EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, September 26, 1996

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[English]

The Chairman: Could we come to order? The finance committee of the House of Commons is resuming its hearings on the proposed amendments to our financial institutions legislation.

We have before us this morning a person who is no stranger to our committee, a person who has appeared before, and we look forward with anticipation to the presentation of Mr. Duff Conacher from Democracy Watch. Welcome, Mr. Conacher.

Mr. Duff Conacher (Coordinator, Democracy Watch): Thank you very much,Mr. Peterson, and thank you very much for the invitation to appear before the committee during these hearings.

I will make a brief presentation and then I will welcome your questions with regard to this very important topic - important to many consumers across the country.

The review of financial sector legislation is important to many Canadians because many Canadians deal with financial institutions. Over 20 million Canadians are depositors, and of course many Canadians also hold insurance, so the Bank Act, the Trust and Loan Companies Act, and the Insurance Companies Act affect Canadians on a day-to-day basis in terms of their relationship with financial institutions.

There are several reasons why in this review consumer interests should prevail. Most central to this is that without the money and savings of Canadians, many financial institutions would not exist. Also, taxpayers and the government have provided protection and many privileges - especially to banks - for several decades, and, as a result, Canadians have a right to know what financial institutions are doing with their money, how these institutions make their money, and they also have the right to be protected by strong consumer protection laws.

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The concentration that has occurred in the financial services industry has also been facilitated by taxpayer dollars, which have helped banks take over several failing trust companies, and have also covered the losses from those failing trust companies.

Currently the big five banks control about 70% of all deposit-taking financial institution assets in the country, 80% of small business lending, over 80% of the assets and all but a few of the large companies in the investment brokerage industry, all but two of the large trust companies, and a majority of deposits, consumer credit and small business and mortgage lending.

They are also moving into the mutual fund industry and are now already controlling - just from being allowed in the last nine years to move into the industry - over 30% of the total industry assets.

This level of market control by the big banks has been reached through taxpayer subsidies and government protection. In return for these privileges and protections, banks should be required to give back to Canada and face a higher standard than other corporations in terms of their responsibility to their customers.

Because of the protections and privileges banks have received for decades, we feel that banks are much more like public utilities than private companies. Public utilities such as hydroelectricity, water and telephone are granted the significant privilege of usually almost exclusive rights to generating and exploiting a natural resource, whether it's the airwaves or the water waves in our country.

Similarly, banks have been given the significant privilege of playing the major role in generating and exploiting a human-created resource - namely, money. Both utilities and banks are in a position of public trust with regard to the resources they manage, and therefore banks should face higher standards in many areas of their activities than do other corporations.

When we look at the discussion paper that has been prepared by the Department of Finance on the 1997 review of financial sector legislation, we unfortunately see that the financial institutions are not being held to this higher standard. Especially in the area of strengthening consumer protection, most of the proposals are inadequate and unfortunately show what has been a clear bias in the government over the past several years. Instead of requiring compliance through regulation or legislation, it has decided to take the route of voluntary compliance and self-regulation.

While this may be arguable because it will save money - because government enforcement or government spending on enforcement is not involved - this has not been proven to date. The government is finally studying, under Industry Canada's voluntary codes project, the effectiveness of voluntary compliance. We feel that other studies, such as the 1994 KPMG environmental management survey and a study by the Public Interest Advocacy Centre, have shown that voluntary codes only work in very specific circumstances.

Unfortunately, many of the proposals made by the government with regard to consumer protection do not adhere to these criteria in terms of enforcement. The criteria are, first, is there independent and fully resourced enforcement of the measure? Second, are the institutions and the enforcement body accountable to the public? Third, are appeal mechanisms available for unsatisfied customers? Fourth, are there sanctions for violations? Fifth, does the government support the measure?

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I will quickly go through the measures proposed in the discussion paper, pointing out the inadequacy of each with regard to these five criteria. These five criteria are not just the criteria of outside bodies who have surveyed the effectiveness of voluntary compliance. They are also, one would hope, stated as a necessary part of a regulatory scheme by the government in the discussion paper itself. This has confused us because on page 19 of the discussion paper, it says:

There is no question that regulations are required in the financial sector. Regulations not only protect the consumer, they set out the rules of the game so that the sector can operate smoothly.

Unfortunately, with most of the proposals, the government is not setting out regulations but is instead proposing to work with financial institutions or simply ``explore'' the issue.

The only area in which regulations are proposed is in the area of privacy safeguards. But once again there is no enforcement body that will be independent and effective and accountable, with appeal mechanisms and stated sanctions for violations. Indeed, the proposal is for a person selected, paid and directed by the financial institution to be the so-called ``enforcement body'' - a person who would be in a clear conflict of interest - and clearly would be completely ineffective.

Even in the one area where the government is saying it is going to regulate, the enforcement will be lacking and therefore the regulations will be virtually meaningless.

Secondly, with regard to cost of financial services, the government is simply saying that consumers can shop around if the information is stated more simply. While we are heartened to see that the government recognizes that comparing charges can be difficult, we feel there should be a requirement not only to state service charges fully in advance and in a uniform manner, but also that banks should be required to disclose the cost of providing services, not just the amount charged for that service. This is an area where they should face a higher standard than other corporations.

Currently, their profit reports do not provide the information needed to determine whether they are gouging customers through banking fees or whether they are using fee revenue to subsidize losses in areas such as foreign operations that are of little benefit to Canadian consumers or the Canadian economy. The government should require banks, trusts and insurance companies to disclose this information.

In the area of availability of basic financial services, again the government is stating that it will work with financial institutions. Several non-profit organizations, one of which you will hear from this morning - ACEF-Centre from Montreal - have been working with financial institutions for many years on this issue and have been stonewalled.

Clearly there is a requirement for banks and trusts to open an account to any person who requests, to legitimately cash government cheques without charge, and to limit the hold on all deposited funds. Clearly, these kinds of requirements are needed in order to ensure that people with low incomes - the most vulnerable consumers - can at least receive basic banking services. Again, banks and trust companies should be required to provide these services because of the privileges and protections they receive. They should be required to face a higher standard in their service to customers than do other corporations.

With regard to the cost of credit and disclosure of cost of credit, there should be requirements not only to state the cost of credit fully in advance and in a uniform manner - and the U.S. Fair Credit and Charge Card Disclosure Act of 1988 provides a very good model for the committee to look at with regard to this. Again, financial institutions should be required to disclose the cost of their credit card operations as compared to the revenues generated from these operations so that we know whether their interest rates are justified, whether their fees are justified, and whether they are actually providing a service in a cost-effective manner to consumers.

You've heard about tied selling from investment dealers. We feel there is further exploration needed in this issue, but at the same time, why not simply prohibit it? Then at least customers will have the right to go to an enforcement body, which we hope will be independent, and say ``I have been put into this situation and it's an unfair situation and I want something done about it''.

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But the government should do a full survey, as it has done on other issues, similar to the survey ACEF Centre has conducted on the availability of basic banking services, which you'll hear more about again when they appear later this morning, I'm sure. The action of the government could be based on that survey.

We also feel there are areas not dealt with in this discussion paper and the consumer voice should be much more central to this review. First of all, there is currently a business impact test the government uses whenever regulation or legislation is proposed, and it explicitly states on the cover of the business impact test, or the cover sheet that's sent along with it, ``the attached questionnaire provides you'' - that is, business - ``with an opportunity to influence the government's policy-making process''. This raises the question, where is the corresponding consumer impact test? Why is the government not sending out a consumer impact test questionnaire and survey to consumers whenever the government proposes legislation? Well, there isn't one.

This shows that although consumer issues are raised in this discussion paper, consumers are not central to the review as they should be. As I hope you as elected members would realize, more voters are depositors than are heads of financial institutions.

We also feel in a few of the other areas there should be disclosure of lending statistics, which I know has been addressed by the industry committee but which should be part of this review; also reinvestment requirements to correct any discrimination in lending revealed by disclosure of lending statistics; and finally the provisions, which you will see in my brief when you receive it, and I know it is being translated currently. We also comment on the proposals for restrictions on self-dealing and conflict of interest within financial institutions.

There's also a section on the state of the board and make-up of the boards of financial institutions. We feel the conflict-of-interest restriction should be very strong and there should be requirements to ensure consumer and community interests are represented on financial institution boards and to ensure shareholders can propose social responsibility measures at shareholder meetings.

To return to the consumer protection measures, we currently have ombudsmen at banks who are, once again, selected, paid, and directed by the banks. Again, they are all in a fundamental conflict of interest, making them ineffective lapdogs for the banks instead of effective consumer protection watchdogs.

We have two recommendations for resolving this situation. First of all, there should be an independent government-appointed ombudsman for all financial services industries. I talked about banking ombudsmen. When you talk about trusts and insurance companies there aren't even ombudsmen where people can apply, not even ombudsmen appointed by the companies themselves, who again would be ineffective but at least would exist. So the government should appoint an independent ombudsman for all financial institutions. It can require the financial institutions to pay the cost of it. There's no reason why that can't work in the same way as the Office of the Superintendent of Financial Institutions is currently funded by financial institutions.

As for our second recommendation, those of you who were at the hearing or read our submission from August of last year will be aware...and I hope you also all have, if not the full brief, at least this question-and-answer sheet with regard to the Financial Consumer Organization.

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I'll take you briefly through the mechanism for creating the Financial Consumer Organization. It would be created by the federal government, requiring federally regulated banks, trusts and insurance companies to enclose a one-page flyer when they mail out their bank statements, credit card bills and insurance premium statements to their customers. The flyer would invite the customers to pay a nominal annual membership fee to join the Financial Consumer Organization. This mechanism has worked very well to organize utility ratepayers in the U.S., and it is needed in Canada in order to facilitate consumers banding together in the financial services area.

Currently we are very outmatched by the lobbyists, by the political donations of the financial institutions. There are about 100 full-time lobbyists who work for financial institutions in the country, tracking your every move and the government's every move. They donate millions of dollars to political parties, and they're not representing consumers, who are voters. We and a few other groups are trying to do that, but all together, if you added up all of our time, there are about two full-time people trying to represent the interests of over 20 million consumers.

I'll end by giving you a few examples - which you'll see attached in appendix B to the brief - of other flyers that have been sent in mail-outs by financial institutions.

This flyer was sent out by the Canadian Association of Mutual Insurance Companies and it advocates their position in the debate over whether banks should be able to sell insurance from their branches. It was sent through their premium statement envelopes to all their customers. It says at the end that there are reasons why government and consumers should say no to added powers being given to the banks in the current review of the financial services legislation and it advocates that their customers contact the government.

I'm showing you these to make you realize that this is not a new idea, this idea of having flyers go out in billing envelopes, mailings to customers, for many different causes.

The federal government sent out a notice with regard to the census in credit card envelopes of financial institutions.

The Royal Bank sent out this notice with regard to their support for the Canadian Olympic Association, in announcing a contest - again, a worthwhile cause, but why should it only be mailings that they want to send to their depositors? Why shouldn't depositors be given the chance through receiving a flyer to make a decision about whether they want to join a financial consumer organization that will represent their interests in the financial marketplace?

