequate one, one that provides a prepayment penalty for mortgages over five years but none for mortgages of five years or less.

We urge the committee to support amendments to the Interest Act in this Parliament to give Canadians a right to prepay a mortgage. We also ask you to support a standardized approach to calculating penalties. The right to prepay without the mechanism to prepay is no right at all.

I have deliberately spent my time on these twin issues, which we consider most important. Our members also produced compelling arguments for two other amendments. One would release an original borrower from a personal covenant once the lender has approved a subsequent assumer of a mortgage. For example, Mr. Chairman, if you sold your house to me and I assumed your mortgage, the current scenario would still hold you accountable if I defaulted on payments.

Another amendment would provide for uniform annual compounding of interest rates. Consumers are sometimes confused by being quoted rates without being told they are compounded semi-annually. This results in a higher effective rate of interest.

We have previously submitted suggestions for improving disclosure requirements on mortgage documents: the use of plain and concise language that can be reasonably understood by Canadians. We are pleased to see in the discussion paper that the government has also recognized the need for greater clarity. We urge the committee to support revisions of all appropriate statutes to achieve this.

We will be glad to discuss these issues further and to answer your questions. Thank you.

The Chairman: Thank you, Mr. Beauchamp.

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Were the recommendations for amendments to the Interest Act, as contained in our pre-budget report last year, adequate to meet your needs? If not, how would you suggest they be changed?

Mr. Beauchamp: What is terribly important to us, in line with the presentation, the words I have just given you, is that the right to prepay be legislated and that wording be inserted in the act to actually do that.

The Chairman: How is our report from last year inadequate on this issue?

Mr. Beauchamp: My understanding is that no one has come up with the language as yet and that there's not unanimous support for it to be done in that fashion. If that's your understanding of how it would be done, we are very happy.

The Chairman: No. I'm asking you very specifically about the report made by this committee last year in its pre-budget report dealing with amendments to the Interest Act. Do you have any problem with that recommendation the way it was made?

Mr. Beauchamp: No. We were pleased with your support.

The Chairman: Okay. Thank you.

[Translation]

Mr. Loubier.

Mr. Loubier: How many members do you represent, Mr. Beauchamp?

Mr. Beauchamp: Seventy thousand.

Mr. Loubier: Are they mostly people who earn their living from real estate transactions?

Mr. Beauchamp: They are real estate agents and brokers across the country from some 115 real estate boards.

Mr. Loubier: You mentioned the penalties assessed on mortgage loan prepayments. Can you give us some idea of what those penalties can represent relative to the value of a house?

You were speaking a moment ago of the value of a $100,000 house, but you were only talking about the IRDs, interest rate differentials, which could reach $1,000 according to the various calculation methods used.

Mr. Beauchamp: I will ask Mr. Laplante to provide you with greater details.

Mr. Loubier: Perfect.

Mr. Martin Laplante (Specialist Consultant, RES Policy Research Inc., Canadian Real Estate Association): The charges vary greatly with changes in interest rates. In one case where interest rates may have fallen by two percentage points, we would have charges in the order of $5,000 or $6,000. A greater fluctuation in interest rates would result in a larger amount. The minimum amount charged would be about $2,400 in cases where interest rates had increased.

Mr. Loubier: You said a moment ago that you wanted to continue charging penalties since they are normal, but that you would like to see a standard calculation method. You presented a method that was based on the net present value and included a payment schedule. Even if the method is standardized and even if it is based on a method such as present value, it is nevertheless always up to the banks to estimate the future value of a property and to calculate its present value. Consequently, you are still subject to a certain amount of subjectivity on the part of the banking institutions, even if the method is standardized.

Mr. Beauchamp: Our starting point is that there is currently no standard or guideline on the subject. Under the arrangement we are proposing, we would establish a standardized method from the outset.

You are asking me whether we would come to exactly the same result in all cases. Probably not. However, fluctuations will probably be so small that, in my view and that of the Canadian Real Estate Association, we will have made a great deal of progress relative to the present situation, in which there are absolutely no guidelines.

Mr. Loubier: Do you know whether the common practice among the banking institutions of other countries, in the United States or in Europe, is to standardize prepayment penalties?

Mr. Beauchamp: I can't answer your question.

Mr. Laplante: The regulatory framework is very different in the United States and it is generally possible to repay a mortgage without penalty. However, there are additional costs at the start of the loan.

Mr. Loubier: There are no penalties, but charges are added. Thank you.

The Chairman: Thank you, Mr. Loubier.

[English]

Mr. Solberg, please.

Mr. Solberg: I have a couple of questions, Mr. Chairman. First of all, if you standardize the penalty, won't that become the ceiling - sort of - in terms of the penalty?

In other words, there will be no incentive for anybody to come up with something better amongst the banks. If the penalty is the same amongst all the banks, then we will be missing the competition that would actually bring lower penalties and give the consumer a break. Isn't that correct?

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Mr. Beauchamp: I think I said in my remarks earlier that we have recognized, as I'm sure you do, that there is a tremendous amount of competition already in that particular market. What we are looking to do here is to ensure that the consumer has access to prepayment under a variety of conditions, which doesn't exist today. Our way of achieving that is to legislate it and to provide the proper tools, the mechanism through an IRD formula based on the net present value, to accomplish that.

We don't believe that that has, for immediate impact, to remove all advantages of competition. In fact, as you well know, banks and financial institutions in that market have all kinds of marketing abilities, starting with interest rates and the actual rates they all charge, plus the additional features that are thrown into the marketing of their services. We are simply trying to level the playing field and to provide information to the consumer when he takes on a mortgage - information that he does not have today.

Mr. Solberg: If I remember right, I think the bankers are offering to be much more explicit about the terms and conditions of the loan as part of a sort of self-regulatory package that they would offer as an alternative. What's your opinion about that? Have you talked to them about that?

Mr. Beauchamp: I go back to the fact that what we feel is critical here is to legislate the ability for the consumer to prepay. I understand - and after meeting with the Canadian Bankers Association, I agree - that they are sincere in their approach. At the same time, I think it would be very useful for the consumer also to understand the general guidelines that will lead him through his mortgage. To legislate it and to provide the IRD formula based on net present value is the best way to do it.

The Chairman: Thank you, Mr. Solberg.

Ms Whelan, please.

Ms Whelan (Essex - Windsor): You're talking about standardizing the mechanisms of the penalty, not standardizing the rates across the board, so you're still going to end up with differences between institutions. Is that correct? Is that what you're talking about?

Mr. Beauchamp: We're not talking about standardizing rates. Let's be very clear about this. We're not standardizing rates at all. All we are suggesting is that we provide a legislated prepayment formula that effectively will point to a ceiling. We are not dealing with rates. We are not dealing with the current competition, which we believe is extremely healthy and is serving Canadians very well. I think we're complementary with respect to banks and the work they have done in that area. We're only focusing all of our attention on the prepayment penalties that are imposed.

Ms Whelan: When you're talking about the standardization of the penalty, are you also talking about disclosure of what the penalty would be? Or are we talking about some type of example to the consumer when they are purchasing or acquiring a mortgage?

Mr. Beauchamp: We're hoping that with the additional recommendation, which I understand you've already endorsed, the language in a mortgage document would be very clear, would be plain language to spell out clearly the conditions under which the person is taking a mortgage, including their prepayment ability at the time when they wish to exercise that option.

The big point that we have identified here through this IRD is the fairness that we are trying to build in for both the consumer and the banks, because the lender has to be compensated and we recognize that. We feel that the IRD formula that we've circulated to you is the best way to accomplish it.

Ms Whelan: I read your paper with interest. I couldn't understand how all the different banks had come up with a different number on the same rate. It didn't make a lot of sense to me.

The Chairman: Mrs. Brushett.

Mrs. Brushett: In terms of the pay-down of principal per year, is it a standard practice to allow 10%, or is this part of your overall plain language that you would like disclosed as well?

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Mr. Laplante: There's no regulation that I know of that controls this. This is purely a competitive feature offered by some lenders. Other lenders offer different features.

Mr. Beauchamp: We use 10%, as an example.

The Chairman: Mrs. Chamberlain.

Mrs. Chamberlain (Guelph - Wellington): Thank you.

The Reform Party has made several references to competitiveness. Obviously, competitiveness for consumers is very important, but you also said in your statement today the word ``fairness''. I had that written down here also because I think that's a very key component to competitiveness. You also need to have fairness factored into that.

Because the preoccupation at the moment by the third party seems to be competitiveness, tell me in your opinion how a prepayment of five years or less, if it was legislated, would affect competitiveness. In your opinion, how would that hurt competitiveness?

