EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, September 24, 1996

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[English]

The Chairman: The Standing Committee on Finance of the House of Commons is continuing its investigation of the white paper involving Canada's financial institutions.

Our first witness this afternoon, from TelPay Bill Payment Service, a division of CTI-ComTel Inc., is its president, Mr. William Loewen. Welcome, Mr. Loewen.

Mr. William H. Loewen (President, TelPay Bill Payment Service): Thank you for the opportunity to speak to you about an issue that concerns our company.

I should first explain a little about what our company does. We provide telephone bill payment service similar to services like the on-line banking services that banks now provide. We initiated that service in Canada in 1985. In fact, we may be the longest-running telephone bill payment service in existence today. I'm not sure about that, but certainly we are in Canada. We provide service coast to coast. Our clientele is the general public plus a fair number of smaller financial institutions, mainly credit unions, trust companies and the smaller banks.

The purpose of my appearance is to ask you to give fair consideration to the participation of -

The Chairman: Excuse me, Mr. Loewen. Before you go further, could I ask you this: why would it be to my advantage to use your services as opposed to paying the bill directly to the phone company?

Mr. Loewen: If you pay it by cheque, you have to write the cheque and put it in the mail. You pay for postage, and of course there's a time delay -

The Chairman: And service charges.

Mr. Loewen: And service charges, yes. In the case of our service, we also have to charge a fee, which is 50¢ a payment. We collect the data today, and on the next business day we electronically send that information to the bank and the bank account is debited and the payee's account is credited. At the same time we transmit the details of those payments to the payee so that they can credit your account.

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

Mr. Loewen: You're welcome.

When I talk of financial services, I mean the processing of electronic payments particularly, although others may have other types of services they would like to offer. I'm not talking about the managing of other people's money.

I'm encouraged by the comment in the white paper that a comprehensive review of the payment system is warranted. I'll be making more detailed representations to the Department of Finance and the Bank of Canada about the payment system.

The Canadian Bankers Association stated in its submission that the Department of Finance has said that its policy objectives for 1997 include the following: ``to ensure the continuance of a healthy level of competition, within the financial services industry''. We certainly help provide competition in this newly emerging field.

The next is ``to make financial institutions statutes more consumer-oriented''. As you'll see as we go through, we give consumers a choice, which is essential for competition.

The third is ``to ensure that the legislation does not inhibit the ability of Canadian financial institutions to innovate and compete in the marketplace''. In a former company, Comcheq Payroll Services, which was recently bought out by the CIBC, we were the leaders in innovation and competition in that entire field. As matters stand today, we are also the leaders in many respects in bill payment.

We are entering a new era in which electronic delivery of financial services makes it possible to contemplate a more competitive, cost-effective and convenient financial services environment. It will be up to you as legislators to determine whether the benefits of these innovations will flow to consumers or simply fatten bank profits.

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What we propose does not involve anything that is not being done today by regulated and non-regulated organizations. It merely involves doing it faster and better - that is, on-line to customers' bank accounts instead of overnight through the clearing system. It does not include the management or investment of other people's money, which requires that banks have significant capital, be regulated by the Superintendent of Financial Institutions and be covered by insurance such as that provided by the Canada Deposit Insurance Corporation. Not that we would object to regulation, but if we were to become regulated it would be for a different reason.

The TelPay division of CTI-ComTel has provided telephone bill payment to Canadians since 1985. The service operates coast to coast and provides a convenient means of paying bills to over 500 companies, mostly utilities and credit and charge card companies. Over the past year our service has also been available on computer. Our clientele is the general public and over 100 credit unions, trust companies and banks.

Our service provides three important benefits. It allows smaller financial institutions to offer bill payment service to their customers on a cost-effective basis. This means they can be more competitive with larger financial institutions. It allows consumers to use a bill payment service that is not linked to the bank they use. This means they can change bank accounts without the inconvenience of having to change their bill payment service. In the long run customer mobility is important in ensuring competitive pricing. Third, TelPay is an alternative source of electronic payments for payees who are otherwise being directed to receive their payments from one lead bank, a move that is inefficient and eventually will cost them significantly.

In considering this issue I'd like to explain one principle of business that may not be readily apparent. It is not the practice of business to look for ways to reduce revenues, especially to do so by reducing prices. Established firms are always looking for ways to increase prices, not the reverse. They may at the same time be looking for ways to reduce costs, but that is another matter and is not necessarily reflected in prices.

What causes the price to the consumer to be reduced is the introduction of some new element, usually a new participant. Smaller participants have the flexibility and incentive to introduce such elements. If a new participant can become well established quickly enough, then the purveyors of older technology will have to adapt to the new structure; therefore, consumers will benefit. Otherwise the older participants may introduce the change eventually but will find ways to maintain the revenue base.

Most wages now arrive in people's bank accounts by way of electronic credit. Telephone banking, banking on home computers, Interac and the Internet all provide new ways to access bank accounts and financial information. Formerly that access was possible almost exclusively through paper transactions passing through the mail or over the counter. While electronic transactions are much cheaper to process than paper transactions, banks have not only kept the savings to themselves but have dramatically increased service charges to consumers.

These new access methods make it possible to separate the banking functions of lending money on the one hand, which involves significant risks, and meeting the daily transaction requirements of the public on the other hand. The latter may involve the risk of fraud and abuse, but such risks are dealt with by laws of trust and criminal laws. The risk is further reduced by the fact that electronic transactions are more easily traced than cash transactions, reducing if not eliminating the incentive for fraud.

There are obvious reductions in cost that can flow from these changes. However, such reductions will never be passed on to consumers if the means of delivering them are limited to the larger organizations with already established older technologies. Their dilemma is how to maintain an ever-growing level of income if new technology is going to require them to reduce prices.

Telephone bill payment is an example of the situations where banks have already taken action to protect their revenue. TelPay has been able to process fairly large volumes of debits to customer bank accounts in computer-readable form. TelPay pays its bank in the neighbourhood of 10¢ a transaction for each debit. The bank would have charged its customers 50¢ to 60¢ for the same payments if they had been made by cheque, or $1 or more if paid over the counter. Thus the revenue per payment has been reduced by 80% by payments processed by TelPay.

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Clearly, independent processors are a threat to banks' revenues. When the banks realized what TelPay was doing, they began to put roadblocks in our way. Having already demonstrated through our previous company, Comcheq, that we could successfully compete with large banks, there was no way they were going to let us get away with another attack on what they consider their exclusive territory.

In the case of TelPay bill payment, the banks have reacted in a number of ways. First of all, in 1989 they used the Canadian Payments Association rule H4 to limit TelPay's offering. That rule said that we could make non-variable payments, such as telephone bills and hydro bills, through a particular process, but we couldn't make variable payments, such as credit cards and charge cards, by that same process, which virtually eliminated our offering to consumers. Apparently they don't understand that telephone bills and hydro bills can be variable.

Those limitations were finally replaced in 1996 by the new CPA rules that were merely discriminatory. By that time the banks had their own phone systems and had devised ways to make TelPay's offering less competitive.

Initially, as mentioned above, consumers paid 50¢ to pay a bill through TelPay and TelPay paid the banks 10¢ to process the debit. This was a good deal for consumers, who formerly had to pay40¢ to 50¢ for postage plus a fee for clearing their cheques. In addition, they had a very convenient way of paying their bills. It was also good for the banks, since the transactions were presented in bulk to the banks in electronic form.

The banks have now had 10 years to figure out how to ensure that consumers and competitors will continue to contribute to their revenues at similar levels to those that applied with the older, more expensive models. The process they use is referred to as double billing and is currently under investigation in the United States by consumer advocates and politicians. It involves charging the customer for initiating the transaction and again for debiting the transaction to the consumer's account.

The Canadian banks have gone even further. They also want to charge the payee for remitting the payment. Thus the banks can charge as many as three fees for handling one transaction.

In the case of a competitor such as TelPay, our customers are charged the normal 50¢ fee. We pay the banks 10¢ for making the debit, but the banks have now turned around and charged the customer a further 40¢ to 60¢ for the same debit.

The banks have also devised a scheme whereby they are trying to tie up payees, which are the utility companies, credit card companies, etc., so that each payee will be forced to receive its remittances from a single bank...a certain formula for increased charges in this phase of the transaction. This process they refer to goes through something they call the ``bill payment club''. This the CPA has dealt with through their rules, page 6, which legitimizes this process. In fact, it tries to make it an almost essential part of these companies receiving their payments.

If consumers, including corporate consumers, are to gain any benefit from new technologies that are involved, clearly the CPA must be restructured so that non-financial institutions' service providers can provide their customers with the same access to their bank accounts as the financial institutions themselves do, and in non-discriminatory ways.

While such a proposal has been labelled fundamentally untenable by the Canadian Bankers Association, in the same paragraph it says that consumers have consistently emphasized their desire to retain control over when and how payments are made from their deposit accounts.

Surely control includes having choice. We believe access to accounts through service providers such as TelPay should be among the choices open to consumers. The question you as legislators have to ask is whether or not consumers will have that choice as to how they access their accounts and whether the banks will be allowed to retain the monopoly over the depositors' accounts by continuing, through the CPA, to write rules that exclude competition.

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In urging equal access to provide services to the public, we will no doubt encounter violent argument from the banks. The banks want to be into everybody else's business, but don't want anyone else in theirs. However, if you truly want competition and innovation, you can and should allow non-bank companies to facilitate access to deposit accounts for consumers who wish to have that option.

You might consider the situation where service providers such as TelPay are not able to give customers on-line access. That is basically the case right now. Customers can buy their on-line services only from their own bank. The only way customers can change their bill payment service is by changing their bank account. There could be many reasons for not wanting to do that, including the possibility that there may be no other bank available. This immobility of customers creates a virtual monopoly situation for banks. It is this that allows them to get away with double and triple charges referred to earlier.

This is the question you have to ask yourself: who owns the account? The answer must be the consumer, and the consumer should be given options in the way he or she accesses the account.

The precedent for this type of access has existed for forty years. There are no technical restraints. Interac now provides a logical means of access. The banks, of course, will say they have a fiduciary responsibility to look after their clients' money.

As true as this is, and as poorly as they sometimes do that, they do not have a fiduciary duty to refuse to allow customers to access their accounts as the customers see fit. In fact, that access has been available for many years in the form of pre-authorized debits. These debits are initiated by third parties and processed overnight. Millions of insurance, mortgage and other payments - including political donations - are processed in this way.

A brilliant opportunity to open up access in this way exists through the Interac system. This is the type of on-line access service providers and consumers want. It is unlikely that the recent effort of the Competition Bureau will open up Interac in any significant way. In fact, The Globe and Mail articles suggest that Interac fees will go up as a result of the hearing, exactly the opposite effect to that intended by the Competition Bureau.

There were excellent solutions to a number of problems inherent in that exercise, but the Competition Bureau seemed more intent on a settlement that suited the banks than one that could have opened up the clearing system in a meaningful way.

It is now up to legislators to see that the stranglehold the banks have over access to accounts is broken so that real competition and innovation can take place. The banks will not do that. The Competition Bureau failed to do it. Only you can make it happen.

The stranglehold was made possible by Parliament's creation of the Canadian Payments Association in 1980. This removed the handling of the clearing system from the Canadian Bankers Association to what was intended to be an organization more representative of the financial services industry. In fact, it still left the system under the control of the major banks. However, it became more restrictive because it could now act under the aegis of an act of Parliament. It considers itself a law-making body, and in fact it probably is. Actions by the banks might be considered predatory by the Competition Bureau were it not for the protection given to them through the CPA act.

When Parliament created the CPA in 1980, it set up a regulatory body that is the equivalent of saying that the CRTC should be run by Rogers Cable, Videotron, WIC, Shaw and CanWest. The only way to bring about change is to have the Canadian Payments Association dissolved. It provides only regulatory functions anyway. That regulatory requirement should be dealt with by a separate commission that could listen to all parties rather than the present situation where the regulators are the regulated.