Finally, the Royal Bank also sent out this flyer for the white lion exhibit at the Metro Toronto Zoo - again, an interesting event, something they might want to make their customers aware of, something they are deciding, not their shareholders or their customers, to provide financial support to, and again, another example of flyers being used to inform and to fund-raise, and also to organize or advocate particular issues.

We are simply asking for a quid pro quo, something in return for the privileges and protections that the financial institutions, especially the banks, have received for decades from many federal governments.

I will end on that note and hope you will think about the consumers who are voters out there, and also about what has been done for cable television customers in the last week, and push the government to strengthen all of the consumer protection measures in this discussion paper and in regulations they will hopefully propose over the next few months in the 1997 review of financial sector legislation, and also push them for this very simple method that costs the government and the financial institutions nothing and gives consumers a chance to join a financial consumer organization that will be directed by them, funded by them, and will represent their interests in the marketplace.

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I know when the banks report $6 billion in profits in a couple of months many consumers across the country will be writing you at the House of Commons, Ottawa, K1A 0A6, sending you letters and saying, you had better do something for me because I know I'm going to meet you within a year or two on the doorstep and I'm not going to look at you stopping banks from selling insurance or selling auto leases as something you've done for me; that's something that's been done for other industry sectors. Unfortunately, to date, the whole review has been dominated by turf battles between industry sectors, and it's now high time for the government to do something for the consumers of this country.

Thank you very much.

The Chairman: Thank you, Mr. Conacher.

Could we start the questioning, please, with Mr. Grubel or Mr. Schmidt.

Mr. Grubel (Capilano - Howe Sound): Mr. Conacher, it's always a pleasure to see you. You have refined further your presentation, and I really admire your idealism about wanting to help the poor and the consumer.

I have studied economics for a long time, and I have come to the conclusion that there are two ways of protecting the consumer. History is full of evidence, and we could talk about this for a few hours, that on the one hand you can pass regulations, you can interfere with the system of free enterprise - I agree that there is not entirely free enterprise in this sector - or you can assure that there is good competition.

I do not know whether or not the banks are overcharging, whether the banks are frivolous in the offering of the products they have, whether they discriminate against the poor, or any of those kinds of things, but we have seen from the history of mankind that the poorest in the world in every country are best off when there is free enterprise.

I'm as much concerned as you about the poor and about the consumer getting a good break, but there are two diametrically opposed ways of achieving this. One of them is to go and require the government to require the banks to do certain things they don't want to do. The alternative way is to make sure that the banks have lots of competition.

How many more new credit card opportunities exist now in Canada than 20 years ago? Have you ever studied that? You should have a look at it. There is lots and lots of competition.

We heard yesterday about MasterCard wanting to come to Canada and wanting to lower the rate that is being charged from an average of 21-odd percent, which they explained is due to the fact that the banks have high losses. They have found a way of cutting these losses. They have brought down rates in the United States from over 20% to well under 10%. That is an effective way of protecting the consumer: having more competition.

On loans, we had a witness here who was telling us how people who have been rejected by these nasty banks come to them, happily walking away having gotten a good deal.

Competition is the way to go. That's the first point I want to make. You owe it to yourself to really examine the merit of the two alternatives.

On the alternative you're proposing, have you ever taken a course in accounting?

Mr. Conacher: Yes.

Mr. Grubel: Have you ever studied the problems that utilities and all business have in making a distinction between marginal cost and average cost?

Mr. Conacher: Yes.

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Mr. Grubel: Are you prepared to say it is possible for the banks to come up with reliable figures on what the true marginal cost is of, say, providing a specific service on some account, a specific service on this and that. Are you prepared to have a government agency or yourself go to each bank to discover whether they have allocated properly their average cost to the marginal cost for which you want a revelation of the price?

Mr. Conacher: First, in terms of competition as a way to go and in looking at the situation from the vantage point of classical economics, there is always the assumption, whether it's a laissez-faire perspective or that of interventions, that the consumer is fully informed. Competition, because of the complexity of comparing service charges, does not exist in a lot of cases.

In 1987 a finance committee report concluded that the variety of ways of stating credit card prices and interest rates was so confusing that the wide choice available was meaningless.

Mr. Grubel: Mr. Conacher, I agree with the point you are making.

Mr. Conacher: All we're asking for is simplification and then for a disclosure of their costs versus their charges.

Mr. Grubel: Okay, but now you tell me whether you really understand the difference between two different cars that are for sale. Are you now wanting to have a simplified listing of how thick the wire is on a Lincoln Continental versus that of a Chevette? Do you want to know precisely whether the consumer is in fact getting a bad break because the Chevette is not a sufficient amount cheaper than the Lincoln, even though the wires are 50% thinner? This can be said about food products, about electronic products - it can be said about everything.

Mr. Conacher: I agree.

Mr. Grubel: Have you ever considered the social cost of doing those kinds of things? Why do it with this and not with all the other products in the world?

Mr. Conacher: Again, this is a point in response to simply having more competition. If we could go back a number of decades, then I think simply opening up the borders and the barriers to competitors would be a possible solution, but the control that the banks now have can't be reversed. Also, as the banks -

Mr. Grubel: Can I interrupt you on that?

Mr. Conacher: If I can just make one point made by a witness that you and the industry committee have heard from before, the Hongkong Bank of Canada - and the foreign banks as well will testify and have already said in a Canadian Bankers Association article that they can't even get into retail banking because of the cost of the bricks and mortar. The only reason the Hongkong Bank of Canada has branches is that it took over two failed banks.

Mr. Grubel: But you see, the point is that you are confronting a problem as you see it, and I reserve judgment on whether or not the banks are overcharging.

Mr. Conacher: I reserve judgment as well. All we need is disclosures, as they say.

Mr. Grubel: There are two ways of attacking this. One of them is via the left-wing, socialist, ultimate Communist way of doing it. You require everyone to reveal exactly what the costs are of that lamp on the car so that they can precisely estimate and make a rational choice. The alternative way is to devote your considerable energy and resources to doing the right thing and to saying that it is wrong for Canada to have legislation that reduces competition in Canada in the financial sector. That is the way I would urge you to go.

Let me ask one last question. You believe that it is clearly obvious that the banks should be required to offer special services to the poor of Canada. Is that what you're saying? I can quote you.

Mr. Conacher: Yes, in return -

Mr. Grubel: Then if somebody is poor, why don't we give them money? If somebody is genuinely poor, they deserve some more money. But do you understand how much it will cost society to ask automobile dealers, banks - all of whom have some kind of protection by the state - pizza parlours, anybody, to give breaks to poor people? What kind of a society will that be? Why do you pick on banks? Why aren't you going after cars and electronic products and clothing and shoes?

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Mr. Conacher: First of all, this is the finance committee and these are hearings on banking legislation. That's the first reason why I'm speaking about banks this morning.

Secondly, 95% of the capital base of the banks is made up of depositors' dollars, and the protections and privileges that they have received for years and years mean that there should be a quid pro quo, there should be something they should give back in return. They should be held to a higher standard in the same way that public utilities are. For example, public utilities that provide heat cannot shut off the heat in the winter even if the bills are not paid. That's because we don't want people who are on low incomes and who may face a cash crunch to freeze in their homes during cold winters.

Thirdly, we're talking about competition. Again, the foreign banks will say - and have said before - that they won't get into retail banking, so there won't be that competition for consumers. They are up here filling a niche in investment banking because of the cost of the bricks and mortar of getting into retail banking. All we are asking for is disclosure. As a wise person once said, sunshine is the best disinfectant. If you simply require banks to disclose what their costs are versus their charges, we will very quickly see whether or not they are gouging consumers.

Mr. Grubel: The point, young man, is that you don't understand. Where are you going to get the cost figures? If you have studied economics, you had a very poor economics and accounting teacher.

Let me tell you just one last thing. The automobile industry and the electronics industry in Canada have protection through the North American trade pact. They have privileges granted to them by the state, for whatever stupid reason, just like the banks. It's just ludicrous to take your initiative and to put it on every industry that has benefited from the state. To ask those kinds of questions makes no sense to me. The costs are horrendous. If you look at the history of countries that have tried to go this way, they have all abandoned this system, yet you are pushing us in this direction.

I urge you to look again at the alternative of removing whatever obstacle there is to the entry of competition to the banks. The banks in principle should not object because the competition won't come in if they don't charge excessive rates. Maybe that's one reason they don't come in. Maybe it's because the banks in fact are charging competitive rates. So devote your energies to this.

I just wish to make this as a final statement, Mr. Chairman. Thank you very much. Maybe you can turn to the next group.

Mr. Conacher: If I may respond just briefly, the United States, which many might call the heart of capitalism, has many of these measures in place already: disclosure of lending statistics; reinvestment requirements if the disclosure shows discrimination in lending; and uniform disclosure of credit card interest rates and charges.

Finally, I simply don't believe perfect competition exists when the sellers are organized but the buyers aren't. What that means is that all the sellers are there to represent their interests, not only in the marketplace but also in policy. You've heard from all the associations, insurance trusts and banks, and they are using consumer dollars for those representations. They are passing on the costs of their lobbying, their political donations, to consumers. Perfect competition will exist when there are many competitors and they are all organized and are representing the interests of their various sectors, as well as organized consumers.

If you want to really foster competition, I think you should support the proposal for a financial consumer organization and push the government to place this requirement on the federally regulated financial institutions.

Thank you.

The Chairman: Thank you, Mr. Grubel.

Very briefly, I have indications that there are three questioners from the Liberals.

Mr. Duhamel.

Mr. Duhamel (St. Boniface): Thank you, Mr. Chairman.

Thank you for your presentation. I simply wanted to pick up on two points very quickly.

The first one is this. As a member of Parliament, I get a number of complaints from citizens and small businesses with respect to the banks. One of the things I've found is that since we have an ombudsman - or this office - in place, a number of those problems have in fact been resolved.

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So I just wanted to caution about your very strong statement that because they are paid by the banks, they simply are lapdogs for the banks. I think it's a little harsh. I know that in some cases, when I wasn't satisfied with the ombudsman's decision, I asked some citizens to look at the situation. They came to the same conclusion. That doesn't mean to say that it cannot be improved, but I think it was a valuable, additional service, and perhaps we need to see what we might be able to do further.

Here's the question I wanted to ask. Is your concern here primarily with the poor who are, in a sense, disenfranchised or have a great deal of difficulty accessing services, or is it with consumers generally overall? Perhaps you would like to comment on that.

Mr. Conacher: It's with consumers generally overall. All consumers who receive a bank statement or a credit card bill would receive a flyer with regard to a financial consumer organization having access to this information. So we are concerned about all consumers generally. Obviously, those without the resources to hire a financial planner or to have somebody deal with the bank and get private banking services because of the savings they have are the ones who are the most vulnerable just in terms of access to information or fundamentally just access to the basic financial services of being able to cash a cheque from a government, open an account, etc.

With regard to your statements concerning the banking ombudsmen, one of the flyers that the banks have not sent out in their mailings to customers is one that says the banking ombudsman exists, what the address is, and the step-by-step procedure by which you can complain.

