[Recorded by Electronic Apparatus]
Monday, September 30, 1996
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[English]
The Chairman: Order. The finance committee of the House of Commons is continuing its investigation of the proposed changes to the legislation affecting Canada's financial institutions.
With us this afternoon we have, from General Electric Capital, Michael Davies, vice-president, general counsel and secretary; Robert Weese, vice-president, government and external relations; Leslie Battrick, counsel; and Roman Oryschuk, president and chief executive officer.
Welcome, and thank you for being with us. We look forward to your presentations.
Mr. Michael N. Davies (Vice-President, General Counsel and Secretary, General Electric Capital Canada Inc.): Thank you, Mr. Chairman, members of the committee. On behalf of General Electric Capital Canada and our parent company, General Electric Capital Corporation, we welcome this opportunity to present our views to the committee on the proposals contained in the white paper.
First of all, just a little background on GE Capital. GE Capital is headquartered in Stamford, Connecticut. It is a diversified financial services company with a triple-A credit rating. Through its Canadian affiliates, GE Capital has been in Canada since 1937 and now has more than $5 billion in net earning assets in Canada, with over 2,000 employees.
Our headquarters are in Mississauga, Ontario. We have offices across the country and are engaged in over a dozen different financial services businesses. These include, among others, equipment leasing and financing, auto leasing, rail car leasing, retail sales financing, commercial and industrial project funding and commercial real estate financing.
A relatively minimal degree of overlap exists between the Canadian businesses of GE Capital and those of Canadian banks. Some services offered by GE Capital in Canada - for example, those offered by our commercial finance and equipment financing business - do overlap with those offered by banks, but primarily such services tend to be complementary rather than directly competitive with the banks and usually serve different customer needs.
For example, we often provide funding in situations outside a bank's ``comfort zone''. We're often prepared to offer higher financing ratios due to more detailed familiarity with the equipment being financed. Our global reach in the remarketing of equipment around the world has helped localized industries in Canada gain access to needed capital that may not otherwise be available to them for financing of equipment. We have successfully followed counter-cyclical investment strategies, which provide much needed liquidity to the market when funding ceases to be available from traditional sources. We also fill an important gap as a transitional lender during periodic economic downturns when banks and others may withdraw from certain sectors where risk exposure is considered too high in, for example, the commercial real estate market.
GE Capital is not a bank. It does not take deposits. It does, however, fall within the broad Bank Act definition of what constitutes a foreign bank. As a result, on several occasions in the past we have had to obtain cabinet consent to be able to expand or rearrange our financial services business in Canada. Two years ago, as a condition of obtaining one of these consents, we were also required to sign an undertaking with OSFI, which among other things prohibits us from engaging in retail funding.
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[English]
Of particular interest to GE Capital in the white paper, because we are considered to be a foreign bank, are the proposed changes to the foreign bank entry regime, in particular those provisions relating to ``near-banks''. A foreign near-bank is defined in the white paper as a foreign entity that does not take deposits, that is not regulated as a bank in its home jurisdiction, but that does provide one or more banking-type services that banks are allowed to provide. We strongly support the white paper proposal that would allow near-banks such as GE Capital to operate more freely in Canada.
In fact, since the inception of the Bank Act review a little over a year ago, it has been our public position that companies like GE Capital should generally be free from regulation under the Bank Act for a number of reasons. As I mentioned a moment ago, GE Capital is not a bank. We're not regulated in the United States as a bank, not considered to be a bank there or elsewhere in the world, and we do not take retail deposits in either the U.S. or Canada, nor do any of the Canadian subsidiaries of GE Capital. We do not participate in the payments system and we do not expose the system to losses via deposit insurance.
In our view, regulatory oversight in these circumstances imposes needless administrative costs, delays and uncertainties on both the government and the company for no apparent public policy purpose. For example, cabinet approvals are currently required under the Bank Act in respect of inter-company transfer of assets from one subsidiary to another new subsidiary.
For example, if we're legitimately engaged in a business in one company in Canada, and for securitization or other purposes we want to incorporate another company and merely transfer the assets over to that company, the Bank Act requires us in certain circumstances to apply for and obtain the minister's cabinet consent.
Another example is acquisitions related to businesses in which GE Capital is already legitimately involved. For example, we can obtain approval to acquire a particular financial services business and then subsequently, if we wish to add to that business, we may be again required to go and obtain approval for that subsequent acquisition, even though it's the same business.
As well, approvals are required in traditionally non-banking areas into which the banks have been permitted to expand. As banks are permitted to expand into new areas - and I might mention, GE Capital does not oppose the expansion of banks' powers in any way - under the Bank Act those areas then become banking-type activities, with people participating in them, and then commercial enterprises, financial services business such as ourselves, are then required to obtain approval for those new really non-banking activities that banks are allowed to participate in.
GE Capital's major competitors in Canada are not the banks but rather other asset-based lenders. Canadian-owned companies such as Newcourt Credit Group - and they are our principal competitor in Canada in this field - are not subject to any Bank Act overview or regulation in Canada. I believe approximately 50% of their business is now in the United States, but they are not subject to any similar oversight or regulation in the United States. They are simply subject to the same regulation as we might be as a non-banker.
So in our view, the notion of national treatment under NAFTA and WTO agreements suggests that foreign near-banks such as ourselves should be subject to no more regulation than domestic near-banks such as Newcourt, Commcorp and others.
The white paper proposal will result in all foreign near-banks in Canada being treated in a uniform fashion. At present, only those foreign near-banks that have entered into an acquisition or reorganization have had to apply for ministerial consent. Only those foreign near-banks have been required to provide an undertaking to OSFI that restricts their activities in Canada in a number of ways, including the retail funding restriction. The white paper proposal will eliminate this current discrepancy.
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As stated earlier, GE Capital is in total agreement with the proposal in the white paper to provide foreign near-banks with greater freedom from regulation. The white paper itself contemplates, in order to implement this greater freedom, that once a foreign near-bank has received approval under the Bank Act to enter the Canadian market - and GE Capital received that approval several years ago - then provided its unregulated activities in Canada remain outside retail funding - and the white paper doesn't specifically define that - it would not be subject to any additional approvals. And as has been confirmed by OSFI, the existing undertakings that some foreign near-banks have had to sign would be terminated.
Since GE Capital does not raise funds in the Canadian retail market as defined by OSFI - that is, we do not currently issue securities in denominations under $100,000 and involving subscriptions under $200,000 - the white paper proposal would not appear to present any problem to us in respect of the way we normally go to market to raise our money.
However, we do appreciate that serious concerns have been raised by a number of investment dealers and other foreign near-banks who issue securities in much lower denominations than GE Capital regarding the potential application of this current definition of retail funding as it relates to their borrowings on the commercial paper in mid-term capital markets. It might require them, if the current definition were to be carried forward, to either severely restrict those activities or themselves become banks. We understand that discussions are currently taking place in response to these concerns.
In conclusion, and by way of summary, GE Capital Canada is involved in a variety of financial service activities, none of which attract government regulation under the Bank Act when conducted by similar domestic companies. We're not in the banking business either in the United States or in Canada, and our major competitors in Canada are not banks.
As well, the notion of national treatment suggests that GE Capital should not be subject to more regulation than similar domestic near-banks. Although we're of the view that companies like GE Capital, which do not take deposits, should not be subject in any way to the provisions of the Bank Act, the white paper proposal before you effectively frees foreign near-banks from the Bank Act except for approval of initial entry and providing they refrain from engaging in retail funding. This for us at GE Capital is a reasonable middle ground.
Consequently, subject to resolution of the concerns that have been expressed related to retail funding and on the understanding that existing undertakings will be terminated as the white paper anticipates, we strongly support the white paper proposal, which will allow foreign near-banks to operate more freely in Canada.
Thank you, Mr. Chairman and members of the committee.
The Chairman: Thanks, Mr. Davies.
[Translation]
We'll start our round of questioning with Mr. Bélisle.
Mr. Bélisle (La Prairie): Here's my first question: on page 1 of your presentation, fifth bullet, concerning the complementary role to bank services your organization plays, you say:
- We fill an important gap as a "transitional" lender during periodic economic downturns when
banks may withdraw from certain sectors where risk exposure is considered too high.
Mr. Roman Oryschuk (President and Chief Executive Officer, General Electric Capital Canada): Forestry is one sector where Canadian banks, depending on economic cycles, sometimes get more involved and sometimes less. It's an area where our organization is very active whether it's in Val-d'Or, Chicoutimi, the North Shore or the Canadian West. It's a sector where we've developed an important niche.
If we're participating so actively in that sector, it's mainly because we put enormous energy into knowing the equipment we finance as well as the industry and the people working in it. This combination of knowledge of the equipment and knowledge of the industry and our clients often allows us to do good business in that sector. That's a good example.
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Mr. Bélisle: You mentioned forests. Could we be a bit more specific and say that it's cyclical sectors like forestry and mining? Maybe not mining...
Mr. Oryschuk: I think a lot of our activity is cyclical. Take the transportation sector my organization is involved in. That's only one of the 14 activities in which GE Capital is involved in Canada. We're very strongly committed. Forestry and construction are also areas where we have a big interest. They represent a sizable portion of my organization's business.
Mr. Bélisle: On the last page, in your concluding remarks, you wrote:
- ...except for approval of initial entry and providing they refrain from engaging in retail funding.
This, for us, is a reasonable ``middle'' ground.
Mr. Oryschuk: I can give you the preliminaries of an answer.
[English]
Mr. Davies: I think when we say a middle ground, we are suggesting that this is acceptable to us as a middle ground. When I refer to middle ground, what we're really referring to is that the position we have put forward is that there is no apparent public policy purpose to regulate near-banks at all. We're not really banks; we don't compete with banks; we're not a bank anywhere else in the world. Therefore the definition of foreign bank might be changed so it doesn't apply to near-banks at all.
The proposal that has been brought forward in the white paper is that so long as approval has been granted for the near-bank to enter Canada in the first instance - and that is not an issue for us because we received approval many years ago to enter Canada - and so long as the near-bank refrains from engaging in retail funding, what retail funding is or will ultimately be defined as or whether some other concept will come forward is still somewhat up in the air, because discussions are going on that retail funding as currently applied to us under our undertaking and which we're satisfied with is that we are prohibited from borrowing money. It's the source of our funds in the market, whether it's commercial paper or whatever, in instruments under $100,000. So that particular proposal doesn't impact negatively on us.
However, there are many other near-banks that do go to market and borrow money in much lower denominations and it is a problem for them. I understand that problem is generally recognized and discussions are taking place to look for a solution as to how to define the difference between what is a near-bank and what is a real bank insofar as their source of funding is concerned.
The jury is still out on what that definition will be or what that concept will be, but we support the principle and the proposal to wait and see what the actual definition of retail funding is. But at the moment, from our own point of view we are happy with the definition that currently applies.
Mr. Bélisle: Thank you.
The Chairman: Mr. Schmidt, please.
Mr. Schmidt (Okanagan Centre): Thank you, Mr. Chairman.
Thank you for appearing before the committee. It's good to see you present the paper.
I would like to ask a question. It has to do with the statements you made on page 3. I'm not sure I fully understood what you were getting at when you mentioned the expansion of the banks into other areas they had not been involved in before that somehow got you involved as a company under the Bank Act. In particular, I'm referring to the top of page 3, the first entry under that section, the ``commercial (traditionally non-banking) areas into which the banks have been permitted to expand''.
Does this suggest that you are interested in getting into such things as trust activities or insurance activities, or getting into the investment dealer area as a securities dealership at all?
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Mr. Davies: No, it's rather the contrary. This really isn't a question of our being interested in getting into banking type activities. But what has happened since 1992 is that the banks have been permitted to expand into certain sort of generally commercial areas. Maybe I can take an example of one area that has been under consideration, and that is the banks entering into auto leasing. I might mention that we have taken a totally neutral position and are not opposed to the bank powers expanding in that area.
However, under the Bank Act as it is currently worded, it has a strange effect and I doubt if it was ever intended. If the banks were to enter auto leasing, auto leasing would then become a ``banking activity''. Foreign companies engaged in auto leasing would then become foreign banks. If we wish to expand our auto leasing activity in Canada, we would potentially be subject to seeking and obtaining cabinet approval to expand that non-banking commercial activity.
Mr. Schmidt: Which is what you're interested in now.
Mr. Davies: Yes, we're currently engaged in that business, as are many other companies that are not banks.
Mr. Schmidt: Would you consider yourselves a wholesale type of bank operation?
Mr. Davies: We don't consider ourselves a bank operation at all.
Mr. Schmidt: No, I appreciate that. Is that because you don't take deposits or is that because you don't - -
Mr. Davies: Partially, I guess. We're not considered a bank in the United States. In other words, GE Capital under the Bank Act is considered a ``foreign bank'' because it just happens to fall within that definition. However, in the United States GE Capital is not a bank and it's not a bank elsewhere in the world. But it falls within the definition, so it is a foreign bank in Canada. GE Capital does not take deposits, nor do any of the Canadian subsidiaries. We are not involved in the payment system and do not involve deposit insurance.
Mr. Schmidt: Do you want to get involved in that?
Mr. Davies: No.
Mr. Schmidt: Okay. The final question I have has to do with the operation of retail funding. Do you know that this is a controversial area?
Mr. Davies: Yes.
Mr. Schmidt: And it's partly a matter of definition, and it's partly a matter of competition. I'd like to ask you, while you have no difficulty with the definition as it currently exists, what would happen if that definition were changed?
Mr. Davies: I suppose, Mr. Schmidt, we would need to wait until we saw how the definition was changed to the extent that the definition is relaxed to take into account the concerns as we understand them of other near-banks that are borrowing money in the commercial paper market and in the near-term market where there is provincial securities protection across the country. To the extent that the retail funding definition were changed to accommodate those concerns, that would allow greater freedom and we would anticipate that those changes would be agreeable to us.
Mr. Schmidt: Thank you.