It should be possible to have two or more clearing systems, one for paper transactions, one for electronic transactions including Interac, and possibly another for large value transactions. Possibly, direction for such a commission should not come only from the Bank of Canada or even only from the Department of Finance. These services are much more an issue of ordinary commercial activity. They may more properly come under the aegis of the Department of Industry. That department would not be as likely to be faced with conflicting interests when dealing with banks.

The white paper proposes to establish a task force on the future of the Canadian financial services sector. We urge you not to leave CPA issues to this task force, whose work is to effect legislation five years hence. CPA changes are needed now. The changes in the payment system are coming too quickly to wait for that report.

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I thank you for the opportunity to bring our concerns forward. As you can appreciate, our participation in issues dealing with competition with banks and the clearing system has been long and arduous, spanning over 25 years. We've made significant contributions to stated objectives of various governments in terms of competition, efficiency, responsible handling of funds, privacy concerns of the public and more. We hope you'll see merit in our being allowed to continue to do so in the field of bill payment.

In summary, I'd like to see an immediate restructuring of the regulation of the clearing system. I would like to see a recognition that the provision of services can be separated from the lending activities of financial services so that the risks inherent in lending functions do not interfere with the potential for providing choice to consumers in service functions. I would like to see a recognition that small companies can play an important, possibly an essential, role in seeing that competition and innovation thrive, and that the benefits of doing so are passed on to consumers. I would like consumers to have a choice in the services they use, a choice that only TelPay and others like it can provide.

I have enclosed a number of appendices that deal in more detail with some of the points I've raised.

Thank you very much.

The Chairman: Thank you, Mr. Loewen.

[Translation]

Would you like to begin the question period, Mr. Bélisle?

Mr. Bélisle (La Prairie): I have a quick question.

Mr. Loubier (Saint-Hyacinthe - Bagot): You'll have to wait a little bit because there's no translation.

The Chairman: Pardon me?

Mr. Loubier: There is no simultaneous translation yet.

The Chairman: Do we have a technical problem?

Mr. Loubier: No, no, the witness doesn't have his earpiece.

The Chairman: Oh, I'm sorry.

[English]

Maybe the system is under the control of the Canadian Payments Association.

[Translation]

Mr. Bélisle: After listening to you and reading your document, can we conclude that the banking institutions charge truly prohibitive fees? Is the cost of billing prohibitive?

In your document, you state that double and triple billing seem to be quite widespread. Could you elucidate that? Is double and triple billing truly widespread in all Canadian banks or do only some of them have this practice?

[English]

Mr. Loewen: On the first question, I believe any study of bank service charges would indicate that they've increased at a tremendous rate. When we started in business in 1968, which admittedly was quite a while ago, service fees for bulk volumes of payment were as low as 5¢, and companies generally paid 10¢ to 12.5¢. Our company now pays 75¢ for a transaction. So those fees have gone up when perhaps they should have gone down because computer technologies should have reduced costs.

Regarding double and triple billing, I think it's fair to say that double billing is fairly universal among the major banks. I haven't encountered it in the smaller institutions. Even VanCity, when they announced their new system, made reference, somewhat obliquely, to the fact that this double billing is going on and that they would take advantage of the fact and might not double bill.

As far as triple billing is concerned, that's relatively new. That is made possible by what the CPA calls rule 86. That came into effect this month. It still may not be in effect - it may have been the end of the month or the beginning of the month, I'm not sure.

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There is a certain amount going on whereby payees have to pay the bank for the information that is provided to them. The customers have already paid the bank to send that information to the payees.

The Chairman: Thank you, Mr. Bélisle.

Mr. Grubel.

Mr. Grubel (Capilano - Howe Sound): Mr. Loewen, I am very sympathetic with your position and I congratulate you on the success of your business. Is it still functioning in spite of this rule? How did you get around that?

Mr. Loewen: Initially we were doing most of our promotion to the general public, but we didn't feel that was very productive when we couldn't promote to any Royal Bank or TD customers. There were other complications too, so we focused more on being a service provider to other financial institutions. In fact we were the service provider for bill payments up until a year ago for one of the major banks, but then they took that in-house.

We've concentrated on that, but we see a big opportunity among all of the major banks' customers that would be lost to us. If we could open up the payment systems so that we could provide on-line service to our customers, then all of those people would be potential customers.

Mr. Grubel: Opening up the market and having competition is what you like, is it?

Mr. Loewen: That's right.

Mr. Grubel: Is this a misprint or were you the president of the National Party of Canada?

Mr. Loewen: Yes, I was.

Mr. Grubel: What was the main platform of the National Party of Canada.

Mr. Loewen: The main concern was Canadian sovereignty.

Mr. Grubel: So nothing to do with keeping out options for consumers and opening up the market and all that.

Mr. Loewen: No, that wasn't our main thrust. We were mainly people who were opposed to the free trade agreement.

Mr. Grubel: It's ironic that I so strongly agree with you that there should be no protection from competition for anyone, but that Canada must be protected. You were alleged to have given millions of dollars to fight forces, like you are doing now, to open up Canada to competition for the benefit of the consumer, and now suddenly you have changed your mind. Isn't that contradictory?

Mr. Loewen: No. We never opposed the reduction in tariffs. What we opposed was giving up sovereignty over our resources, over our business opportunities and many other things relating to the sovereignty of the country, not competition. We were never opposed to tariffs. The tariffs were going down anyway.

Mr. Grubel: Everybody knew that the level of tariffs was not natural anyway. Free trade was prevented by all kinds of other rules and regulations, just like the banks come here and say they want more competition. You should have heard them.

Mr. Loewen: Free trade is a huge subject.

Mr. Grubel: I find it somewhat ironic that you're just like everybody else. You come up here when it rhetorically suits you to tell us that we need more competition, we need benefits for the consumer, and then you turn around and say, except for the things you really believe in, that's where the government must prohibit competition. It's strange.

Mr. Chairman, thank you very much. I've made my point.

The Chairman: Would you mind repeating it? I didn't quite catch it, Mr. Grubel.

Some hon. members: Oh, oh!

The Chairman: Are there questions from anyone else?

Mrs. Brushett.

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

Mr. Loewen, are there other companies similar to yours in Canada that would have faced similar problems?

Mr. Loewen: Not too many. In the payroll business there were two companies, our company and another one. They operated in a little different fashion and were eventually sold to the Toronto Dominion Bank. That was the extent of it in the payroll business.

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That's not to say there wasn't competition. If you decide that you've chosen the banks as your competition, you have some competitors, that's for sure. But they're not necessarily fair competitors.

In bill payment, I know of one other company that could be wanting to do this, but that's all that exists now. However -

Mrs. Brushett: That was my point. Are there a lot of people attempting to get into this? Do you know of companies that might wish to be into this as you are?

Mr. Loewen: No, there are not, but I suspect there will be. There are many companies talking to us now that weren't talking to us before about whether or not we could provide bill payment service to their customer base. Those companies aren't necessarily financial institutions that have the balance of the account there. If we could get them marketing for us to their customer base, I can tell you there would be some significant competition out there.

We might not be the only ones. There would be nothing stopping, say, another bank from going to those same companies and saying, ``Hey, if you want to sell our service to your customer base, you can do so''. But the only way that would be viable is if that bank could debit accounts in other banks, which is not what's done right now.

Mrs. Brushett: No, that's cross-debiting. Thank you.

The Chairman: Thanks, Mrs. Brushett.

Could you just take me through this very simple arithmetical exercise? You charge the telephone user 50¢, 10¢ of which you give to the bank. How does the bank get involved in triple billing? Just take me through that again.

Mr. Loewen: We have paid the bank 10¢ to debit that customer, but when the bank debits the customer, they charge the customer another 50¢. It ranges from 40¢ to 60¢. So we've paid for the debit and the customer has to pay again for the debit.

The Chairman: The customer ends up paying $1 as opposed to the cost of a cheque and a stamp, so they're behind.

Mr. Loewen: That's right.

The Chairman: They pay more using you than they would if they did this directly.

Mr. Loewen: That's true.

The Chairman: Why would they use you? Why are you still in business?

Mr. Loewen: It is a very convenient service. It's very handy to be able to pick up the phone and pay your bills instead of writing cheques. Actually, we do have one.... I hesitate to say this because CPA might rule against it, but if a customer phones our service and wants to pay three bills, we put one debit through to the bank account, so the customer only gets debited 50¢ once. If they use a bank service and are paying three bills with one telephone call, the bank will put through three debits and charge three charges.

The Chairman: How much do you think the banks should be entitled to charge both you and the customer for this service? After all, I assume there is some cost to the bank in accepting a debit, is there not?

Mr. Loewen: There is some cost, but it seems to me that what they charge us should be - and always traditionally has been - the fair price. When insurance companies put debits in for insurance premiums, those debits went through at approximately that same price and the customer wasn't charged. But just recently they've introduced this additional charge for those kinds of debits as well.

It seems to me that the consumer should know what the total fee is at the time of the transaction, and there shouldn't be any further charges.

The Chairman: You're aware, Mr. Loewen, that the government has established an advisory committee to the Department of Finance to look into the entire payment system. The committee will include industry participants, academics, consumers and other key users of the payment system. Not having had testimony before us on the entire range of issues confronting our payment systems, I'm not sure this is an area that we feel qualified to act on in isolation, but I welcome your comments on that.

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Mr. Loewen: I've recently become aware of that. I guess I was aware of it even before asking to appear here. The fact is that we're trying to introduce an idea that is relatively new to people. The more people we can talk to about it, the better it is, as far as I'm concerned. Hopefully, you will hear positive things about the idea from that committee, and we'll certainly be in touch with them.

The Chairman: Mr. Loewen, this has been a very interesting presentation to us. We wish you well. I'm sure Mr. Grubel will be asking you to join the Reform Party, and I know there are other parties in Canada that might appreciate your attention.

Thank you very much for bringing this to our attention, Mr. Loewen.

Mr. Loewen: Thank you.

The Chairman: Our next witness is from the Credit Union Central of Canada. Appearing today are Robert McVeigh, the chairman of the board of directors, and Mr. Bill Knight, the president and chief executive officer.

Welcome, gentlemen.

Mr. Robert McVeigh (Chairman, Board of Directors, Credit Union Central of Canada): Thank you, Mr. Chairman. Good afternoon, ladies and gentlemen. My name is Bobby McVeigh and I'm chairman of the board of Credit Union Central of Canada. With me is the president and chief executive officer of Credit Union Central of Canada, Mr. Bill Knight.

First of all, let me begin by thanking the committee for inviting us to speak today. The comments that Mr. Knight and I are about to share with you reflect the collective concerns of Credit Union Central of Canada, often referred to as the Canadian Central, and the six regional centrals registered under the Cooperative Credit Associations Act, commonly known as CCAA.

The Desjardins group in Quebec, I should point out, is not a member of our system. Rather, it is a completely separate financial cooperative system that we work very closely with in regard to numerous initiatives.

Canadian Central is registered under the CCAA, and it is the national trade association and central finance facility for Canada's credit union system. We are a distinctive, community-based, consumer-driven organization with 4.5 million members and more than $44 billion in assets. The Canadian system has over 1,900 locations, and I should point out that we are larger than the Canadian Imperial Bank of Commerce in terms of our number of branch offices.

As one of the country's major employers, Canada's credit unions provide work for more than 18,000 Canadians. The credit union system holds over 7% of the national market share in the primaries of business, namely savings and deposits, mortgages and personal lending. The credit union system is clearly a significant competitor in the Canadian financial sector, particularly in British Columbia, where we have 26% of the market share, and in Saskatchewan, where we have 30% of the market share.