Mr. Duhamel: I've done it in my householder to all of my citizens.

Mr. Conacher: Yes. You're a socially responsible politician. Where are the socially responsible corporations?

Having a complaint body that nobody knows about will, first, keep the complaints down. The banks are very good at aggregating how many debit card transactions have occurred - the increase in that shows that everybody must love debit cards - and how many automatic banking transactions occur, showing of course that everybody must love automatic banking. Look at the increase in their use.

Yet they seem to be incapable of aggregating the number of complaints that have been received about informing consumers through flyers in their mail-outs that there are complaint handling procedures.

So again, you have banking ombudsmen selected, paid and directed by the banks. They're in a conflict of interest. As well, you have complaint handling procedures that most consumers don't know about.

Surveys have shown that most tellers don't even know about it. ACEF Centre I'm sure will testify to that.

The Chairman: Thank you, Mr. Duhamel.

Mr. Schmidt, please.

Mr. Schmidt (Okanagan Centre): Thank you, Mr. Chairman. My questions are going to have to be short; I have lots of them.

Here's the the first question. You wanted to absolutely outlaw tied selling. How do you propose that to be done?

Mr. Conacher: I think more exploration needs to be done, but I think some provision could be put in now. Again, it wouldn't be that difficult to do the kind of survey that ACEF Centre has done within the timeframe -

Mr. Schmidt: Here's what I'm asking you. You've made a proposal here -

Mr. Conacher: Yes.

Mr. Schmidt: - that tied selling should be prohibited. Well, there's got to be some kind of rationale that allows you to make that kind of a statement. How do you prohibit it?

First of all, what is tied selling in your opinion? I know what it is.

Mr. Conacher: Tied selling is when you are not allowed to have one service of the bank without accepting also another service.

I must say that we have not received phone calls or complaints on tied selling ourselves. That's why we feel more exploration is needed. Some other consumer groups may testify that they are hearing from consumers about this.

If a small business wants a loan, that's fine as long as they also do all of the other services with the bank.

Mr. Schmidt: So would you also prohibit coercion?

Mr. Conacher: Yes, coercion in contracts is prohibited.

Mr. Schmidt: What's the connection then between subtle suasion, if you will, coercion, and tied selling? Could you differentiate among those three?

Mr. Conacher: If you have the option.

Mr. Schmidt: You always have that option.

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Mr. Conacher: You may not have the option if the bank says you have to do this.

As for suasion, I didn't bring a flyer. But when several of the banks now send out their automatic banking cards, there's a flyer that also says what are all the benefits of automatic banking: you save time, you don't line up, there's less cost, whatever. It depends on the bank or the trust company.

Mr. Schmidt: Is that good?

Mr. Conacher: That's fine. That's informing the consumer.

Mr. Schmidt: Okay.

Mr. Conacher: That would be trying to persuade the consumer to use those services. It would be nice also if they stated how much money they save, when the consumers use those services, by the number of tellers they've laid off and the reduction in their operating costs, but you really can't expect them to do that. That's why we want the overall disclosure of their costs versus their revenues.

Coercion is when it goes beyond persuasion and you're taking advantage of somebody in a vulnerable situation.

Tied selling is when there is no option. You have to accept this service if you take this. So for a small business, if you want to have a loan, then you also have to have insurance through their subsidiary. That is tied selling.

Mr. Schmidt: So you obviously would not make a distinction then between the small business that wishes to have a loan and that would then.... Something would not be as a condition of getting the loan, but it would be offered. At the same time, there would be certain privileges as a result of having taken the loan at this bank that it might not otherwise enjoy. That's not tied selling and it's not coercive in any way, shape or form.

Mr. Conacher: No, if the option is there to refuse those other services.

Mr. Schmidt: Okay. My final question has to do with the statistics you want the banks to deliver on costs and a variety of other things.

I sat on the industry committee when we had the discussions on lending to small business by the banks.

Mr. Conacher: Hopefully those discussions will continue.

Mr. Schmidt: They are continuing. In fact, the banks appear on a quarterly basis before the committee.

One of the greatest difficulties has been to get a reliable set of statistics, for whatever reason.

Mr. Conacher: Yes.

Mr. Schmidt: In any event, it is extremely costly and difficult to get those numbers. I'm not suggesting it shouldn't be there. As a committee, we want them very much and we want them to be reliable and clear. I would certainly agree with that.

The question I have is whether you want this for all consumers. If you took the average consumer in Canada, would they even begin to understand what those numbers are?

Mr. Conacher: They currently have them for mortgage lending in the U.S., which I hope you've heard as a committee member at one point or another from the researcher or others.

As there are identified problems, we feel they can be addressed again through disclosure. Sunshine is the best disinfectant.

Mr. Schmidt: I don't disagree at all. It's just a question of being practical and realistic in the request.

Mr. Conacher: The difficulty with all these proposals that we of course face is that nobody is counting the social costs now of what discrimination might be there. The Canadian Federation of Independent Business is doing its best, and you've heard from them, but nobody is counting all of those costs. At the same time, every time the banks appear before the industry committee, you better believe they remind you of the costs of collecting the data.

Consider a cost-benefit analysis. As well, it may be difficult to quantify the benefits in economic terms, in a dollar sense, of having this disclosure. From an economic standpoint, one can say these costs are very identifiable and that it's going to cost the banks $25 million to collect this data. They can't quantify the benefits, so they focus on that cost.

Mr. Schmidt: I think you're missing the point of my question. My question is not that. My question is, to what level do you refine these numbers so that Joe Brown can understand them? That's the point.

Mr. Conacher: It's actually quite appropriate that you say Joe Brown, because it is an issue of racism in the U.S. in addressing these mortgage-lending statistics. They are very simply disclosed, collected and collated by the government, by the Federal Reserve and by the other regulators in the U.S., and disclosed and shown and collated for the media and for public consumption.

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It's been very useful in the U.S. Many consumer groups have found it so. And it's not that difficult to have good statistics. The banks have unfortunately been successful in delaying the release of good statistics for two years. I'm convinced they've had them all along, because I'm sure they do them for market research.

Mr. Schmidt: I was hoping in your answer you'd tell us what level you want to go to. Statistics can be collected at so many different levels.

Mr. Conacher: For businesses, size and type of business, size and type of the loan, the loan loss and loan default rates for each. For small businesses -

Mr. Schmidt: We're talking about consumers here now. That's a whale of a lot more than -

Mr. Grubel: By branch or by the nation, by region -

Mr. Conacher: By postal code.

Mr. Grubel: By postal code!

Mr. Conacher: Yes, forward sorting area. If they can do it for 11,000 banks in the U.S., we should be able to do it for 6 up here.

Mr. Schmidt: If you're going to do it by postal code, I want to ask you what happens to your requirement for privacy. If that comes out on the basis of postal codes, you've almost told the world who is getting what loan.

Mr. Conacher: No, it would all be done according to the Statistics Canada guidelines for privacy protection, which they use in their census gathering and their disclosure of census information.

Mr. Schmidt: Of course there's a lot of debate about that - whether that is not in fact invading some privacy.

Mr. Grubel: That remedy would be nationwide or by postal code?

Mr. Conacher: Remedy?

Mr. Grubel: Remedy, yes. You find out that somewhere there is too much being charged, they make too much profit. Do you want it fixed just in that area or do you want it fixed for the whole country?

Mr. Conacher: No, we're not saying too much is being charged or too much profit is being made. This is in the area of lending and whether they're discriminating unjustifiably against certain borrowers. So the remedy would be targeted reinvestment, as you'll see when you read my brief, pages 9 and 10.

I know it's much more related to what the committee is focusing on, but we feel the Bank Act is open. It should be part of the discussion and should not be voluntary negotiation.

Mr. Schmidt: I agree with the discussion. It's just a question of what level you want to go to.

Mr. Conacher: Yes. Please contact me if my brief does not provide enough details for you.

The Chairman: By popular demand, Mr. Conacher, there are two more members who want to ask you questions. We're beyond our time, but would you mind staying on?

Mr. Conacher: Not at all.

The Chairman: Ms Brushett.

Mrs. Brushett (Cumberland - Colchester): I'd like to applaud Mr. Conacher for coming here this morning in defence of consumers. I believe a lot of the areas he's brought forward, such as full disclosure, the cost of credit, of prepayment of mortgages, tied selling, the cost of doing business, purchasing financial services...these are all areas that others have brought before us, and his intervention simply adds clout to the defence of consumerism and fairness in buying financial products.

That having been said, the defence of what we have done in terms of issuing services to banks, selling insurance over the counter, and leases from the automobile dealers wasn't done simply because of sectors in our society and our economy. These were consumers as well. They were small job creators in rural areas. We thank you - I thank you - for keeping us vigilant that consumers are the ones we're here to serve and reminding us of that.

My question is this. Do you feel it's necessary to develop your financial consumer organization as opposed to opening up more competition, so consumers would have more information, more knowledge, more access there?

Mr. Conacher: I don't believe more competitors, or any new competitors, will necessarily disclose more information. It's not going to help consumers to have another five credit cards, all of which price their credit card services differently, their interest rates differently, so you just have five more people you're trying to compare to figure out what is the least expensive option.

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Again, I would say perfect competition will exist when not only the sellers are organized but also the consumers. They shouldn't be left out. And for no cost to the government and no cost to financial institutions, why not send out the flyer once and see if they respond? Give them the option. Give them the choice.

Mrs. Brushett: I applaud you one more time for your youth and your idealism. You are the person who makes democracy work. Thank you.

Mr. Conacher: Thank you very much.

The Chairman: Mrs. Chamberlain, please.

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

First of all, I welcome you here. I am pleased you did come and share your ideas with us.

I was really pleased about your talking about consumers all the time. If you have followed the hearings at all...we talk a lot about consumers. Obviously consumers are constituents. We hear a lot from them.

A couple of avenues in the banking area about which I have heard a lot from consumers or constituents are the record profits you made reference to.... That is an ongoing theme. People want to try to understand how the justification comes for those. That is a huge theme that emerges.

One of the things, though, that really did bother me a bit in your presentation was the reference to the ombudsmen being ``lapdogs''. I guess I would ask you your real justification for such terminology. As you know, the industry committee worked very hard towards a national ombudsman, and although the representation on the board of directors is not perfect - I certainly have questions in that area - I really believe we're headed in the right direction with an ombudsman. I think the banks have been good at least to recognize that this is an important aspect. So I would like you to elaborate a little on why you really see no value in the ombudsman as it is today.

Mr. Conacher: I'll quickly echo what I've said before. First, consumers haven't been informed about the ombudsman procedures. Second, many bank staff don't even know about it. Third, they're all selected, paid, and directed by the banks. Fourth, they can't make any binding rulings. Fifth, on the board of the national industry ombudsman, five of the members are from the banks; the board makes decisions by majority; the only decision that can't be made with consensus of the three outside directors is his dismissal. That's the only decision.

One of the outside directors comes from an institute that has received over $800,000 in donations and endowments from the Royal Bank. There's a question about his independence as well. So then we're talking about six of eight.