The Chairman: Mr. Fewchuk.
Mr. Fewchuk (Selkirk - Red River): Good afternoon, ladies and gentlemen.
I would like to ask a question of you. On your GE Capital, would it make it easier for you to invest in, let's say CAMCO in Hamilton and the other Montreal factories, with the money coming from your side of the people? Would the white paper help you in that direction?
Mr. Davies: I'm not sure I completely understand the question, Sir.
Mr. Fewchuk: For investments in Canada.
Mr. Davies: Yes, I believe at the moment, unrelated to any Bank Act provisions, that GE Capital, or GE Canada for that matter, which we also sort of represent or are involved with, would not have any constraint in investing further in CAMCO if they chose to do so. I don't believe the Bank Act would operate as any constraint on that type of investment. I know it didn't when we invested in CAMCO initially 20 years ago, when CAMCO was formed with the amalgamation with GSW and then the acquisition of Westinghouse. So if further investment were called for or appropriate in CAMCO, I think that could take place without any concern presently or subsequently under the Bank Act.
Mr. Fewchuk: Very good. I just wanted to know if there were some rules just in case.
Mr. Davies: I don't think the Bank Act has any application and therefore I think there's total freedom there.
Mr. Fewchuk: Thank you.
The Chairman: Mr. Cullen.
Mr. Cullen (Etobicoke North): Gentlemen, thank you very much, and ladies.
When we look at GE Capital, and you talked earlier about the natural resource sector, the forest industry, which is where I spent a bit of my time previously, one of the things that we found attractive was GE Capital and other companies providing what we call off-balance-sheet financing, particularly at times when debt-to-equity ratios were very poor, for equipment leasing and pay contracts. To me that's a very useful service and I'm wondering where that fits in with your overall scheme of services. Obviously it's not retail banking. Is that just part of your normal suite of merchant banking services?
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Mr. Oryschuk: That is certainly one of the types of products we bring to the marketplace that would not otherwise be available. The operating lease, the off-balance-sheet lease, is usually predicated upon a lessor willing to take a risk on the value of the equipment down the road. To be able to take those risks, one must understand what the value of the equipment is today and what it could be under conditions of economic unsettling and a good understanding of what the contractor is going to be using the equipment for and in what conditions. That's certainly one of those products that we bring to the marketplace.
I must tell you in frankness that our Canadian customers still prefer to own the equipment, and we provide financing that is creative under those terms as well.
Mr. Cullen: All right. I have just one quick follow-up. In the business of counter-cyclical loaning, the forest industry has a reputation for being very cyclical and we typically make investments as the cycle moves up and then by the time we hit the peaks the market is gone in the tank. Are you in a position or have you had some experience maybe to comment on making your counter-cyclical investments or loans? Are they at the bottom of the trough for cashflow requirements only, or do they tend to help the industry through and basically invest at the right time so that when the capacity comes onstream you are able to take advantage of the higher pricing?
Mr. Oryschuk: That's a very tough question to answer. What I would say is that we have tremendous experience in dealing through the up cycle as well as the low cycle. I think one of the important facets of how we do business is that we support our customers throughout the good times and the bad times.
The worst situation in which you can find yourself as a customer and as a lending institution as well is to pull the plug a little bit too early and not stay with your customers when the going gets tough, because they tend to remember that. So if you're going to play this game, you have to be in it from the beginning to the end and you have to be consistent throughout the piece.
The customers we deal with usually also have a fair amount of expertise in what they're doing and we'd like to look at them as being good business people, understanding in what marketplace they are, and we try to select those to do business with us and to do business with them.
I don't know if that gives you a complete and satisfactory answer, but that's as close as I can get.
Mr. Cullen: Thank you.
The Chairman: Is one of your biggest deals of financing the sale of GE locomotives to CN?
Mr. Oryschuk: I cannot really answer that question. You probably saw a press release last week with respect to the financing. I think that financing was not arranged through GE but was arranged by CN directly in the U.S. marketplace. But I'm speculating as to what transaction that was.
The Chairman: So that's not your account then.
Mr. Robert D. Weese (Vice-President, Government and External Relations, General Electric Capital): Mr. Chairman, GE does have a business, General Electric Transportation Systems, that manufactures and sells locomotives. That business has sold locomotives to both CN and CP Rail.
GE Capital has a business, rail car leasing, which leases rail cars to the railways in Canada and elsewhere in North America. So we're actively involved in that industry.
Like Roman, I'm not familiar with the particular transaction you're referring to.
The Chairman: Why wouldn't the Canadian banks, first of all, want to get into this business? And secondly, what would stop them from getting into the business of heavy equipment leasing?
Mr. Oryschuk: Several of the banks are actively involved in the equipment leasing business.
What comes to the forefront of the discussions in committees like this one is the issue of car leasing to consumers, but typically all the banks have the powers to engage in a substantial part of the leasing business. There are some constraints to that.
I think it's for business reasons and the way we approach the business that is different from what a traditional bank would do. Our way of approaching the equipment financing and equipment leasing business is first and foremost to go by niches and then to understand each niche we're involved in.
The Chairman: Could the banks get into this type of heavy leasing through a separate subsidiary?
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Mr. Oryschuk: I think they can do it either directly or through a subsidiary. I think the existing bank powers do allow them to do so.
The Chairman: Okay. Thank you very much.
Mr. Schmidt.
Mr. Schmidt: Thank you, Mr. Chairman.
I have one small question I wanted to get into. You're obviously involved in big business operations. Are you also involved in small businesses and start-up businesses?
Mr. Oryschuk: Definitely. Especially if you look at the logging operations, we deal with many contractors in the transportation industry. In the printing industry we deal with the smaller companies. In fact in my business the majority of transactions are with the small or medium-sized businesses, not with the large corporations.
Mr. Schmidt: Is it harder for a small business to get money from you than it is from a bank?
Mr. Oryschuk: I'd say it's easier -
Mr. Schmidt: How much -
Mr. Oryschuk: - but that would be the easy answer. I'll tell you why it would be easier. Again, it comes back to knowledge of the equipment, knowledge of the industry, and the understanding of what makes a successful business venture in that particular industry, the understanding of what that type of equipment is worth and how that equipment is being used.
Often we also have arrangements with manufacturers and dealers of equipment that cater to customers in specific industries. Again, that allows us to have partnerships with these dealers and manufacturers and come to the marketplace with solutions that are practical for the small-business person.
Mr. Schmidt: How much of a margin does the small-businessman have to pay to do business with you compared to the bank?
Mr. Oryschuk: If it's a fixed rate it's below 10%. If it's a floating rate it's - with the current prime rate - typically below 7.75%, and many times it's lower. Sometimes with the rate subsidies that we can negotiate with dealers, we can offer even better rates to our customers, again because there's a partnership involved.
Mr. Schmidt: Thank you.
The Chairman: Thank you for appearing before us. It's always nice to have somebody say ``We approve of what you're doing.''
Our next witnesses are from the Investment Dealers Association of Canada. We have with us Andrew Scace, vice-president and director, RBC Dominion Securities; Peter Marchant, vice-president and director, CIBC Wood Gundy; Jean Morin, vice-president, Midland Walwyn Capital; and Ian Russell, vice-president, capital markets, the IDA.
Mr. Andrew Scace (Member, Executive Committee, Investment Dealers Association of Canada): Thank you for your introduction, Mr. Chairman. I would like to begin by introducing myself and my colleagues who are appearing before your committee this afternoon on behalf of the Investment Dealers Association.
My name is Andrew Scace and I am here today in my capacity as a member of the IDA executive committee. I'm a vice-president and director of RBC Dominion Securities Inc. In this capacity, I have responsibility for the global fixed income division for the Royal Bank of Canada's investment banking affiliate, RBC Dominion Securities Inc.
Peter Marchant is managing director, CIBC Wood Gundy Securities Inc., who has responsibility at the firm for the issuance and distribution of the commercial paper and other debt securities offered by major corporations in the Canadian domestic money markets.
Mr. Marchant and I each have more than 20 years' experience in working on behalf of issuers and investors in Canadian capital markets.
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Also with us this afternoon is Jean Morin, a vice-president with Midland Walwyn and chairman of the IDA Quebec District Council; and Ian Russell, vice-president, capital markets, at the Investment Dealers Association.
It is in the interests of efficient, liquid, and safe globally recognized Canadian capital markets that we appear before your committee this afternoon. Our remarks will be relegated to comments on specific aspects in the federal white paper that are technical in nature, but which have far-reaching and serious ramifications to the Canadian capital markets.
The white paper proposes a less intrusive regulatory regime for foreign near-banks operating in Canada. These institutions fall under the jurisdiction of the federal government, generally by virtue of their affiliation with a foreign banking affiliate. More streamlined regulation of these institutions is a commendable objective. However, the white paper intends to impose a minimum threshold amount on the funds raised in capital markets by these near-bank institutions to ensure that the investing public is not put at risk by the proposed policy approach.
We believe the proposed $200-million minimum funding threshold will have serious repercussions on the liquidity -
The Chairman: It's $200,000.
Mr. Scace: The $200,000 minimum, sorry. This threshold will have serious repercussions on the liquidity and efficiency of the domestic money markets, will be disruptive to the lending and leasing operations of the near-bank institutions, and will have disadvantageous consequences for the individual investor and borrower alike.
Our purpose this afternoon is to amplify our concerns and to suggest to the committee a more effective policy approach to meet the regulatory objective while mitigating the negative financial consequences arising from the proposal. It goes without saying that my colleagues and I will be pleased to respond to any questions your committee members may have.
As a group, the foreign near-banks have been active borrowers in domestic commercial paper and medium-term note markets for many years. They have been instrumental in the development of broadly based and sophisticated capital markets in Canada. Many of these institutions routinely issue money market securities in amounts less than the contemplated $200,000 minimum threshold. They do so in response to strong demand from retail investors, investment counsellors managing the funds of individual investors, and smaller institutional investors - such as pension funds - for these investment-grade and highly liquid securities. The proposed funding restrictions would deny these financial institutions access to this retail marketplace, and would result in turn in higher-cost financing for these institutions, as well as reduced liquidity in secondary markets.
The flip side of these developments is to preclude individual Canadian investors and smaller institutional investors the opportunity of purchasing comparably high yielding and safe investments for their retirement portfolios and other requirements.
The white paper proposals would of course mean that the foreign near-bank institutions operating in Canada would be disadvantaged vis-à-vis their competing domestic counterparts offering consumer lending and leasing services, since these domestic institutions would not be subject to the proposed funding restrictions. The clients of the foreign near-banks would be expected to be disadvantaged by the proposal in terms of higher-cost loans or reduced availability of credit. It should be of concern to federal authorities that a valid argument can be made that these restrictions, which are imposed retroactively, abridge the principle of national treatment and therefore contravene the North American Free Trade Agreement.
We believe the white paper proposals to limit the regulation of foreign near-banks are well-intentioned, and that concerns about protecting retail investors are well founded. However, since the foreign near-banks fund their operations through marketable securities offered in capital markets rather than through deposit-type instruments, investors are already protected through their reliance on existing provincial securities regulations, thereby obviating the need for arbitrary minimum thresholds for the issuance of securities. Moreover, reliance on provincial regulations would avoid the negative market consequences of the proposed minimum funding threshold.
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Federal officials can be assured that the provincial regulators are acutely aware of the market and credit risks arising through securities issuance. They have imposed and indeed recently modified disclosure requirements and other measures to protect investors. We believe it would be useful to engage provincial officials in discussions on the adequacy of existing disclosure requirements and the provincial standards imposed by self-regulatory organizations on salesmen distributing securities, to protect the investing public.
We also understand OSFI concerns to preserve a distinction between funding through marketable securities by unregulated entities and the deposit-taking activities of the regulated banks and trust companies. However, we believe this objective can be met without disruption of the commercial paper and medium-term note programs of the foreign near-banks.
In the past week OSFI officials have informed us that they intend to develop revised proposals that would not interfere with the capital market borrowing activities of the foreign near-banks. OSFI has given the IDA an opportunity to review and comment on these proposals before they are finalized, and we have accepted their offer.
We are optimistic that a solution can be found to enable foreign near-banks to carry out their capital-raising activities, to protect the investing public, and enable the government to discharge effectively its regulatory obligations.
We hope our comments have provided you and your colleagues with some perspective on our concerns and suggestions for remedial policy action. This would seem an appropriate juncture to take any questions from your committee members and to thank you for your attention.
The Chairman: As I understand it, Mr. Scace, you are having fruitful discussions with our officials at this very time to get that limit lowered from $200,000 to around $50,000 perhaps.
Mr. Scace: We haven't had those specific discussions, but the discussions are ongoing. We're very encouraged from our discussions a week ago with the officials, and they have given us assurances that we will be part of the ongoing process.
The Chairman: So all we can do to help you along is to just say keep up the discussions.
Mr. Scace: Thank you.
The Chairman: Monsieur Rocheleau.
[Translation]
Mr. Rocheleau (Trois-Rivières): On page 2 of your document, you mention the financial restrictions imposed by the Office of the Superintendent of Financial Institutions which you apparently find unfavourable. Could you explain what kind of pressure or influence is exercised on the Superintendent of Financial Institutions? Through its attitude or intent or the way procedure is oriented, whom is the Office going to favour, consciously or unconsciously?
Mr. Jean Morin (Vice-President, Midland Walwyn): Mr. Chairman, we can offer several elements in answer here. First, there are the services and products available and offered to your voters who are also our depositors and clients. As investment advisor, I can tell you that thousands of clients all across Canada use these instruments daily to diversify their portfolios.
In day-to-day practice, for our clients, we trade medium term paper for amounts up to $5,000. That may seem a small amount, but I'll give you the example of an RRSP portfolio or a more ordinary investment portfolio that any one of our Canadian clients, men and women, may depend upon rather heavily. Someone with a $200,000 portfolio, his or her entire savings, who manages to get a rate half a percentage point higher, will be getting an additional $1,000 a year. So that's $1,000 on $200,000 which means four or five grocery orders for that person. That can mean a change in their quality of life. So there are concrete results felt by small depositors.