We are hopeful the legislative review will provide credit unions with a stronger foundation from which they may expand and continue to be the domestic consumer alternative for Canadians. We feel many of our concerns regarding the white paper are simply a result of an apparent misperception of the credit union system structure. This misperception is understandable in light of the fact that our structure is very different from that of either a Canadian chartered bank or a traditional Canadian corporation.

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Unlike banks and trust companies, credit unions are financial cooperatives. This simply means they are owned and controlled by their members or customers. The members democratically elect a board of directors, which develops pricing and service policies. The profits earned by credit unions are redistributed to the members or are used to better serve these consumers.

There are three tiers in the Canadian credit union system. First, there are individual credit unions in every small community, whose membership consists of 4.5 million Canadians. Secondly, there are the regional centrals, whose membership consists of the individual credit unions in various regions of the country. Thirdly, ladies and gentlemen, there is the Canadian Central which, together with assistance from the regional centrals, is responsible for developing and implementing national financial service programs. An example of this is the issuance of credit cards to credit union members. The membership of the Canadian Central simply consists of the regional centrals.

As you can see, the control, the ownership of our system, is the inversion of a traditional parent-subsidiary corporate structure. The credit unions are owned by 4.5 million Canadians and the credit unions in turn own the centrals.

Ladies and gentlemen, Mr. Chairman, I would now ask Mr. Knight to describe the unique structure of the system and to then comment on specific matters addressed in the white paper.

Mr. Knight.

Mr. Bill Knight (President and Chief Executive Officer, Credit Union Central of Canada): Thank you, Mr. McVeigh.

Mr. Chairman, it's nice to be with you again on a fall afternoon. We've spent some time here on financial institution reform in the past.

My task today is to bring to your attention four major issues concerning our system as we look at the next round of financial institution reform.

You will recall that in 1992 we went through a major revision of not only our act but the Bank Act, the Trust and Loan Companies Act, and the Insurance Companies Act. When we did that review, competition was one key item that we wanted to zero in on. Competition was important in terms of providing services to Canadians in the financial marketplace.

We're unique in the context that we have at least 900 Canadian communities in which credit unions are the exclusive provider of retail financial services. Through competition with the banks and the trusts and loans companies, we hope to continue to provide full financial services to our members from coast to coast. In development and in partnerships with local communities, we have been able to assist in providing services to small and medium-sized business. We have attempted to be innovative in the provision of those services in order to ensure that those partnerships - whether they're in the service of aboriginal peoples in Saskatchewan or communities in the Northwest Territories - are provided in a manner that allows Canadians in those communities, through membership in their credit union, to have a real choice in the marketplace.

We have some unique structures. A moment ago, we had a reference to VanCity Credit Union in terms of its services. I can report that VanCity has a unique approach to its community of Vancouver in terms of the services it provides, because those services are not just provided to the individual but in fact to the community. Often a major portion of its retained earnings are reinvested back into community projects.

In this round we're interested in seeing the Cooperative Credit Associations Act amended in order to continue the tradition of pioneering new services for the Canadian consumer. We are also interested in extending to credit unions the efficiency opportunities that other financial institutions presently enjoy. Some of these opportunities include greater access to joint venture projects and national programs. For example, a number of the services that we have introduced to the Canadian financial market may be a surprise to some of you: automated teller machines, which began in Sherwood Credit Union; ethical mutual funds; a virtual bank, which we introduced more recently in which the Citizens Bank of Canada allows services to be rolled out virtually across the country from one of our major credit unions.

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We want to comment to you today on four key matters in the white paper and to give you some insight into how there could be changes to our act to ensure that we continue to provide a competitive choice for Canadians.

The first item I will comment on, Mr. Chairman, is the proposed elimination of the federal regulation of our regional centrals. Second, I will comment on the restriction of the delivery of retail financial services. Third is the requirement that ancillary business corporations be controlled by a single central. Together with that, I will comment on minority investment regulations and the restriction on joint venture arrangements as outlined in the white paper.

First, the white paper suggests ending federal regulation of credit union regional centrals, which are essentially our provincial centrals. We strongly oppose any proposal that would prevent our regional centrals from being incorporated federally. We ask you to refrain from ending any federal regulation of regional centrals that would inhibit our capacity to do business across the provincial lines.

It is our view that the credit union system requires federal regulation to provide a common bond in an increasingly borderless world. Our concerns centre on the constitutional jurisdiction of the provinces to regulate regional centrals, given that under subsection 91(15) of the Constitution Act, 1982, most banking activity falls in the area of federal jurisdiction. Access by regional centrals to the Canadian Deposit Insurance Corporation for liquidity loans remains an important aspect of our business. We hope, through the centrals, through federal regulatory power, to continue to participate on a parallel with the banks and other federal financial institutions.

I may say, Mr. Chairman, that today in discussions with one of our major centrals, B.C. Central reaffirmed its commitment to being under federal regulation and the federal act.

There are, as we all know, some significant areas of duplication in the area of administration and inspection that we as citizens of Canada would like to see ended, whether it's in B.C. or Ontario. But those issues do not negate, for our purposes, being under the federal act.

The second issue relates to the restriction of the delivery of retail financial services. The present act as amended in 1992 effectively prohibits Canadian Central and regional centrals from delivering retail financial services by restricting their activity to delivery of financial services to their members, namely the credit union itself. The white paper proposes to amend the act to clarify the entities to whom the prohibition regarding the delivery of retail financial services applies. The proposed amendment extends the delivery of retail financial services prohibition to ancillary businesses invested in by Canadian Central or a regional central.

We request that you refrain from amending the relevant section of the CCAA. Canadian Central and the regional centrals should be put in a legal position to provide supporting retail financial services to credit unions by means of ancillary businesses.

I have an aside about why the second item is of real significance to us. What is happening out there in the financial marketplace is that many of the small and medium-sized businesses, maybe in the interior of B.C. or in Alberta, maybe biotechnology on the west side of Saskatoon, are now expanding their services and business so that they're playing in any number of marketplaces. In order for our centrals to retail...corporate banking, for example. The flexibility that would be brought about by allowing us to provide those retail services would allow us on certain sized loans and companies to back up that local credit union in co-operation with that provincial central. That's why I think number two is significant to us in terms of updating the act.

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The third issue is that the requirement for an ancillary business to be controlled by either Canadian Central or one regional central causes us some difficulty. We request that the investment rules in section 390 of our act be modified to permit Canadian Central, the regional centrals and individual credit unions, as a system, to collectively own ancillary business, as spelled out under the act.

The act requires each ancillary business, even those established to carry out a national program, to be controlled - that is, 50% equity ownership - by either Canadian Central or a regional central. To require an ancillary business, which provides a national program, to be controlled by either Canadian Central or a regional central is difficult in our structure.

The Chairman: Could you give us an example of an ancillary business?

Mr. Knight: Yes, Mr. Chairman. Neither Canadian Central nor any of the regional centrals have sufficient capital to maintain a controlling interest in an ancillary business that delivers a large national program. Rather, it is the credit unions collectively that have the capital to maintain the controlling interest in such a business.

We have, for example, a credit card company, which at this point is shifting in terms of its ownership within the credit union system. So we have a card company to be competitive with the other financial institutions. It is difficult with our capital structure between the national and the provincial centrals to meet easily the 10/50 rule, yet we can meet 100% ownership of that card company if we're allowed greater flexibility between the credit unions, provincial centrals and Canadian Central. Therefore, you may get an ownership package around the card company of not one central, but in order to serve the whole country you may have one or more centrals. You may have Canadian Central and the ten largest credit unions in the country who come in and suggest we structure that ownership around that basis. We've been running into difficulty since 1992 with the 10/50 rule.

I hope that is helpful, Mr. Chairman.

Finally, the white paper has proposed that minority investment regulations be amended to remove the requirement that the investee entity be controlled by a financial institution. We would welcome such an amendment. Discussions with officials of OSFI have also indicated that a possibility exists to increase the investment limits in the regulations from 25% to 50% of the investors' capital. We do not feel that such an amendment would adequately address our concerns. We request that subsection 4(2) of the regulations be amended to either remove from the aggregate investment limits the amount lent by a central to the investee entity, or permit any level of investment, i.e. beyond the present 25% of the investors' capital, as long as the investor entity is controlled by a federally regulated financial institution.

Either amendment should occur for the sake of fairness since a limit of 25% or 50% is not as restrictive for banks as it is for Canadian Central or regional centrals.

The challenge for us here again is due to the unique structure of the credit union system in which the majority of our capital is spread out collectively amongst the individual credit unions, the 960 or so out there.

Mr. Chairman, in summary, what I brought to your attention is a range of issues that end on one final issue, that is, in the area of joint venture arrangements and the restrictions thereof.

The competitive market is driving, as you could see this summer with the federally regulated banks providing arrangements and proposals for three of the banks and then two of the banks getting together on dealing with sourcing in terms of their paper transactions. These are very significant shifts in the marketplace. Almost weekly there is a buy-out or a deal made to provide services of a varying nature to the Canadian consumer. What we're seeking is flexibility around the delivery of those financial services so that we can continue to compete.

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Mr. Chairman, some of your colleagues from the west will know that in markets like B.C. we're well over 20% in market share, and in Saskatchewan we're well over 34% in market share. So we are a significant player. If we're to provide that option to Canadians in general, then we seek these amendments to this particular act that we've been governed by since 1992 and before.

Mr. Chairman, I'll close by summarizing the key points for the committee. We have raised with you at least four key issues. One, proposed elimination of federal regulation of regional centrals we hope not to see. Second, restriction on the delivery of retail financial services - we believe since 1992 and because of the marketplace it needs updating to give us greater flexibility. The requirement that ancillary business corporations be controlled by a single central needs greater flexibility. Last but not least, minority investment regulations and restrictions on joint venture arrangements should be given greater flexibility for us to be competitive in the marketplace.

In 1992, Mr. Chairman - I will end on this note - there was great hope in this committee under the former chair, Mr. Blenkarn, who took, as you do, great interest in the financial services market. The changes brought about in allowing for the shifting of capital where banks could own trusts, where trusts could own banks, where loans companies and securities companies, etc., could broaden their ownership to bring about a competitive market for Canadian consumers - those are still under review, as shown by the task force established recently by the government, as they should be. But in that competitive arena we have seen far fewer trust companies, and the securities industry is in the hands of a few competitors in the financial marketplace. Those financial competitors, namely the banks, looked after their interests in terms of ensuring that they were in insurance, in trusts and into securities companies.

Interestingly, prior to 1992 our structure meant that we had a number of operating companies to provide a range of services to Canadians. The present chair of Canadian Central was the chair of Co-operative Trust Company of Canada, one of our subsidiary companies. We have had two insurance companies.

Since 1992 we have introduced a national ethical funds mutual fund company. It is very competitive on its rates. I invite individual members to invest. Number two, we've brought about a brokerage company that this very day is rolling out from B.C. across the country. We have moved to ensure that through the actions of VanCity we give people a modern, 21st century glimpse of the virtual bank, but one owned by the Canadian credit union system.

Should this committee, the government, Finance and all the players see fit to give us some running room on those four items, Mr. Chairman, I think we can continue to build, along with our colleagues in Quebec in the Desjardins, a real financial cooperative alternative for the consumer, and bring about some of that competitive marketplace referred to earlier in the day.

Mr. Chairman, thank you.

The Chairman: Thank you, Mr. Knight and Mr. McVeigh.

Just to clarify my thinking, you do not have a regional central in Quebec.

Mr. Knight: No.

The Chairman: So I take it that Desjardins is a unique entity. You work everywhere in Canada but Quebec.

Mr. Knight: Yes.

The Chairman: Will Desjardins have the same concerns you do in terms of this legislation?