ACEF Centre will also testify to this. They've studied the British system. They've done a report for the government on banking ombudsmen. The structure fails on every single criterion, and every single criterion I've set out, of an independent, accountable system with an appeal mechanism and sanctions. I've listed five criteria, and the banking ombudsman fails on all five.

Again the government could have, at no cost - because that was one of the reasons raised for the government not appointing an ombudsman - simply required the banks to fund it. I think it should be for the whole financial services industry and they should all kick in. It won't be that much for any one institution if all the insurance companies, trust companies, and banks are contributing to the budget. Then you will have somebody who is at arm's length.

Not to put too fine a point on it, the government also - and this is another one of our issue areas and campaigns - promised an independent, effective, and publicly reporting ethics watchdog, you may remember, in the red book, on page 95, if you haven't read it. Instead we have Howard Wilson, who reports privately to the Prime Minister, who cannot investigate without the Prime Minister's approval, and who is a lapdog for the government instead of a government ethics watchdog. We criticize both of them.

There's a lot you can do to strengthen them. I would think consumers in Toronto, in Truro, in Guelph, in Winnipeg, in Niagara Falls, in Kelowna, and also in West Vancouver.... I think consumers in these cities, as well as across the country, will be very interested when they meet you on their doorsteps in a year or two to hear what you've done for consumers.

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A perfect complement to a banking ombudsmen and to solve a lot of these problems is, once again, the Financial Consumer Organization.

Give consumers a place they can call when they have a complaint, when they need help complaining to an ombudsmen and when they want to try to compare service charges, and also so that it's not just myself sitting here but a representative of a group with a few hundred thousand members who can really tell you from surveys they've done what consumers are worried and concerned about. We'll have done surveys on tied selling; we'll have done surveys on some of these other issues that the government wants to address but right now has no information on. That's because none of the groups that will appear before you from the consumers' side have the resources to match the bank lobby, the insurance lobby and the trust company lobby.

Mrs. Chamberlain: I thank you for your perspective, and I think certainly there are some things you have proposed that do have merit.

One thing I would add is a little disappointment that there does not seem to be a recognition, almost of any of the institutions you've talked about, that they really do provide valuable services to consumers. It really does appear that you've fared it the worst and have a bad opinion of all, and that is too bad. I think there have been gains made and those need to be recognized too. If we become too focused on one side, I don't think that's valuable either.

I do thank you, but I would hope in the future you would focus a little bit on the positive side, too, because I think there are some positive things.

Mr. Conacher: Financial institutions provide essential services to Canadians, as essential as any public utility. We do recognize that they provide those services well, in many cases. It's a stable and sound system in terms of banking, although we have had as much of a savings and loans crisis in our trust company area as the U.S. has on a per capita basis and given the size of our economy.

There are a lot of problems, and I guess we feel when we appear before this committee that you hear from the other side very much, all the time. They're here every day. I can't be here every day, and no consumer group can. We don't have the resources to be here every day.

I hope you take that into account regarding the strength of my comments on behalf of consumers today. Thank you, again, for the invitation to appear.

The Chairman: Thank you, Mrs. Chamberlain.

Mr. Conacher, you have presented to us a very comprehensive list of concerns you have on behalf of Canadian consumers. I want to thank you. I think the list you have presented to us, in a very articulate and detailed fashion, will serve as a benchmark for us, and we will look forward to the responses of the banks when they come back before us at the end of our hearings.

I thank you again for the excellent work you have done.

Mr. Conacher: Thank you very much.

The Chairman: Could we take a two-minute break while our next witnesses come forward?

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The Chairman: Our next witness is the Deutsche Bank - Canada: Stephen von Romberg Droste, president and chief executive officer; Barry Munholland, senior vice-president and managing director; and Marlene Buchanan, who appeared yesterday with the group representing schedule II banks.

Before you start your presentation, we had a presentation by the schedule II banks yesterday. Are you looking at the issue of foreign branching that they brought before us, or are you looking at some of the issues that were brought before us by Norwest Financial and Capital One, involving doing business in Canada and not being regulated as a bank?

Mr. Stephen von Romberg Droste (President and Chief Executive Officer, Deutsche Bank - Canada): We have been very supportive of the CBA initiative for foreign banking in Canada, but I think it is fair to say that we also have to deal with the realities of the white paper and that's what we're really here to talk about.

The Chairman: Fine. Welcome. We look forward to your presentation.

Mr. von Romberg Droste: Thank you very much. First of all, let me express our appreciation for giving us the opportunity today to talk a little bit about our views on the white paper as it has been presented to the public.

As I said, we are in full support of the CBA initiative to allow foreign banks to branch in Canada. At the same time, we would also like to look at the white paper itself because we think there's more than the branching issue.

Let me give you briefly a rundown of who we are here in Canada. We have been long associated with Canada over the last years and have started actively in this market in 1981. Since then we have really established three distinctive businesses: our banking franchise; our investment banking franchise; and of course our asset-based financing, which caters principally to small and medium-sized enterprises in Canada.

All those business areas are affected by the white paper, and that's why we thought it would be very helpful to contribute to this process.

Basically, except for the branching issue, I think it's fair to say that we feel the white paper is a very good start in the process of changing the Bank Act in Canada and the regulatory regime associated therewith. From this point on, however, we feel that a rapid evolution is needed to preserve the financial marketplace of Canada and, indeed, to expand it further. At the same time, we also consider it necessary that the government rationalize certain inconsistencies in the white paper, and we will come to those in a moment.

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These inconsistencies refer basically to two or three principles. One relates to the non-bank affiliation. That is the issue about schedule II banks holding their subsidiary companies in Canada through foreign entities. We think there are serious issues to be looked at and to be dealt with in taxation, the self-dealing regime, capital issues, and consolidation. On the near-bank side we seem to detect an uneven playing field between regulated institutions in Canada and non-regulated institutions in Canada. Furthermore, this area is of serious concern to us because it affects our capital base quite dramatically. What can be said about the CDIC opt-out is that we have looked at this and of course we are not on the retail side of the market at all, so for us as a wholesaler it is an issue we would obviously choose if it were to be available to us.

Let me comment briefly on our views on what the regulatory regime will do to the Canadian financial marketplace. First of all, we think it has fostered domestic institutions to become very strong in their own regions, but there is an argument that it has inhibited international growth. At the same time it's fair to say it has restricted the foreign banking community from playing a meaningful role in this market. This is in stark contrast to developments in global financial markets. We see three major developments here: globalization regardless of political and geographic boundaries; liberalization that plays into the hands of the domestic institutions...that they are not disadvantaged relative to others; a tremendous technology drive and at the same time serious consolidation in the financial services industry as such.

The effects of the regulatory environment in Canada really are an incongruent application of internationally recognized standards. We also seem to detect a migration of Canada's financial markets offshore, something we do not really support. At the same time there's a contraction and withdrawal by foreign banks in Canada. We have to change the regulatory regime very quickly to avoid a further erosion of our market.

The solutions are manifold. The branching issue was dealt with in an extensive way yesterday, and we support that. But beyond that there are other issues we have to deal with. For example, the leverage test we are operating under has to be reviewed or redefined. The self-dealing regimes have to be analysed and looked at; also certain taxation issues on withholding tax and alike. The level playing field is something we would certainly vote for.

What is the up-side? We think the up-side is that we will foster migration of financial services into Canada rather than the other way around. We want to keep Canada on the leading edge in financial development, and this is one tool to achieve that.

Finally, I also think under the right circumstances we will have a better job environment for foreign institutions. We will have better technology available to us and we will import corresponding infrastructure. We will generate a meaningful tax revenue base. Most important of all, we will enhance the perception of the world of Canada as a place to do business in. We certainly believe Canada is ready and should be a full global participant in these markets.

We are certainly willing to participate actively in the definition and finalizing of the white paper as it has been presented. I hope I can contribute here with a few questions and answers you may have on further details of this paper.

I would like to thank you for your attention. Thank you very much.

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

Mr. Schmidt, please.

Mr. Schmidt: Thank you very much.

Welcome. It's good to see you. I think the whole concept of what you've presented here - a ferocious amount of detail is hidden behind all these short statements you made - is very well done.

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I'd like to ask you in particular about the statement you make in here on the migration of financial institutions into Canada rather than the other way around. How do you see this actually taking place? I think we have at the moment, if I understand your paper correctly - this is the first moment at which I've seen this - a domestic banking community in particular that is very strong as far as the domestic marketplace is concerned. It's not quite as strong when it comes to the international marketplace. In fact, quite the opposite is true.

With this migration into Canada, do you see it being balanced by our banking system going out internationally?

Mr. von Romberg Droste: I hope that would be the case. I was reading yesterday that one major bank was making a serious announcement about increasing its international profile. I think it should go both ways and that foreigners should come here.

Mr. Schmidt: It should, but do you think it will? That's the point.

Mr. von Romberg Droste: I would hope it would.

Mr. Schmidt: The other question that I have in that connection is also with regard to the number of domestic banks we have now. If that kind of effort was made in the international marketplace, would you anticipate that it would probably result in the merger of some of the current banks that exist in the domestic market in Canada?

Mr. von Romberg Droste: As I've said earlier, I think there is a certain worldwide consolidation movement in the banking industry. I don't think Canada will be able to avoid that same process over time.

Mr. Schmidt: So that would be an expectation that you would have.

Mr. von Romberg Droste: I don't have an expectation as such, but I think it's inevitable over time.

Mr. Schmidt: So you would anticipate it then.

Mr. von Romberg Droste: I would think so.

Mr. Schmidt: Okay.

The next question has to do with the level playing field that you're talking about here as it exists among the various financial institutions that we have in Canada. Could you detail a little more clearly what kinds of changes would have to be made in order to create that level playing field?

Mr. von Romberg Droste: Barry, do you want to pick that up for a moment.

Mr. Barry Munholland (Senior Vice-President and Managing Director, Deutsche Bank - Canada): I think there are a number of issues, and they have to do with the entire financial industry.

An example we used was the regulated versus non-regulated sectors of the economy.

We hold an operation that provides asset financing for medium and small businesses. Because of its association with the bank, it is unable to compete in the same way as other institutions that are not associated with the bank. Our investment dealer, because of its association with us, cannot compete at the same level and with the same competitive advantage as investment houses that are not associated with a bank. As a result, we are usually operating at a disadvantage in those businesses because we are under the auspices of the Bank Act and comply with the Bank Act, but the Bank Act is not consistent with some of the other regulations that different parts of the financial industry work under.

Mr. Schmidt: To put this into context - and you probably heard the witnesses who were before us yesterday, such as Capital One - do you see yourself competing directly with Capital One?

Mr. Munholland: At a certain point, yes. It's one part of our operation that we would want to have in direct competition with different parts of the financial community. Right now, we have to compete with them as a bank, but what we would like to be able to do is differentiate ourselves.

Mr. Schmidt: Either they compete with you as a bank or you compete with them on their level.

Mr. Munholland: Exactly. As long as it is equal for each person or each entity in its own market, I think we will have achieved what we want.