Just to go a little bit further, as for the Senate findings, there's the fact that the only reason one might wish there to be a prepayment is a fluctuation in interest rates. I don't agree with that either. I think that your several reasons, such as marital breakdown and job loss, are all very real factors in today's world that would make a scheme, a legislated factor in this, all the more real at this time. I think it would also increase stimulation in the housing market and in all the things that go along with housing, such as construction, renovation, and all that follows.

Mr. Beauchamp: I think my answer is not that different from the one I gave to the gentleman here a little bit earlier. I think the idea here is not to remove competitiveness or attack it. We don't feel it will impact on the ability of financing institutions to compete with one another, starting from the actual interest rate they charge. We're not getting involved with their merchandising or marketing, the rates they charge, or any of the other value-added products they have put on the market and that they use to compete with each other.

What we're simply trying to do here is establish a system that, as you said, was fair to both themselves, the lenders, as well as to the consumer. So in our opinion, there is no downgrading or downsizing of the competition that they're able to do today compared to what they would do under a system like this.

Mrs. Chamberlain: Thank you.

The Chairman: Thank you, Mrs. Chamberlain.

Since the white paper on financial sector legislation does not specifically mention the Interest Act, I think it would only be proper and fair that we would give banks the opportunity to come back in order to hear their point of view on this particular issue. They understandably did not address it in their initial presentation to us.

However, I see no reason why we would deviate from the recommendation we made in last year's pre-budget report, which you have indicated satisfies CREA. So, thank you very much for your presentation to us.

Could we take a two-minute adjournment? Thank you.

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The Chairman: Could we come to order again? We have before us the Insurance Brokers Association of Canada, represented by: Rod Jones, president; Rick Frost, president-elect; André Bois, from the financial institutions committee; and Joanne Brown, executive director. Thank you for being with us. We look forward to your presentation.

Mr. Rod R. Jones (President, Insurance Brokers Association of Canada): Thank you very much, Mr. Chairman. Before we begin our presentation this morning, I would like to thank all parliamentarians on behalf of our independent insurance brokers for maintaining the status quo on retailing of property and casualty insurance in Canada.

Hon. members, ladies and gentlemen, having just celebrated its 75th anniversary in Saint-Sauveur-des-Monts in Quebec, the Insurance Brokers Association of Canada welcomes this opportunity to participate in the 1997 review of financial sector legislation.

As the national association representing the independent property and casualty insurance brokerage industry, we have a vital interest in ensuring that our country's financial services sector remains strong, fair, viable and competitive.

From our perspective, the 1992 changes affecting our industry have been acceptable. We commend the federal government for its efforts on this front. IBAC is convinced that the restrictions on the retailing of property and casualty insurance through the branch systems of deposit-taking institutions have been maintained to the benefit of the consumer.

It is our clear understanding, therefore, that the legislative and regulatory regime regarding the insurance operations of deposit-taking institutions will not be subject to review until at least 2002.

The principles outlined in the federal government's consultation paper address in a pragmatic way the views of the many competing interests existing within the financial services sector. In particular, they strike a good balance between the need to promote healthy competition while enhancing consumer protection.

From the broker's point of view, we share the federal government's opinion that the legislative framework adopted in 1992 is generally working but that certain provisions of the statutes require adjustment.

With its specific action-oriented proposals, the federal government's consultation paper will help accomplish this objective. IBAC, therefore, endorses the federal government's approach and we support many of the principles outlined in the consultation paper.

Unlike other members of the financial services sector, our concerns are sharply focused. As a result, not all of the proposals highlighted in the consultation paper apply to our industry. With this in mind, IBAC has submitted a position paper that deals with some aspects of the policy and consumer issues reviewed in the consultation paper. It also describes our concerns with some of the clauses in the legislation and regulations that we believe could still cause difficulty.

You will note that we offer suggestions and recommend improvements for the committee's consideration. We would now like to share with you some of these suggestions and recommendations.

Charting a new course for the financial services sector should be the principal challenge of the task force on the future of the Canadian financial services sector. Its work should flow into the 2002 review and not constitute a mid-term assessment of decisions the federal government has clearly made.

The task force should mark the beginning of the development of a much-needed policy framework for the financial services sector, provided it does not exclude any of the stakeholders, as we have seen in the past.

In addition to the development of a sound policy framework, a thorough assessment of corporate concentration in the financial services sector and its effect on competition should be undertaken. This concern has been a recurring theme throughout this and the previous review process.

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In early 1995 IBAC recommended to the federal government that it conduct a detailed study of this issue. At the time, we believed that such a study would ensure that future policy decisions were in the best interest of all concerned, in particular the Canadian consumer. Nothing has caused IBAC to change our position. We think the issue of corporate concentration in the financial services sector can be further explored by the task force. The issues of privacy and tied selling require a deeper understanding before any significant new measures are undertaken. In our view, invasion of privacy and tied selling are linked and therefore cannot be dealt with separately.

Further, regardless of good intent, you cannot regulate perception. The financial services sector is unique, and this should be recognized in the development of future legislation and regulation. As we have stated before, the abuse of accessibility is only one concern; a more fundamental concern centres on what the right to privacy really is. It has become an issue of growing concern for many Canadians. For this reason, IBAC recommends that Parliament or a study group be invited to undertake a more complete examination of the issue of privacy and tied selling, whether it is overt or covert, as it affects consumers of the financial services sector.

Meanwhile, the proposals noted in the consultation paper are favourable moves toward dealing with the issues of privacy and tied selling, and we await the more detailed regulations and measures with interest.

In light of this, we offer the following advice to government. To ensure the utmost privacy of information, we plead that the proposed regulations include a provision that forbids any form of negative option marketing. Further, they should also state that individuals must specifically authorize the giving of personal information and specify exactly what they will permit to be released. Naturally we believe that no form of blanket consent is acceptable, and regulations should state this explicitly.

For our part, we are working closely with the Insurance Bureau of Canada to adapt a code of conduct that embraces the Canadian Standards Association's code for consumer privacy.

With regard to overlap and duplication, IBAC proposes that efforts be undertaken to improve the level of harmonization between federal and provincial insurance legislation and regulation to ensure that the same rules and educational standards apply to all insurance distributors. Specifically, we recommend the establishment of an insurance harmonization working group. This joint government/industry working group would make recommendations to federal and provincial financial sector ministers. We have experience in this area and we would be pleased to assist our governments.

With regard to technical matters, we offer the following for your consideration. It is important to note that the placing of insurance is only one of several services provided by insurance brokers. For example, we regularly intervene on behalf of customers to resolve claims. Other duties include risk evaluation, risk assessment, coverage assessment, market selection, underwriting, after-sales service, and product development.

It is for this reason that we feel the wording of section 416 of the Bank Act should be modified to reflect the intent of the federal government's policy that prohibits deposit-taking institutions from undertaking the activities carried on by insurance intermediaries. Our position paper offers some specific examples of how this can be achieved.

The legislation and regulations should also distinguish between activities that are promotional and those that are advisory. As it now stands, the prohibition on providing advice that refers the customer to an insurance company can be circumvented by calling it ``promotion'' for the benefit of the insurance company. As a result, it is very difficult to determine when there has been a breach of the regulations. We suggest, therefore, that the definition of the term ``promotion'' should be revised to limit it to the activity of advertising and not to the broad spectrum of promotion that now exists. Further, we also suggest that definition be included for the term ``solicitation''.

Once again, our position paper offers concrete suggestions to reflect these concerns. As we have reviewed with members of Parliament before, federal policy is clear. The business of providing insurance brokerage services is not part of the business of insurance. This distinction must not change. Our concern is that deposit-taking institutions must not own independent brokerages.

To conclude, IBAC supports the direction and many of the principles of the federal government's consultation paper: (1) The task force on the future of the Canadian financial services sector should mark the beginning of the development of a sound policy framework for the financial services sector. The mandate should be clear and precise. (2) We, and all stakeholders, must be active in the formation and the work of the task force to ensure that its members take into account every facet of Canada's unique financial services sector. (3) There should be a thorough assessment of the issue of corporate concentration. (4) Privacy and tied selling should be closely examined by Parliament or a study group. (5) Some minor changes to the legislation and regulations are needed to ensure that they accurately reflect government policy.

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For our part, we shall be addressing many of these issues in considerable detail at other stages of the review process over the next few months. Meanwhile, it is with great anticipation that we await the work of the task force.

Thank you for giving us this opportunity, Mr. Chairman, to share our views, and we welcome any questions you may have.

The Chairman: Thank you, Mr. Jones.

Mr. Grubel.

Mr. Grubel: Thank you, Mr. Chairman.

Ladies and gentlemen, thank you for being here.

I would like to put on the record that you have mentioned many times the consultation process that is bound to come. I would like to use this to reinforce a criticism I made on the very first day of these hearings, that in fact this review should have taken place leading up to the 1997 revision and not be postponed for another two years or until the next election is over. The government I think acted irresponsibly for not doing so; it should have been settled. The issues will still be the same. They will be as big then as they are now, and they could have been undertaken.