As for the security of the investment, we who resell the commercial paper are of the opinion they are well circumscribed and regulated by provincial authorities. If accessibility to those products decreases our depositors will have the choice of two products only: those bonds issued by different levels of government, municipal, provincial or federal or whatever banking instruments are available. In both cases, the rates are different and our clients are at a disadvantage. So there's both the diversification and the return aspect.
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Based on our experience, we believe our clients have never been ill served or badly protected in the past simply because we could effect transactions of $10,000, $20,000, $30,000 or $50,000 using these instruments.
Mr. Rocheleau: I seem to understand the Superintendent of Financial Institutions has said that henceforth a $200,000 minimum will be required to buy this kind of paper from near-banks. Why has that office made this recommendation?
Mr. Morin: We think it's to decrease the administrative burden surrounding near-banks regulations. The process is being lightened under the pretext of better regulation and protection for small depositors. We don't think that one process excludes the other. In reality, there have been very few if any complaints concerning those instruments, and regulations which are already working well can be reduced while maintaining, within the context of provincial legislation, protection for our clients. We don't see why those two elements must be tied together.
Mr. Rocheleau: Fine. I have one last question, Mr. Chairman. You mentioned NAFTA. You say that this would contravene the principle of national treatment mentioned in the Free Trade Agreement. Could you explain how this would be contrary to that principle?
[English]
Mr. Ian Russell (Vice-President, Capital Markets, Investment Dealers Association of Canada): I could answer the question you've asked.
Under the NAFTA agreement, there is the principle of national treatment where foreign financial institutions that are operating in the Canadian marketplace are subject to the same rules and regulations governing their business activities as their competing domestic counterparts would be.
In this particular issue, in the event the $200,000 funding threshold were embedded in the legislation, it would mean that the foreign near-banks that are engaged in leasing activity and consumer credit would not have the same flexibility in funding to meet those business operations as their domestic counterparts.
For example, the earlier witness was GE Capital, which is engaged in leasing activities. If these rules became effective, it would be subject to these funding restrictions, whereas a domestic competitor, such as Newcourt, which is also involved in leasing, would not. Similarly, an AVCO Financial Corporation or Beneficial Finance, which are two other near-banks engaged in providing consumer credit, would be subject to these funding restrictions, whereas Eaton's Credit, as an example, would not.
The reason these domestic institutions would not be subject to these same rules is that they do not fall under federal jurisdiction and therefore they wouldn't be subject to those restrictions.
[Translation]
The Chairman: Is that sufficient, Mr. Rocheleau? Mr. Schmidt, if you please.
[English]
Mr. Schmidt: Thank you. I have one short question, Mr. Chairman, that has to do with the national securities commission.
You talked about provincial regulators and the differences among the provinces. There are two parts to this question. First of all, I think you would be unfair to the national securities commission, but I'm not sure. I'd like to know whether you are, or whether you aren't. What is the resistance to that commission being established?
The Chairman: Very good question.
Mr. Morin: I had the pleasure, or the displeasure, to be the first chairman in the history of this organization to diverge from the national position in the Quebec legislative assembly by trying to explain this exact question. I'm not sure how this fits into this committee, but....
Mr. Schmidt: It fits perfectly.
Mr. Morin: Why?
Mr. Schmidt: Because of the securities that are involved.
Mr. Morin: Under the current regime, securities are provincial legislation. There are different chapters and sections of the Investment Dealers Association, namely B.C., Quebec, and a part of Alberta. Some of our constituents in Alberta believe that the current system in place does address reasonably well the problematic of protecting clients and also of regulating securities and securities firms. Having said that, nobody is against simplification, virtue and reduction of costs.
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My understanding is that until the proposed national securities commission can be demonstrated to be effectively more efficient in doing the work in addressing the regional needs and also at reducing costs, there are certainly some substantial reservations - part of the some of the chapters - before we go ahead and fully support this initiative as a whole industry.
It was and it is the position of their current chairman and it was a done through a vote at our national board that we would support and do support this initiative. However, elected officials must understand it is not unanimous and it is also a reflection of the situation in our country.
Mr. Russell: Perhaps I could take a different tack on the question. I'm not sure it's so much a question of whether we have a regime of provincial securities regulation or a federal system such as a Canadian securities commission.
In this instance it's perhaps more a question of banking regulation meshing effectively with securities regulation. On the one hand you have OSFI, which is involved in the regulation of federal financial institutions that are engaged in banking, and part of this issue has to do with the deposit-taking powers of those institutions.
In trying to find, I think quite legitimately, a solution that would enable those unregulated institutions to still carry out their activities but not to engage in deposit taking, it has meant the federal regulators have to be cognizant of the provincial rules and regulations and take all that into account. That isn't to say it's completely laissez-faire. At the end of the day the federal regulators might have to impose something a little bit different. But the fact of the matter is there has to be very close coordination between the federal regulators and the provincial regulators in this instance. It seems to me you could encounter the same kinds of difficulties in either regime.
In other words, whether you had a federal banking authority and a federal securities commission, you could encounter the same kinds of problems as you could with a federal banking authority and a Canadian securities administrators group that would represent the provincial commission. So I think it really comes down to a question of coordinated regulation.
Mr. Schmidt: Isn't there in that kind of position a little difficulty with having the federally regulated banks at one level and these near-bank institutions going into the marketplace to solicit funds and to get the funds, with having the solicitation and the administration of those funds done under a set of provincial regulations while the bank over here is run federally? Isn't there a conflict of activities here?
Mr. Russell: Yes, I agree. If we were remaking the Canadian markets, there might be a more ideal way to deal with it. I guess what I'm implying here is that we have a system now.
Mr. Schmidt: That's what the review is about. Let's improve it. Let's fix it.
Mr. Russell: That's right. I guess it's a question of whether you can fix it better by a Canadian securities commission or through improved harmonization and consultation.
Mr. Schmidt: You're the experts here. You should be able to tell us.
Mr. Peter K. Marchant (Vice-President and Director, CIBC Wood Gundy Inc.): I think, Mr. Schmidt, one of the reasons we're looking at this whole issue - and we're not and can't deal with this as an isolated country -
Mr. Schmidt: We don't want to either.
Mr. Marchant: No, but as global capital markets are emerging - all the issuers and the investors - the securities commissions have set up a regulatory framework to enable both investor and issuer to obtain the cheapest capital in the case of the issuer and have a variety of investments to buy from the investor's perspective.
The harmonization of the regulatory framework has also got to take into consideration what's happening in the other marketplaces. Clearly more recently the provincial securities commissions have been looking to the SEC and the U.S. regulators to make securities issuance more fungible and give opportunities on both sides of the border to Canadian issuers and also investors from the perspective of having the issuance of foreign companies' securities in this country available to retail investors.
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It hasn't totally worked because we haven't seen American companies coming with equity issues to any degree in Canada. But, again, that's the disparate environment we have here.
Mr. Schmidt: Isn't one of the reasons that the American securities are regulated centrally and that if they wanted to come here they'd have a deal with ten different ones?
Mr. Morin: It's not quite correct to say it's regulated centrally. We have to be registered in various states for permits, for licences, to do business there. That's from our perspective. My colleague here can address the situation with issuing, but I understand a prospectus has to be deposited in states as well.
Mr. Schmidt: Thank you, Mr. Chairman.
The Chairman: Thank you, Mr. Schmidt. Are there any further questions?
Mrs. Brushett (Cumberland - Colchester): I have a brief question, Mr. Chairman, if I may.
Coming back to the minimum threshold of $200,000 in distribution from the four near-banks, was there some reason this was a proposed change within the parameters of the financial framework? Is the $50,000 minimum a number that's more uniform throughout the provinces, that would be more acceptable, or are we just choosing a number? Is there a framework? That's my question.
Mr. Marchant: In fairness, in our discussion with the Office of the Superintendent of Financial Institutions, I think it was a number that was chosen arbitrarily. It dated back to what the Ontario Securities Commission had proposed in 1988 or 1989. I couldn't find correspondence I'd written at that time to discuss the elimination of the prospectus exemption for commercial paper and increasing it to $250,000.
Clearly, we had discussions on an ongoing basis at that point and convinced the commission to retain the $50,000 prospectus exemption for commercial paper. In different jurisdictions across the country that's a different number. I think in the case of B.C. it's $150,000; in Saskatchewan it's $150,000.
More importantly, when we throw out a $50,000 number for mid-term notes and bonds issued under prospectus, clearly when a prospectus is filed with the various commissions across the country, that is not restricted to $50,000. It could be $1,000. Again, the provincial securities regulators have gone to great work and diligence to have full disclosure so they protect the individual investor. But a person, an individual, can buy $1,000 bond if it's issued under prospectus.
Practically speaking, that doesn't necessarily happen or mid-term notes, which could be a year out to 30 years.... But it does happen in the case of debentures issued under prospectus.
Mrs. Brushett: I guess I understand that the reason for the smaller denomination would be to cut down on the paper work and the cost of doing business. For some years a significant spin-off of benefits to the Canadian economy would be lost if this doesn't quite come into place the way you see it.
Mr. Marchant: Clearly, before the electronic age we discouraged writing tickets for small amounts, and/or the cost of that ticket was passed on to the buyer. With the availability of the book-base system we have, the transaction costs are minimal.
We're very conscious as dealers and participants in the capital market to make markets that reflect the value of the security and to see that the individual is not disadvantaged as a result of the electronic capability we have in the marketplace.
So I think we've taken a step forward. As a result of that, we see a capital market that's much more liquid and fluid. We have a thing we refer to as structured notes, a product that enables individual buyers their complicated transactions. I can't really give you an example at this stage. I'm not involved in that are. But we're very conscious of making a very tight market so if an individual wants to sell the paper after he's bought it, the ability is there and he's not financially penalized to any degree.
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The Chairman: I know of no one who opposes your recommendation that the level be dropped from $200,000 to $50,000 or whatever the provinces regulate. Secondly, this is very much in line with the concept of trying to harmonize our laws with those of the provinces. Thirdly, following what Mr. Schmidt said, when you do have such divergent provincial laws, going from $50,000 to $150,000, would there not be an advantage to all Canadians in having a far more simplified system that was either uniform and under provincial control or else simply under a national securities commission?
Subject to strong evidence to the contrary, I believe members have the disposition to support your proposition. I urge you to continue your discussions with Finance officials, whom I think you'll find amenable to reason and very eager to hear your views. Thank you very much for being with us.
Our next witness was supposed to be the Power Financial Corporation, but I understand that the Wells Fargo Bank is here and would be willing to go on now. Members and presenters have been very cooperative in speeding up our hearings this afternoon.
Ms Louise Pelly (Legal Representative, Wells Fargo Bank): Thank you for the opportunity to appear before you today on what has been rather short notice. I am a member of the law firm of Gowling, Strathy and Henderson and I represent Wells Fargo. Mr. Gadi Meir, who is here with me, is with the business banking group of Wells Fargo. He came in from San Francisco last night to be here today.
I am going to let Mr. Meir do most of the talking, but I want to give you a very brief summary of the situation. We have prepared a brief, which we put together rather at the last moment and which you obviously won't have had time to look at yet, but that brief does expand on what we're going to say today.
Wells Fargo, as you may or may not know, is the ninth largest bank in the U.S. It has over $1 billion in assets and it was recently described as the best managed bank in the U.S. Over the last few years it's taken the lead in the United States in small business lending. During the three years between 1992 and 1995 it lent out $5 billion, I think it is, in small business loans of between $5,000 and $75,000.
The reason it has been able to do this and the reason for its success is that it has developed technology that is based on a credit-scoring method of assessing risk, which Mr. Meir will tell you more about. That has enabled Wells Fargo to lend to small business on a mass scale on the basis of a one-page application form, without requiring the lengthy procedures a customer would normally have to go through to get a small loan.
The Chairman: Will you be giving us a copy of that one page?
Ms Pelly: It's appendix 2 in the brief. Appendix 4 is a sample of a typical application for a small business loan that would have to be completed if you were applying to a Canadian financial institution. As you'll see, it runs somewhere between 11 and 15 pages.
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Since that time, during this year, Wells Fargo has pledged to do a further $25 billion in small business lending in the U.S. over the next ten years. To put the matter in a nutshell, Wells Fargo would like to bring its system to Canada and lend to Canadian small businesses. I think we all know that's the section of the market that has been very much under served in Canada. There has been a lot of talk about it, and there is a tremendous need for small business lending.
Because of the technology that Wells Fargo has developed and its method of risk waiting, it requires a minimal physical presence in Canada. Its intention, as it's been discussing over the last few months, was to make an application under section 521 of the Bank Act for an order allowing it to provide this one financial service in Canada.
We have not actually gotten to the stage of making the application, but we have been in preliminary discussions with the Superintendent of Financial Institutions. The reason for our appearance today is that just last week we received a letter from the office of the superintendent stating that in view of the statement in the white paper that foreign banks should only be allowed to come in through a regulated financial institution, they would not even consider recommending the section 521 order under the Bank Act. Actually, there's a copy of that letter here.
That decision effectively precludes Wells Fargo from offering its small business loans in Canada. The requirement for it to set up a schedule II bank or loan company would impose enormous expenses on a very top-heavy structure, which would really make it unfeasible for it to do what it was planning to do.
I should add that Wells Fargo has no intention of taking deposits of any kind, nor does it need access to the Canadian payment system. Its present plans are basically to offer this one small business lending service.
As I said, that's the reason for our rather last-minute appearance. We had not thought we would be turned down on the basis of something that was in the white paper that's not even in the legislation yet, when the existing Bank Act clearly provides for a section 521 application for an institution such as Wells Fargo. Our appearance today is in the hope that we can get the committee to consider perhaps some alternatives to that very strict proposed rule that foreign banks can only come in if they incorporate a schedule II bank or other institution.