Mr. Schmidt: At the moment your interests are primary; your activities are primarily in the wholesale banking area. Would you move into the retail banking area if branching became possible?

Mr. von Romberg Droste: Not at this very moment in time. We are piloting various projects in Europe and are looking at the results there. It may well be that it will happen, but at the moment it is not envisaged.

Mr. Schmidt: Okay.

At the moment, Mr. Chairman, that will be it.

The Chairman: Thanks, Mr. Schmidt.

Are there any further questions? Mrs. Brushett.

Mrs. Brushett: It's been brought to our attention by other witnesses that only Canada and Mexico, within industrialized nations or G-7 nations, are not up to date in international banking and act almost as protectionists. Do you agree with this, and are you saying that we are behind in developing into international markets?

Mr. von Romberg Droste: I would agree with that, yes.

Mr. Munholland: It's not that Canada is so much behind as it is - and I think this is the word that Mr. von Romberg Droste used - incongruent. We are slightly out of step. Our timing may be a little different and our approach is slightly different from what the international community appears to be moving toward. As a Canadian, I don't like the characterization of being behind, and I'm not sure that I'm really enamoured of being lumped with Mexico, but in some cases in actual fact we are.

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Mrs. Brushett: In terms of branching, I think most of the foreign banks have indicated that they are interested in wholesale banking. In our rural areas we find there is a loss of services from domestic banks and that foreign banks aren't interested. Who in turn will serve rural areas if no one is interested in retailing there and it's too costly to serve?

Mr. Munholland: That's a fair question and a concern that I think the members here should have. I think the response to it is that the foreign banks, as they approach Canada, do so with limited resources, just as Canadian banks facing the international market also have to distribute limited resources. To some extent, large parts of the market have to be left to the domestic bank because they are the only ones that have been able to assemble the resources in Canada to be able to serve universally, as they do. The Canadian banks would be faced with an equally difficult task if they were asked to serve rural Germany, for example. They would not have the resources to be able to do so. But they would still serve an interest by being present in those foreign markets and by providing entrées to Canadian businesses, as well as to non-Canadian businesses. That is an effort we're trying to make as well.

To be perfectly direct with you, I don't think we would be able to serve rural interests as well as the Canadian banks. I don't believe we can assemble the resources in order to do that in Canada. We're working to do that in the countries where we have a complete branch network, in our own home country of Germany.

Mrs. Brushett: Thank you.

The Chairman: Thank you, Mrs. Brushett.

How many of your problems would be resolved if we allowed foreign branching immediately?

Mr. von Romberg Droste: Percentage-wise, I would have to figure that out, but I would guess 50% to 60%. I think there's a certain danger, however, to saying that branching is the only issue. I know that in there -

The Chairman: You were the first witness to raise before us this issue of the withholding of tax differences that arise, the capital tax differences that arise, and these issues. Have you had an opportunity to discuss your points of view with our Finance officials?

Mr. von Romberg Droste: Yes.

The Chairman: Are the discussions ongoing or are they closed?

Mr. Munholland: We in fact spent part of last week discussing these very issues with the Bank of Canada and with the Department of Finance. They're aware of our concerns. We have actually been working very hard to try to find solutions within the context of the regulatory environment in order to resolve some of these problems. So discussions are ongoing. We still have more to do.

The Chairman: Are you the only schedule II bank in Canada that has these problems? This is the first time we've heard of them. It was not part of the brief presented to us yesterday by the CBA task force.

Mr. von Romberg Droste: I think the reason why this wasn't presented yesterday is that there seems to be a common undercurrent to say that if a branch were to be allowed, capital tax would fall away, and probably withholding tax would as well. I have not seen that as fine print as of yet, so we don't know. If the current environment were to go on, however, these are issues that we certainly would have to look at very seriously.

Mr. Munholland: I think a lot of the schedule II banks that have responded have tended to look at branching as being the panacea for all the problems they're facing. In actual fact, we don't see it that way. Underlying branching, we think there are a number of problems that need attention that branching may or may not address. Our concern is that these are the ones that should be addressed directly. Branching may in fact become a moot point if these other issues are handled differently. Branching would become irrelevant to some extent.

The Chairman: Could I ask you to explain to me quite quickly what the withholding tax problem is and how it should be resolved?

Mr. Munholland: The withholding tax basically applies to transactions between ourselves and the rest of the Deutsche Bank community throughout the world. We are able to raise funds in a variety of different countries at rates that are very often attractive and competitive, and that would give us a chance to provide lower rates in Canada. We cannot borrow from our other Deutsche Bank relations because the withholding taxes that are applied to any interest payments back and forth between our entities makes it uneconomical no matter how -

The Chairman: What's that rate at in Canada now, under the treaties?

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Mr. Munholland: Between Canada and the United States right now it's at 10%. Between Canada and Germany it's at 15%. Of course, if I can save 20 basis points, 10% wipes that out very quickly. It's not even a point for us.

The Chairman: Your point is that because of the tax regime you're unable to access the cheapest capital for use in Canada.

Mr. Munholland: That's exactly correct.

The Chairman: I think this is the first time we've heard this issue raised before us. It's one I want to see pursued.

Mr. Grubel: May I put a question for information, Mr. Chairman?

The Chairman: Please.

Mr. Grubel: Withholding tax is taken away, but then when you file your return you get your money back. What's the issue here? Is it the withholding or is it the tax rate; that there exists a tax?

Mr. Munholland: If we really get down to the details and the economics of it, it's really the cost of carrying it, because we have to pay the withholding tax immediately and we then have a period before we collect it back. The withholding tax rate is relevant only because that determines the actual amount of money we have to pay in withholding tax. Then that money is held by the government until such time as it's refunded to us. There is a cost to that money being transmitted to the government first and only refunded afterwards. That cost still makes our dealings between ourselves uneconomical.

Mr. Grubel: If the withholding tax is 10% on whatever base, how much of that do you get back?

Mr. Munholland: That's a question I'd have to ask the tax authorities.

Mr. Grubel: I'm trying to distinguish whether the problem lies in the existence of the withholding provision or in the tax itself. You can see there's a significant difference.

Mr. Munholland: There's a very significant difference. The problem, as I can define it, without being a tax expert, is the fact that the tax has to be remitted now and the refund is received only later. Obviously when those funds are out of our hands we don't have access to them for use, and that loss of revenue offsets the gains we might realize by being able to borrow from other Deutsche Bank entities.

Mr. Grubel: How do our tax rates and withholding provisions compare with the kinds of impositions you have in branches in the United States or branches in Britain? Do you know that?

Mr. Munholland: Again, I'm not an expert on taxation outside Canada, but the situation in the United States and in London is that we actually have branch status and our entities in those countries are regarded as an extension of Deutsche Bank AG. As a result it's not regarded as a loan between the two entities, and therefore there's no withholding tax. Since we're a subsidiary here in Canada, we're regarded as a separate entity and therefore are subject to withholding tax.

Mr. Grubel: In that sense yesterday's witnesses really zeroed in on the main point. If you were a branch, similarly, these taxes would go away.

Mr. Munholland: That's a fair point, and I think that's their assumption. But our concern is that if we are a branch and there are no changes to the tax act, then there would be no problem, but a concern may be that, yes, we have branch status, but the withholding tax could still be applied. We want to make sure everyone understands it's the withholding tax that's the issue, not necessarily the name of ``branch''.

Mr. Grubel: One last thing that's very important, I believe, is whether or not the taxes and the withholding.... Is the same applied to Canadian banks in their domestic transactions?

Mr. Munholland: Yes, it is. If the Canadian banks borrow from an entity outside Canada that they are related to, they would be subject to that withholding tax as well. But obviously the Canadian banks don't have that situation, because they raise most of their funds from the entity in Canada and distribute it outside. But they are subject to withholding taxes just as we are.

Mr. Grubel: But it is true that if there were no such withholding tax, maybe they would raise more money abroad as well.

Mr. Munholland: I think that's a very good possibility.

Mr. Grubel: These taxes are really a serious barrier to the flow of cheap capital into Canada, both through branches of foreign banks in Canada...and the domestic banks have this obstacle to overcome.

Mr. Munholland: I think that's a fair statement.

Mr. Grubel: We would say the tax is therefore almost totally passed on to consumers. One reason why we have higher tax rates in Canada than our competitors have in the United States and in England and elsewhere is because of this tax.

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Mr. Munholland: Without being able to say there is a study backing me up, I believe very firmly that this is very true.

Mr. Grubel: Thank you.

The Chairman: With all due respect, I don't think our withholding taxes among the G-7 countries are vastly different, are they? That's because they're regulated by tax treaties that follow the OECD model.

Mr. Munholland: I don't believe for a moment that withholding tax in Canada, in terms of the rate setting, is out of line. It's just that, unfortunately for us, it's applied to these transactions -

The Chairman: Your problem, if I could get more precise about it, is that even if we could eliminate the withholding tax that's reduced by treaty from its basic Canadian rate by allowing you to branch, as opposed to having a subsidiary in Canada, we still have a withholding tax that applies to the profits from carrying on a business in Canada if you are a foreign entity. Is that the precise withholding tax that you would be worried about? Even if we allow you to branch, it would be the tax imposed on branch profits?

Mr. Munholland: No, the taxes that would be imposed on the branch profits would be taxes based on the operations here in Canada. It's a form of income tax. Remittances in the form of dividends, etc., are subject to withholding tax, but that's so for all financial institutions, including Canadian banks. That is not the area of our concern.

Our concern is primarily on the funding side for the bank. When we access funds to support the operations in Canada, it's the withholding tax that we have to pay on those kinds of borrowing.

The Chairman: Just on interest?

Mr. Munholland: Just on interest.

The Chairman: So if you were a branch, you would not have to pay it.

Mr. Munholland: Right. Well, that's if we were a branch and the structure was left as is. Then we would not have to pay interest on that tax. We'd still have to pay withholding tax on dividends.

Mr. Schmidt: I have one short question, Mr. Chairman, which has to do with small business.

You're primarily into wholesale lending. Do you have a particular empathy, if you will, for a small business, because that's really the generator of jobs in Canada?

Mr. von Romberg Droste: I think we have two sides on the SME issue.

One side is that we made a serious investment into that area by acquiring an asset-based finance unit here in Canada that specializes in financing SMEs. They are particularly strong on inventory finance. Normally, the size of the transactions they deal with are at the 90% level, which is $1 million or less. So that indicates to you already that this is a medium-sized enterprise.

Second, I think it's also fair to say that we do finance European and Asian subsidiaries here in Canada that are, relatively speaking, compared to large Canadian corporations, small and medium-sized enterprises. So there is an issue there, yes.

Mr. Schmidt: What proportion of your lending would be done that way, either through the subsidiary or directly? It's done through a subsidiary, I see that.

Mr. von Romberg Droste: I think it's about 15% to 20% of our total asset base at the moment.

Mr. Schmidt: Thank you.