But I want to change the tack a little bit. You have probably seen editorials and newspaper articles about a study released by the Fraser Institute on how many thousands of dollars it costs a family every year because of all these regulations. I know you're in the business of proposing regulations, but have you ever thought about whether or not in the entire context, the buyers we have, every time we find that there's a threat to our secure niche in the market or whatever, we run to the government and say ``We need another regulation''? Of course, we never say it's for our benefit; we always say it's for the benefit of the consumer. But when you add up all of those things, it's $2,000 of family income that is due to all of those regulations that are always justified on the basis of serving the consumer.

What would you tell me I should say to people who are saying these guys are self-serving, they're not really acting in the interest of the consumer? Are there any regulations that now exist that you think we should or can get rid of in order to reduce the burden of government on our free society?

Mr. Jones: I'd like to defer the question, if I might, to our executive director.

Ms Joanne C. Brown (Executive Director, Insurance Brokers Association of Canada): Our industry is self-regulated to a large extent, so it doesn't really affect our consumers and it doesn't add any cost on to the property, casualty, brokering part - any type of issues. Other than that, we'd have to do a study on that and get back to you.

Mr. Grubel: Yes, but what I heard you say is that you want more regulation. You weren't quite as strong on it as the earlier witnesses in the day. You just want further studies so that we could have the right regulations to protect the consumer from tied selling and all these other kinds of things. Are you saying you don't want these regulations, or do you want yet more regulations imposed on the poor people of Canada?

Ms Brown: What we would like is that if any regulations are put in or amended - whether they're existing or new ones - that they be done after everyone's quite certain as to what is really needed. That really has been our position, and that's what we would like.

Mr. Grubel: Thank you very much. I appreciate that. When you present it again maybe you should also ask for something that a lot of people are asking for: before we pass any new regulation, we should have a cost-benefit analysis done by some independent, outside people who look at these issues, not through the prism of the industry but from the overall public interest.

Thank you very much.

The Chairman: Mrs. Brushett.

Mrs. Brushett: May I thank Mr. Jones for his presentation. He is a constituent of mine from Nova Scotia, from the great riding of Cumberland - Colchester.

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The Chairman: The poor fellow.

Mrs. Brushett: I'll just follow up very quickly. You've suggested a working group on harmonization of federal and provincial legislation. Are you proposing that this would take place before the 1997 review, or is this a longer-going working group? Could you elaborate on it just a bit?

Mr. Jones: Certainly.

We see this as a long-term project. We're looking at harmonization in relation to uniformity in licensing requirements for insurance product distributors and other types of legislation that currently seem to be impairing the possibility of being able to get things done properly. So we see it as a long-term project and we think there is some great benefit to both sides.

The Chairman: Mr. Duhamel.

Mr. Duhamel: Thank you, Mr. Chairman.

[Translation]

Thank you for your presentation.

[English]

I just wanted to follow up on the comment from my colleague from the Reform Party. While I think many Canadians would acknowledge that we have plenty of regulations and rules and legislation out there, and some of them are much more useful than others, a couple of assumptions are probably somewhat inaccurate. Certainly they should be questioned, and I'd like your reaction. Mr. Grubel and I do talk about these things, and not necessarily in a partisan way.

Is it necessarily the case that a new regulation implies more government control and additional expenditures? It seems to me a new regulation might remove some other regulations and therefore might make things more efficient. For example, the Canadian Real Estate Association just suggested some ways of dealing with mortgages. I'm not sure that would cost the Canadian taxpayer more. It might cost the banks more; I don't know about that.

How do you react to that particular charge, that more regulations are - well, I guess there were two comments, really - very often self-serving, not really intended for consumers, but secondly, ipso facto an additional cost. I'm not sure that's correct.

Ms Brown: What we have worked with a lot across the country, from both a federal perspective and a provincial perspective, is having the actual regulations harmonized. None of them cost the consumer anything, as I mentioned before. What we're trying to do is to make sure what is done in British Columbia in the servicing of consumers is the same as in Ontario, at absolutely no cost to the consumer.

Mr. Duhamel: In fact it might save consumers money.

Ms Brown: In most cases it does, because we're trying to get the provincial governments to make sure the property casualty insurance brokers have professional liability insurance, so it's their own insurance policy that would compensate the consumer if they make an error. It doesn't cost the consumer; it would cost the person servicing. We're doing that across the country. That's what we mean by harmonization of regulations and working with regulations that bring the onus to the professional and not to the consumer at the consumer's expense.

Mr. Duhamel: Thank you. That is useful.

Mr. Grubel: We're going to have to have it out.

The Chairman: I am absolutely delighted at the level of cooperation among all members.

The Insurance Bureau of Canada represents brokers and their employees, who are a very important part of our economy throughout all of Canada. I am particularly grateful that you talk about the need for politicians at both federal and provincial levels to get their acts together. Why can we not agree on a common code that would govern all of us, so we could get rid of levels of bureaucracy and regulation that cost all of us? Mr. Grubel has made this point very clearly. I very seldom agree with Mr. Grubel, but in this one case he recommended that a cost-benefit analysis for all new regulations be part of the process of regulating. If he goes back in history, he will find a report by a very green parliamentarian in 1980. It was a task force on regulatory reform, which recommended that all new regulations have a regulatory impact analysis attached to them.

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An hon. member: What was the year?

The Chairman: I wish you wouldn't get personal. We've always attempted not to get personal. But it was part of that recommendation.

So thank you very much, Mr. Grubel, for your support for that Liberal government initiative back in those days.

On behalf of all members, I thank you for your presence here today and for your ongoing work with our committee.

Can we take a two-minute break?

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.1145

The Chairman: Can we come to order?

Our last witnesses this morning are from the Canadian Federation of Independent Business. We have with us the president, Catherine Swift, and the senior vice-president of policy and provincial affairs, Mr. Brien Gray.

We welcome you again before our committee.

Ms Swift.

Ms Catherine Swift (President, Canadian Federation of Independent Business): Thanks very much for having us here today.

As Mr. Peterson mentioned, my name's Catherine Swift and I'm president of the CFIB. I have with me today my colleague, Brien Gray, who's our senior vice-president. For many years now Brien and I have been the financial sector people responsible within the CFIB.

Naturally, from a small business standpoint, any review or anything that touches on financial institution regulation and structure is of very particular interest to the small business community. We now represent approximately 87,000 small and medium-sized business members across Canada in urban as well as rural areas of the country. We're very pleased to be able to participate in this review.

A little package was just distributed around, containing a brief statement and accompanying graphs. I'd like to touch on some aspects of the statement and refer to some of the charts, and then leave the rest of the time we have open for questions.

Generally speaking, we have found over the past few years, from a small business standpoint, there have been significant improvements in financial markets, some of which have been driven by technology and some by policy. Nevertheless we still find that small firms do have considerable challenges, particularly within our Canadian financial institution structure, where concentration and power are held in relatively few hands.

The issue of financing itself is number one for small firms. The white paper didn't specifically address financing - a lot of those issues were put off to another day - but a number of matters included in the white paper do impinge indirectly on financing concerns or otherwise have an impact on small businesses. We'd like to touch on a few of those today.

Certainly the whole state of competition is vital for small businesses. I realize this is going to be looked at much more thoroughly under the proposed task force, and we very much look forward to participating in that process as it evolves.

Generally, many of the reasons small firms don't believe themselves to have been particularly well served in the past have been a result of this high concentration of our financial sector. This is certainly one reason that our constituency strongly opposed the unlimited entry of the banks into insurance, retail and automobile leasing. That's been the case for many years and will continue to be the case in the future.

I have summarized in a number of the charts attached to this document some of the data we've recently taken from member surveys. It shows that despite the fact that our current financing climate should auger well for small business financing issues - we have low interest rates, a growing economy and a reasonable stability in the Canadian economy - we nevertheless see the problem of availability of financing.

This is on page 3; it's actually the first chart. We have tracked this issue of availability of financing for most of the 25 years we've been around as an organization, and this chart just covers about the last 12 or 13 or so.

It's interesting how, naturally, the level got very high through the early 1990s. That was a recession, so one would totally predict that. What surprises us is it really hasn't gone down very much over the past few years. Granted we haven't had a stellar economic period of growth, but we have had consistent growth in the economy for a few years, so this we find pretty worrisome. All the other conditions out there would suggest there should be better conditions for small firms than is indicated by our member data, and this has been a pretty reliable indicator for us over time.

Also, the Bank of Canada data is shown on page 5. This line shows lending under $200,000, which is typically for small firms. In fact the average small firm loan is actually about $70,000, but under $200,000 is the way the Bank of Canada compiles its data. Over $200,000 is shown by this higher solid line. We've seen that there has been very little improvement at all in the overall level of lending to small firms, and we think this is pretty significant.