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Mr. Knight: I think it's very important, Mr. Chairman, to hear from Desjardins whenever there is financial institution legislation. There may be similar ones, but because we have a federal act and they do not - they have a Quebec act and are within the entity of Quebec. The nature of how they have done business - they have bought into Laurentian or whatever. It's very important to get their direct view on major policy items. They usually don't comment on our act and we normally don't comment on theirs, but we work very closely together.

The Chairman: I take it then that not one of the 960 individual credit unions under your inverted pyramid structure is in Quebec?

Mr. Knight: That's correct, Mr. Chairman.

The Chairman: Thank you, Mr. Knight.

Mr. Solberg.

Mr. Solberg (Medicine Hat): You came up on me a little quicker than I needed you to.Mr. Chairman, if someone else would like to ask a question while I'm rereading some of the presentation, I'll be better prepared.

The Chairman: Could I ask you some questions?

Have you discussed these four concerns with Finance officials?

Mr. Knight: Mr. Chairman, at the present time we are meeting with the finance department and OSFI. Next month we'll go through . . .

The Chairman: Have they expressed particular concerns about any of your four proposals for change in the white paper?

Mr. Knight: The initial response was for them to take it back and look at them, but it is a response that says there's a lot of flexibility on their part to look at the possibility of a number of these changes. We have not had a firm yes or no. We are in the exchange period.

The Chairman: But they have welcomed your representations and have taken them under advisement or are giving them serious study.

Mr. Knight: Very much so, Mr. Chairman. We have a very good working relationship - the committee should know this - with the department and OSFI.

The Chairman: Part of the reason for the white paper coming out was to give the industry and other individuals an opportunity to respond - to read it, to study it, to make comments, to suggest what changes could be made. We found that this process worked well last summer when we looked at some of the financial regulations. We all sat down around the table - legislators, administrators, industry people, consumer people and public servants - and worked out changes, recognizing that in this complex area it's very difficult for anyone to get it absolutely right for every sector the first time.

Mrs. Brushett.

Mrs. Brushett: Thank you, Mr. Chairman.

You have large numbers through all of the provinces, except in Quebec where they have their own credit unions through the Caisse Desjardins and caisses populaires. I'm wondering about your clientele. You've indicated that one in three Canadians do business through a credit union. Does that clientele tend to be more rural than urban? Is your growth more in rural areas than urban? I'd like a glimpse of the landscape of where your growth is and the tendency towards your membership.

Mr. McVeigh: Thank you for your question.

I think it's safe to say that it's quite diverse. If you look at Saskatchewan, where we have 30% of the market share, you cover the urban and rural areas. In my home town of Dominion on Cape Breton Island, where we have a large rural population, there are a lot of rural members. For example, in the town of Canso, which lost its own financial facility two years ago, the credit union moved in and set up a financial service through an operation from Port Hawkesbury. So it's quite diverse. I think we cover all sectors. Depending on the particular area you look at you may have different clusters, but it's quite a diverse population base when you look at 4.5 million members.

Mrs. Brushett: Would you say that the needs of those people who support the credit union are virtually the same as those who support the major banks and financial needs, or are you catering to any different services that would draw them in?

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Mr. McVeigh: We like to think that we do provide a full range of financial services to our members. Depending on the area of the country, whether it's Saskatchewan or Nova Scotia, there may be a clientele that likes this idea of ownership and membership and control and wants to be part of a financial institution and have some direct input into its operation. You have that type of member, and then you have some in the urban areas who simply want to join and have a financial package that meets their needs. That's provided also.

Mrs. Brushett: Is it safe to say, then, that your resources may remain in the region more directly in the communities than with other financial institutions?

Mr. McVeigh: That's a very safe bet. There are some fine examples of that, particularly VanCity, the largest credit union in Canada, where last year - and Mr. Knight can correct me on this - in the proximity of 8% was returned back to the community and to its members for community use.

The Chairman: We have a brief question from Mr. Solberg.

Mr. Solberg: Actually this is a brief comment. I just want to say that I think it's very important that the Department of Finance consider these requests very seriously. We've talked over the last while about the need to have more competition in all the various pillars of finance in the country, and I would just encourage the Finance officials who will be looking at this to be mindful of the need to support the credit unions and encourage competition overall.

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

I think all of us share Mr. Solberg's concern that we want to make sure you have a full hearing and an opportunity to work with Finance officials as you have in the past to work out any differences you may have. We certainly want the response of Finance officials if they do not accept your recommendations, and we also expect to hear back from you on how these discussions are proceeding.

We know that the cooperative movement, the credit association movement, has played a very valuable role throughout the history of Canada in helping a lot of people who might not otherwise have had access to certain types of services and goods. We commend you for your efforts in expanding and taking your industry and sector into the 21st century, meeting the technological challenges that lie out there. You are a very valued and valuable part of our financial structure in Canada. Thank you very much for being with us.

Mr. McVeigh: Thank you, Mr. Chairman and your committee, for hearing us. We appreciate it.

The Chairman: We will take a five-minute break.

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The Chairman: Can we please come to order.

Our next witness is the Canadian Institute of Chartered Accountants. The CICA has been before us many times and has helped us with most of our deliberations.

Representing the CICA are: Graeme Rutledge, chair of the CICA financial institutions reform study group; William Broadhurst, chairman of the legal liability task force; and Douglas Derry, member of the CICA financial institutions reform study group - and a neighbour of mine.

Welcome, Mr. Derry. I'm glad you're here.

Mr. Douglas Derry (Member, Financial Institutions Reform Study Group, Canadian Institute of Chartered Accountants): Thank you very much.

The Chairman: You have been impugned. I'm sorry for the damage I've done to your reputation.

We also have with us Diana Hillier, the director of auditing standards.

We welcome all of you and thank you for being with us.

Who's going to start? Mr. Rutledge.

Mr. Graeme Rutledge (Chair, Financial Institutions Reform Study Group, Canadian Institute of Chartered Accountants): Thank you, Mr. Chairman.

First of all, we appreciate the opportunity to appear here today and to discuss the government's consultation paper on the 1997 review of the financial sector legislation.

I will make a statement first of all, Mr. Chairman, following which Bill Broadhurst will also make a statement on the issue of proportionate liability.

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Our written submission, which we've provided to you today, has been developed from submissions we've made before this committee in the past, comments we're making in connection with the proposed amendments to the Canada Business Corporations Act, and the proposals in the white paper.

Our submission also reflects the most recent mission and vision for Canada's CA profession as developed by the Inter-Institute Vision Task Force, a task force made up of senior chartered accountants that was created to address the challenge of leading our profession into the next decade.

The Canadian Institute of Chartered Accountants generally supports the changes proposed in the white paper. There are, however, some areas where we believe improvements can be made. I do not propose to go over our recommendations in detail. However, there are three issues I would like to emphasize in my remarks to you today.

First, we believe improvements should be made in defining the fiduciary duties of directors. The classic corporate governance model currently focuses on protecting the rights of owners of the corporation. However, the degree of protection for depositors and non-participating policyholders is less clearly defined.

The proposed reforms to the Canada Business Corporations Act recommended that no changes be made in defining the fiduciary duties of directors and that the matter of defining the ``best interests of the corporation'' be left to the courts to interpret.

We believe in the case of financial institutions it will be important to clarify the duties of directors with respect to depositors and non-participating policyholders. We believe it would be helpful to explicitly state that the directors, in addition to representing the interests of shareholders, also have the responsibility to consider the interests of depositors and non-participating policyholders.

Second, the duties of the board of directors and the audit committee with respect to control and information systems needs to be clarified. The duties of the board of directors are being addressed under the CBCA reforms. The CICA supports efforts in the white paper to clarify the statutory duty of audit committees of financial institutions with respect to internal controls. However, in order to respond to evolving trends we feel the legislation must go further than the proposals suggested in the CBCA reforms and the white paper.

The CICA supports the view of the Toronto Stock Exchange committee on corporate governance that the board has a broad responsibility for control and information systems and recommends that legislation be amended to include the provision that the board shall review and evaluate whether the corporation has effective control and information systems to manage its affairs and to support the board's discharge of its responsibilities.

This recommendation reflects current thinking as to the role of the board. The CICA has committed significant resources to develop guidance on designing, assessing and reporting on the control systems of organizations. Our publication, entitled Guidance for Directors - Governance Processes for Control, provides practical guidance to directors on how they can discharge the responsibilities for control within an organization. The publication is attached to our submission for your reference.

The Canada Business Corporations Act does not deal with the responsibilities of audit committees. Whereas the financial institutions legislation sets out specific responsibilities for the audit committee, we believe the duties of the audit committee set forth in financial institutions legislation reform should conform to the recommended provision - as just mentioned - regarding the duties of directors.

In particular, financial institutions legislation should state that the audit committee shall review and evaluate whether the corporation has effective control and information systems for financial reporting and satisfy itself that management has taken appropriate action on any deficiencies that have arisen.

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Finally, I'd like to comment on reporting to stakeholders. The CICA supports the government's efforts to facilitate the disclosure of information to stakeholders. However, we have some concerns.

As I explained earlier, the current corporate governance model focuses on protecting the rights of owners of the corporation. Information requirements in the legislation are similarly focused and designed for less technologically sophisticated times. As technology changes, so do the needs of stakeholders.

Furthermore, the Corporate Governance report recognizes the need to communicate with a broader range of stakeholders such as depositors, non-participating policyholders, etc., and the need for new ways of communicating with stakeholders over and above the annual financial statements. Although OSFI and others are making efforts to improve the information that goes to these stakeholders, disclosure requirements are evolving like a patchwork quilt on an existing system. We're concerned that this approach will lead to an inefficient and costly system.

What type of financial and non-financial information do stakeholders need? How frequently do they need it and in what format? The CA profession's vision is to provide guidance, advice and leadership in the evolution of corporate reporting in a digital world. Efforts are already under way that will help provide the answer to some of these difficult questions.

The Canadian Institute of Chartered Accountants recently initiated a research study to investigate the impact that electronic reporting systems are having and are likely to have on financial and business reporting. The CICA is also initiating research to develop new non-financial and broader financial performance measures that are needed to track organizational behaviour in the new economy, and reporting frameworks that enable CAs to report to senior management, boards of directors and eventually shareholders on this broader basis. It also intends to develop guidance on the role of the auditor for providing assurance on the reporting entities' continuous disclosure system.

These studies, however, will not provide all the answers. The CICA is certainly prepared to work with regulators and others in improving the relevance, timeliness and reliability of financial and non-financial information that is communicated to stakeholders.

Mr. Chairman, at this point I'd like to ask Bill Broadhurst if he'll speak on the issue of proportionate liability, following which we'll be pleased to answer questions.

Mr. William Broadhurst (Chairman, Legal Liability Task Force, Canadian Institute of Chartered Accountants): Mr. Chairman, committee members, I am appearing before you today in relation to a very short comment in the white paper. I quote from page 29:

There have also been representations to change the liability of auditors and actuaries from joint and several liability to a regime of liability proportionate to the defendant fault in causing damage. Although these may have merit, any changes to the requirements for financial institutions should be postponed until the preferred approach for business corporations generally is developed.

The issue of auditor liability is the most significant problem facing the auditing profession in Canada and worldwide. As you know, the Senate Standing Committee on Banking, Trade and Commerce held hearings on a number of issues related to the Canada Business Corporations Act and corporate governance in February. At the specific request of Minister Manley, the auditor liability issue was included. We appeared before that committee, at which time the Hon. W.Z. Estey presented a brief, a copy of which you have received today.

The Senate committee reported on this subject as follows, and I quote from page 2 of its August 1996 report:

Finally, the Minister suggested that the Committee also look into the issue of auditors' liability. ... It became clear, from the views expressed at the hearings, that the issue of joint and several liability, affecting all professional advisors, warrants further investigation. The Committee will hold such a set of hearings shortly.

The hearings before that Senate committee in relation to auditor liability and the CBCA are now scheduled for late October.