That is the basic picture, and I'd now like to turn the floor over to Mr. Meir, who will be able to tell you all and everything about how this system works.
The Chairman: We've had very similar testimony from Northwest Financial and Capital One. You may be regulated as a foreign bank in your jurisdiction, but you don't intend to carry on a full range of banking activities in Canada. You simply want to do one type of lending function, be it a credit card in the case of Capital One, small consumer loans in the case of Northwest Financial, or small business loans in the case of your bank.
Ms Pelly: Mr. Chairman, we have seen submissions from those organizations and you're absolutely right in saying the arguments are very similar. The difference is that those two organizations are already here.
The Chairman: Capital One isn't here.
Ms Pelly: In any event, Wells Fargo has not even gotten as far as making a section 521 application yet and has basically been told that there wouldn't be any point. But you are right; the situations are similar.
The Chairman: We're happy to hear you out, but I think it might be more fruitful from your point of view if we allowed members to ask you questions to elicit the information, and then if there's anything that we omit to deal with, you could come back and clean that up. We'll give you as much time as you want.
Mr. Gadi Meir (Project Leader and Senior Financial Consultant, Business Banking Group, Wells Fargo Bank): Sure. If you want, I can quickly go through what the marketing plan is.
The Chairman: It's not about what I want. I'm just giving you some advice, but we're in your hands as to how you present it.
Ms Pelly: I think the other thing that differentiates this situation is that it is specifically geared towards small business lending, for which there is a huge need in Canada. We'd be happy to answer questions.
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The Chairman: If there's anything you do not have a chance to put on the table during the questions, feel free to take as much time as you wish after that to make sure we understand exactly what you're doing.
[Translation]
Mr. Rocheleau.
Mr. Rocheleau: If I've understood you correctly, you're thinking of penetrating the business market in Canada which is not the present case. You have identified a niche.
Are we to understand that, in your opinion, the Canadian banking system and all similar institutions granting loans to small and medium businesses show such glaring and important deficiencies that it seems interesting for you, on a business basis, to establish yourself or do business in Canada to fulfill a need that is not being met right now? Could you define the weaknesses you have identified?
[English]
Mr. Meir: Yes. The situation is that.... We saw the equal situation in the U.S. When we began in California, we began by just lending in California, and when we developed the scoring technology and the one-page application that is part of our system and rolled that across the country, we found that many business that had been turned down in other banks or that did not want to go through the lengthy application process were willing to bank with Wells Fargo.
Partly, we think the gap is that the Canadian banks price their product, their line of credit, very aggressively. It's prime plus 1% to prime plus 3%, more or less. Our interest rate price ranges from prime plus 1.75% up to prime plus 8.75%. And we've been able to bank those customers who are slightly higher-risk, who are perfectly bankable customers. We've been able to identify characteristics of customers who are slightly higher-risk, and we've been able to incorporate that added risk into the pricing and offer them a financial credit facility.
Does that answer your question? It's a combination of a higher variability of customers and a higher variability of risk and interest rates, plus a much simpler application form. That has opened up a tremendously big market that did not exist in the United States and does not exist now in Canada.
[Translation]
Mr. Rocheleau: Where does your project fit in, bearing in mind the spirit and letter of the NAFTA? Does the NAFTA make it easier for you to fulfill your intent or does it constitute an obstacle you'll have to eventually deal with and negotiate around?
[English]
Ms Pelly: I think the situation is that if NAFTA were being strictly followed in Canada, we wouldn't need to be here today. I certainly don't see NAFTA putting any obstacle in our way. It's more the way that Canada has - perhaps interpreted is the wrong word - implemented NAFTA at the present time. I think if NAFTA were being followed to the letter, Wells Fargo would not have any problem doing business in Canada.
Mr. Meir: I agree. The easiest route was to go forward and make this section 521 application. If we're turned down, to go the route of challenging it under NAFTA is a very arduous route and is something we don't want to do. But I think that if this were challenged under NAFTA, this would be found in contravention.
[Translation]
The Chairman: Thank you, Mr. Rocheleau.
Mr. Schmidt.
[English]
Mr. Schmidt: Thank you, Mr. Chairman.
How would you raise your capital that you would lend to the small business?
Mr. Meir: To the small businesses in Canada?
Mr. Schmidt: Yes.
Mr. Meir: Or how did we raise it the U.S.?
Mr. Schmidt: No. If you came into Canada, what would be the source of your lending funds?
Mr. Meir: It would be depositors in the U.S. We're not taking deposits in Canada. We'd be using U.S. financial resources to fund the loans here. No deposit-takers in Canada would be put at risk.
Mr. Schmidt: Would you not entertain entering into the commercial paper market here and buying it in the commercial marketplace?
Mr. Meir: We don't have plans to at the moment. At the moment, the plan is to use financial resources from the U.S.
Mr. Schmidt: Thank you.
The Chairman: Mr. Cullen, please.
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Mr. Cullen: If Wells Fargo were given this opportunity, once you arrive here what's to stop you from getting gobbled up by the Canadian banking culture and beginning to lend as banks here do? I think banks here are trying to improve their performance in loans to small business, but we tend to be a little more risk-averse and tend to lend on assets rather than cashflow. Would we have any assurance that you would stick to your game plan that has worked in the U.S.?
Also, I'm wondering if you could talk about the kinds of instruments you use in the U.S. Is it straight debt at the rates you're talking about, or do you mix it in with any other instruments?
Ms Pelly: Maybe I could address the first part of that question. If Wells Fargo received an order under section 521 as the law is at present, it would be restricted to carrying out the activity consented to in that order. It could not expand into any other kind of lending without coming back for further approval.
Mr. Meir will deal with the second part.
Mr. Meir: Even to address the first part, I think there is another angle. Critics in the United States also said that we would go this route, be hit with a lot of losses and then retreat to lesser-risk lending. The evidence was to the contrary. We went into this higher-risk lending and came up roses. All the extra risk we took on was absolutely within what we considered to be the risk, and we were able to accommodate for that within the interest rate. We are continuing throughout the States, and the same commitment we made in the States we would make here.
Let me just say as an aside that from our preliminary investigation into the Canadian market, we think that on average Canadian small businesses might be more creditworthy than American small businesses.
Ms Pelly: The other thing to stress is that when Wells Fargo started this in the U.S., rather than taking away a share of the market that they weren't initially looking to serve, other banks started trying to do the same thing for competitive reasons. So there was in fact an enlargement of the small business lending process all round.
Mr. Meir: Exactly. The exact opposite happened to what you said. Rather than trying to lower ourselves to the competitive arena, what happened was that in California, for instance, when we launched this program, all the other major banks announced a similar program within the next year. Many of them couldn't duplicate it, thankfully.
Mr. Cullen: The second part of my question was about the kinds of instruments you use. Is it straight debt capital at the rates you referred to? Is your formula based on assets and cashflow? How does that work?
Mr. Meir: The lending that we would like to do in Canada and that we rolled out across the U.S. is unsecured lines of credit. So the lending is not cashflow-based and it's certainly not asset-based, because it's unsecured. It's based on mathematical models that relate to certain criteria of a small business.
Mr. Cullen: And it's straight debt?
Mr. Meir: Yes, debt.
The Chairman: Ms Brushett.
Mrs. Brushett: You've indicated that you are the ninth largest bank in the U.S. Fortune 500 has done some curves and graphs with banks in relation to assets and percentage of profits. How does your percentage of profits relate to your assets?
Mr. Meir: If I understand correctly, you're asking about return on assets. I know that in Canada an average bank makes about 70 basis points return on assets. Is that what you're...?
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Mrs. Brushett: I think if we look at the banks globally, the percentage of profits in relation to assets is much smaller in other countries than here in Canada. In Canada, for example, they have a smaller asset base with a much higher percentage of profits. I wonder how you relate to this global picture.
Mr. Meir: I would have to consult with our finance department to get an exact pin on that. I could certainly look at our annual report and tell you what our return on assets is, but you could compare it with the Canadian banks' return. I would have to say that we have had profitable years in the U.S. and have a very strong balance sheet and income statement. Whether in the U.S. we're making the enormous profits, hitting the billion-dollar mark that is anathema here.... I would have to do the analysis. I don't have the answer off the top of my head.
Mrs. Brushett: To follow the return on your investments, your rate of loss, or whatever, if you're expanding your small business loans, your loss rate is considerably low then.
Mr. Meir: Our loss rate would be higher than in Canada, but the interest rates we charge are commensurately higher as well. We are taking a broader span of risk. Canadian banks come in and take businesses only up to this much risk. Businesses that have this much risk or higher have to go to sweat capital, venture capitalist, or what have you. We have come in and taken the grade A customers and then also found a way to lend to grade B and grade C customers.
Mrs. Brushett: I understand with much success.
Mr. Meir: Yes, with much success.
Mr. Pillitteri (Niagara Falls): I see that in table 2 you have a comparison on credit. You have interest rates of prime plus 1.75% to 8.75%, and for the Canadian banks you have prime plus 1% to 3%. Then you have here comparable monthly charges, but you do not have any charges for others.
We do know from talking to the banks that sometimes...and in consumer protection sometimes we try to.... I know that small businesses have a hard time getting their hands on money. Sometimes they really look at the bottom line, what they're getting themselves into, and what kind of loan they've got themselves into.
We do know, for instance, from a 1% to 0.3%, a maximum being more than 0.3%...the average in loans could be even as high as 2%. In your 1.75% to 8.75%, what is the average on the overall lending of the 120,000 businesses? What is the average income from that in your loans? Is it closer to 8.75%? Is it closer to 1.75%? What range are we talking about?
Mr. Meir: It's a very good question.
If I told you exactly, I would be giving away some competitive secrets, but what I can say is that is the entire range and it's probably a bell curve within that range. So whatever the mid-point is would probably be a safe guess -
Mr. Pillitteri: Would you give -
Mr. Meir: Let me just say it is probably a higher rate than the average loan, but we're lending to riskier customers.
The other thing I would say is that the price is not just the interest rate. The annual fee -
Mr. Pillitteri: Yes, I see $250 versus $750 -
Mr. Meir: That's about a 1% difference. For the monthly monitoring fee, you add $45 or $100 a month. Over the course of a year, for a small businessman, that's another 1% or 2%.
Mr. Pillitteri: I beg to differ on the point of monitoring anywhere between $45 to $100 a month. I'm a small businessman, and I don't see this amount; it is much, much lower than that.
However, the point I'm trying to make is what is your average? Possibly you could answer me in a different way. Is it higher within the low end of loans or within the higher end of loans? You have here from $5,000 to $75,000. What are the percentages? Is it higher in the low end or is it higher in the upper end?
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Mr. Meir: Most of the business lines we have issued have been for $15,000, $25,000, or $50,000, with fewer around $75,000. The average commitment is approximately $40,000 to $50,000, if I remember correctly. That's an average commitment...that's an average credit facility.
Ms Pelly: Upper limit.
Mr. Meir: Thank you, Mr. Chairman.
[Translation]
The Chairman: Mr. Rocheleau has another little question.
Mr. Rocheleau: How do you deal with the so-called new economy businesses, the high tech ones based on knowledge whose values and guarantees are intangible? Do you have any special strategy to deal with those small and medium-sized businesses?
[English]
Mr. Meir: Yes. I know, partly because I worked for a Canadian financial institution, that has been a problem here in Canada. I used to work for a Canadian bank here. I'm Canadian. I remember that problem. Our situation is that we are not an asset-based lender. We lend based on the criteria you see on the application form, such as the number of years in business, the sales level, and the particular industry they're in. More than anything it's probably based on credit: the ability to repay, and how they've demonstrated that they have repaid in the past. The whole issue of what the assets are worth does not enter into the decision at all. That's how we've gotten around that issue.
The Chairman: Mr. Rocheleau, I promised you that if anything was omitted that you wanted to put before us you would have as much time as you wished.
Mr. Meir: I guess - -
The Chairman: I'm sure your legal counsel has always advised you not to overstate a good case.
Mr. Meir: I'll just summarize. We've developed this great product and service in the U.S. We've had great success in the U.S., and we think there's demand here. There's an underserved market, and we don't think a Canadian bank could duplicate what we've done in a short time. That's been our experience in the U.S., and we'd like to come to Canada. We're being thwarted by this one line in the white paper.
The Chairman: How much of the phenomenal growth of Wells Fargo has been due to the small-business lending program?
Mr. Meir: I'm not sure what the percentage of the growth is, but we've had explosive growth in the business banking group itself. Ten percent of the bank's profit is now coming from the business banking group.
The Chairman: From the small-business lending.
Mr. Meir: That's correct.
The Chairman: You've made a very interesting case to us that Canadian small-business persons and medium-sized businesses - well, small anyway - could benefit from this type of additional service. I'm sure members have listened with a great deal of attention. Without making any promises, it sounds like a very interesting innovation that could be of great help to many of the enterprises, which are really the heart of job creation in our country.
On behalf of all members, may I thank you very much.
Mr. Meir: Thank you.
The Chairman: May we take a five-minute break until our next witnesses come?
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The Chairman: Could we come to order?
Our next witnesses, from Power Financial Corporation, are James W. Burnes, president, and Edward Johnson, vice-president, general counsel and secretary. We welcome you.
Mr. James W. Burnes (President, Power Corporation of Canada): Are we ready to begin?
The Chairman: Please.
Mr. Burnes: I didn't know whether you struck a bell or not.
The Chairman: I'm always hearing bells. Whether I strike one is another issue.
Mr. Burnes: This committee, Mr. Chairman, is the beneficiary of a very large number of briefs, some of which I've had a chance to review. In putting forward our own submission we've tried to keep it as short as possible.
First, by way of introduction, we're representing ourselves here as the parent company, Power Corporation of Canada. One of the subsidiaries of the company is Power Financial, as you've identified.
In our brief - and members of the committee may not have had an opportunity to look at it - we've just represented that Power Corporation has directly and indirectly been involved in the financial services industry in Canada, the United States and Europe for 25 years. We identify the areas of financial services where we have had active business activity before and now: deposit taking, corporate and personal trust, mutual funds, financial planning, life insurance, health and disability insurance, and corporate and personal lending.