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The overall level has actually fallen by a couple of billion dollars, even from the early 1990s. We see there has been some fluctuation, certainly in large corporate lending, but the trend line has been up since the last recession of the early 1990s and continues to track upward.

We think there's a pretty compelling case from both our data and data from the financial industry itself, reflected by the Bank of Canada, that the lending climate generally for small firms remains pretty constrained.

Touching on a few other issues noted in the white paper, the white paper focuses on consumer protection. We like to believe that extends to small business consumers and not simply individual consumers. Small businesses naturally have a lot in common with individuals dealing with the large financial institutions. They certainly have a lot more in common with individuals than they do with large corporations.

With respect to the cost of financial services, the area of service charges, which is specifically referred to in the white paper, has been and continues to be a major concern of small businesses. For a number of years now financial institutions have been moving increasingly toward a fee-for-service orientation, and this issue has correspondingly taken on a much higher profile among our members.

With small businesses in rural areas sometimes there's literally one bank in town, so the notion that competition even exists or that, even in larger centres, it is truly a solution to service charge issues we have not found to be the case, at least not with the majority of small business clientele.

Charts on pages 7 to 10 of the package refer specifically to the service charge issue. I guess one thing we find particularly worrisome - and it's consistent again with results we've found in the past - is that the smallest firms have the greatest problems with service charges. These firms, as you probably well know, are the ones that tend to be the most robust job creators right now. So the small, young, new firms - those heavy job creators - are getting the worst deal from financial institutions.

We've found from past research, which we don't reflect here, that the smallest firms not only face higher service charge demands but also higher collateral and interest rate demands. In other words, the financial sector seems to be geared toward levying the heaviest costs on the smallest firms that are doing the job creation.

Some other data included in these charts on page 9 show that again the small firms with four and under employees have experienced most of the service charge increases. These data cover the first half of this year, so we're looking at some pretty recent data. For larger firms the concerns are not nearly as high.

Tied selling, which is also touched upon in the white paper, is also of grave concern to small firms. Markets for financial services are very different in Canada from markets for goods and services generally, because of this power imbalance between a small business borrower and a large bank. A small firm needing a loan can be a very vulnerable consumer if other services are offered by the lender.

Small firms are also concerned about self-dealing. We did a survey of our members about three years ago, which showed that just under half believed that banks should not be allowed to lend to companies represented on their board of directors because there was simply too much potential for abuse, while 33% were not in support of this view and another 13% were undecided.

We believe that some streamlining of the current self-dealing regime may make a lot of sense, but it must also be kept in mind that although our banks are widely held they are effectively run by a handful of individuals, so the potential for difficulties rises accordingly.

In terms of foreign bank entry, we did some recent polling of our members in light of this review to get an update on their views on this issue. The result was interesting because we had a mixed vote, with more of our members opposed to unlimited foreign bank entry without the need to establish a branch network. One can conclude from this that small firms feel that having financial services provided by a Canadian entity is very important, and certainly at least as important as the promise of more competition in the market.

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Overall, however, we certainly do find our members would welcome increased competition since they believe the current highly concentrated environment hasn't met their needs, but from a short-term standpoint we don't believe realistically we're likely to see very rapid change.

We do hold out some hope that ultimately technology in the form of electronic banking may very well help our constituency. We might also, however, mention some concerns that so-called virtual banking may create problems for small firms. One can envision so-called virtual banking helping with easily standardized services - personal auto loans, mortgages, those kinds of things - but for many small firms, that personal connection with a lender is absolutely essential and their services to small firms do not easily lend themselves to standardization.

As a result, the banks certainly plan to close down a lot of branches as a result of their ability to handle these issues via technology. We wonder if...and we're certainly keeping an open mind, but we would like to say that it may well be that the elimination of a lot of these branches might end up in poorer service to small firms, especially those that are not in large urban centres. So we will see on that one, but we may well find that this technological change could be a mixed blessing for small firms.

I want to note quickly that we've very much welcomed the initiatives of one of your colleague committees, the industry committee, to follow up on recommendations that our organization has been making for a number of years now to conduct regular reviews, ideally on a quarterly basis, of how well the large banks are serving small business needs. As a result, we fully support the continuation of such reviews. We believe history has shown that financial institutions are responsive to ongoing government and public scrutiny, and it is essential in the absence of a truly competitive marketplace to keep up this kind of scrutiny.

To note some of our updated bank market share data on page 6 as it relates to our members, we find it encouraging that the financial institutions that appear to be making the most effort to provide services on a reasonable basis and tailor services to the small business marketplace have consistently, in our market share data - and this period only covers roughly the last eight or nine years, but nevertheless we see consistent improvements in the institutions that have been making an effort and deterioration in those that perhaps are a little slow to take up some of these service areas.

I guess it's worthy of note that these banks that do seem to be picking up market share, and one would presume are serving small business better, also don't seem to be having terrible experience on the profit side. So small business can't be a terrible proposition for financial institutions either.

To sum up, financing challenges of small firms naturally are not uniquely tied to the difficulty of obtaining debt financing. Canadian small firms continue to struggle to retain earnings in our relatively highly taxed and highly regulated environment, and governments must also assume responsibility for their part in creating this problem.

A more small business friendly tax and regulatory environment that permits firms to retain earnings for investment and expansion, along with improved access to financing, are both essential components of a business climate that allows small firms to maximize their potential to create jobs and wealth for the benefit of us all.

Thank you, and we'd be delighted to try to answer any questions you have now.

The Chairman: Thank you very much, Ms Swift.

[Translation]

We are going to begin with Mr. Bélisle.

Mr. Bélisle: I have no specific question, but rather a comment. I believe we must deplore the fact that the representatives of the Canadian Federation of Independent Business, whom we are hearing today, have filed a document in English only.

The Chairman: That's our fault. We are required to have a translated version.

Mr. Bélisle: Mr. Chairman, I deplore the fact and I don't think that any of the business people who are members of the Canadian Federation of Independent Business in Quebec or Francophones across Canada would greatly appreciate the fact that their federation has filed a unilingual English document when it was heard before the Standing Committee on Finance.

All these little gestures do more to undermine the picture of a bilingual Canada that the Prime Minister often paints with such emphasis. I believe they reveal more than the actual situation.

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I must say I appreciate receiving answers to the polls that business people and contractors from my district who are federation members send me. These people regularly send me the findings of polls and their answers to your polls. These documents are usually bilingual and I appreciate that. However, I must deplore the fact that this document, which is in English only, has been filed here today.

We can say whatever we want, but it is all these little gestures that more accurately reflect the actual situation we are experiencing here in Canada. And afterwards people are surprised that Quebeckers have wanted to leave this federation for about the past 20 years, since 1980. It is all these little everyday gestures that make us feel uncomfortable in the federation. I believe we should react as quickly as possible. Thank you, Mr. Chairman.

[English]

The Chairman: Do you wish to respond, Ms Swift?

[Translation]

Ms Swift: Yes, please. We usually translate our documents and I regret to say we have not done so today. We normally translate all the briefs that we present to the committee. Please accept our apologies.

The Chairman: You have no obligation to do so.

Ms Swift: No, that's true, although we feel we normally have an obligation to do so. However, from time to time, and this is very, very rare, we are unfortunately unable to translate the documents. We regret it.

The Chairman: I must assure every Canadian that we are a committee that works in both official languages, at times in one, at times in the other, and at times in both. Parliament has an obligation to translate the documents that are not presented in both official languages. Consequently, I cannot criticize you.

Ms Swift: I would like to emphasize that we do not translate all our documents into English at our Montréal office. This is perhaps the case today.

[English]

The Chairman: Thank you, Ms Swift.

Mr. Grubel.

Mr. Grubel: Thank you. I'll be speaking English. We could do it in German, but there's no market for that.

Some hon. members: Oh, oh!

The Chairman: Nicht gut.

Mr. Grubel: Ms Swift, it's nice to see you again.

Could you please go to your chart on page 3? I'm trying to understand it. What does ``SME Problems with Financing Ability'' mean? What does SME stand for?

Ms Swift: It stands for small and medium-sized enterprises. I'm sorry. I guess we're used to our own shorthand.

[Translation]

It's the equivalent of PME in French.

[English]

Mr. Grubel: Okay. Secondly, what is the question that is asked for which something like 37% of all your respondents say what?

Ms Swift: This is a running survey that we conduct on an ongoing basis, basically to gauge the flow of problems. Our number one problem - just to give you an example - is the overall tax burden. Financing is not the number one problem and it's worth pointing that out. I tried to mention that in my comments earlier. What it basically means is the ability of small firms to access financing. So we track it over time -

Mr. Grubel: You don't know what the question is. You can't give me the question -

Ms Swift: Oh, do you mean the precise question?