We have also distributed to you today a backgrounder on this issue, and I will review several matters in that document.

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The accounting profession, which plays a key role in ensuring that reliable financial information is available to the public, is facing increasing litigation pressures. These pressures have already begun to undermine seriously the ability of the profession to perform its function, which is necessary to the sound operation of the marketplace in Canada. If allowed to continue, these pressures could threaten the existence of the accounting profession as we know it.

The causes of the profession's litigation problem include: the dramatic increase in the size and number of business bankruptcies, the legal principle of joint and several liability, the near collapse of the commercial liability insurance market, and the increasing litigiousness of society in general.

In Canada, there are four substantial claims under way involving auditing firms and others. These are Castor Holdings, Standard Trust, Confederation Life and Royal Trust. These claims total in excess of $3 billion.

The major Canadians firms, in fact, the major accounting firms worldwide, are essentially self-insured, as the international market for liability insurance has nearly ceased to exist. This lack of insurance coverage combined with the way in which the rule of joint and several liability is applied in legal cases involving claims for negligence against auditors and other defendants threatens the continuing viability of the auditing profession.

It is important that you understand the significance of joint and several liability. This simply means that the auditor is exposed to the risk of a payment of 100% of the total amount awarded to the plaintiff even though, on the facts of the case, the court finds that the auditor is only responsible for say 5% of the actual losses. The other 95% in such an example would consist of the damages caused by all other defendants in the action who may be unable to pay.

We would like you to understand that the audit report is the final product of a complex process involving discretion and judgment on the part of the auditor at every stage. Using different initial assumptions and approaches, different sampling techniques and the wisdom of 20-20 hindsight, few audits would be immune from criticism.

Virtually all cases against auditors will be settled because the threat of joint and several liability, the vagaries of the applicable legal standard and the unpredictability of litigation makes audit defendants settle even if they have a good defence. The auditing firm simply cannot risk being found 5% responsible and therefore possibly having to pay a life-threatening 100% of the damages.

In many ways, the auditor has not only been denied a day in court but has become the insurer of all defendants. They have become victims of being perceived as deep-pocket defendants.

In the United States, in late 1995, Congress enacted a securities reform bill, which included the replacement of joint and several liability with proportionate liability, whereby a defendant's share of damages is assessed according to the degree of responsibility.

In Australia, in July of this year, the federal government and the New South Wales government together released draft legislation for public comment replacing joint and several liability with proportionate liability in cases involving economic harm and financial loss.

In the United Kingdom the government is currently considering submissions from the profession and others in relation to this issue.

In Bermuda, whose CA institute is part of the Canadian Institute of Chartered Accountants, the government enacted, in July, a proportionate liability amendment to its companies act.

Our proposal, which is presented in the Estey report, for federal corporation and financial institutions legislation is as follows:

The Court shall in awarding damages for negligence relating to the issuance of financial information by an organization, apportion such damages according to the fault of each defendant and their liability shall not exceed their proportion of the fault.

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In looking at this proposal, you should understand that, first, our proposal does not apply where defendants knowingly participated in fraud.

Second, auditors are fully prepared to take responsibility for losses flowing from their own negligence, but they do not believe they should have to assume financial responsibility for the negligence of others.

Three, the accounting profession is proposing that each province adopt similar legislation for organizations subject to provincial jurisdiction.

Four, our proposal would apply to all defendants involved in the preparation and distribution of financial information. They too would be responsible for the damages awarded according to their respective degree of fault as determined by the court.

Five, there is, of course, no retroactive effect of our proposed amendment to claims currently in the legal process.

After all this, what are we asking of you? We are asking that you urge Industry Canada to include a proportionate liability amendment in its proposals for amendments to the Canada Business Corporations Act.

Second, following from the white paper, we are asking for a similar amendment regarding proportionate liability to be picked up in financial institution legislation, which is the subject of your current hearings.

We cannot afford to let this matter drift beyond the current cycle of amendments to corporation and financial institution legislation. This problem is undermining the confidence we always had about the role of and future for our profession, which has played a significant role in the production of reliable financial information in both the private and public sectors. The liability issue is already causing serious doubts as to whether capable individuals will wish to continue to fulfil this function.

Thank you.

Mr. Rutledge: We're open for questions, Mr. Chairman.

[Translation]

The Chairman: Mr. Bélisle.

Mr. Bélisle: You spoke in some detail about the measures recommended to avoid unreasonable lawsuits that could harm your profession. At the end of your document, you also discuss ways of enabling the profession to continue to keep its best people, competent young people who want to work in auditing, a very important sector.

Could you specify the types of measures that you're recommending? Will substituting the principle of proportionate liability to the current several and joint liability, which you describe in your document, settle the entire problem of potential unreasonable lawsuits? Would that measure alone mean that there will be fewer unreasonable lawsuits? Would it eliminate any risk of this? Would there still be unreasonable lawsuits against which members of the profession would have trouble defending themselves? Thank you.

[English]

Mr. Broadhurst: I think the best way I can answer your question is to look at the experience in the United States, where the Securities Act was amended in December 1995 along the lines of what we have suggested for the CBCA and financial institution legislation. By and large, the number of cases has dried up, almost ceased, under the Securities Exchange Act, against auditors.

This is the lesson they learned in the States. Proportionate liability was only one of the many issues surrounding what was considered to be a need for litigation reform in general. So the act I'm speaking of dealt with a lot of issues about litigation reform of which proportionate liability was one. Certain abuses were viewed to be in the system, some of which do not exist in Canada, perhaps most of which do not exist in Canada.

Their experience has been that lawsuits have substantially diminished because of this reason. There will still be lawsuits. There will still be occasions when auditors have not done a proper job, deserve to pay the costs of whatever that is, and be adjudicated in a court of law. I hope that answers your question.

[Translation]

Mr. Bélisle: Thank you.

[English]

The Chairman: Mr. Grubel.

Mr. Grubel: Thank you, Mr. Chairman.

It's nice to see you again, gentlemen.

I wonder where the opposition is coming from to the proportional liabilities law.

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Mr. Broadhurst: I can't answer that because we aren't far enough along in Canada. We are meeting with a number of organizations to try to find out what their view is of this - and we've been spending the last six months doing so. In the United States, clearly one of the issues surrounded the consumer organizations. We have met with them in Canada, and although I can't speak for them - and I don't wish to - they thoroughly understood the problem and are looking into it. By no means did they say this was something they would oppose, but they are looking into the matter.

The other opposition came from what's known as the plaintiff's bar, which is a subset of the legal system in the United States. They are the people who enter these lawsuits against accountants and carry the day. They're almost always class actions with contingency fees. One of the criticisms in the United States had been that too large a portion of the amounts recovered in fact found their way into the plaintiff's bar.

So those were the two areas of resistance. I can tell you, though, that in both the Senate and House of Representatives over the course of 1995, they received an overwhelming majority on the compromise bill that emerged and dealt with a number of subjects, including proportionate liability.

Mr. Grubel: I'm not a lawyer and I've never been familiar with this issue, but my common sense and my sense of justice suggest that the idea that an auditor should be responsible to the extent that you are is just totally in violation of what we would consider our cultural norm. How did this legislation get onto our books in the first place?

Mr. Broadhurst: I'm not a lawyer, but Mr. Justice Estey deals a little bit with that subject in the brief before you. It certainly arose in a time when there was, for example, a way of protecting yourself against this kind of a risk.

The issue comes out of the theory that in all cases you should keep the plaintiff whole, meaning the plaintiff should not lose. Therefore, if there was a defendant who could pay and a defendant who couldn't pay, you went to the defendant who could pay. That was in the whole area of where you could protect yourself against this kind of thing. I don't think it was necessarily any more just at that time, but there was a protection. As I said, we have virtually become self-insured.

Mr. Grubel: I will hear from my learned colleagues, from professors of law and in practices, afterwards, in order to have this explained to me. But why has this issue raised its ugly head in recent years? I would like to link this up with a slightly political question.

It seems to me that this is such a clear-cut issue, especially with what happened in the United States. Why isn't this in the current report of the white paper, and why was this delayed again for another two years in order to be considered by the upcoming commission? I think this is an issue that is so clear-cut, it should have been treated now and not delayed. Do you have any views on this?

Mr. Broadhurst: In your first question you ask why this issue is coming forward now. It's probably because in Canada, through the mid- to late 1980s, we experienced many more large bankruptcies with particular relationship to financial institutions. In the lawsuits that followed them, auditors were always included.

There was a second event that triggered these things, too. Until recently, auditors have been able to deal with this problem partly through insurance. In 1991 the seventh-largest accounting firm in the United States, Laventhol & Horwath, went bankrupt. It was wiped out. The individual partners of that firm, in addition to losing their investment and their jobs and everything else, had to pay some $50 million U.S. to settle the various lawsuits. That made those of us in Canada realize that this can really happen: an accounting firm can go bankrupt. So the combination of more lawsuits, the experience in the United States, and the loss of insurance all sort of converged together to make this an issue that we saw as life-threatening.

Mr. Grubel: On my second question, did you try hard in the last few years to get this thing settled out of the Department of Finance? Why did they not go along with your request?

Mr. Broadhurst: No, I think it would be fair to say we started dealing with this subject in the late fall of 1994 and began discussing it with officials primarily in Industry Canada. Later, in 1995, we began to appraise the finance department people. It was agreed between the two departments, I think quite logically, that only one would deal with the issue, and I think whatever solution emerges from one should be in both kinds of legislation. So the carriage of the legislation was left with Industry Canada. We had our first hearings, as I mentioned, before the Senate committee in February.

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I don't attribute an undue delay in the unfolding of this. On the other hand, we hope the matter can be resolved quickly because, over time, the potential for further lawsuits is always there, and the people coming into our profession, if they're bright - which is what we need - have other things they could do with their lives rather than exposing themselves to this kind of a legal climate.

Mr. Grubel: I certainly wouldn't join your profession under these kinds of circumstances, even though I'm not that bright.

Thank you, Mr. Chairman.

The Chairman: You have such intelligence and knowledge, Mr. Grubel. I'm sure there are a lot of professions that have sought your services.

We are honoured to have Mr. Graham, the distinguished chair of the external relations committee, with us.

Mr. Graham (Rosedale): Thank you, Mr. Chairman.

I perhaps promptly display my lack of any knowledge relating to matters of finance, but I wonder if I could ask Mr. Rutledge a question about directors' responsibility arising out of his report, and particularly that of audit committees of financial institutions.

My understanding is that the audit committees of both schedule I and schedule II banks presently do make special reports to the director general of financial institutions. In fact, they are required to report directly to the government after fairly extensive inquiry into the banks' auditing practices and in consultation independently with the two auditors who are appointed in respect of banks. Is that the sort of process you're recommending be followed here? Are you recommending a closer relationship between the audit committees and the governmental agencies that regulate the financial institutions? Is that sufficient, or do you really see the need to spell out in a legislative fashion what the responsibility of the audit committees will be?

I'll tell you where I'm coming from. It seems to me that quite often when we legislate this type of thing in too comprehensive a way, the wanted results are not produced and a lot of rules are created and observed pro forma, but in the end the idea of the real responsibility that we're trying to achieve here is not achieved.

I just wonder if you could comment on your proposals in light of the present responsibility of bank audit committees, which I happen to know something about.

Mr. Rutledge: Thank you very much for your question.

We're coming from basically this position. In 1992 legislation was introduced that significantly enhanced, I believe, the relationship between the auditors and the board of directors and the audit committees of financial institutions. I have to include the audit committees because audit committees are a part of the legislation, unlike with the Canada Business Corporations Act, wherein they are not included. That was very good, and certainly it's been our experience that it has worked well.