We have over time been involved in all of these activities. We point this out to indicate that we have some background to offer of some notions on the subject that's before your committee, the review of the white paper. We were active in appearing before this committee before 1992, at the time the acts were being reviewed and passed along, so we welcome the opportunity to return.
First of all, despite a few recommendations we have, we would encourage a speedy passage through the process of the white paper, recognizing that the committee will have its own concerns about areas of it. But I think in the broad sense, the financial community really prefers to operate with certainty. Uncertainties that are hanging out there never seem to do anybody any good. So we urge the speedy passage.
Mr. Chairman, in our submission we have provided the committee with a few charts. The charts have to do with the three elements that we think should get the committee's attention in reviewing the status of financial institutions in Canada. The first element in the charts has to do with market share in the important areas of consumer interests, both assets and liabilities. The second chart deals with the profitability of the major Canadian chartered banks, in both real and relative terms - relative to the rest of the world.
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Third, we draw the committee's attention to what would be extremely important, which is data and information in what we all loosely call the ``information age'' and the position of the chartered banks in the collection and control of that kind of information about customers, both corporate and personal.
What we're trying to put forward to the committee is that in each of these three areas, which are critical in the current situation in Canada - market share, corporate size and economic power, and control of customer information - it might, when each is looked at independently, lead you to a different kind of conclusion than if you put all three together and thereby put into perspective the unique, special and extraordinarily powerful position of the chartered banks in Canada, which is really unprecedented in the world. There's no other country where one small group, i.e., six institutions, have that kind of economic power and potential for increasing that power.
We therefore suggest to the committee that it might very well be very interested in anything that has do with enhancing or increasing that power. There are two elements in the white paper that look like - and we can't be quite sure what they mean, because they're kind of obtuse - suggestions for enhancing that power. We're wondering why anybody would be enhancing the power when the government has already announced it intends to set up a commission or a major study group to look at the financial services and financial institutions of Canada.
That being the case, before it even starts, why would you be looking at enhancing that power, particularly in ways that are very difficult to determine when you look at the white paper? What does it really mean?
So in the end, what we're really recommending is that the committee take a hard look at those elements and satisfy itself that there isn't an enhancement of powers there that isn't understood by the proposers of it or by the committee itself.
Mr. Chairman, I think we were advised that you didn't want to get a long ``talkie-talk'' from the people appearing before this committee. Didn't somebody tell us that?
The Chairman: I can't imagine who that would have been, Mr. Burnes. I just saw the movie Long Day's Journey into Night. It was a very long movie, but it was very compelling - and it was Canadian, too.
Mr. Burnes: You'd be interested to know that my daughter is one of the actresses in that film.
The Chairman: You're kidding. Congratulations.
Mr. Burnes: She's the only member of the family who ever amounted to anything. She has a long way to go yet, so she really might amount to something. She was in the play and then in the movie.
The Chairman: What a terrific production.
Mr. Burnes: Yes, it really was.
Can we take a few minutes, Mr. Chairman, just to look quickly at these charts? They may not be easily perceived, and I wouldn't want them to be misleading.
These were prepared at our request by Bain & Company, a management consulting company of some renown. They are specialists in the field of financial institutions and activity. They're quite famous in the trade for having their own way of taking different kinds of cuts at data to demonstrate a better perception of what's going on.
The first chart covers banks' share of the total market in percentages. It not only demonstrates the status as of 1995, which is the last year we have data for, but it also draws out where the banks were in 1984. The reason for this is to demonstrate that there's been quite a shift of economic market share power from a wide variety of contributors to a relatively small number.
.1715
For example, in personal trust services and estates in 1984, the banks were zero in that category, because that was not a permitted field for their activity. By 1995, however, they were 93%.
Members of the committee, of course, will be aware that in that quite brief period, 1991-94, the personal trust industry per se simply disappeared...from independent stand-alone companies into the chartered banks. The most recent was the Montreal Trust to the Bank of Nova Scotia, which was just last year. Montreal Trust was in the financial group of companies at one point.
Discount brokerage...zero to 95%, and so on, across the piece. The one area there that doesn't demonstrate a very dramatic increase is independently managed pension funds.
I think there has been over the last year the first indication of banks taking positions with these independently managed fund management companies. I think the pattern of the future is observable. Once one of the big banks makes a move in a certain direction, it's not very long before the others follow. Clearly, that's one area where they do not actually have an overwhelming market share.
If you turn the page, you have the market share in the consumer credit markets...residential mortgages, 26%, in 1984, and then 55% by 1995. Again, I think the primary driving force there is the disappearance of the trust companies that were major providers of residential mortgages purchased by chartered banks.
Non-mortgage loans stayed more or less at the same position over that period of time. The credit card position improved slightly, but clearly a very, very dominant 80% of the market, and on a weighted average across that piece, it would be a dollar-weighted average from 44% of the market to 62%. I think most people would agree that 62% represents a very dominant control position in any marketplace.
If you turn the page, there is an indication of the household financial portfolio. At the very top on the left-hand side, it shows the numbers for 1984. The number at the top, $0.9T, is $900 billion, or $0.9 trillion, which was the total household assets of Canada, not corporate, but household, and you see the number zero. Anything below zero is the liability of the households, and in 1984 it was $300 billion. That's the total of everybody's households.
In 1984, the shaded areas indicate the areas that the banks by law were permitted to be in, which excluded equity, common equity, pensions, life insurance, bonds and treasury bills.
By 1995, that is, post-1992, and then before that - and again we're looking at a $1.4 trillion asset position and $500 billion, or $0.5 trillion of liability - the chartered banks were permitted into all of those fields in terms of household finance. The combination of those indicates the percentage that this category represents of the total.
.1720
The next page is the most important one because it takes those total household numbers we just looked at, the $1.4 trillion and $500 billion, and shows the market share in the various categories that the banks enjoyed in 1984 and then the market share that they have in 1995.
If you exclude life insurance and pensions, it shows the banks with a market share overall in households of 66%, up from 33%. The reason we chose to exclude life insurance and pensions is not that they're not permitted to do that, it's just that they haven't done much with it yet. They are permitted, as I'm sure committee members know.
If you look at the pattern, it is pretty clear throughout the piece. The chartered banks have very substantially increased market share in all of these categories of business that are important to households. If they're not a polygopoly in these particular categories, they're pretty close.
So that's the market share representation, and we think that should be a part of any committee consideration.
Secondarily, on profits and profitability, we have no brief. Contrary to the banks' profits, we're not here to bash banks. In fact, a great many Canadians and almost all pension funds own the bank stock. So on the one hand you're kind of happy they're making money too.
But I think that the earning power of these institutions in the Canadian context is enormous. So the period that we have here, from 1991 to mid-1995, which is when these particular numbers were actually prepared - we haven't updated them - the top six banks represented 53% of the total earnings of the 300 companies listed on the TSE.
During that period the market cap of the banks, which gives the relative capitalization, was as high as 15%. Clearly, they not only earned a lot of money in total against the Canadian total, but their profitability was also very high against the Canadian average. If you have a 15% market cap and 15% of the profits, somebody has something going for them that's pretty good.
In terms of the profitability on a world scale, we've added to the brief a page from the August 5, 1996, Fortune magazine. In this particular instance it is ranking the government banks of the world.
If you look at the two largest Canadian banks, the Royal and the Commerce, you can see in asset size they have slipped and are not relatively important in the world context. If you take a look at the profitability, the profit after tax, in the case of the Royal they're 49th in assets and 20th in profit on a world scale.
In the previous presentation the Wells Fargo people posed a question on the relative profitability of Canadian banks against the Wells Fargo. If you're looking at return on equity or on capital, you'll find that Canadian banks would probably outperform a Wells Fargo. The answer to the question really is they have a relatively higher fee income. Since you don't need capital or assets to generate fee income, that comes in and gives them this higher percentage if you're basing it on assets and/or capital.
If we look at our market share activities and so on, a lot of those are fee income generating activities. They don't relate to loans or traditional banking. So mutual funds, for example, require no capital, no assets, but they generate fees. That makes them look relatively more profitable than a Wells Fargo would be, which probably doesn't have that fee income generating power.
.1725
Finally, we've taken a look at the information that is now contained in the bank data centres, which would be about as all-encompassing as.... Well, they would have more information than even the Department of National Revenue tax department. If they chose to manipulate the numbers in their data centres, they would have a more comprehensive picture of any Canadian customer of the bank than probably the people themselves would know, if they want to put it all together. They could have a profile because they clear your cheques, they do your Visa, etc. If they lend you money, you've disclosed your assets, and so on.
If you're an employee of a company and you're in their payroll services, which the banks really control, that's another category. I don't know what controls are on that in terms of transfer information, but if you've ever looked at what's on a payroll calculation sheet, it's almost anything you'd ever want to know by itself or for developing market activity. They have age, family status, deductions, income benefits, voluntary deductions, etc. They know what you're contributing to savings plan deductions, voluntary and the like.
So is there a permitted use for this data? I don't think there's anything in law. Financial institutions could indicate that they don't do that or they wouldn't do that, but are they prohibited from doing it? We think the only prohibited activity, which seemed to suggest that it does work, is that in 1992 the banks were permitted to go into the insurance business by law, but they had to do it in a subsidiary. They couldn't do it in the bank. We have references to that here.
They were permitted to do this in a subsidiary, but the second half of it was the stopper. They could not transfer customer information from the subsidiary to the parent. We are of the view that they lost interest in that business. Certainly they haven't done anything about it in the intervening four years for that reason, the information flow. In other words, they could operate the same way as everybody else did, standing alone, but they couldn't use the information flow, back and forth, to enhance their business.
So they offer Chinese walls and various kinds of curtains and so on. If you're serious about a Chinese wall, I think that's what it really means. An effective one would be simply that. By all means, come into the market and carry on with these activities and compete, but do it in a subsidiary and don't move the customer data from the subsidiary to the parent or vice versa.
Consumer privacy and confidential information are important. That seems to be about the only stopper out there, even in the computer age. If it's against the law to do it, nobody will do it. We're not unaccustomed to that. I believe the Department of National Revenue by law is not permitted to provide information from its files to anybody. I also believe Statistics Canada by law must contain their data in specified, regulated areas, and nobody can have access to the raw data. They can see the totals, but they can't see who said what.
At the end of this submission, Mr. Chairman, we have two points. Maybe Ted can speak to the two things we're offering.
Mr. Edward Johnson (Vice-President, General Counsel, and Secretary, Power Corporation of Canada): We have two recommendations, Mr. Chairman.
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On the question of data bases and data processing, on page 8 we bring together our recommendation in that area. In the white paper the government talks about allowing the data processing that is presently done in a subsidiary to be brought in-house, in the bank. That, in our view, could be a potentially dangerous practice. We don't know that for sure, because in our view we haven't seen a clear explanation about what this is all about and why it's being done.
Picking up on the point Mr. Burnes was making, we certainly would be concerned to see anything more in the way of information brought within the bank. Once something is in-house, the egg can be scrambled very quickly. The potential for unwinding uses of information becomes increasingly difficult. In our view, the potential for abuse increases.
Our recommendation in connection with that part of the white paper is to simply put this proposal on the shelf, to put it on hold until the task force that the government has talked about setting up in the next few weeks to look at the whole financial services industry has had an opportunity to look at this and perhaps give this committee something more substantial on which to base a view on this particular recommendation.
Secondly, on page 10 we deal with the recommendation in the white paper that appears at page 15. It's not really a recommendation. It is a comment. The government says in the white paper that it proposes to enact regulations dealing with the question of the handling of customer information and privacy codes. Again, we think this is an extremely important area. We set out our reasons why we think these codes, which tend to be based on consent, are somewhat fictitious. Really, in our view there's no such thing as consent. We see tremendous potential not only for abuse of personal information but also for anti-competitive practices, if information is used and manipulated willy-nilly.
Again, in that connection our recommendation is not to kill the government's regulations, not to stop them, but to urge this committee to require that those regulations be brought before you so you can have a look at them and review them in the context of the competitiveness of the entire industry in Canada.
Those are the two recommendations we are making. I just reinforce what Mr. Burnes was saying. We think most of the white paper consists of housekeeping items that could and should be acted on very quickly, but in these two areas we think there's potential for trouble.
The Chairman: Thank you very much, Mr. Burnes and Mr. Johnson.
[Translation]
Mr. Rocheleau.
Mr. Rocheleau: My question is on personal information. You gave us a long presentation on that point. You mentioned the advantages the banks have because they have access to varied information: loan applications, credit card statements and the cheque compensation process. They also have the benefit of information that may come from investment dealers. Some, as affiliated corporations, have even taken over independent company pay services or health management systems.
You used a very harsh word and I was even very surprised to hear it from your lips: oligopoly. This is usually heard from other quarters and usually concerns monopolistic profits. I'd like to know what objectives you are pursuing, as a corporation, by denouncing this phenomenon. Are you denouncing the fact that banks enjoy undue advantages which prevent real and healthy competition or is your intent and interest simply to come to the defense of the common citizen's privacy? I'd like to know what your intentions are and what the interests of your corporation may be.
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[English]
Mr. Burnes: Thank you. There are two questions as I understand it. One, are we defending the citizen's right for privacy? Yes, absolutely. Is there more potential now for an abuse of that privacy? Absolutely, certainly more than there was ten years ago.
Take for example personal trusts. There was a clear wall between personal trusts and the chartered banks' operations prior to 1992 because they couldn't be in the business. As you've seen in our charts, they now control the business.
Now, what should be in law to protect absolutely citizens' personal trusts, recognizing personal trusts, particularly when it's what they call sole discretion, where the institution really manages the money. I can't see any reason why it shouldn't be chiselled in law. Why should there be any opportunity for mischief in such an area? It won't be chiselled in law until there's some mischief. Once there's mischief, then people get busy about regulation or law.