Mr. Grubel: The precise question for which you have made me a bar chart.

Ms Swift: Sure. The question is, ``Which of the following issues should be high priorities for CFIB action?''

A whole pile of things is listed there: availability of financing, government regulations and paper burden, labour laws, debt and deficit reduction, unemployment insurance, etc.

Mr. Grubel: Now you're talking about financing availability?

Ms Swift: Right.

Mr. Grubel: How precisely is that question phrased with respect to financing availability?

Ms Swift: It's ``availability of financing''. That's the option.

Mr. Grubel: So somebody who believes he has the solution to mankind's problem with respect to keeping hair would go to a bank and say he thinks he needs a million dollars. The bank says it has some programs where they might charge him 30% per year on that and he says he can't afford 30%. Alternatively, he goes to a bank and says he needs a million dollars. They say they're sorry, but they're not very happy about the prospect of him really persuading the world that he has solved the problem of baldness. Would that person be induced to say he had problems with the availability of financing?

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Ms Swift: It's possible, but I think it's worth keeping something in mind with any survey. Of course, opinion surveys that ask you who you're going to vote for in the next election are certainly included as surveys that are conducted in a similar manner, and people seem to believe them.

We know that our membership, on average, is larger, although they are in small businesses, and older, as they have been in business longer. I don't mean the people are older; I mean the businesses are older than your average small business out there. We also know through our tracking over time that they are the better-established firms, and so on.

Although it's not impossible that the person you describe could be among that, each survey has a sample size that covers about 20,000, so that particular entrepreneur would be a fairly small proportion, shall we say, of any sample that we would take.

Mr. Grubel: Yes, I agree with you that the consistency of the same question being asked through time is valuable and indicates something.

Ms Swift: Right. It's a trend.

Mr. Grubel: Nevertheless, I hope that at some point you would, perhaps through your questionnaire outright, establish whether the people are unhappy about the rates they're being charged -

Ms Swift: Yes, we do.

Mr. Grubel: - and various other things like these.

Mr. Brien Gray (Senior Vice-President, Policy and Provincial Affairs, Canadian Federation of Independent Business): Mr. Grubel, I don't know whether you're aware that every three years the federation does massive, in-depth surveys of the relationship between the banks and small business. We're the only organization in Canada representing business that does anything of that kind. In fact, the last survey was some eight pages long, and we do get into the kind of thing you're talking about.

I don't think we need to make any excuses for our methodology or for the soundness of our research in this area. We surely don't do it every year because we think we've got to give the banks an opportunity to respond to what we're saying to them. We feel that for very large institutions three years is an appropriate length of time.

In that regard, we'll be going to our membership in the early part of next year to find out, once again, with probably another very long, comprehensive survey, what they feel about the current climate for small business.

Mr. Grubel: Please don't misunderstand by questioning you that I am challenging the validity of your surveys; I'm just trying to understand it. I'm just trying to figure out what your careful research has shown, in these detailed levels, about why there has been such an increase in the degree of dissatisfaction with the availability. Can you elaborate on this?

Mr. Gray: I think there are an awful lot of factors. Probably the most important one has to do with the fact that I don't think the banks have gotten back into the lending game that they were in prior to the recession since the recession has been over. I think they got into a tight money kind of view about lending to the market, particularly our end of the market, although it has eased somewhat. I think if you were to ask most of your constituents in our band of the business community, they would tell you the very same thing I'm telling you.

I think there's another phenomenon that's more attributable perhaps to the tax situation in this country, and that has to do with the tax mix. In the early 1980s, when we came out of that recession, we came out relatively quickly, partly because the tax mix was such that profit-sensitive taxes were much more in evidence than the profit-insensitive taxes we see today.

As a result of that, firms, particularly small firms that generally are a little bit less well capitalized than large firms, haven't got the option to go to money markets and the like. They were able to come out because they could plow back any profits they got into the firm and restructure their balance sheets such that they were financially sound and confident to move ahead.

I think the same is not true today. With the massive increases in payroll taxes - there's UI, CPP, and workers' compensation, and in those provinces, such as Quebec, Newfoundland, Manitoba, and Ontario, that have health taxes, the structure of the tax mix has gotten to the point now where those firms don't have the ability to re-establish their financial health. As a result, they can't move as quickly to get back into business. As a result of that, financial institutions are going to be a little more cautious.

Mr. Grubel: Well, I'm very glad you elaborated on this. As one reads this with the atmosphere of bank bashing that's going on - I don't want to defend the banks - it sounds a little bit as if this increase in the index is due to the change in behaviour and attitude of banks. You mentioned that a little bit.

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But as I listened to you carefully you also suggested that in fact it may be regulatory regimes, taxation regimes, and various other exogenous circumstances that have changed that may have influenced the behaviour of banks and, more fundamentally perhaps, the views of the individuals being surveyed that they have been treated badly. Did I summarize that correctly?

Mr. Gray: I think that's fair. We have an equity problem as well as a debt problem in Canada, and we can't deny the fact that they both exist. Lack of equity will affect the availability of debt. For that reason we pushed very hard for this government and previous governments to permit the retention of equity in firms on a much larger basis.

Equally, we said to financial institutions that you cannot decide unilaterally to get out of the business of financing those small firms that are effectively providing the jobs and the economic growth in most of Canada, especially in the regions of Canada.

Ms Swift: I'll just add briefly that we also have found as we track this over time - it is just a trend line whereby more than one thing is indicated - that it moves to a certain degree with interest rates. When interest rates are extremely high, we're not surprised to see financing problems tick up.

But what we have now, of course, is historically low interest rates and quite a high level of debts. So that raises an alarm for us. Normally, that would not have happened in our data.

Mr. Grubel: I just have a comment. We don't have historically low interest rates.

Ms Swift: Well, they're certainly a lot lower than they have been.

Mr. Grubel: But adjusted -

Ms Swift: If adjusted for inflation, yes, I know what you're saying.

Mr. Grubel: Adjusted for inflation, we have extraordinarily high interest rates by all historic standards. A 10% or 15% interest rate is very low when the inflation rate is 15%.

Ms Swift: Yes.

Mr. Grubel: We now have interest rates that are high because the inflation is so low.

Ms Swift: I think most of our members would feel, relatively speaking - I know where you're coming from on the real interest rate issue - that they are still low. There are some rates that are lower than U.S. rates, which is unusual, historically speaking.

Mr. Grubel: Thank you, Mr. Chairman.

The Chairman: Were you advocating an increase in inflation, Mr. Grubel?

Mr. Grubel: No, I advocate getting the fiscal house of this country in order so that the risk premium, which is now nearly 1% between long-term bonds in the United States and long-term bonds in Canada, will be eliminated. The reason is because we are not getting our house in order.

If you're asking me to be political, I will be political.

The Chairman: No. These are issues that are going to be an important course to study. We will be addressing, certainly in our pre-budget hearings, the level of the deficit, the level of the debt, whether we should decrease expenditures further than we already have, which programs to cut, or whether we can increase expenditures in certain areas now that we've wrestled that deficit down from 6% of GDP to around 2%.

Mr. Duhamel.

[Translation]

Mr. Duhamel: I also appreciate receiving these polls that are sent to me from time to time in my constituency.

[English]

I wanted to understand something about these surveys. What percentage of people normally respond? How does one know that they are a representative sample? That's one of the questions.

There's another question I wanted to ask. I want to quote here:

Canadian small businesses continue to struggle to retain earnings in our highly taxed and highly regulated environment,

I think many people would agree that there is a lot of tax and regulation. How do we fare? Do we have any data that indicates how we fare? How do we compare with other nations with which we compete or trade?

Finally, with respect to a comment you made, Ms Swift, with regard to low inflation rates - I understand the difference - is another way of looking at that saying that there's just very little money to be made with smaller loans to smaller businesses, or have I misunderstood something?

Ms Swift: I am trying to remember what your first question was. Oh yes, it was our survey methodology. It's a good question. In terms of response rates, they vary with our membership. Typically, we get about 25%. Sometimes, it's as low as 20%. We did a survey a few years ago on the GST and we got almost 40%, which is huge. With our membership we had almost 40,000 responses, which is huge.

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We have done the kind of tests you're talking about to determine whether or not we have a non-response bias, which is the kind of thing that I think you're alluding to. I've collaborated actually, in my days as director of research for the federation, with academics who were econometricians and statisticians and everything else, and we systematically found the non-existence of non-response bias. That's the problem with surveys of this nature.

This particular one was done in person with people, so our response rate is actually like 100%, but our membership is, as I mentioned earlier, a little bit older, a little bit more established than your average small business. As a result, we would actually anticipate that they would have fewer financing problems than the firm that started up just two weeks ago with Mr. Grubel's hair transplant methodology.