The Chairman: I'm going to recommend that your discussions with our Finance officials on this particular aspect continue. Since you're the first witness who has raised these interesting tax issues as part of these discussions, I feel it's important for us to be brought up to date on an ongoing basis by you as to what is happening. We don't want to let this issue die. We want to thank you for bringing it before us. We will look forward to hearing about fruitful discussions with our officials. Thank you very much for being with us.

Our next witness is the Association coopérative d'économie familiale du Centre de Montréal.

[Translation]

May I ask the next witnesses to please come forward?

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Our next witnesses are from the Association coopérative d'économie familiale du Centre de Montréal: Louise Rozon, Director General; Éric Fraser, who is in charge of the Consumer Assistance Service; Jacques St-Amant, who is our lawyer and researcher; and Sidney Ribaux, Project Coordinator. Welcome to the committee, and we look forward to your presentation.

Ms Louise Rozon (Director, Association coopérative d'économie familiale du Centre de Montréal): Thank you very much, Mr. Chairman, members of the committee. We would first like to thank you for this opportunity to express to you our concerns regarding the proposals for changes to the financial sector legislation tabled last June by Mr. Peters, Secretary of State for International Financial Institutions.

These proposals rightly indicate the importance placed by the government on certain questions, such as access to banking services, consumer protection and protection of privacy.

It should first be noted the ACEF-Centre is a consumer association with its headquarters in Montreal and is not affiliated to any other movement. We are interested in a vast range of issues. For example, yesterday, we held a press conference announcing the results of an enquiry we conducted on a personal growth group. We have been concerned for a number of years, in fact since 1989, with issues related to banking issues.

While we appreciate the needs of consumers as a whole, we are more familiar with the needs of low-income consumers living in urban areas.

This morning, we will deal primarily with banking-related activities, whether they be carried out by banks or by trust companies.

We know that your deliberations focus on the proposals for change tabled by the government. However, we think it is important to remember that such proposals cannot be considered without taking into account the profound changes which will affect the banking sector over the next few years.

To give but a few examples, I would mention business concentration, diversification of financial groups, the emergence of new players in areas of activity which were previously a preserve of the banks, electronic trading and increasing electronic transfer of funds. Obviously, all of this changes banking and radically transforms the relationship between consumers and their bank.

After all, tellers in branches are being replaced by Internet wickets. Not everyone will find it easy to adapt to this change.

We must continue to address the essential needs of consumers. Consumers want banking services, particularly deposit and payment services and mechanisms which are safe, efficient and inexpensive. They obviously want quality services. They want to have a choice in services and to be well informed.

It is also essential that our financial institutions retain the trust of consumers and that as they change they take into account the interest of their shareholders but also the interest of their clients, their employees and the community as a whole.

This may appear to be no easy task. However, for 150 years our financial institutions have played an essential role in the development of Canada, and in exchange for these heavy responsibilities they have reaped substantial benefits. These benefits and responsibilities go hand in hand.

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Consumers sometimes have doubts about the ability of the banks to meet the challenge. Polls conducted by CROP for ACEF-Centre in 1994 and in 1995 reveal, for example, that over 55 p. 100 of Quebeckers are mistrustful of preauthorized withdrawals and of preauthorized charges.

Many surveys have been carried out by financial institutions, and sometimes even tellers in branches advised us against using this method of payment because it was not safe enough and involved too many problems. This is important information which the financial institutions and the government must take into account.

Our surveys also show that 11 per cent of Quebec consumers have in the past complained to their financial institution and that about half of those consumers considered that the problem was not resolved to their satisfaction.

Another survey indicated that about 20 per cent of Canadians feel very concerned about the way the banks handle personal information.

It is in this context that we will briefly address some of the proposals made by the government of Canada, focusing particularly on those affecting low-income consumers more directly.

We will look particularly at questions regarding access to banking services and service costs, and also protection of privacy.

We will conclude by looking briefly at an essential question: What is the role of Parliament with respect to the changes taking place?

Access to banking services: According to a cross-Canada poll conducted during the summer of 1995, 8 per cent of households with an annual income of less than $25,000 do not have a bank account. The proportion is even higher outside Quebec. This figure represents 660 000 Canadians, or 3 per cent of the adult population, without access to any banking services. The situation is most serious in the Atlantic region and British Columbia.

You will find more precise information on this subject in the written observations we sent to the committee, and particularly in a report published in June 1996 which we sent to the government. The report is entitled; Les hauts et les bas de l'accès aux services bancaires au Canada ("Ups and downs of access to banking services in Canada"). We have submitted to you a copy of this report in French and English, and we have brought extra copies with us today.

We regularly receive complaints from consumers who have difficulty in opening a bank account. For example, this summer, a teller working at the National Bank contacted us to know whether she could cash a cheque for someone receiving welfare benefits.

What is very surprising is that the National Bank is the bank in Quebec which has the contract with the government to issue cheques for recipients of income security. Although the person concerned had two pieces of identity, the head office of the National Bank considered that they were not enough to cash a cheque. We had to inform the teller of the bank's policy so as to enable the lady concerned to finally cash her cheque. But how many people would not think of contacting us or contacting another agency to help them to obtain the services to which they are entitled?

We see that there are a number of practices which make it difficult to access banking services. For example, three pieces of ID are often required to open an account or even cash a cheque. Sometimes pieces of ID with a photo are required although the population in general, and particularly people on a low income, do not always have those pieces of ID.

Financial institutions also freeze funds for a very long time when a cheque is deposited. Someone on a low income cannot wait five, ten or fifteen days before being able to receive the money due to him.

In some branches, we've even seen cases of people wishing to deposit their welfare cheques and having a 30-day-freeze imposed on them. Obviously, not many branches have this policy, fortunately, but it is a policy which we consider to be unacceptable.

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Over the last few weeks other consumers have complained to us that their financial institution had taken part of the money deposited directly, either by the government of Canada or by the government of Quebec. The money deposited was in the form of pension or disability benefits. The bank took out part of the money as compensation for debts owed. In one case, it was for a Master Card debt. As a result of such practices, obviously people on low incomes are not inclined to do business with the banks.

The closing of branches in disadvantaged neighbourhoods and their apparent scarcity in certain rural areas also complicate the situation for consumers.

The need for banking services is increasing. There are more and more electronic transactions, and governments also quite rightly want to pay most of their benefits through direct deposit, because that method is less expensive for taxpayers as a whole.

Without banking services, consumers have to pay a very high price to cash cheques in cashing centres. For example, to cash a $500 cheque, an income security recipient is charged $14,50 by a company such as Insta-Chèques.

Financial institutions can change some of their practices, and we have held financial consultations in a number of areas for a few years. However, progress is very slow. We believe that the problem of access will be resolved only by laying down clear guidelines with respect to identification and freezing of funds, and also by making it an obligation to serve the community as a whole, as is done in France and several states in the United States.

We believe, therefore, that the government proposals are a step in the right direction, but that they do not go far enough.

I would now like to talk about bank charges. Obviously, such charges also limit access to services. Many Canadians think they are too high. Last summer, we conducted a survey on bank charges and found that the same basic services can cost from $10 to $20 a month, depending on the financial institution.

The survey revealed that the charge structure of financial institutions was very complex. I would even say that some head offices found it difficult to explain to us adequately how to calculate the cost to a consumer using the range of services offered.

Therefore, we must support the wish of the government to simplify charge structures. In order to be able to shop around, consumers need clear and simple information, and don't want to have to decode 12 footnotes in a flyer.

However, there is another question, namely whether the charges are reasonable. Institutions make considerable profits, but we do not know what proportion comes from consumers or how much they make from them. In our view, far greater transparency is needed in this area.

Consumers are concerned about the protection of personal information. The banks' competitors are worried about the way the banks can use the information they have regarding their clients' transactions.

The Minister of Industry and the Minister of Justice have announced that Canada will adopt legislation protecting personal information in the private sector under federal jurisdiction.

One week ago, the Minister of Justice promised that this legislation would be adopted by the year 2000. Therefore, privacy safeguards must be addressed and, in this context, it will not be enough simply to strengthen very inadequate provisions already contained in the Bank Act and regulations.

Parliament must adopt as soon as possible legislation of general application, based on internationally recognized principles in this area which were recently restated in Canada through the code on privacy safeguards developed under the auspices of the Canadian Standards Association.

There are other important issues. We might consider amendments suggested to the deposit insurance system which do not seem desirable to us, or the development of methods used by the banks for handling complaints which are still, in our view, unsatisfactory.

Other questions have been submitted for study by advisory committees, such as changes in the system of payments. This area has a number of components to it. We would mention the various forms of electronic funds transfer, such as debits and direct deposits, and debit cards, which are gradually replacing the cheques, but which are not adequately regulated at the present time.

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In short, we're just beginning to think about the future of banks services.

In this context, the government has a very important role to play. Parliament should first listen to what people have to say and then act. Your committee and other parliamentary parties give all interested parties an opportunity to put forward their views. That is an essential contribution to the process of defining the rules we should establish.

We very much hope that you will continue your work in this regard and that in the months ahead you will give Canadians another opportunity to say what they think about the emerging trends.

In addition, we think that Parliament should pass legislation. At the moment, there is a lot of talk about self-regulation or a code of conduct. Our experience is similar to that of a number of other groups. Our clear conclusion is that self-regulation works only in certain specific cases.

In the Canadian banking sector, self-regulation initiatives are producing very few results for the time being. So we must define the rights and obligations of consumers, but also of third parties who are not necessarily bound by a particular code. Only legislation is universal in its application. We also think that legislation is required in order to implement such fundamental rights as the right to privacy.

Finally, only Parliament can ensure that the Canadian banking sector will develop in accordance with the views of all interested parties. You will therefore be invited to take action.

We know, of course, that legislation cannot cover everything. In some cases, codes of conduct may be useful to complement legislation. Nevertheless, Parliament should set the tone.

The government said that the Task Force on the Future of the Financial Services Sector should suggest changes that would be implemented by 2002 at the latest. So this is just the start of our discussion of banking matters.

However, we don't think we can wait five years to determine the direction in which the Canadian banking industry should head as regards regulating access to banking services, electronic funds transfer and privacy matters.

Neither the industry nor consumers will win if the current situation persists, in which uncertainty is reducing Canadians' sense of trust regarding their current and future services.

In this context, we would suggest that you invite the government to continue the consultation process it began on these issues and try to find some truly effective long-term solutions.

One of our recommendations is that Parliament pass legislation to deal with problems regarding access to banking services, to protect privacy properly and to cover electronic funds transfer.

Together we would urge the government of Canada to show some leadership with respect to the issues we've raised and we hope that your work will encourage the government to take action to insure that consumers' rights are protected properly.

We would be pleased to answer your questions now. Thank you.

The Chairman: Thank you very much. We will begin the questioning with Mr. Duhamel.

Mr. Duhamel: Thank you for your presentation, which I found very interesting and quite comprehensive.

I would like to ask two questions. First, you mentioned many concerns. You spoke about consumer protection, but is there a particular concern about low-income individuals? I would like some more information.

My second question is this: If you were the government, what type of law, code of conduct or other measure would you adopt to change the disturbing situations you mentioned? You mentioned a number of them, but I would like you to summarize your priorities. If you couldn't do everything at once, which things would you start with? I would like some clarification on this point.