Secondly, if one looks at competition or the potential for future competition, even if you were the most powerful of foreign institutions - a big foreign bank or major non-Canadian financial institution of some kind - it would be a very daunting exercise to think you could come into Canada in any serious way and make any kind of significant progress against a group that has in the order of 70% of the market share in a given area, in some cases higher, that has vast resources and that controls the customer information data base. It's pretty hard to get in.
I think world competitors would tend to start looking somewhere else in the world to go. They would come into a Canadian market as niche players in a particular area where they spotted a lack of market penetration or an opportunity for doing specialized business, as the previous representative was saying. They're specialists in small loans to high credit risks.
You have American companies that do that. They find a niche and they want to pursue that. But overall to establish themselves as a market presence, I don't know how they would do that. At least, we wouldn't do it because it would be such an uphill and expensive battle with very limited potential for reward.
Therefore, entry, which is one of the measures of competition - can somebody get into the business - in size and in scale, is one of the critical issues. You take a look at the reality and have to ask yourself who would do that.
In answer, sir, to your two points, I would say first, yes, we think privacy by itself should be protected, particularly in an electronic age where it's so easy to manipulate information. Anybody can do it. You've got a screen in front of you. A kid can push those buttons around and get at it.
Secondly, we've reached a point where in the context of a national economy you've got a very significant in-place presence. It's difficult for us to see how that would be altered or dislodged. It's not the camel's nose in the tent; the camel's in the tent at this juncture.
[Translation]
The Chairman: Thank you, Mr. Rocheleau. Mr. Schmidt, if you please.
[English]
Mr. Schmidt: I'm very intrigued by your observations on the privacy issue particularly. I'm wondering what your concern is. We now have the banks having subsidiaries and the trust company a subsidiary of investment dealers and suddenly we have the subsidiary in information processing. Is the fear that if the bank does this processing of information in-house, it would then automatically filter that information into its insurance subsidiary, investment dealer subsidiary and so on? Is that the basis for your concern?
Mr. Burnes: Yes. There are two parts to it. One, it would permit anybody who has this amount of data to target the market in an unbelievably strong way. Secondly, they not only can target markets, they also have the potential, spoken or unspoken, to apply a lot of leverage.
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You're a small-businessman and you rely on your bank for your line of credit. Maybe the bank asks you why you're using XYZ to fund your pension plan and suggests you use them or their insurance company for the group insurance for your employees. The bank wouldn't have to twist your arm, but it would take a pretty dumb guy not to get the message.
Mr. Schmidt: You also say in here that there's no such thing as consent.
Mr. Burnes: You can get consent by saying ``Would you like us to send you information that is pertinent and valuable for your investment purposes?'' Yes, why not. All of a sudden you've given them an entry to collect information about you as a potential customer because you've given them permission to take this data, massage it around and find out what they can go to you for.
Mr. Schmidt: I want to pursue it in another context completely. It has to do with the banks, with one subsidiary versus another subsidiary. For example, I know of at least one banking institution where if you become a client of their investment dealer subsidiary, one of the conditions of becoming a member or a client in that section authorizes them to use whatever information you give them for this subsidiary with the other subsidiary, if you like, the insurance part or the banking institution. If you don't give them this permission, then they have the right to terminate you as a client in the investment dealer part, or vice versa. If you grant this permission but withdraw it later, they have 30 days' notice in which they withdraw whatever business relationship you have with them.
That's a different kind of freedom of consent. In fact, is there consent? Is there any freedom if becoming a client on this side is a condition of information going elsewhere?
Mr. Burnes: I would think that's a form of some kind of coercion. They may call it something else. Any financial institution has to get information in order to provide the service.
I spent most of my life in the insurance business. If you want a life insurance policy, you have to sign permission to allow the company to approach your doctor, your attending physician, before they'll issue the insurance. It's perfectly obvious why you'd want to know that. So you have to do that. If you said you wouldn't give them that authority, they'd say fine, you don't get the insurance. They'd ask how they could measure the risk if they don't know the status of your health. They have to have it. Do they use that information for anything else? No. But they have to have it for that function.
Mr. Schmidt: Your organization though, Power Financial, I think has at least an insurance arm.
Mr. Burnes: Yes.
Mr. Schmidt: It has a mutual fund arm and has a trust arm as well.
Mr. Burnes: It has a mutual fund, but we don't have a trust arm any more in Canada, although we do in Europe.
Mr. Schmidt: You used to have.
Mr. Burnes: Yes, Montreal Trust.
Mr. Schmidt: Is there now then information from the insurance part of your operation that moves over into the mutual fund and vice versa?
Mr. Burnes: No, absolutely not. Zero. It's not because we mandate it but because those companies are free-standing, independent. Power is the controlling shareholder, but there are other shareholders and they defend their turf with a vehemence. There's no way they would.... If they thought there was a good customer, the last thing they'd ever do would be to give it to the enemy down the street. Internecine warfare is.... No, absolutely not, never.
Mr. Schmidt: It wouldn't be warfare between subsidiaries, but I'm not so sure about the holding company that coordinates these two. They might want to know this very well because the liability and the insurance part of the arm might be very significant. They may very well want to know what's going on.
It's not going to happen at the subsidiary level. It's going to happen at the higher level. I think that's precisely the concern you identified with this MIT, I believe it is, the Royal Bank has just set up. Isn't that precisely your concern? It's not going to happen here. It's going to happen at that level.
Mr. Burnes: If you talk about this health information, as I said, there's one body or block of information the banks do not have and that is the health of Canadians. They have everything else.
Mr. Schmidt: Yes, now with their insurance companies -
Mr. Burnes: If they get into the business of clearing cheques on behalf of the government, then I think a legitimate question is where that gets done.
Does that get done in the bank, and therefore is it information available to another party in the bank? Or is it done in a subsidiary to which it cannot be transferred?
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That's what Mr. Johnson was drawing attention to, this loose information or saying we'll do this in-house. That is a very easy thing to say, but there's a huge difference between doing something in-house - which then makes it available to anybody who has a computer screen and can call it up - and doing it somewhere where you can't do that, where it's blocked off.
Mr. Schmidt: I think the point is clear, Mr. Chairman. My concern is how you prevent this from happening. It's one thing to say there are these iron walls, these Chinese walls, but the fact remains that even in CIBC's most recently published annual report there was no Chinese wall between the returns they got at the securities part of the operation and the sort of regular banking operation. So obviously there was an exchange of information, or else how...? You know, there was no Chinese wall here.
Mr. Burnes: Oh, I think securities are done in-house.
Mr. Schmidt: But they're not supposed to be. According to the legislation they're supposed to be a subsidiary, which is separate -
Mr. Burnes: I don't know whether that.... I'd have to check with somebody who understands the act. We don't happen to be in that business, so I'm not familiar, but I don't believe the act or the regulations prohibit them from passing it on. Well, we all know they do, so -
Mr. Schmidt: Yes. If I follow you, you're suggesting -
Mr. Johnson: I'm just wondering if we're talking about two different things. I think you're talking about the actual activity, the securities activity. Mr. Burnes is talking about the passing of customer information from one to another.
Mr. Schmidt: Yes, and -
Mr. Johnson: To our knowledge, there are no restrictions on the passing of the customer information from a security to a subsidiary, which would be provincially regulated, to the bank, which is federally regulated.
Mr. Schmidt: No, and I understand that. I'm quite aware of that. But the point I'm trying to make is that you're suggesting there be some control here. I'm asking you, how would you practically do that? With the information there already now, how do you reverse that?
Mr. Burnes: I think you used the key word - reverse - because a lot of this has already been done.
Mr. Schmidt: Yes.
Mr. Burnes: If you chose to reverse it, or you tried to reverse it, I guess the only way you could do it would be to categorize certain activities that must be done in a subsidiary. And if they're done in that subsidiary, they cannot transfer the customer information between the subsidiary and any other part of the institution, to the parent or another subsidiary.
Mr. Schmidt: How would you monitor that to make sure it didn't happen?
Mr. Burnes: Well, I don't know whether you'd really have to. I think the marketplace would monitor. If you caught them doing it, everybody would know. Somebody would know, and they'd blow the whistle.
Prior to 1992, in fact before this committee or its predecessor of that House, they said how can you stop that transfer? We said if you put it in a subsidiary, and by law you don't permit the transfer, I don't think you'll have to worry about it, because, I think we said, I don't think they'll do it - and they didn't.
Mr. Duhamel (St. Boniface): Gentlemen, thank you. I wanted to make one brief point, and it will require just a very short answer.
As I understand your presentation, much of the focus is on the banks getting into more product lines, and increasing their market share on those product lines almost virtually everywhere. In fact if one looks at their overall operations, it's significantly larger than it has been. In the last decade it has grown phenomenally.
So is one of the points you're actually making here that banks have too much power, and they need to be constrained? Is that one of the points being made? It sounds like that to me, so I'd like to have a clarification on that.
Mr. Burnes: I think we would indicate that the charts sort of speak for themselves; i.e., they have an extraordinary amount of market share.
All by itself, if somebody just has market share, it wouldn't necessarily worry me as a businessman. You'd say we'll figure out a way to get our activities in there if it looks like an attractive business. But when you combine market share which is very dominant with a very high level of profitability - they have lots of money and lots of power - and thirdly, with these massive data banks, if you put all three together, we'd say perhaps that's gone far enough.
.1750
There's a group. The provincial governments appoint these people. I guess that if they conclude something like that, they seriously have to address the question, okay, what do you do about it?
Mr. Duhamel: Okay, thank you.
The Chairman: Mr. Pillitteri.
Mr. Pillitteri: Thank you, Mr. Chairman.
I just wonder, from all the data you've brought forward here.... You refer back to 1984 and 1995. I see that most of the growth in the bank actually took place in the early 1990s. You make this quite clear in your presentation, that in the last bank review they had much more power than they do now. Is this the case as you see it, and did you make a presentation the last time it was reviewed?
Mr. Burnes: Yes, we did, and their powers were enhanced in the Bank Act of 1992. Their powers, particularly the references made to the investment dealers.... Actually they were permitted into the investment dealer business around 1987 or 1988. Somewhere between the two bank acts, they were given permission to go into the investment dealer business.
In 1992 much of the furore of the time was.... Their representation was to get into the insurance business - not just life insurance, but the casualty and property business too - and the government of the day and the act gave them permission to go into those businesses. But, as we've been saying here, they said you go into it, but you go into it in a subsidiary, and you don't transfer customer information.
Now, we find it kind of passing strange that they were permitted into the business, but they didn't do anything about it, whereas they did an enormous amount...like the trust business, because they bought them all. And they're doing that business in-house.
So, you know, you're reflecting on where it's at. You have to take into account....
The Chairman: Thanks, Mr. Pillitteri.
Thank you, Mr. Burnes and Mr. Johnson. I can assure you that members from all sides of this committee would agree with you that before any new rules are enacted by regulation or otherwise, involving the collection, use, retention, or disclosure of consumer information, we would want to see it come by our committee for a full public hearing, so that we know exactly the implications. We are very concerned, as you are, with the need for confidentiality and privacy, in terms of the information that is disclosed to banks.
I would also like to say -
Mr. Burnes: If I could interject, I'm delighted to hear that, because we learned to have quite a bit of confidence in the House finance committee in years past, as a....
The Chairman: Don't praise us until we deliver on that one.
Voices: Oh, oh.
Mr. Burnes: I think you will, Mr. Chairman; I have great confidence.
The Chairman: If I could also say something else, I think your testimony here today solved one of the problems of which you spoke. Your testimony on the growth of the market share enjoyed by our banks from 1984 to 1995 may do one thing of which I'm quite certain. It will probably increase their share value on the stock market as of tomorrow, thereby decreasing the disparity between market capitalization and profits that you noted, and bring them more into line with foreign banks.
So may I thank you on behalf of all members here for data we have not received that maybe has put a new perspective on our thinking, in terms of these things. I'm sure this will not be limited in its utility to our endeavours, but will be of great interest to the task force as it goes about its questioning.
On behalf of all members, may I thank you.
Mr. Burnes: Thank you.
Mr. Johnson: Thank you.
The Chairman: Our next witnesses are from the Congress Financial Corporation. They are William Davis, president; Albert Mandia, president; Ruth Jennings-Brader, counsel; and Jean Anderson, McMillan Binch, Barristers and Solicitors.
.1755
Welcome, Congress Financial Corporation Canada. We look forward to your presentation.
Mr. William R. Davis (President, Congress Financial Corporation): Good evening,Mr. Chairman and members of the committee. Thank you for providing this time from your busy schedules to discuss these proposed changes to the financial sector legislation that we feel can negatively impact two non-bank subsidiaries of CoreStates Financial - Congress Financial Corporation and CashFlex.
We have submitted a written submission to you that you should have received today in English and French. We are sensitive to the fact that you've no doubt heard some of the comments we're going to make from others who have made presentations. So we apologize for being redundant, and we'll try to move our presentation along very quickly.
I'm William Davis, president of Congress Financial Corporation, which is a finance company. With me is Al Mandia, who is president of CashFlex, basically a data processing company. We're also accompanied by Ruth Brader, counsel from CoreStates in Philadelphia, and Jean Anderson, with McMillan Binch in Toronto, our Canadian counsel.
Congress Financial Corporation is headquartered in New York, and has been involved in providing asset-based lending and factoring basically business loans for small to medium-sized businesses for over 50 years.
In December 1994 Congress opened its Canadian office in Toronto under the terms, conditions and authority of an undertaking received at that time. Congress perceived, and still believes, the small to medium-sized companies in Canada need alternative sources of capital to traditional bank lending. Since its inception, Congress Financial Corporation Canada has engaged exclusively in providing this type of financing.
Asset-based lending, unlike bank financing, allows small to medium-sized borrowers to borrow based on the quality and quantity of their assets rather than cashflow, operating history or balance sheet ratios.