Mr. Duhamel: Just to make sure that we're talking about the same thing -

The Chairman: Could we use examples that would make certain members less sensitive?

Mr. Duhamel: When you make a statement, for example, concerning foreign bank entries, saying that small businesses are divided on whether or not foreign banks.... You go on to state the statistics.

Ms Swift: Right.

Mr. Duhamel: That's a fairly powerful comment, and someone not looking behind the number of respondents, etc., the kinds of respondents.... It could be a fallacious conclusion. I guess it could be false.

Ms Swift: Potentially it could.

Mr. Duhamel: In terms of an overall view.

Ms Swift: Usually on a question like that we get a sample size of about 20,000. That was a particular kind of question. Of course we do more than one kind of surveying too, so there are differences.

With a sample of that size, for one we can disaggregate it if anyone was interested in subsets of results. Secondly, you tend to smooth out a lot of those kinds of problems statistically that you're talking about when you have a very large sample. The usual problem is that you have a sample size of 200 and all kinds of problems arise from that.

Mr. Gray: You had another question, with regard to how we compare on tax and regulation with other countries.

Mr. Duhamel: Do we have hard data on that, as opposed to opinion and views? I'm not saying that those are not useful, but....

Mr. Gray: Yes. Probably the easiest thing for us to do would be to send you copies of previous research we've done that compares directly Canada and jurisdictions in Canada with our biggest competing neighbour to the south.

Mr. Duhamel: How recent is that?

Mr. Gray: That would be in the early 1990s. Frankly, the problem for us in doing a lot of this research is that access to the tax data. It's not accessible in a timely fashion for us to be able to give you information that's as new as we would like to have it. So I will send that to you. I'll endeavour to send it to you.

What it shows is that from a tax perspective Canadian firms are tax disadvantaged, particularly those small firms.

On the regulatory side, we haven't done any studies ourselves that compare the regulatory burden on small firms versus our competitors. I think, though, that it's at a level where we cannot disregard it. Every other jurisdiction in the world is looking at deregulation and regulatory controls.

I currently am co-chair of the public-private sector forum on paper burden reduction here in Ottawa. I can tell you that there is an awful lot of work to be done and there's more that ought to be done.

The difficulty right now.... You could see on our surveys the very same ones you're talking about here. Regulation is always up there with taxes and the deficit as the most important problem. It took off with the GST in the early 1990s.

We really have to look at the level of regulation - federal, provincial, and municipal - in this country. We're an overgoverned country.

Your final question had to do with whether or not there was any money to be made on a small loan.

Catherine, would you like to take that? Or I could take it.

Ms Swift: I don't know; I guess you can ask bankers, because bankers have told us that it's the most profitable area of their business if they handle it properly. So they're the experts as far as we're concerned.

There's no question that it is more of a logistical challenge to loan out $100,000 fifty times than it is to loan $5 million once. But the advent of technology, the way the institutions are handling that issue....

The interesting thing that we have found in our data - again, the banks have corroborated this, because we meet with them all the time - is that a small business owner typically gives all of their business, the RRSPs, their payroll business.... So it's not just that loan. It's true that a small business loan has a slim return, but - and this is what the bankers have said - when you aggregate all of the different service areas where the margins are much higher, they actually find the small business area is the most profitable area of their business. Again, they're more expert than we are on that score.

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Mr. Duhamel: I guess I'm wondering why I'm getting so many complaints.

Ms Swift: From constituents, you mean?

Mr. Duhamel: Oh, yes.

But thank you.

The Chairman: Thank you, Mr. Duhamel.

Mr. Grubel, you had a question.

Mr. Grubel: I have just a quick point, Mr. Duhamel.

Somebody sent a university-educated person in Peru to try to get all the approvals to start a small business, and it took him approximately six months. The same thing was done in the United States and it took a day, and in Canada it took about a week.

Mr. Duhamel: Was it the same person in the same business who was being sent?

Mr. Grubel: No, but believe me, this is as good a scientific approach as one can have to this very difficult subject.

Mr. Duhamel: I'm a believer, but I'd like to -

Mr. Grubel: I have had constituents come to me and say ``I really wanted to open a business right here in British Columbia, but I got stonewalled by the following officers in Victoria and in Ottawa. I have been at it for months. I went to Bellingham, across the border, and I got my business licence in one day. I am moving to Bellingham.''

Where there is smoke there is fire. It is a very serious problem for small business. I'm sure Ms Swift has all kinds of evidence on that subject.

Mr. Gray: Actually, in that regard, research done in Quebec about four or five years ago indicated that for quite small firms starting up, the biggest obstacle was not financing - though financing was up there, no doubt - but rather regulatory hurdles they had to get through. That is remarkably interesting; maybe the committee would be interested in getting a copy of it.

Mr. Duhamel: But that was in Quebec. I think most people would agree that is a problem. The question is what's it like in comparison to others?

With all due respect to my colleague, his comment is potentially useful - and I don't say that to denigrate it - but it's not what you call hard, scientific research.

Mr. Grubel: I can get you the data.

Mr. Duhamel: But it's one. It's like the Fraser Institute.... It's one study in one period of time. Let's be just a bit more rigid here.

Ms Swift: I don't know if you've seen the OECD work on the job studies. There have been a few of them. There was a recent update just a few months ago.

They just focus on employment, market-related regulation and rigidities, and Canada ranked right up there. Europe was worse than us, and I always love that comparison. They also haven't created a net new job in about 30 years now, so I don't think we want to emulate those jurisdictions. Maybe we haven't become as bad as them yet, but I don't think our objective should be to aspire to that.

Mr. Duhamel: I'm not sure anyone's suggesting that either.

Ms Swift: No, but often in these international comparisons they say, ``Well, sure, we're worse than the States'' - which, mind you, is the number one relevant one to compare - ``but Sweden is still worse than us''. Well, frankly, who cares?

I'm not saying anyone here is promoting that position, but I guess I've heard it from others so often that I take every chance I can to debunk it.

The Chairman: Thank you, Mr. Duhamel.

Mrs. Chamberlain, followed by Mr. Shepherd.

Mrs. Chamberlain: Thank you.

I want to ask a question about page 5. I'd like a clarification on that particular graph. Am I reading this correctly? According to your data, the small business loans have been fairly flat, the same, from 1983 to 1996. Is that correct?

Ms Swift: Basically, yes. This is the level of lending at any given time; this is loans outstanding to small businesses. Yes, it's pretty flat, as you can see.

Mrs. Chamberlain: You made reference to the industry committee. I'm wondering if you're aware that the banks did a survey in this area of lending practices to small businesses, and it reflected different data from what you have here. It reflected that there was an increase in lending to small businesses. Are you aware of that study? Have you seen it?

Ms Swift: Yes, we've seen the study.

These are the bank's data, by the way. This is Bank of Canada data provided to the Bank of Canada by the financial institutions, so these are not our data, for what it's worth.

It is true there has been a change in market share among some of the different banks and so on, and also, because we're talking about billions here - on the left-hand scale - a slight increase could be an increase of $1 billion. That's not chicken feed. We don't want to underestimate that. But we think the trend line over time is quite important.

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Notwithstanding that, I think if you examine the bank's data you'll find that they might say yes, we increased it by half a billion or a billion overall as an industry, and that isn't inconsistent with the data that are presented in this particular chart. But we also feel, particularly when we look at the past three years or so, that there has been a disturbing stability, I would say, given other positive indications in the economy; there should be more borrowing, more demand, and more supply, in our view.

To be honest with you, certain bankers have told us that they feel the last recession - which some people are still trying to drag themselves out of, but by and large the economy is on a growth path - hit bankers very hard and made them very gun-shy. Again, that's not scientific nor anecdotal, but we've been told that by bankers and we figure if they're going to admit that there's probably some truth to it. We feel that this is what we're seeing reflected in the numbers and what we're seeing reflected from our members, because we get quite a lot of anecdotal data - again, it may be unscientific - that sort of fleshes some of these numbers that are a little bloodless.

Mrs. Chamberlain: In your view, then, representing the CFIB, can the banks do better in this area? Should they be doing better?

Ms Swift: We certainly believe they can, and again I think our market share data show that a couple of the institutions, notably the Bank of Montreal and the Bank of Nova Scotia, have made some pretty strong and public attempts that we believe are having some success, and their market share data are increasing.

Market share isn't exclusively a measure of performance, because, as you know, if there's one bank in town they're going to have a 100% market share whether they're any good or not. But nevertheless there is reflected in market share data a component of how well that institution is serving the market, and again the banks themselves have told us that.