Ms Rozon: I will try to answer your questions about specific recommendations. However, I'm not sure whether I understood your question about low-income individuals.

Mr. Duhamel: This is a very particular issue. Low-income people apparently have less access to banking services, and I would like to understand why.

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Ms Rozon: Our comment on banking services relate to all clients of financial institutions, but we have always been concerned about the specific problems that low-income people encounter.

As a result, we looked at access to banking services, which is a problem for low-income people only, people who have very few I.D. cards. This is obviously an underlying concern in all our studies of various banking practices.

Mr. Duhamel: Have some banks or financial institutions made any progress in this area? Could you give us some examples?

Mr. Rozon: Yes. Since we've been involved with these matters, financial institutions have made some progress. Initially, very few people in the banking sector recognized that this was a problem, but I think that now they recognize at least that there are some problems and that some practices should be changed.

Some financial institutions have even started offering accounts that are more in keeping with needs of low-income people.

Mr. Duhamel: So some concrete steps have been taken.

Ms Rozon: Yes. In fact the CIBC consulted us last year about an account project it was trying to set up. In order to better meet the needs of low-income consumer, the bank asked what we thought about the new account and the fees it was planning to charge.

In Quebec, the Mouvement Desjardins has a policy on identifying clients whereby most low-income individuals can open an account in a caisse because only two pieces of identification are required. That is not true in most other bank branches.

If people have to provide three pieces of identification including one with a photograph, many individuals are left out. But there are some changes happening.

Mr. Jacques St-Amant (lawyer-researcher, Association coopérative d'économie familiale du Centre de Montréal): I would add, however, that while there has been some improvement in the policies of the head offices of financial institutions, unfortunately, we find that these policies are not always followed in practice.

Last winter, we conducted a telephone survey of bank branches in Toronto and Vancouver to find out what their policy or practice was on opening bank accounts. We found that in most cases, the answers we got did not correspond to the official policy.

Mr. Duhamel: I want to make sure I understand. So there is a difference between the official policy of the bank or financial institution and what actually happens at the wicket.

Mr. St-Amant: Exactly. To come back to your second, very broad question, I will try to pick out three or four elements of it.

As far as privacy considerations go, we said that the best thing the government and Parliament could do would be to pass an act governing the entire private sector. The government is already looking into this area.

We are seeing a sectoral approach, with an act covering banks and one on transportation companies, for example. This could become impossible for anyone to understand.

So this is one possible approach. Within government, work is underway at the moment to determine how an omnibus bill, which might be similar to the current Quebec legislation, could be linked to codes of practice that would apply to specific sectors.

There is something we should consider with respect to access to banking services. France has a provision in law whereby individuals who want to open a bank account and have been rejected by two banks can go to the Banque de France, which then forces another bank to open an account for them.

In the United States, some states have introduced rules requiring banks to offer accounts to everyone at a very low cost if those banks plan to engage in activities outside the state.

So there are some possibilities along these lines that should be considered.

There are more and more regulations on electronic funds transfer. The statistics from the Canadian Payments Association show this clearly.

In addition, there are no specific guidelines at the moment, and more and more people are wondering about their rights and responsibilities. We could look to the US legislation, which has been in place for several years, or to the Danish regulations on electronic funds transfer. In this way we could set up a system for dealing with issues such as the validity of electronic signatures, the division of responsibilities and so on.

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You probably know that for several years now, Canada has had a code of practice on debit cards. It was introduced with the agreement of the Canadian Bankers' Association among others. Unfortunately, we have found that the code is not always followed. There are still some bank contracts on card issuance that do not comply with the codes. The conclusion may be that only legislation will guarantee the standardized rules that everyone needs.

In the area of complaints processing, bankers have made some efforts in the last few years. They have set up their ombudsman.

They have just established a structure for the industry as a whole. However, it is unfortunate that Canada has not gone nearly as far as the United Kingdom, where the bank ombudsman has more power and a more appropriate structure than the Canadian counterpart. In Great Britain, legislation was passed to force building societies to put an ombudsman in place. Over the next few months, we will see what happens in Canada and be better able to determine whether legislation is required.

Mr. Duhamel: Everything you recommend exists in other democracies...

Mr. St-Amant: Yes.

Mr. Duhamel: ...with which we deal regularly. So there's nothing new. We need only adapt what has already been done. Is that in fact what you are saying?

Mr. St-Amant: Yes. Canada could put itself in the same position as other countries. Obviously, if we are imaginative enough to introduce something new, so much the better!

Mr. Duhamel: Right. Thank you.

The Chairman: Thank you, Mr. Duhamel.

Mr. Bélisle, please.

Mr. Bélisle (La Prairie): My question is somewhat broader. Yesterday, the Finance Committee met with two finance company representatives. One was from a Canadian company, and the other represented a Canadian subsidiary of an American firm.

One of them told us that his company had opened up four branches a few years ago, not in order to get out of the credit sector, but rather to try to work in savings as well. The company wanted to determine whether it could invest RRSPs and perhaps GICs and encourage its customers to save.

After a while, the company had to close down the four test branches, because very few people were buying RRSPs or GICs. So the company realized that their customers were mainly borrowers, and needed credit services. They realized that the people who came to them did not have savings to invest.

I think the profile of these people is similar to that of the low-income people about whom you are speaking. Personally, I find this quite disturbing. Of course, some people do not save any money because their incomes are too low, but there are others in society who, even though they earn a very good income, spend two dollars for every one they make.

What role could the government play in helping low-income individuals borrow money at non-prohibitive interest rates?

The person I was referring to said that his company intended to issue a credit card. He told one of the committee members yesterday afternoon that the interest rate would start at 19.6 per cent. I think this is very disturbing, because we're talking about low-income people who are already having a hard time making ends meet. I wonder how such people could borrow money at 19.6 per cent interest and up from a finance company.

In your view, what role could the federal government play to help these people get credit at more reasonable rates of interest?

Mr. St-Amant: That is a huge question. I am tempted to say that Canada already has significant supplies of capital, particularly in the banks. Giving people access to banking services will solve a significant part of the problem, because this will give them access to credit at reasonably affordable rates.

We were talking earlier about problems with access to banking services. If individuals, such as employment insurance recipients, cannot open a bank account, they start cashing their cheque every two weeks or every month in an institution such as Insta-Chèques. Such people would not be inclined to go to a bank to try to open an account, because of the poor image of banks.

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If they need credit, it is also unlikely that they would be inclined to go to a bank, because they would not be known there. Consequently, they get a credit card from Sears or go to a finance company. Why? Because they would have initially been turned away by the banks at a time when they needed a little support and understanding.

In addition, there is considerable diversification in the credit sector at the moment, at least credit for businesses. The changes may be occurring a little more slowly with respect to consumer credit.

Your question leads into a very broad debate about who should be allowed to provide banking or quasi-banking services in Canada. For example, do we want foreign banks to play a larger role in the market and offer competition? At the moment, we cannot give you as much information as we would like, but we are studying these matters.

Thank you.

Ms Rozon: I could perhaps add that to your question leads us to the problem of personal debt and the resulting difficulties it causes. Obviously, financial institutions or other creditors lend money according to the risk they are taking. If the risk is greater, the interest rate they charge is higher. In fact, we find that low-income consumers borrow money at interest rates that are sometimes higher than 19 per cent. We need only think of credit companies whose rates are 25 or 30 per cent, and sometimes even higher.

You ask what the government could do? I think it might be able to do something about interest rates. In usury, the interest rate is 60 per cent. Is that reasonable? Shouldn't the government do something about this? Should we have better guidelines about the interest rates paid by low-income consumers without necessarily opening the floodgates to credit, which would mean that people would face significant debt problems and would be forced to declare bankruptcy? So we must establish a balance in this area, even though it is not easy to do.

Mr. St-Amant: I would just like to point out that in the early 1980s, the federal Small Loans Act set ceilings on interest rates for small loans.

In addition, people with excessive debts are likely sooner or later to consult someone to find out about the Bankruptcy and Insolvency Act. We found some weaknesses with the latest amendments to the act about proposals and consumer proposals, for example, which were designed to allow these people to reorganize their affairs without declaring bankruptcy. We need amendments to the legislation to ensure that people who are in dire financial straits can find a solution to their problems without declaring bankruptcy.

The Chairman: Thank you, Mr. Bélisle.

[English]

Mr. Schmidt.

Mr. Schmidt: Thank you, Mr. Chairman.

I commend you for coming to our committee. It's good to see you. I notice your paper is very far-ranging, and I want particularly to commend you for looking to the interests of the consumer. But I'd like very much to have some further clarification on some of the specific recommendations you've made, and there are several.

The first is recommendation 13, in which you ask that the government examine the extent to which financial institutions are adequately serving all regions of Canada and that it envisage taking measures to compel financial institutions to reinvest their funds equitably in various communities. I would really like to ask you, what does ``equitably'' mean in this context?

Mr. St-Amant: That's an interesting question.

Mr. Schmidt: It's a very significant question.

The Chairman: Libéral.

Mr. St-Amant: In the context of the study we made in the last year on access to banking services across Canada - which was funded by Industry Canada, I should note - we had discussions, for instance, with people in Nova Scotia, with public servants, who told us how the people don't even have access to banking services because there is no branch in their community. What we also found, in some areas of Montreal, for instance, and it's the same elsewhere, is that branches in low-income neighbourhoods tend to close or to become less numerous. There is, it seems to us, a serious problem there.

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Mr. Schmidt: I'm sorry, but does equity then mean a branch in every community?

Mr. St-Amant: Not necessarily. With the development of electronic banking services, there may be a path to follow there, assuming that people do have access to telephone services, which is becoming less obvious, and to computers.

What inspired our reflection - and we're still thinking about this - is what's in the United States with the Community Reinvestment Act and other measures that tend essentially to force banks to invest in various ways in various communities. It does not necessarily mean opening branches, but it may include branches.

How one measures the adequacy of access to banking services will probably depend on the needs of a given stratum of the population, but it seems to me that any person who needs either deposit services or loan services should be able somehow to get access, either by going through a branch, or by contacting an agent for a bank, or -

Mr. Schmidt: I'm sure. I have no trouble with that concept, that there should be access. The thing I'm really concerned about is this ``equitably'' part.

Take the Yukon, for example, where right now there is a problem. At least there is the anticipation of considerable development into the mining area. There's no question that if you took the amount of money that's going to be required to establish those mines - and it will be loan capital to a large degree - and you compare that with what they had done there in the past, equity just goes right out the window.

Do you mean you want the government to decide which sector shall get the money from the bank and the bank is told that this is where they'll lend money?

Mr. St-Amant: We were not thinking about it on the sectoral basis but rather on the geographic -

Mr. Schmidt: Oh, mine is geographic; it's the Yukon. You said you have to spend $2 billion in the Yukon over the next five years. Is that what you would want us to do?

Mr. St-Amant: Actually, it's more or less what's happening in the United States.

Mr. Schmidt: So the answer to the question is yes. That's what you want?

Mr. St-Amant: It may be.