Many of our clients and prospective clients need working capital financing to stabilize their businesses, turn around a struggling enterprise, finance growth, and provide jobs and employment opportunities. Recently our financing of National Gym Clothing in Toronto allowed that retailer to resolve its CCAA situation.
Congress's initial Canadian research indicated this need existed and still exists today in Canada. Our Toronto office has reviewed over 300 requests for loans in the past 21 months. Today out of this subsidiary we have over $188 million in funded commitments to Canadian companies.
At the present time we have eight Canadian employees, including our manager, Mr. Wayne Ehgoetz. We plan to open an office in Montreal by year end to better serve that market, and eventually we hope to have an office in Vancouver.
Many of our clients and prospects have been referred to us by banks, accountants, investment bankers and other intermediaries.
Our view that asset-based lending is a viable alternative source of financing is actually supported by the Canadian Bankers Association. In the September-October 1995 issue of Canadian Banker, the journal of the Canadian Bankers Association, an article entitled ``Filling the Gaps'' was billed as a banker's guide to alternative sources of capital for small and medium-sized businesses that currently do not qualify for bank financing. The article provided information on asset-based lenders. This clearly recognized asset-based lending as an alternative source of capital, separate and apart from banking. The same magazine issue pointed out that banks cannot be all things to all borrowers.
To summarize our business, we are not a bank but a finance company. Congress borrows its funds from the Bank of Montreal, and relends the money at slightly higher rates to qualified needy businesses. We don't take deposits; we don't require deposit insurance; we don't use the cheque-clearing Canadian system; and we don't lend to consumers.
We recently met with the Department of Finance and the Office of the Superintendent of Financial Institutions to explain our business and to express our concern and disappointment over this proposed legislation and its implications for Congress and its customers.
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Congress entered the Canadian market under certain economic assumptions and conditions, per its undertaking. It hardly seems fair to change these ground rules after we have committed resources, capital and our reputation to the Canadian economy. Based on the undertaking, Congress has, in good faith, entered into customer contracts, employment agreements and leases that would be costly if terminated.
The additional cost and the administrative burden of this legislation are really to support a full service bank, not a narrowly focused finance company like Congress. We don't understand what there is about our business that you -
The Chairman: Mr. Davis, might I just interrupt you here just for the benefit of members who I'm sure are way ahead of me on this. Your situation is simply that you are controlled, indirectly or directly, by a U.S. bank.
Mr. Davis: That's correct.
The Chairman: But the activities you're carrying on in Canada - in one case lending to corporations, and in the other dealing with documentation, storage and things like that - are not banking activities, and therefore you say you should not be regulated as a bank in Canada. Is it as simple as that?
Mr. Davis: Yes, it is.
The Chairman: This is the same type of argument we've heard basically from Northwest Financial, Capital One, and even Wells Fargo Bank. Am I wrong on that?
Mr. Grubel (Capilano - Howe Sound): No.
Mr. Davis: No, I believe you're correct.
The Chairman: Do you have any additional arguments, apart from reciprocity under NAFTA and the quasi-burden of regulation it will impose upon you, to suggest why you should not come to be regulated as a bank when you're not carrying on a banking activity in Canada?
Mr. Davis: No, I don't believe so, sir.
The Chairman: Maybe I could go to questions then, and ask you at the end if there's something we have omitted to look at. I would ask you if you would sum up for us, and bring to our attention those areas that we haven't covered in our questions. Would that be acceptable to you, Mr. Davis?
Mr. Davis: Yes, it would.
[Translation]
The Chairman: Mr. Rocheleau.
Mr. Rocheleau: As you have a chapter on the NAFTA, I'd like to hear what you have to say about that agreement. Earlier, people from the Wells Fargo Bank said that if the spirit of the NAFTA were respected, they would not even have had to come as witnesses before our committee to praise the legitimacy of their undertaking. What are your thoughts on that?
[English]
Mr. Davis: I would have to say, sir, that there are certain terms and intentions in the NAFTA arrangements that should provide for our type of financing to be done on an equal footing in Canada, as Canadian operations would be allowed to conduct business in the United States.
Certainly I would agree with the gentleman from Wells Fargo that we shouldn't have to be here if the spirit of NAFTA were carried out, particularly since we came to Canada two years ago to conduct our business under certain legislative guidelines, and have adhered to those guidelines.
[Translation]
The Chairman: Thank you very much, Mr. Rocheleau.
[English]
Mr. Grubel.
Mr. Grubel: I just have a brief question. I also agree with the summary I heard, and I think we have understood what the issue is.
There is something that continues to puzzle me. You may not wish to answer this question, but from where do you believe the pressure, or the suggestion, to the Department of Finance came to institute this regulation?
For example, the Bank of Montreal, which is one of your main suppliers of funds, probably would not want to be behind a move of this sort. Do you have domestic competitors, purely Canadian competitors, who would be pushing for this? Can you speculate about this?
Mr. Davis: I can't speculate about it. No, sir, I can't.
We talked to the regulators and asked what the initiative was that moved this along, and we were told it was purely an organizational addressing of a commonality. They were trying to come up with a common way of classifying operations that were owned by foreign banks. That in itself was enough to put us under this type of regime.
Mr. Grubel: It sounds to me a lot like it's all for the convenience of the bureaucrats and regulators, to make life as easy as possible for them. And the consumer, if he suffers, that's too bad. That's the impression I get, and I hope this hearing will help rectify the situation.
Thank you, Mr. Chairman.
The Chairman: Ms Whelan.
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Ms Whelan (Essex - Windsor): I'm going to ask a bit of a different question. I'm just wondering: you say that subjecting you to regulations would make you uncompetitive, or it would seem to be unfair vis-à-vis your competitors in Canada. With the controlling shareholder from the United States, are you subject to the same tax implications?
Mr. Davis: I don't believe I said we'd be less competitive with our competition.
Would you rephrase your question? I'm sorry.
Ms Whelan: You said that subjecting you to the regulations would be unfair because your competition in Canada isn't subject to them. Are you subject - and I don't know enough about it - to the same tax laws as your Canadian competitors because you have a controlling shareholder in the United States?
Ms Jean E. Anderson (Counsel, Congress Financial Corporation): There is a special tax imposed on the schedule II, the regulated financial institutions, to which we are aren't currently subject. Other than that, the tax regime would be similar.
I think the point really addresses the fact that there are a number of competitors, such as General Electric Capital Corporation, First Treasury, and CCFL, who are treated as near-banks, and under the proposal would actually continue to receive the same treatment as we do now, and would not be subject to the regulatory burdens of capital requirements, outside directors, and so on.
Ms Whelan: Okay.
The Chairman: Thank you, Ms Whelan.
Are there any further questions? Mr. Duhamel.
Mr. Duhamel: I just want a clarification. If you had your wish, if you could direct, what would happen? What would you ask this committee to do, clearly, specifically, briefly?
Mr. Davis: I would have to ask the committee to support our contention that we are not a bank, and should not be thrown into a regime of being a schedule II bank.
The Canadian government certainly has the ability to tax us on any basis. They have the ability to set up regulatory guidelines specific to our industry and our business. But putting on us the burdens of being a schedule II bank, when we are not a bank and don't want to conduct that wide array of services, seems -
Mr. Duhamel: You want to be what you are -
Mr. Davis: Yes.
Mr. Duhamel: - as opposed to what someone would want you to be?
Mr. Davis: Yes.
Mr. Duhamel: Okay. Thank you.
The Chairman: Thank you, Mr. Duhamel. Mr. Fewchuk.
Mr. Fewchuk: My question is straightforward. It's to do with the tax law. If you're not a schedule II bank, and what you're preparing to do.... What, if any, difference in money does the Government of Canada lose in tax funds going across the border, in income tax? Are you all treated the same if you are a schedule II, or...?
Ms Anderson: Congress Canada and CashFlex Inc. are really taxed as any other corporation would be. The only difference is that the tax has recently been applied to the banks.
Mr. Fewchuk: Thank you.
The Chairman: If I understand it properly, the issue we have before us is a very simple one. If, for example, Citibank out of New York were to own the school bus concession for Nepean, through a subsidiary, would that school bus franchise company be governed as a bank because its foreign owner is a bank? Or would it be governed as a transportation company here in Canada?
I guess we have a slightly complicating situation, in that one of the functions you're performing, at least, through one of these entities - providing loans to corporations based on their assets, receivables, and inventory - is a function that banks do perform, but it is not banking. Therefore should you be regulated on the same basis as a bank that does that one activity - but many others, the essence of which is taking deposits - and serving as a financial intermediary here in Canada? Or should you be controlled based on the activities that you do?
Many other witnesses have made this case very strongly to us. I think you are the fourth one that has brought yet another type of activity before us that they feel should not be regulated because in Canada it is not banking. My indication from members around the table is that we will have some very hard questions to put to officials about why you should be regulated as a bank in these circumstances.
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I cut you off during your presentation, Mr. Davis. Is there anything else you wish to add?
Mr. Davis: I don't have anything, but Mr. Mandia might.
Mr. Albert Mandia (President, CashFlex Inc.): Mr. Chairman and committee members, I wondered if there was anything specific you would like to know about our business, which is a remittance processing business, unlike asset-based lending.
Mr. Grubel: It's even more surprising that essentially.... Who owns your business?
Mr. Mandia: We are five subsidiaries below the CoreStates Bank in the United States, so we're not even a direct subsidiary. In the simplest form our business is retrieving mail from the post office, sorting mail, opening envelopes, scanning invoices and cheques, and providing data to companies so that they can update their accounts receivable system.
Mr. Grubel: And you would be required under this law to be a schedule II bank?
Mr. Mandia: Correct.
Mr. Grubel: I'm very glad you spoke up and brought out this absurdity. It's almost a better story than Mr. Peterson's on his school bus operation, if it can be taught.
The Chairman: It certainly can be taught, especially by you, Mr. Grubel.
I have to declare a conflict of interest. Jean Anderson is with McMillan Binch, a firm with which I served for many years, and it would be totally improper for me as chair of this committee, in a public forum, to say anything good about that firm even though I might like to in spades. So I will refrain from doing that and on behalf of all members, I thank you for a very lucid presentation.
Our next witnesses are Canada's privacy commissioner, Bruce Phillips; and Mr. Julien Delisle, executive director of the privacy office. Thank you for being with us.
Mr. Bruce Phillips (Privacy Commissioner of Canada): Thank you very much,Mr. Chairman. By way of introduction, I remind the committee in case it slipped your minds that I am an officer of Parliament. You are my bosses, masters and mistresses, so to speak. I mean that in the ancient definition.
The Chairman: That information would be subject to the rules of privacy.
Mr. Phillips: Thank you, Mr. Chairman. I hope so.
It is one of my functions to come to Parliament when I feel there is something affecting privacy that should be brought to your attention. In my five and a half years as commissioner this is my very first appearance before the House of Commons finance committee, although I have appeared on a number of occasions before your colleagues in the other place. I really am glad to be here.
I am here because of the words in the white paper dealing with privacy. I want to say that I hope that is not the last word on the subject. I am encouraged by what it says, but I am apprehensive about what is not included.
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On pages 15 and 16 in my copy of the white paper, the government proposes.... I think it was referred to by previous witnesses, the people from Great-West Life. I just met them on the street. The government proposes to introduce regulations governing the collection, use, retention and disclosure of customer information by federal financial institutions. More specifically, financial institutions would be required to adopt a code of conduct governing the collection, use, retention and disclosure of information, to designate a senior level officer in each financial institution to implement procedures for dealing with consumer complaints, to provide customers with written information on their privacy code, and to report annually on the complaints received.
In my opinion, that would not in any way constitute an advance over the status quo. It would be merely requiring banks to do what they say they are doing now. And missing from this are the two essential ingredients of any respectable regulation: that is, an enforceable law that contains a system of independent complaint arbitration and oversight.
We have been dealing with this issue, and this is the response I received from the finance department in 1992. We wrote to them at that time, pointing out that the information world was changing dramatically, that the banking system was being given ever greater powers in terms of the things it would be allowed to do and consequently would have much greater opportunities for the use of personal information and misuse, and that more was needed, not just for banks, but for the private sector generally. I'm glad to say that in the intervening years the Government of Canada as a whole has come to that conclusion.
This statement, which I presume reflects the view of the finance department, does not reflect the views of the Government of Canada as a whole, as I read the record of recent months.
Last week, as a matter of fact, the Minister of Justice, Allan Rock, gave a speech to the 18th International Conference on Data Protection and Privacy, in which he said the following:
- By the year 2000 we aim to have federal legislation on the books that will provide effective,
enforceable protection of privacy rights in the private sector.
But neither the bank codes nor the CSA code of practice require them in any way to open their doors to any independent oversight mechanism. Thus, a person dealing with a bank who may have some complaint about the management of his or her personal information in the end is going to depend upon the degree to which the bank is prepared to comply with that code.
If, as is stated in this white paper, there is no further appeal beyond a report, presumably to government - but that's not specifically stated in the white paper - on the degree to which they have observed their own code.... There is no process for audit, no process for independent oversight or arbitration. To me, any law that is described as enforceable and effective certainly is not if it does not have those elements to it.
I can think of no ordinary law - such as our traffic laws or any other sort of important law - that does not have some type of enforceability. Even though people are expected to voluntarily comply with laws, in the end there has to be some form of third party oversight. That is missing from the white paper. Happily, it is not missing from Mr. Rock's statement on the subject. I could do a whole lot worse than recommend to this committee that rather than accept and approve the language contained on pages 15 and 16, you adopt the language used by Mr. Rock in his speech in which he gives a firm commitment to an effective, enforceable law.
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I commend the rest of the speech to your attention as well. I won't take the time to read it now, but it was a landmark speech by a minister of the Crown, given last week at a public conference. It's now been run on CPAC once or twice. I draw it to your attention because it did not get the media coverage it deserved. It represented a commitment by the government to the establishment of a legal, enforceable right in privacy, which has been missing. In that sense the Government of Canada would be catching up to the Supreme Court, which already in one or two landmark judgments has recognized privacy implicitly, at any rate, as a charter right. Unhappily it's not yet in the charter explicitly, but maybe we'll get around to fixing that one of these days.