What we're talking about here, though, is some fine tuning in that respect. We're talking about things like the audit committee or the board of directors not having the direct responsibility to manage; they have a responsibility of oversight. So we're really trying to get more specific language directed at the information systems, at the adequacy of those information systems, in order to enable the board and to enable the audit committee to discharge its responsibility. We're focusing on the process that they should be following. So we're advancing what was in the 1992 legislation.

As for your reference to the regulators, yes, the regulators do carry out an examination of financial institutions, they do work with the external auditors, they work with the internal auditors, and they use part of that work. But that's not what we're getting into in here.

Mr. Graham: May I continue, Mr. Chairman?

Would you have any fear of the very problem that Mr. Broadhurst is dealing with in terms of liability? We hear a great deal about the problem of directors' liability today and the reluctance of outside directors to get involved in corporations. You mentioned Confederation Life. That's certainly one that, in Toronto, once familiar with the lawsuits, everybody is named, every director is named.

If you impose additional obligations on audit committees, are you going to create a new class of liability that will create a reluctance among people to participate in audit committees?

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Mr. Rutledge: I'll comment on that. Bill Broadhurst might also like to comment on it.

I don't believe this will increase the liability of directors. What we're dealing with here is helping the directors to discharge their responsibilities. It's helping to give guidance as to the type of due diligence they need to exercise. Directors of large corporations, of large financial institutions, cannot look in detail at transactions. They have to be dependent on the system. We're asking them to focus on the governance aspects in the organization and how that organization satisfies itself that things are properly under control and being monitored. That's our focus.

Mr. Broadhurst: Mr. Graham, on the issue of directors' responsibility, we see that they are increasing as corporate governance expectations increase. If there's a due diligence defence, if they're allowed to rely on an expert, it's likely that they will look to the auditor and others - but in many cases to the auditor - to be that expert. To quote one sentence from Mr. Estey: ``In the current legal climate auditors are loathe to provide information or assurances beyond the statutory minimums''.

Simply for the reason you raised, in the current liability climate we're trying not to take on any more situations that give rise to the liability problem I mentioned. But there are areas where auditors probably could be helpful to directors, such as expressing views on internal control, if the directors are required to do so, as experts that the directors can rely on.

Mr. Graham: I have a suggestion, Mr. Broadhurst. Perhaps the auditors should get the lawyers to back up their opinions with legal opinions. That way you wouldn't get sued so much because you could bring the lawyers in and join in several liabilities for your problems. That way you'd get some support from the profession that seems to take joy out of the lawsuits.

Mr. Broadhurst: There have been more incidents in the United States, and now in Canada, of lawyers being joined in on some of these lawsuits. I think the law societies and groups are beginning to take more interest in the other side of this, in our side of the problem.

Mr. Graham: It might cool their ardour somewhat. Is that the suggestion?

Mr. Broadhurst: We hope so.

Mr. Graham: Is there any suggestion in your report that this might be a matter of provincial responsibility? It would seem to me that limiting liability in a civil action would normally fall within the jurisdiction of the provinces rather than the federal government.

Mr. Broadhurst: As I understand Mr. Estey's brief, we would require legislation federally and provincially to create a net in this situation. So yes, we would also need provincial legislation.

Mr. Graham: Thank you very much.

The Chairman: Thank you, Mr. Graham. Good of you to be with us.

Mr. Campbell.

Mr. Campbell (St. Paul's): Thank you, Mr. Chairman.

I'm going to follow up on that last point. I think the point about coordinating changes at both the federal and provincial levels goes to the question Mr. Grubel was asking earlier about not proceeding right away. Why the delay? As you and your colleagues stated, Mr. Broadhurst, there's nothing untoward, but I think it reflects a view that to proceed now rather than to do it in coordination with the provinces or when other legislation is being reviewed and revised could lead to some players in a particular transaction, or some transactions, being subject to one set of rules while other transactions and other participants are subject to the old rules. Can you comment on that as a rationale for the delay?

Mr. Broadhurst: This problem has been worrying to us because it's a question of who goes first in this kind of an issue. It's clear that it would be virtually impossible to organize yourselves so that everyone in the provincial legislatures and the federal legislature move jointly on an issue of this kind, and that's been the advice given to us - that you should start with the federal legislation and then move immediately to the provincial legislation.

We have talked to every province about this issue. We have local institute committees of chartered accountants at each provincial level who deal with their own provincial people, with their own particular problems. It has become apparent to us that they are looking to action at the centre as a lead in this. We're not hearing great outcries on jurisdictional issues. We're more or less hearing ``Let the feds go ahead with this and then we will look at it, but we don't want to be first''.

So we have a bit of a catch-22 on how to get this started.

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Mr. Campbell: That seems to happen a lot in this country. I was concerned more about certain pieces of federal legislation being amended before other pieces of federal legislation were amended - certain entities under federal jurisdiction being subject to one set of rules while others are subject to another set of rules. Favourable treatment for financial institutions as opposed to federally incorporated corporations - that could be the unfortunate outcome of proceeding in one area and not in another.

Mr. Broadhurst: In looking at the kinds of lawsuits that we've had against us, three of the four institutions that I mentioned with the large lawsuits are really under the federal financial institution legislation. We commenced our activities with the Canada Business Corporations Act because in a sense the two acts that we were most interested in - the financial institution legislation and the corporations act - were under two different departments. That's understandable. Industry Canada was moving at a pace to begin hearings and this kind of thing. We were advised that we had better start with what is now going forward. If financial institutions had been going forward first, we would have been before Finance first and Industry Canada later.

We agree with you that changes should be made in both, and we understand that the intention of the white paper is to bring some CBCA changes into the financial institution legislation. We hope this would be one of them.

As to the short-term potential problems, we don't have any lawsuits under the CBCA, but it is a good place to start.

Mr. Campbell: That is a good place to start. I detect in your comments some concern that if it's not part of this review, it might be deferred for five or ten years until the next scheduled review. I don't think that's necessarily the case. When this thing is resolved under the CBCA, it could be dealt with in the financial services sector legislation at that time. It doesn't necessarily mean a delay of five or ten years, which would be unfortunate because I'm quite sympathetic to the position you are advancing.

Mr. Broadhurst: That's our biggest fear - looking at the history of amendments to these acts over time and looking at the five-year sunset proposal on the results of the committee. I don't know where we will be in five years. Looking at history, there will be an economic downturn out there somewhere. That's when these lawsuits hit these institutions and when we get dragged into the play.

Mr. Campbell: I understand. It has been a growing problem. Earlier I think someone asked why it suddenly seems such a problem when this issue, this joint and several liability, has been part of the common law for many years. I think the litigiousness that we find prevalent today has raised this concern.

I want to make one other point, Mr. Chairman.

I am quite sympathetic to your proposal for all of the reasons you advance, but there are some out there who will say - you may have an answer for them or want to repeat what you said earlier - that the proposal could result in plaintiffs not recovering their full damages. If damage was apportioned among the defendants and some defendants were to be judgment proof, the plaintiff would be unable to collect all of the plaintiff's damages. That will trouble people, especially those who believe there must be somebody responsible at all times. In part that underlies the original common-law justification for joint and several liability.

Do you have anything to say to those who would advance the view that in a relative weighting of your interest versus the interest of the successful plaintiff who has been wronged, you should pay, rather than a plaintiff going without collecting some of the damages?

Mr. Broadhurst: Mr. Campbell, these issues have been brought forward. First, note that when we have a sole defendant and the sole defendant is bankrupt, there has been no interest expressed by the legislature in keeping that particular plaintiff whole. It just happens that a coincidence of more than one has created this issue.

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Second, it could be a public policy issue in the sense that at the risk, on occasion, of a plaintive not collecting 100%, is it in the public interest to weaken a profession that is involved in a public activity, the attestation of financial information for capital markets and things of that nature? In the United States that's the way they looked at it. They felt the risk of losing a valued service related to the risk of one plaintiff, on occasion, not being kept whole...the trade-off was there, and they opted for the legislation. As well, in most cases, in the areas we are, plaintiffs recognize that there must be some risks in business.

Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Campbell.

Mr. Rutledge, on the issue of corporate governance you raised with us, I assume you have begun discussions with Finance officials.

Mr. Rutledge: Yes, we have, sir.

The Chairman: I also assume that the discussions are on an ongoing basis and that you have not been rebuked or rejected totally.

Mr. Rutledge: That's correct.

The Chairman: I would then encourage you to keep that up. If you do have difficulties, come back to us, but we will assume that those discussions will possibly result in changes - or else we'll hear from Finance officials as to why not and we'll be prepared to talk with you further.

Mr. Rutledge: Thank you.

The Chairman: The case you've brought before us, Mr. Broadhurst, I think Canadians should understand. I'll try to put it in very simple terms. Take a financial institution such as Confederation Life. How much was lost there?

Mr. Broadhurst: I'm afraid I don't have the figures.

The Chairman: Approximately how much - $100 million?

Mr. Broadhurst: Oh, I would say more than that, sir.

The Chairman: So $600 million was lost. Confederation Life had an auditor.

Let me just talk hypothetically. Suppose management had lied to the auditors in such a way that a court determined that management was 99% wrong and the auditors were 1% wrong. That would mean that the auditor could be sued for that $600 million under the current law the way it exists, even though your liability extended to only 1% of that.

Mr. Broadhurst: That's correct, sir.

The Chairman: That would mean if you are a small accounting firm it would wipe out a couple of partners, their capital in the firm. Accountants cannot have limited liability the way a business person can. If you're the plumber and the building falls down and kills 500 people, or you're the contractor, you probably have limited liability, so probably the individual cannot be sued. It would just be the corporation. Am I correct?

Mr. Broadhurst: The individuals involved can be sued, though, as individually responsible, as officers or such things as that.

The Chairman: Right. But you as accounting firms do not have limited liability.

Mr. Broadhurst: We do not.

The Chairman: So the liability does not apply just to the office in, say, Toronto that did the audit. If you have an international partnership, it would apply to partners right around the world, I would assume.

Mr. Broadhurst: You'd have to look at the structure of the international entity. It's more likely that the containment would be within one national jurisdiction. But there have been lawsuits because of multinational companies, where they have shopped for a jurisdiction and then tried to export the liability to the other parts of the world.

But by and large, they're contained in a national sense. The event could occur in Vancouver and the Halifax partners would be equally liable.

The Chairman: I would like to use this occasion - we are on television and our hearings are open - to invite any Canadians who have a problem with the changes to the law that you've suggested to come before us or get in touch with us very quickly, to contact our clerk.

For my part, I've heard very compelling testimony from you. Having read your report and studies before, I recommend that we proceed very quickly to provide to you the type of fairness and certainty that I think you need to do your jobs and that makes sense in our world today.

I don't think we, as government officials, can hide behind the fact that because it requires some other level of government or some other department in the federal government to also act that we should use this as an excuse for not acting ourselves. I feel very strongly that we should take a role of leadership and recommend changes to the financial institutions legislation that would bring this about.

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On behalf of all members, may I thank you for not only your presentation today but also the ongoing role the CICA has played as experts bringing very important fiscal, regulatory and other types of issues before us, based on the working knowledge you have gained in your profession.

We're very grateful to you, once again, for being before us. Thank you very much.

We'll adjourn until our next witnesses come before us.

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The Chairman: [Technical difficulty - Editor]...chairman and chief executive officer; and William Babcock, vice-president of public affairs.

We've been looking forward to your presentation, gentlemen. Thank you for being with us.

Mr. Hal Couillard (Chairman and Chief Executive Officer, Life Underwriters Association of Canada): Thank you very much. Good afternoon. It's unfortunate that we're a little bit late, but we'll keep our comments relatively brief and then open it up for discussion at the end.

As mentioned, my name is Hal Couillard. I am the elected chairman of the board of the Life Underwriters Association of Canada. I've been in the financial services business for about 21 years. I'm from Calgary.

As mentioned, this is Dave Thibaudeau, president of LUAC, and Bill Babcock, our vice-president of public affairs.