We do believe they can do better. We think our own market share data, for that matter, and that of the institutions show that when they make an effort they seem to get more market share, which would suggest they're serving that constituency better. They also seem to have pretty good profit numbers, so it also doesn't look like a horrible proposition from the bank's standpoint.

So we have been working certainly with the financial institutions. We've been working with you, industry committees, and so on, to try to bring about a good mix of legislation in this area, because it isn't a competitive market. We're not usually big promoters of regulation, but in this type of market you do need some constraints on people with that much market power, but also on the institutions themselves, and we feel when there's a genuine interest on their part to better serve the constituency of small business at the top, right from the top, it seems to work. So we think the evidence is there that it can work, and we believe it can be a lot better than it is and that the benefits wouldn't just be to the small business person whose business doesn't go into the tank, but it would benefit the whole economy.

Mrs. Chamberlain: As a comment on that and on the data that are here from the industry committee - and I may be remembering incorrectly but I don't think so - the banks' indication was that their lending practices to small business were better than what is reflected here. I know there are bankers here - the Bankers Association is in the audience - so I hope I'll be provided with that information.

Ms Swift: I wonder if their definitions -

Mrs. Chamberlain: I know surveys and data, apples and oranges, and all of that...but it seems to me there is an inconsistency here. That's where I have difficulty. When two different groups of data are brought in, it's very hard to compare them.

Ms Swift: Yes.

Mr. Gray: One of the major recommendations made by the CFIB eighteen months ago to the Berger committee was the very issue of data. It was horribly frustrating for us to get our hands on any data that were reliable beneath $500,000 in loans or $200,000 in loans when the average small business loan out there, the median amongst our membership, is a $50,000 loan. So what we said to the committee and the committee listened and has made recommendations along those lines.... I've yet to see the final details as to what is going to be supplied, but in order for everybody to be talking from the same book here and to understand what's really going on, it's absolutely vital to have that data.

I think this conversation reflects that kind of frustration, and the sooner we have the data that everybody can agree on and compare in a reasonable way, the better it will be for small business and for policymakers.

Mrs. Chamberlain: One final question is on tied selling. I want to ask you whether CFIB has done any surveying in that area, and do they believe this particular process is being employed by the banks?

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Ms Swift: There has been. Again, it's been more, I would say, anecdotal than a hard survey, data type of situation. But we have heard of instances where they do believe that offering alternate services.... Certainly the services are offered, and I guess the real problem.... It's very tough to measure because it's a perceptual thing.

The small business consumer who really needs that loan for their business, for start-up, expansion or whatever, or who already has an outstanding line of credit, which, if pulled, puts them in major trouble, naturally has a pretty unbalanced power relationship vis-à-vis that lender. If a service is offered, at least the perception - if not the reality - of some pressure to consume it is certainly there in spades on the part of the small business borrower. We have heard that from our members many times.

Mrs. Chamberlain: As a final comment on that point, I think it will be a real challenge for this committee to make sure that we can identify the issues of tied selling and cross-selling, because obviously perception.... When we talk about anecdotal evidence we have to be very sure that what we're doing is right.

Ms Swift: Just for the record, I've found over the years with our members that the two things they are least willing to speak out on and be identified with are the banks and Revenue Canada, not surprisingly. Who can nail them most profoundly? Those two entities can. This is one of the problems we've had with getting our members to come forward, even with specifics. They'll tell us, but they'll ask us not to use their names. And you can't blame them, because the cost of retribution is pretty high.

Mrs. Chamberlain: We hear that from constituents too.

The Chairman: Thanks, Mrs. Chamberlain.

Mr. Shepherd, followed by Mr. Pillitteri and Mr. Fewchuk.

Mr. Shepherd: Thank you very much for your comments. I'm a member of the industry committee and we're just going through the process now of lining up the banks for the next quarter.

One of the issues that wasn't my central question but which I'd like to get off since Brenda brought it up is that I know the banks are going to argue and even indeed agree with you that under certain parameters - probably less than $200,000 - lending has been rather static.

They argue that the reason for it is that the nature of business has changed, and because we are moving toward a more technology-based society, the size of those loans is going down. In fact, they say we're actually increasing the number of lenders, but the quantum of the money being borrowed is a lot less. I know they're going to bring that up as an argument to defend why the numbers are what they are for this next quarter. You might want to address that.

The way I see the financial services businesses going, their attitude toward small businesses is that they are getting into the concept of micro-managing a loan and they're saying, ``Look, it does cost us too much to administer these loans on due diligence and all the other costs that are involved, so we're moving toward a credit card''. The Royal Bank has just announced a plan of $35,000 and so on, and it seems to me, as I talk to other banks, that they're all moving in the same way.

To me, what that means on the immediate horizon for small businesses is that, first of all, their interest rates are going to increase. Now we're talking about prime plus 3% to administer them. Secondly, as for the problems in rural communities and others where they were getting personal service from the local bank, it's in fact clear to me that the whole object of that exercise is to administer that out of Toronto or wherever the data processing system is. I think a dramatic shift in the attitudes of the financial sector towards small and medium-sized businesses and what the fallout is going to be....

My next question is also about a larger issue. Since we're dealing with financial legislation and the banks are so heavily involved in the securities market, and since, as you've mentioned, equity lending is just as much or possibly more of a concern for small business, what obligations do you think the financial institutions have toward creating a more robust equities market in Canada so small businesses can access it more easily?

Of course, a concern I have is the fact that we don't have a national securities exchange commission. Even if we did, the legislation we currently have bars entry to many small businesses, and whether in fact financial institutions don't have an obligation to try to move in the direction of making that a more attractive environment for small and medium-sized businesses....

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Ms Swift: On the whole question of demand, which is really what you're alluding to, and also the way the market is changing, I agree with that to a point. There are changes that we found through the recession. The small businesses that survived often did so when their banks pulled the rug out from under them by having suppliers extend credit, by using other means, and so on. Some of them have stuck with that even though times have got better. They've established their relationships.

Once you've changed your route, sometimes you just keep on doing that. So there is some argument for that.

Speaking on our behalf, when we are continually inundated by our members' telling us of the problems they're having with their banks notably - or other financial institutions, but mostly banks because that's the largest market share - and that there still is a pretty significant rate of loan turndown and so on, even though there has been some change in the market - we don't disagree with that for a moment - we still see pretty serious problems that we believe can be acted upon and that would have positive benefits for all parties. So there is some truth there, but it certainly doesn't explain the whole situation.

On the credit card route, it's interesting. If you read any small business magazine, I've always been surprised by how many of the start-up success stories start out with ``I started my business by maxing out all my credit cards''. They did that because initially there weren't any other sources to which they could turn. I guess in a way the credit card approach is banks acknowledging what has been done for years.

That having been said, typically credit lines are the toughest thing for small businesses. They have to be consistent. They're not huge amounts of money usually, but they have to have a consistency, something where the terms aren't going to change two weeks from now, because obviously the person is planning on having it there and so on.

We don't see, for example, yesterday's Royal announcement as being a bad thing.

Whether or not rates are higher is a very good question. We have found in our surveys that within limits our members are prepared to pay higher rates, to a point. Obviously something like prime plus 8% would be out of the question.

Our banks in Canada - and again they have admitted this to us - have a track record of being ultra-conservative, to the point where they won't even offer anything at prime plus 3%, because that is immediately defined in their minds as being too risky.

We feel that as long as it's reasonable.... We'll certainly keep an eye on, say, this credit card and other developments along these lines, but I think there is a market out there. Our members have told us that there's a market for prime plus 3%. If it's something that people can't get otherwise and they're prepared to pay that for it, then so be it. But obviously in a captive market when you have, say, one or two institutions or whatever and it's not prime plus 3% any more but it's prime plus 5% or whatever, it's probably going too far.

Mr. Shepherd: On both sides of that it would appear to me that what they're trying to do is convert the existing SMEs they have, where they might be paying prime plus 1% or prime plus 1.5%, to the prime plus 3% regime. The next stepping-stone, which it seems to me will be two to three years from now, is for them to say that this is too hard to administer, so they are just going to give you regular plastic, and away you go.

Ms Swift: Yes, at 20% or something.

Mr. Shepherd: Right. You've got it.

Ms Swift: That's a very good point. As I say, we're always happy to let something be out there for a while before criticizing it. Some of these innovations are new. If they do provide administrative simplicity, both for the institution and for the business owner, without increasing costs - and that's a big question mark right now, because we don't know the answer to that - and if they are trying to convert people at prime plus 1% and prime plus 2% to prime plus 3% or more, then we're going to be hearing about it really quickly, I'll tell you that.

Our members do not hesitate to let us know what's going on, and once we start hearing about it, we'll ensure that you and others know about it too.

Mr. Gray: Also there's the question of being forced in the market to do things. You'll hear about that lickety-split, and I can tell you that in the past one of the major financial institutions pretty much forced its clients to go to small business centres to do their work.