It's getting late, and I don't want to take the committee's time to give you a long lecture on privacy theology. I will simply say that the world is changing extraordinarily quickly. Canada is far behind when it comes to recognizing the issue of basic rights protection that is implicit in an information world. We were ahead of the game for a while when we enacted a federal privacy act that guaranteed legal rights for all employees of the Government of Canada and all of its clients - that is to say, millions and millions of Canadians who had dealings with the Government of Canada.
You have in law a privacy right that embodies the code of fair information practices. You have a right as a Canadian to see the files that the Government of Canada has in your name. You have a right as a Canadian to examine those files and to correct them if they are wrong. The government is obliged not to use that information for unrelated purposes without your consent. All of the basic elements of information protection are contained in that act. Subsequently a number of provincial legislatures have followed suit, but until recently the private sector in Canada has never been covered by similar legislation.
The world is changing extraordinarily quickly. Governments are now becoming involved in joint projects in which it will be difficult for ordinary people to know who is managing their information, whether it's a government or a private sector entity working in a joint partnership arrangement. The movement of information back and forth from government to private entities will be very hard to separate out.
Secondly, we now have a very uneven playing field in Canada, even in the public sector, because the Province of Quebec, greatly to its credit, a few years ago enacted privacy legislation that covers all commercial activity in the province, excepting entities that are covered by the Parliament of Canada. But even there, the banks have said they will honour the spirit of the Quebec Privacy Act, even though they do not agree to the point of letting the privacy commissioner of Quebec through their doors for complaint investigation. So people in Quebec now enjoy a substantially higher standard of recognition of their privacy rights than do other Canadians. I think the government is eager to level that field as well.
Finally, there is something I should draw to the attention of this committee because it has a direct bearing on the future economic well-being of Canadian businesses. Europe, which has long been leading the world in this field, has now adopted a common standard of privacy protection for all members of the European Community. One of the basic and most important elements of the new European Community standard is that privacy commissioners of the European states will be able to block transborder data flows to jurisdictions or countries where they feel the privacy laws are inadequate.
It is the view of most of the privacy commissioners in the European Community with whom I have had an opportunity to speak that at present Canada's laws are not up to snuff. I think it is not hard for you to visualize the effect if some state in Europe were to say it could no longer transfer data such as airline booking information or banking information, all kinds of data, to Canada or the United States.
This is not some hypothetical problem. We have already had a case in which the German railway system wanted to have all its passenger traffic data, including fare information, processed in the United States by Citibank, I think it was. The German data protector intervened and said they were sorry, but the railway couldn't do that. They said the American laws were inadequate for the protection of all this personal information about the movements of German citizens.
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The net upshot was that over a prolonged period, Citibank, the German data protector, the German railway companies and I think a representative from the United States government had to sit around a table and work out an agreement so that this contract could be fulfilled, which essentially involves the extraterritorial application of German privacy law to an enterprise undertaken in the United States.
It may be satisfactory contractual arrangement in terms of the parties involved, but a serious impediment to useful business arose that took nearly two years to sort out. I think they're still polishing it up. You wouldn't want to see that kind of an exercise repeated on a massive scale simply because Canada didn't have adequate privacy laws.
People who have given careful thought to this, with the exception of course of some of the corporations and institutions that would be affected by it, do recognize that the world has changed sufficiently now such that the private sector should be brought under an enforceable privacy law, as in the public sector.
There are some people in the private sector who agree with that. You might be surprised to know, for example, that the Canadian Direct Marketing Association - it's difficult to think of any kind of business that has a more direct interest in the ability to freely collect and use personal information than direct marketers - enthusiastically supports the idea of the federal Parliament acting to bring privacy law into the world of Canadian business.
The modalities for doing that are various. It has been the proposal of my office that the federal government, by way of leadership, should act now to bring those things that fall under the jurisdiction of Parliament, principally banking, communications and transportation, under an act similar to, but not necessarily the same as, the federal Privacy Act, because business has somewhat different requirements from that of governments.
There is no reason, I think, why we have to wait for the provinces. I'm quite sure that if the banks, transportation companies and communications companies were operating the privacy law, they would soon be active allies in making sure that the provinces acted to come on board as well.
That's the burden of my piece, ladies and gentlemen. I'll be happy to respond to any questions.
[Translation]
Mr. Rocheleau: First, in view of the importance of his role and testimony, I would like to point out that I would have very much appreciated the commissioner giving us a written statement we could have consulted not only now, but later on.
The Chairman: Could you provide us with a copy of your presentation?
[English]
The Chairman: Mr. Rocheleau has suggested that it would be very helpful to us if we could have a copy of your presentation, rather than waiting for the blues to come through.
Mr. Phillips: Yes, we can do that. I only have one copy with me, but I'll leave it with the committee.
The Chairman: Thank you.
[Translation]
Mr. Rocheleau: The Power Financial Corporation came before us earlier and made quite a long presentation reflecting your concerns about the protection of privacy and gave two real life examples of the dangers we face. First, the Canadian Imperial Bank of Commerce bought a pay service which gives it privileged information on new potential clients and the Royal Bank has purchased SmartHealth, a health management system giving information on health care. First, I'd like to hear your comments on this sort of thing.
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Second, as we don't often hear the Quebec government spoken of in such positive terms here, in Ottawa, I would like you to give us further details on the legislative initiative taken by the government of Quebec and which you seem to find much to your liking.
[English]
Mr. Phillips: I'll try to deal with the second part first. For a detailed outline of the Quebec act, you should ask the Quebec commissioner to come here and do that. I can only tell you in general terms what it does. It extends the Quebec Privacy Act, with modifications, which previously covered only provincial government information management activities, to the private sector of Quebec.
That means that companies in Quebec have to subscribe to the Quebec law, which says basically that if you collect information about clients they have to know about it; you're not going to use that information for other purposes than those you have agreed to with the customer; you will give the customer access, upon request, to those records so that the customer can satisfy him or herself that they are accurate; and that you will keep those records under proper conditions of security and confidentiality. That's the essence of the act.
There are some special aspects of the act that are intended to meet the particular problems of some sectors of the economy, such as credit reporting, but essentially it is a part of the Quebec Civil Code. Beyond that, I would have to ask our legal counsel to give you a more refined description of some of the details of the act.
As for the first part of your question, there are some activities in which banks are becoming involved, such as the smart-health project in Manitoba to which you referred. These are basically non-bank activities. They're done as a profit-making activity by banks making use of their data-processing capacity.
It's not for me to say whether a bank should or should not be doing that. In fact, I have no opinion to offer on other aspects of bank regulation, such as whether they should be allowed to have subsidiaries in the investment business or whether they should or should not own insurance companies. My concern is with what happens to the information that's involved. All the activities in which banks are now involved also include other things, such as trust companies, brokerage firms and so on.
The banks claim that they are living with and honouring privacy rights and that they don't use any of that information without the informed consent of the clients. I can neither agree nor disagree with that observation because we have no way of knowing. We must take the banks' word that under no circumstances do they ever put bottom-line considerations ahead of clients' rights. I can't answer that; we have no way of knowing.
But the opportunities are there, and there is no question about that. I simply think that when you concentrate so much economic power in one place and so much of the sensitive, frequently intimate, personal information of Canadians is in one hand, something better than a well-intentioned promise to be good and respectful of people's rights is not sufficient.
Mr. Grubel: Mr. Phillips, I'm impressed with the argument that you make in favour of privacy legislation. However, as a trained professional economist, bells always go off in my mind, which ask what it's going to cost us.
I think your example that Europe has done all of this.... As you know, there's a lot of revolt going on against Brussels extending all of this power against yet another layer of bureaucracy. You have heard that Canadians' incomes would be several thousand dollars a year higher if we didn't have this huge amount of regulation.
I can just see that over the last 120 years of this country, people as articulate and with as good causes as yours came here and said that this will be a perfect society, or a much better society, if only you pass that one other regulation.
I have a very simple question for you: has your office made a benefit-cost analysis?
.1835
Mr. Phillips: I don't have the economic analytical power in my office to answer that question, but I can tell you - and I'm very glad for Quebec's experience in other ways, because they are now operating under the kind of system I am advocating here - that Quebec's privacy commissioner has found it necessary to add I think five or six people to his staff, period. The Office of the Privacy Commissioner of Canada costs the taxpayers roughly $2.5 million a year. Almost all of that is expended in salaries. We have an operating budget -
Mr. Grubel: With due respect - it's getting late - this is not really the issue. The costs are not the few pennies that are spent by your office, or the office in Quebec. Surely it is all of the reporting requirements, the enforcement mechanisms, and all that.
I'm very disappointed that Canada - and I wonder whether Mr. Rock has done it - has not seen fit to engage the analytical abilities of somebody out there, whatever they may cost, to make a calculation of this type.
If you get your way, we are about to saddle the future of Canada with potentially many millions, if not billions, of dollars over the life of this country on reporting requirements. I am not personally convinced that the code of ethics is working so badly that the next benefits to be had from the enforceability of the sort you have talked about is worth all of that extra cost.
Mr. Phillips: Mr. Schmidt, let me try to respond with some hard information on past experience, which I think is relevant. The Government of Canada has had an access and privacy information law on the books now for roughly 10 years. It is not just my little office, or the information officers....
Please be patient with this, because it bears on the point you made -
Mr. Grubel: You haven't done a cost-benefit analysis, have you?
Mr. Phillips: When it comes to the protection of rights, it's very difficult to make that judgment. I can only tell you what it's costing the taxpayers of Canada now to have an access law and a privacy law, supported by commissioners, supported by staffs to investigate complaints, covering the legal privacy rights of 30 million Canadians in terms of their dealings with the Government of Canada. The total cost for everybody in the Government of Canada associated with that work is about $40 million.
Some may say that's too much, and some may say it's not too much. I make the case that when it comes to a sensible expenditure of taxpayer money, the protection of human and civil rights ought to be one of the number one priorities. No government, in my view, should be complicit in any exercise that is prepared to countenance the sacrifice of civil rights if on a fairly modest expenditure they can be protected. Now, if it involved a heavy expenditure.... But that's an argument, I admit that.
Mr. Grubel: With all due respect, Mr. Phillips, sitting in this room that is full of history there probably have been hundreds of people like you who said their cause was so good that every price was worth paying for it.
I mean, let's be realistic. You're a good advocate for your cause. But before I would vote for anything of this sort, I would like to see...and maybe you can't put a dollar value on the increased privacy people feel, or the sense of it. There are other ways of getting at it. I would like to see the banks and all the other agencies affected by it make a representation on what it will cost them privately, together with the increased cost on your part, plus the burden on the legal system, etc., before we go ahead with these kinds of projects.
I thank you very much, Mr. Chairman, and I thank you, Mr. Phillips. I think we have to differ on the issue.
The Chairman: Mr. Duhamel.
Mr. Duhamel: Mr. Phillips, you said during your presentation that you believe we were at one time in the forefront but no longer are. Is that correct?
Mr. Phillips: Yes, I did say that.
Mr. Duhamel: If so, who is? You've given the one example of Quebec, but there may be others as well.
Mr. Phillips: Yes. I would cite New Zealand, Germany, France, Australia. I might add that Australia is doing now exactly what I'm advocating here. They're in the process of extending their privacy law. There's also the Netherlands, among other countries. They are ones that have statutes applicable.
.1840
Mr. Duhamel: They have made the expenditures to protect the civil rights of their citizens. That's what you're saying.
Mr. Phillips: That's right.
Mr. Duhamel: Thank you.
Mr. Phillips: I have never heard it argued that this represents any kind of an excessive burden on government revenues.
The Chairman: Thank you, Mr. Duhamel. Ms Whelan.
Ms Whelan: Thank you, Mr. Chairman.
I would agree that the privacy of Canadians is of the utmost importance, and I'm very concerned that even with regulation that may not be possible as we move into the world of on-line banking and virtual banking. I'm just wondering if you actually believe it's possible that we can protect the privacy of Canadians in the transmission of information.
Mr. Phillips: Yes, of course I do. Yes, I do believe it is possible. There is ample evidence available, which I would be happy to supply to this committee, that technology is capable of producing in the information world privacy-enhancing systems. ``Smart cards'', for example, do not have to be inimical to privacy interests. You can design a smart card that will actually make it easier rather than more difficult to protect privacy.
None of us can be Luddite on the issue of information technology. It's here. But like all technology, it's what you do with it. You can use dynamite to help get coal or you can use it to blow up your neighbour's house. Technology from the beginning of time has always presented humans with the dilemma of whether to use it for good or ill purposes.
Information technology is no different. If it's used recklessly and without consideration in the design of a particular information technology application so that it does not take account of privacy in that the necessary passwords, gates, firewalls, encryption and all the other devices that are available are not employed, then, yes, they can destroy privacy, because eventually we'll have one database in this city in which all our life stories will be in it and will be available on demand to a lot of people.
The Chairman: Thank you, Ms Whelan.
Thank you very much. I'm very pleased that you have appeared before us. I think Canadians, through the brief debate we've through your presentation, can see the choice before us.
There is the choice contained in the white paper, which says privacy is important but the way to deal with it is self-regulation by the banks. We have the alternative put very squarely and strongly and forcefully by you, that self-regulation is not adequate. It will not meet international standards, standards that may be necessary to fulfil in the future in order to be part of global information technologies. You want third-party regulation, which you admit does bear added costs of regulation.
Mr. Phillips, you've been a very forceful and articulate witness. You've given us an added issue to think on very deeply before we come to our own decisions.
The next meeting will be tomorrow at 3:30 p.m. We will be meeting again, at our request, the Canadian Bankers Association to have them respond to a number of the questions that have been raised in our hearings and that we have put to them on a preliminary basis. We have also asked Finance officials to meet with us again to respond to any concerns we might have.
We are adjourned.