Just as a bit of background with respect to what LUAC is, for the past ninety years the Life Underwriters Association of Canada has been the national professional association of life insurance agents, brokers, agency managers and financial planners in Canada. We are a voluntary association with more than 17,500 members across this nation. Our members are primarily distributors of life and health insurance and annuity contracts as well as pension plans, RRSPs, registered retirement income funds and investment funds administered by life insurance companies as well as mutual fund companies.

Our members increasingly serve the Canadian public by providing solutions to financial needs that perhaps use products other than life insurance. As an association of market intermediaries, LUAC's membership and services have changed over time, adjusting to new marketing realities, and in many cases anticipating these changes. LUAC provides an extensive training and professional development program to its members and other providers of financial services and administers a very high code of ethics that is binding on all of LUAC's members.

We acquire an intimate knowledge of the economic needs and circumstances of our clients in all social and income groups. Our association is committed to ensuring that the Canadian consumer has continued access to a wide choice of insurance and other financial products and services in a competitive marketplace.

LUAC was an active participant in the consultations that led up to the financial institutions legislative reforms in 1992 and we have continued to play an active role leading up to the subsequent developments, both here at the federal level and at the provincial level.

We have come here today to provide LUAC's views in the latest step in this decade-long process, the government's white paper on the 1997 review of the financial sector legislation that was released on June 19. We submitted our formal response on the white paper to the Secretary of State for International Financial Institutions and we have provided copies to your members.

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In my comments today I would like to focus on two issues that we addressed in our written brief and that are closest to the activity my fellow members and I know best - serving the consumer of life insurance and related products and services. The two issues are these: the privacy safeguards for consumers of financial services and the tied selling and cross-selling of products by Canadian financial institutions.

With regard to privacy, our members are accustomed to receiving highly confidential personal information about financial, medical and family matters. We acquire this information to advise our clients properly and to enable insurers to assess individual risk and administer claims. We are reminded every working day that our clients value their privacy and expect that the information they disclose is treated fairly and confidentially.

I mentioned earlier that LUAC administers a code of ethics. Our members must adhere to this code of ethics as a condition of membership in our organization. The first article in our code of ethics requires a member to place the interest of a client or prospective client above his or her own. The second article concerns confidential information. It requires a member to respect the confidential character of all information regarding personal and business affairs received in the course of providing or attempting to provide financial services to that person. Mr. Chairman, our members take this requirement of confidentiality very seriously.

More generally, the recent explosive growth of information technology and concerns about the large, impersonal institutions have led to the widely held belief that there is a need to upgrade the protection of personal information. The government has responded with two proposals for protection of personal information. The first appears in the white paper, which announced regulations that will apply specifically to federal financial institutions. Somewhat earlier than that, following the recommendation of the Information Highway Advisory Council, the Minister of Industry announced that the development of general, applicable legislation to protect personal information should come forward. I trust that the final product will not result in overlapping legislation between the two.

The fact is this, Mr. Chairman: if you could see my chequing account, my Interac records and my credit card statement, you could profile me in a detailed way to target me for different products. That information lets you know what I might be able to buy or be ready to buy, perhaps even before I do. For example in Vancouver, the newspaper The Vancouver Province reported last May on a$15 million software program used by the Royal Bank of Canada to track all credit card and Interac purchases made by its nine million customers. The information goes into a constantly upgraded personal profile on every customer. There, in the software, it is matched with information from the bank's records of the customer's bank accounts, loans, credit cards and credit applications. The system is used to identify prospects who will be susceptible to promotions of specific bank products.

A fundamental principle, Mr. Chairman, of consumer privacy is the need to obtain an individual's free and informed consent before the holder of personal information may use it for a reason other than the reason the individual gave it to the institution in the first place. Consent is critical, but it seems that some institutions will use questionable means to obtain it. I would like to give you an example if I may.

In July a member of our organization, a staff person, received a letter from the Bank of Montreal mailed to holders of its gold MasterCard. On the face, the letter offers the customer an opportunity to reduce the credit card interest charges to 10.9%. Now that's still quite high given that the bank prime is hovering around 6%, but nonetheless the intended rate would be lower than the previous rate. The offered rate is mentioned no fewer than thirteen times in the piece. That is the whole thrust of the letter, apart from a passing comment that the annual fee for the card will increase from $50 to $95. That's a 60% increase, which is described in the article as ``rises slightly''.

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This is the important piece, Mr. Chairman: the letter had a tear-off authorization form at the bottom. The cardholder is asked to sign this ``to activate your new low-rate card''.

What we find puzzling about this whole instance is that the issuer of a bank credit card can adjust the interest rate and the annual fee charged to a policyholder or cardholder as the cost of doing business changes. There is no need for a cardholder to sign an authorization for an interest rate reduction. There is also no need for an authorization to be signed by that cardholder to have a fee increase. You either pay the fee or you don't.

The only result that is obtained from the cardholder's signature on the self-described form, called the ``Gold MasterCard Low Interest Rate Acceptance Form'' is that the cardholder agrees to accept the terms and conditions printed on the back of the tear-off form.

Here's how it was structured. These terms and conditions are on a separate page from the signature, in small print, even smaller than the trademark notices and other legalese that you'd find at the bottom of that tear-off portion. They concern the bank's use of cardholder information. The heart of these terms and conditions is to authorize the bank to:

...use the information in my MasterCard Account to determine which...product or service offers may be of interest to me.

It goes on to say:

...and provide me with information and offers...from the Bank or anyone else that the Bank believes may be of interest to me.

These terms and conditions occupy a very small part of the letter and relate to nothing else in it. A customer who signs the form will do so thinking that his or her signature is needed to obtain the credit card interest rate reduction that is being put forward. In reality, when the bank receives that signed form, it will obtain its customers unrestricted consent to scrutinize his or her credit card purchases and any other personal information on file for the purpose of promoting undisclosed third parties and their products.

Mr. Chairman, this hardly demonstrates a very scrupulous respect for consumers and their rights to privacy.

When the government issues its promised privacy regulation, LUAC hopes it will be drafted to prevent this kind of practice. However, as long as there's money to be made from consumer information, there will be an incentive to bend the rules.

LUAC looks forward to participating in the development of regulations to protect consumer privacy. However, I wish to impress on you that in the business our members know best - and that's retailing insurance - the insurance business regulations that apply to banks and federal trust companies have provided a valuable safeguard to the consumer since 1992.

The prohibition in the insurance business regulations against federal deposit-taking institutions passing consumer information to an insurance company, agent or broker prevents exactly that kind of marketing abuse I just mentioned to you. That is why LUAC's brief, in response to the white paper, recommends that the insurance business regulations be maintained and enforced and that the parallel credit information regulations under the Insurance Companies Act be proclaimed in force at the earliest possible opportunity as a foundation for any future regulations that are adopted to protect the privacy of customer information acquired by federal financial institutions of any kind.

I would like to turn to the second branch of our recommendation, which concerns the need to protect the customer and the consumer of financial services from coercion.

The white paper observes that:

...the special nature of the relationship between financial institutions and their customers renders their customers especially vulnerable to coercion...

It goes on to say that:

...market forces and the Competition Act may not provide sufficient safeguards for these consumers.

Mr. Chairman, we agree. The special relationship that is most likely to make consumers vulnerable to coercion is the relationship of someone who needs to borrow money to an institution that can lend it. That can be an insurance company as well as a bank or a trust company.

So we're not just targeting a certain sector of the financial services business; it's all financial institutions.

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It is obvious that the more you need credit approval, the more vulnerable you'll be. It is less obvious that individuals who are most vulnerable are consumers who need relatively small loans to solve the problems that keep these folks awake at night.

That's because when you're a small borrower, you need the lending institution more than they need you. After all, to the lender, a small loan is a small asset on the company's books. But it can have the same fixed costs to administer this loan as a loan that has a lot more zeros left of the decimal point.

When a lending institution tells you that in today's market coercion is not an issue because the lenders are competing for the borrower's business, please think about the Canadians for whom the lenders are not competing: hard-working people whose families rely on two incomes, or families where one of the breadwinners has lost a job, or the owner of a small business in a town where the big factory has just shut down. In those situations the lender does not even have to know how to spell coercion. A word in the ear of a credit applicant that she really needs more insurance to cover her loan is all that it's really going to take to make that sale, or to get her consent to send her file over to the lender's insurance affiliate.

That is why our brief also recommends that the insurance business regulations be maintained and enforced and the credit information regulations be proclaimed in force at the earliest possible opportunity as the foundation for any additional safeguards against coercive tied selling enacted under the Competition Act or similar legislation.

So, in summary and in closing, Mr. Chairman, we agree with the assessment in the white paper that the legislative framework governing financial institutions, which was established in 1992, is generally working well and should remain largely intact. We see the white paper's proposals for incremental change as the correct approach.

Looking forward to upcoming developments, LUAC understands that the soon-to-be-appointed task force on the future of the Canadian financial sector will examine the whole structure of the financial service sector and consider changes to its framework to ensure Canada's competitiveness into the 21st century.

LUAC wishes to go on record as supporting the government's established decision to establish the task force. We would encourage this committee to use its influence to ensure that the task force consults widely with Canadians, particularly with consumers, and keeps in mind that ever-growing concentration of financial power that some large financial deposit-taking institutions are having over Canadian consumers.

Most importantly, however, we would urge this committee to advance as quickly as possible the introduction of legislative amendments in order to meet the March 31, 1997 deadline. We would be pleased to offer our views and appear as a witness again when the draft legislation is before you.

Mr. Chairman, we would like to thank you and the members of your committee for staying late and allowing us this opportunity to put our thoughts and opinions officially on the record.

We realize it's late, but if there are questions or comments, we would be happy to entertain those.

The Chairman: Thanks, Mr. Couillard. It's only 6:30 p.m. This is not very late at all for members of Parliament, nor is it for people in your profession, many of whom have to work night hours in order to make those important sales.

Could we start the questions, please, with Mr. Graham?

Mr. Graham: Perhaps, Mr. Couillard, it would be fair to say that your observation is right, in the sense that perhaps our intelligence quotient goes down a bit as it gets later and later in the evenings. You'll forgive me if the questions are a bit rambling.

I'd like to really address your point about information technology first. Is your primary concern one of unfair competition from these other institutions because of the massive information they can gather as well as the protection of the consumer themselves? I get the two elements coming out of what you're telling me.

Mr. Couillard: There are two pieces to that. Obviously if there is an unfair or unlevel playing field for the different sectors, that's not in the interest of Canada.

I believe the real focus here is, what's in the interest of the consumer? That's the real issue.

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If we can back up and just talk about the concentration-of-power issue.... I'm sure you've heard the numbers, but the top five schedule I banks control approximately 85% of the banking assets, 75% of the stock brokerage revenues, 50% of the trust companies' assets, and 75% of all the loaning activity that goes on in Canada.

In 1992 they were given the opportunity to come into our business, either to start a life insurance company or buy one, but to keep it completely separate from the bank parent. We think that's the right and proper way for the Canadian economy and for the protection of the consumer.

Information that was obtained for the purpose of granting credit should have no bearing on what a consumer does or does not do with a bank-owned affiliate.

So, yes, it's a mixed bag, but our focus is completely on what is the long-term interest of Canada and what is in the interest of you and me as consumers.

Mr. Graham: Perhaps for my second question I could sort of put in parentheses my own experience on the foreign affairs and international trade committee. We often see these questions from the perspective of the transborder aspect of what is happening.

If you look at a lot of European countries now, they're very concerned about sophisticated information technology enabling people outside the jurisdiction of the country that is trying to deal with this issue.... Then that information is used and brought back in by multinational players that are able to avoid the jurisdiction of one particular national jurisdiction.

The Europeans are struggling with this. They have some directives in this area.