Say that I'm a small business person in Stratford and all of a sudden I'm told I have to go to Kitchener to do my banking. That sort of thing is not going to be easily dismissed by a bank. So if the bank is forcing people off a normal line of credit where they're getting competitive rates and into plastic, you people will know about that.

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On your last question about whether financial institutions ought to be getting into the equity game, we recommended to the industry committee that financial institutions get into the game, in part. It's not the role of financial institutions to be equity lenders as such, and they've always argued that they're not risk equity lenders.

However, for those in the small business community, the most important sources of equity are their bottom lines. To the extent that they cannot take their bottom lines and reinvest them in their firms - we're talking about the masses of small firms out there - equity, venture capital and all of these panaceas that we've heard about from governments for 25 years don't really apply for most small firms. They need people who are interested in investing in their firms, with some disposable income, tax advantage and encouragement to do so. The firms themselves are being taxed to death by payroll taxes and property taxes in every part of this country. As a result, they don't have the equity to throw back into their firms. Until that is fixed - and that's not the fault of the banks - there will be suboptimal growth in these firms.

Mr. Shepherd: I guess the real question I was trying to allude to - maybe we sort of missed it - is the equity markets themselves in Canada and how small is small. For instance, we constantly hear stories about people with good ideas who end up with NASDAQ because they can't get access to the Canadian equity markets. The fact is that the Royal Banks of our world control most of the securities market in this country, so what obligation do they have to try to fix that?

Ms Swift: We also have a more conservative investor community in Canada. This is pervasive throughout the whole financial community. Some of it is very much cultural, but we certainly think improvements could be made to assist that equity access for smaller entities.

We find if you're looking for venture capital less than $5 million, you're usually out of luck. You could probably count on one hand the number of our members who might be looking for that amount of money. There are undoubtedly things that can be done, but I think a lot of it is cultural when we look at the U.S. versus Canada, and the size of the market, too.

The Chairman: Thank you very much, Mr. Shepherd.

Mr. Pillitteri.

Mr. Pillitteri: Thank you very much, Mr. Chairman.

Over the weekend I was rubbing shoulders with bankers. I am always pushing bankers to be freer with their money, or with our money, in order to help out small businesses with loans. They told me that in the late 1970s and early 1980s the banks were giving out so much money, and they no longer want to fall into that category again. They said that was much too much stimulus in the economy.

I said it was the higher interest rates that they were giving out the money to. Rather than stimulating the economy I think it was a return back. If you look at the chart today, $10 billion in 1983 was worth much more than it is today. So they actually lend less money to small businesses.

It's true that they have been lending more money lately, but as you can see from the chart - and I've known this for quite a while - when the interest rates are low, there is a tendency for loans from banks to medium-sized and large businesses to rise. When interest rates are high, they relate more to the small businesses than to the large businesses. Do you have any data on this?

As you can see here on the chart, in 1988 and 1989 the interest rates were starting to go up and there were more loans made to the larger businesses, while loans to small businesses decreased.

Ms Swift: Banks don't, as a rule, make money on higher interest rates because they're paying for money as well. The CBA people will tell you this much more completely than I will. But the notion that when interest rates are high banks are rolling in dough isn't true, because naturally they have to pay a premium on their money.

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Given that right now credit card interest rates are way higher than the bank rate.... It's those gaps that are the important things to consider, not simply that interest rates are high and therefore the banks are raking in money. I don't think there's much of a relationship there.

We do track how much over prime our members are paying. That's the relevant thing, not the absolute level of interest rates. Inflation is also important, as Mr. Grubel mentioned earlier.

One thing we find interesting in this question of overall cost of credit for our members is that the rate over prime being paid - so the real cost to that member - has not fallen, on average. It's stayed about the same. There's been the odd little blip. Some of the banks offer for a limited time period a slightly lower rate, but overall, on average, it's stayed about the same. At the same time, service charges have gone up.

So there are three components of cost to a small business: the rate of interest, service charges and collateral requirements. Collateral requirements have stayed roughly the same, interest rates have stayed roughly the same for the small firm, and service charges have gone up. If anything, we're seeing an increasing cost of this package overall, but the interest rates are not the only part of the equation.

Mr. Pillitteri: What I was referring to is they switch, in accordance with the interest rates, who they lend money to. That's what I'm saying and that's what I'm seeing here in the chart. If you look at 1990 to 1994, there are fewer loans to smaller businesses and more loans to larger businesses. That's what I was getting at.

Ms Swift: Yes, well, we think that's really more of a business cycle-related phenomenon, with the recession, than having anything to do with interest rates, to tell you the truth.

A lot of it, too, is when you have some of the infamous debacles we've had over the last decade, with sometimes billions of dollars going down the tubes, it's not to the small business constituency that happens; it's to the large one. As a result, you can sometimes see more dramatic dips in that big business cycle than you do in the small business. The numbers are just that much bigger.

The Chairman: Thank you very much, Mr. Pillitteri.

Lastly, Mr. Fewchuk.

Mr. Fewchuk: Good afternoon. Thank you for coming.

I have some difficulty with the earlier statements in your proposal. You indicated to us that federal taxes and banks are the biggest problems, but as a former businessman with a couple of businesses, I recall what I had to go through. My big problem was with the rural municipalities, the town councils, the provincial governments, and all their regulations for land and so forth.

In the last two years I've been here, I haven't heard one of you ask your business people what you can do to try to put these regulations at the local level to make it easier for small businessmen to make a start. We all know about the taxes. We don't mind paying taxes, because that tells us we're making money. It's the other problem. I haven't heard you say once that you're going to the local level to try to help the businessmen.

Ms Swift: We do a huge amount of work at the local level. We don't usually belabour it in front of a federal committee, because we figure we deal with federal issues when we're in front of a federal committee.

We have offices right across the country, as you may know. We have provincial people in every jurisdiction. They go to the provincial government.

You're absolutely right. As, granted, successive levels of government say they're cutting down on transfers, it hits the provinces, then it hits the local level. Right now one of our key problems is very much at the local level. We've been focusing way more on municipal concerns, tax issues and regulatory issues than we ever have before.

We keep that to those fora. We don't usually itemize it in detail before a federal group.

I might also comment on one other statement you made. You said when you're paying taxes, you're making money. If only that were true. That is true for corporate income tax, but corporate income tax is the least of the problems for small business.

Mr. Fewchuk: Thank you for saying that, because you were telling the public earlier that it's a big problem.

Ms Swift: But people don't understand the tax system when they say that. The main problem isn't corporate income tax, because it's true that when you're making money, you pay it; when you're not making money, you don't pay it. Payroll taxes you pay whether you're making money or not.

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We have put a focus on profit-insensitive taxes. That has been very much our focus. Federal payroll taxes - CPP and EI - have increased dramatically over the past 10 years. Provincial payroll tax has done the same. Property taxes are another profit-insensitive tax. So are capital taxes.

All of those profit-insensitive taxes, federally, provincially and locally, have increased over the last 15 years and have made our tax system way less responsive to economic cycles. We think the high levels of bankruptcy we saw over the last recession, which were record levels of bankruptcy, are directly related to the fact that at least -

Mr. Fewchuk: Well, most businessmen say the employees are very important to them. They have good employees, they do the job well, and they have a good business. So there's a two-way street here. Benefits are important.

Ms Swift: Oh, I think our members would agree that benefits are important, but what they question is why, for instance, we have $5 billion sitting in an EI fund right now with no seeming hard plans to have dramatic reductions in EI rates. They question how these moneys are being spent.

Mr. Fewchuck: We must remember it was hard for the employees when there was no pot there. It's very important to a businessman.

Ms Swift: Our members agree completely; they just question the management of these funds, and I think they have good reason to do so.

Mr. Fewchuck: Thank you.

The Chairman: Thank you, Mr. Fewchuck.

As usual when you appear before us, we've covered a lot of ground, even some that wasn't involved in the white paper. We've talked about the regulatory burdens imposed on small business, the need to harmonize and the need to rationalize and get rid of paperwork and red tape. We've talked about the tax burden, and in particular we've talked about the role of banks in lending to our small businesses.

One idea that emerged, which I have an incredible amount of enthusiastic support for, at least personally, is that banks must lend $1 million to anyone who can find a cure for baldness.

Some hon. members: Oh, oh!

The Chairman: Let me say, as one involved in public life, it is critical to us as legislators that we have people who can come before us and speak on behalf of the thousands upon thousands of small businesses across this country that would not otherwise have a voice here in Ottawa. Thank you. If you did not exist, I'm afraid we would have to invent you.

Thank you very much, Catherine Swift and Brien Grey from the Canadian Federation of Independent Business.

We adjourn until 3:30.

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