I just wondered if perhaps your organization had thought of your evidence before this committee today in the context of NAFTA and even the World Trade Organization, where we're going to see a greater market penetration by foreign financial and other institutions into our markets and therefore a broader dissemination of this type of information outside our borders.

Do you have any advice to give the committee and our legislators as to how we can come to grips with this sort of transnational aspect?

I know this is something we're all concerned about, because this is really a factor of the modern world. Modern technologies enable it to be done, and the globalization we're seeing is making it a real concern for us.

Have you had a look at that, and do you have some suggestions for us?

Mr. Dave Thibaudeau (President, Life Underwriters Association of Canada): Mr. Chairman, one of the things that comes to mind is the facility of information travelling across borders, across countries and provinces.

We're still here. We're still dealing with the situation of people being able to use technology to make transactions occur in different provincial jurisdictions. It's happening in the United States among states.

I don't know how far we've got in this area, in terms of being able to come up with methods to get agreement among provinces, let alone countries, on how we can come to some form of understanding on what the regulations are when you're transacting with people from one country to another or one province to another.

Mr. Graham: That's an internal question for the Canadian internal economy we read so much about, a question we should be looking at.

Mr. Couillard: Another spin-off of that is the use of the Internet. Perhaps an insurance company - or a bank or any institution - could really start an offshore insurance company, get on the World Wide Web, and market their products.

What jurisdiction would that institution fall under? How do we regulate that? How do we put proper reserves in place? How do we make sure that proper licensing of perhaps sales reps or sales agents, continuing education, proper advice, due diligence and all those things are being done properly?

That's a huge issue. The protection of consumer information, to which you were alluding, is a piece of that, but it's a huge picture with the Internet situation.

Mr. Graham: That would then have an impact on consumer protection from the point of view of the financial viability of the institutions we're dealing with as well. That would raise the question as to whether the product being offered is properly backed up.

Mr. Couillard: Yes, those are definite concerns.

Mr. Graham: Thank you very much.

The Chairman: Thank you, Mr. Graham.

Mr. Campbell.

Mr. Campbell: Mr. Chairman, first I have an observation and then a question.

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I can't help but be struck by the fact that the consumer's interest, as you portray it, happens to coincide with the interest of your own business sector, of course. And that's not surprising, as everyone comes here, speaks on behalf of their own sector, and marshals the best arguments they can. That's not to say I disagree with anything you've said.

The observation, Mr. Chairman, is that I hope in these hearings on the white paper we are hearing from consumers themselves, through consumer advocacy groups or individual consumers who may come forward.

I think it's quite important that we hear from those who make the consumer interests their primary business, rather than those who are in business looking at consumers as their customers.

It would be helpful to this committee to invite those groups if they are not already coming, and I suspect from the look on the chairman's face that they're already on their way to see us, which will be good.

We've seen that in the context of some of the debates we've had before this committee and indeed that have gone on within our respective caucuses. We've not heard enough of the consumer voice directly through their advocacy groups and through the consumers.

The question concerns consumer protection -

Mr. Couillard: Before you move off that, could I just make a comment on that?

Mr. Campbell: Certainly.

Mr. Couillard: We would agree with that a hundred percent. Sure, the Life Underwriters Association of Canada is the association of the sales people. As you know, the Canadian Life and Health Insurance Association is the association of companies.

When we come to speak here, yes, there is a piece of turf protection, if you want to call it that, but we live in the streets, towns and villages of Canada. We work with folks, helping them to identify their goals and dreams, and helping them to put numbers to that, to quantify it, and we show them how they can get there. We work with those folks, small business owners and those who are not. They have to deal with the competitive pressures, the coercion, and those kinds of things that go on.

So when we come to the table, yes, we do have a vested interest in it as well, but we truly do try to put forward the views of our clients.

I know you expect us to say that, but I'm a practitioner from Calgary. That's what I do full time, and that's where it's at. I just wanted to make that clear.

Mr. Campbell: I won't put you up against the local bank manager and see whether he considers he's plugged into his community and understands the needs of his customers.

Thank you. The issue of consumer privacy and consumer protection is of great concern to all of us. You were reading from a Visa Gold application, and you were doing a very effective job of pointing out some of the problems you identified with that.

What do you do with information like that when you come across something you regard as potentially coercive or misleading? Other than bringing it to our attention before this committee, do you as an association or organization do anything to alert provincial consumer protection officials about material like that?

Mr. William T. Babcock (Vice-President, Public Affairs, Life Underwriters Association of Canada): Perhaps I could respond to that question. In the past, where we have had an instance of what we perceived to be a breach of the insurance regulations, our recourse has been to correspond with the compliance branch of OSFI and alert them to our specific concern. That, of course, triggers an investigation.

In one instance we had a case where a deposit-taking institution had to rescind a course of action. It was with respect to telecommunication devices in the branches of banks...direct to their insurance affiliate.

Typically that would be our procedure.

If we're convinced and have the permission of the affected client to pursue it on their behalf, we will do it. Often as not, though, the consumer is somewhat reticent, because there may be a credit-granting situation involved or other good reasons kept privy by the consumer.

But in those instances where we feel there is a clear-cut violation or offside of the existing rules, we have in fact taken that step to apprise the regulator.

Mr. Campbell: I know members of the committee join with me in welcoming your offer to participate in the ongoing evolution of better consumer protection and privacy regulation.

Bearing in mind that these hearings are televised, I guess I - and you - would want to remind people that avenues currently exist for complaining to provincial regulators who have some say about consumer protection in this country when they come across examples such as the one you've raised for us, which is quite disturbing.

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The Chairman: Thank you, Mr. Campbell.

This question concerns privacy and confidentiality of information supplied to any financial institution. As I understand the rule, if for instance I go to a bank and I'm a customer, any information concerning my financial state cannot be transferred to anyone in the bank or outside of it for purposes other than what my dealings with the bank are. Can the bank go into its records and target me for RRSP mailings?

Mr. Couillard: Yes, it can.

The Chairman: Can it do this without my consent?

Mr. Couillard: Typically, you've probably given consent somewhere along the line, hidden in all the signatures. They can put little mailers to do with their RRSP rates, products and that kind of thing in with your bank statements. But they can't transfer this information to a downstream company. There's an information barrier there in the ranks.

The Chairman: Okay. So the bank can use it for the narrow purposes of promoting banking interests, but they could not transfer it to an insurance affiliate outside.

Mr. Couillard: Right.

The Chairman: And they could not sell it to a third party, who might want the names of certain people to target them for certain goods and services.

Mr. Couillard: Unless you've given consent, they could not.

The Chairman: Unless one gives consent to that, they can't.

Mr. Couillard: This kind of a signature would give the bank consent to do this.

The Chairman: I assume you've brought this particular case to the attention of the authorities.

Mr. Couillard: I'm not sure if we've done this yet, but it certainly would be part of our course of action to follow it through. There is no question that we feel this is an abuse of consumer privacy.

The Chairman: Are there any other areas where you feel our financial institutions, in general, should tighten up on privacy, or are you generally satisfied with the proposals that have been put forward by the government in the white paper?

Mr. Thibaudeau: Mr. Chairman, we're pleased with the maintenance of the insurance business regulations. We think they give pretty good protection. But we would be very supportive of anything the government would view as supporting the improvement of privacy on top of that.

We don't see taking the insurance business regulations and changing them to come up with something else. I think in the last question Hal dealt with, under the current rules the bank would not be able to target you as a special person because of a certain characteristic of your file. They would have to send it to everybody if they were soliciting you.

These types of regulations are very positive for the consumer, and this is why we've been very supportive of this all the way along since they were introduced. Then anything you would add to protect privacy and minimize the opportunity for coercion would certainly be welcomed by us.

The Chairman: But basically you're saying we don't have to make any changes to what is already proposed in the white paper in either of these areas.

Mr. Thibaudeau: That is correct.

The Chairman: In other words, this process of consultation has been effective, it has worked, and it is one we should probably commend and continue to pursue in future major reviews of legislation.

Mr. Couillard: Yes, it has been very worth while and very informed from our point of view. We think it has served Canada well. The government should be applauded.

The Chairman: We're not looking for that. We're always looking for ways to do things more effectively, to have laws that are more responsive to the needs of Canadians without being overly burdensome, to try to draw that delicate balance. We can't do it on our own and this is why we need input from experts and people out there who are affected.

So it may take a little longer, but I'm glad to hear from you that this process, which has involved a lot of input from the LUAC people, an awful lot of it voluntary time that's been put forward by you to work with us, has borne fruit, at least in your case.

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Mr. Graham.

Mr. Graham: Thanks, Mr. Chairman.

Since we seem to have another minute or two, I wonder if I might return to the question of tied selling. This is a very interesting and difficult issue. I assume you'd agree with me there are times when tied selling benefits the consumer if it results in lower prices.

The problem you're addressing in your brief is where a superior market power in one area is being transferred to give a competitive advantage to the person in the other area, particularly, say, in the insurance area. In this case the banks, because of their leverage over the client because of the banking relationship, are now transferring that to give them an unfair advantage in the insurance business area, and you feel we should tighten up the area.

I know from my days in law that the Competition Act makes it a little difficult to get a successful prosecution in tied selling, so you're moving into an area that requires some pretty refined concepts. What about your industry? A lot of your association members would be involved in other activities as well, would they not? They'd sell mutual funds and things like that, would they?

Mr. Couillard: Yes.

Mr. Graham: Would they be running into problems themselves because of the fact that they are engaged in more than one activity, so they might in fact be caught a little in the trap they've laid for somebody else if the rules become too complicated?

Mr. Couillard: No, I don't think so. You concede discounting. That's in the interest of the consumer, if you can get a better deal because you're doing some things together. We see that, if you want to use it, in company cars. If you buy so many cars, we'll discount them. That's happening. That's a business practice.

Where tied selling becomes destructive is in instances where a business owner's line of credit is up for renewal, or he wants a mortgage to expand his business, and the bank says it will do that only if he does something else, bring them all his RRSPs, do all those kinds of things. Where such things are being tied together, we think that's destructive. Your choice of what you do with these other products and services should have absolutely no bearing, it should not be tied whatsoever to the issuance of credit in the expansion of your business, or whatever the case may be. That's where we feel it's destructive. If it can serve the consumer in terms of lower pricing, as it does in other industries, that's to the benefit of the consumer. But not when it becomes destructive and you put people in positions where they have no choice. They need the credit; they have to comply.

Mr. Graham: You used the banks because obviously they have tremendous market power in this area. Are there other institutions where this would be worrisome, or is it particularly focused on banks extending their power?

Mr. Couillard: The issuance of credit is the big deal. They're the ones that grant credit. The five scheduled banks control 75% of the loaning activity in Canada. When they have that power, that's potentially very destructive to a consumer.

Mr. Babcock: Mr. Graham, the same is true, of course, for life insurance companies. They have considerable information available about a consumer or policy owner as well, but there we have a situation where, unlike the federal Competition Act and its tied selling provisions in which I think you accurately stated the prosecutorial record is not very great, you have strong tied selling provisions in provincial insurance legislation. If there is going to be a look at strengthening the tied selling provisions federally, I think it would also be incumbent upon those looking at that to consult the provinces vis-à-vis the existing prohibitions on some of the tied selling aspects that are contained in their insurance legislation. That's true, generally speaking, in common-law provinces and Quebec as well.

Mr. Graham: That's very helpful. Thank you.

Mr. Babcock: Just to set the balance straight a bit....

Mr. Graham: Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Graham. Thank you for joining us, having come here from the external affairs committee.

On behalf of members, may I thank you for a very articulate and lucid presentation on what we should be doing in the future. We have worked with you in the past. You've been an important body appearing before the finance committee, and we thank you for all the assistance and information you've provided to us, not only today but also in the past. We look forward to working with you in the future.

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Thank you very much.

The committee is adjourned until tomorrow afternoon at 3:30 p.m.

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