Mr. Schmidt: Okay, thank you.

Mr. Sidney Ribaux (Project Coordinator, Association coopérative d'économie familiale du Centre de Montréal): I'd like to add a little bit to that.

We've mainly looked at the problem of access to basic banking services, and it's in that context that we've talked about equity, equity being the fact that everybody has access to the banking services that everybody needs right now, which is a bank account and being able to cash your cheque.

What's happening right now in many areas across Canada, although we haven't looked at it systematically, is we've had reports from groups saying that in their neighbourhoods banks are closing down. In many neighbourhoods where banks are closing down, cheque-cashing outlets, such as Money Mart, are opening up. They have a business now; they're cashing cheques for over a billion dollars a year in Canada, which is very important.

If you take the case of the low-income person who has $500 a month as his total income, he's going to spend about $15 just to cash that cheque, one of the reasons being that perhaps there's no bank in his neighbourhood, and the other reason being that if he goes outside his neighbourhood to the next bank they'll say, sorry, we only open bank accounts to people who live in the vicinity of the bank. It's in that context that we looked at community reinvestment.

There are other aspects to community reinvestment, such as ensuring there are loans to small businesses in the community, and so forth. I think that would have to be studied further before we had an act in that sense. We haven't gone as far as many places in the United States in terms of emptying a neighbourhood of banking services, but in certain places in Canada this is starting to happen.

Mr. Schmidt: I'd like to shift gears a little bit and go into a totally different area now, if I may, Mr. Chairman. It has to do with the business of legislation prohibiting financial institutions from extending credit to individuals who have not requested it.

I'm thinking in particular here of insurance companies who will advance the payment of premiums without notifying the individual. The individual hasn't asked, but there is a cash surrender value, or there are dividends, or whatever the case might be, and it's really a form of extending credit. So you would prefer to have that policy lapse then, rather than give this person the credit to pay the premium if he's a little late.

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Mr. St-Amant: No -

Mr. Schmidt: Well, what do you mean then?

Mr. St-Amant: What we mentioned at the outset is that our recommendations are mostly aimed at banking services per se.

Mr. Schmidt: That's not what it says here. It says ``prohibit financial institutions''. That includes caisses populaires, banks and financial companies. That's the works.

Mr. St-Amant: Actually, that is the state of law in Quebec. The aim of provisions like that is to prevent a bank or any other credit card issuer, for instance, to augment the credit offered to a consumer.

It may not be clear in the drafting of our recommendations, but we are quite aware that in some cases it may be useful for a consumer to have a slight extension of credit, for instance in the case of overdraft. That's quite clear.

Mr. Schmidt: That clarifies this. I was sure that you really didn't want it to read like that, but that's what it says.

Mr. St-Amant: No.

Mr. Schmidt: I'll stop with that, Mr. Chairman, unless you.... I've got a bunch of other questions.

The Chairman: It's strictly in the hands of committee members. We are now beyond our time, but it's up to members as to how long they wish to go on. It's up to the witnesses as well.

Mr. Schmidt: I'd like to ask one more question, then probably somebody else has some questions. It has to do with recommendation 26, which is the protection of privacy safeguards. The banks claim to be outside provincial jurisdiction, and the same level of protection is to be required of financial institutions.

Parliament now, in effect, takes over in provincial institutions, or it could. I'm thinking particularly of credit unions and caisses populaires. Should the federal government actually legislate privacy regulations for those institutions, which really do have a provincial charter in most cases?

Mr. St-Amant: I would say first that you probably have no constitutional basis for the jurisdiction of privacy in the caisses populaires.

Our concern is this. Take, for instance, Quebec. The Canadian Bankers Association has clearly told us that their position is that the privacy law in Quebec does not apply to banks. As good corporate citizens, they will abide by the law insofar as it suits them. But the clear position, backed by a legal opinion, is that the act does not apply to them.

We see that the same kinds of -

Mr. Schmidt: Do you think it should?

Mr. St-Amant: Yes, in my opinion and in the opinion of a committee of the Canadian Bar Association, it does apply to them. We see the same kind of reaction over issues like consumer protection.

It's a very complicated constitutional issue. We are quite aware of it. What we want to do is draw your attention to the fact that there is an unlevel playing field. Banks, in some cases, invoke the Constitution to say that they do not have to comply with provincial law.

How do we settle that? That is a very interesting legal question. I think it should be seriously explored.

Mr. Schmidt: Thank you, Mr. Chairman.

[Translation]

The Chairman: Oh, the Constitution again.

Mr. St-Amant: There is no getting away from it, Mr. Chairman.

[English]

The Chairman: Mr. Fewchuk.

Mr. Fewchuk (Selkirk - Red River): You mentioned banks, banks, banks all morning. My question to you is this: what do you find in the province of Quebec? What are the credit unions doing to help the poor?

Mr. St-Amant: The fact is that, in general, in the area of access for instance, the caisses populaires in Quebec play a very important role.

First, they are present in almost every area. There are more than 1,200 caisses populaires in Quebec. That's almost as important as the whole Royal Bank network from coast to coast.

Second, Desjardins policies and practices tend to be more favourable to low-income persons. That is not to say that Desjardins is without blemish, but they tend to be more open than banks.

Mr. Fewchuk: So they give a lower rate?

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Mr. Ribaux: Perhaps just to give a very concrete example of that, we did a survey in 1992 that saw us call 200 banking outlets in the Montreal area. We called three times, once saying we were workers, the second time saying we were receiving UI, and the third time saying we were welfare recipients. Everything else about this fictitious character was the same.

In the cases of the banks, 84% of the branches contacted would have opened a bank account for the worker. Only 33% of the same branches contacted would have opened an account for the welfare recipient with everything else being equal - revenue, number of pieces of ID, etc. In the case of the caisses populaires, however, they would have opened a bank account to 95% of the welfare recipients in this survey.

Mr. Fewchuk: My next question to you deals with what you mentioned about going across this great land of ours. You went to B.C., and I'm wondering if you took the same questionnaire to those credit unions across Canada as you did to those in the province of Quebec.

Mr. Ribaux: Yes, we did, and there seems to be a difference in the vocation of the credit unions outside of Quebec. Their policies are a lot more similar to the banks in terms of the amount of ID that they require. In our survey, in which we called 44 banking outlets in Toronto and Vancouver, they had about the same performance as the banks did. One of the problems was that their membership fee is much higher. It generally costs around $25 to become a member of a credit union, which for a low-income person can be very important, whereas it's $5 in Quebec.

Mr. Fewchuk: Did you contact the same amount of people in Toronto and Vancouver with your questionnaire as you did in the province of Quebec?

Mr. St-Amant: No, we did not.

Mr. Fewchuk: Why did you not?

Mr. Ribaux: We found that in the first survey we sort of went overboard. We contacted 200 branches, but we realized that, statistically, you basically get the results you are looking for after 20 or 40. The surveys that we did in Toronto and Vancouver were also concentrated in the areas where low-income people reside, which was not the case in Montreal.

Mr. Fewchuk: So that would put your work across this great land into some question because you did not contact the same amount of people as you did in the province of Quebec.

Thank you. I'm satisfied with that.

Mr. St-Amant: I believe it's useful to add that we did contact a lot of people who intervene, either in Halifax or in Vancouver, for instance. We also discussed these methods with public officials in British Columbia, in Ontario and in Nova Scotia, and they all basically confirmed our findings.

Mr. Fewchuk: Thank you.

[Translation]

The Chairman: Thank you, Mr. Fewchuk. Are there any other questions?

May I ask you one? Is it true that people with excessive debts never want to use banks because that would make it too easy for creditors to seize their funds?

Mr. St-Amant: We do find this happening sometimes. In fact, in recent weeks, we have had two cases about which my colleagues can give you more details, because they had to get involved. The clients had a debt of a few hundred dollars on a bank-issued credit card, and the bank, without notice, simply withdrew the funds from a government benefits cheque they had just deposited in their account. In both cases, we got in touch with the banks, and with the Canadian Bankers' Association in Montreal, and at least one of the cases was settled. I believe the second one is close to being settled as well.

Mr. Eric Fraser (Manager, Consumer Services, Association coopérative d'économie familiale du Centre de Montréal): It is true that low-income individuals who are getting government benefits are more reluctant to use the direct deposit system. Direct deposits are favoured by the Canadian Bankers Association as a response to a number of access problems, particularly the compensation problem. Compensation means that an institution can technically seize amounts that would otherwise not be available for seizure by law.

Another problem we found is that when the Quebec government negotiated an agreement for the direct deposit of social assistance benefits, the Mouvement Desjardins agreed never to seize welfare benefits in this way. The CBA has refused to make any such commitment in writing.

The Chairman: A piece of legislation or just the part...

Mr. Fraser: It is a contract.

The Chairman: That's a good idea for helping the poor.

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Mr. Fraser: Yes, exactly. In the context of electronic payment, there must be a guarantee of this type.

The Chairman: Yes.

Ms Rozon: We would like to add that the Canadian Bankers' Association in its negotiations with the Quebec government on direct deposits made no commitment in writing but did make a verbal commitment. It asked the government to trust it not to proceed in that way. The CBA's representative said they would never use a compensation operation on funds deposited directly into an account. In one of the cases in which we were involved, where a set-off had been used, the financial institution in question was a bank. The Canadian Bankers' Association agreed that the bank should not have done what it did.

The Chairman: And in your view is the system working well at the moment?

Ms Rozon: Excuse me?

The Chairman: Is the system working well at the moment?

Ms Rozon: No, it is not. We need more official, written commitments, to ensure that the system will work properly in practice. This is an example of the gap that sometimes exists between what people say and what they do.

The Chairman: I see.

Mr. Fraser: And the legislative provisions on this matter could be very simple.

The Chairman: I cannot accept your suggestion that financial institutions cannot withdraw from the deposit insurance system when they have no deposits.

However, you have raised a number of very important points. Your research will help us make our recommendations, and we are very much looking forward to the Canadian Bankers' Association's response to your suggestions.

On behalf of all committee members, I would like to thank you for your work and for your presentation here today. Thank you.

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[English]

The Chairman: From Round Top Window Products Inc. we have the president, Dianne Waterhouse. We look forward to your presentation.

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Ms Dianne Waterhouse (Individual Presentation): Before I begin my presentation I would like to say that it's pretty incredible for an individual Canadian, not on behalf of any organization, to be able to sit and actually talk to the government. It's even more incredible to get an invitation from you, Mr. Chairman, and the hon. committee members. I think that's a true measure of just how great this country is, and I'd like to thank you.

I came here today because I have a small business and over the last ten years I have been refused the credit that is necessary to be able to create jobs, not just once but continually over ten years. The most recent was a loan for $1.4 million to purchase a building and equipment to employ 58 people over and above the 41 I have currently. This is after ten years of experience, ten years of profit and three plants financed out of cashflow.

I was deeply concerned when I came here that I would not be able to articulate to you the uncertainty and insecurity that Canadians feel when dealing with the Canadian financial institutions for either their personal or business requirements. I believe I have a wide variety of experience with the institutions in two provinces as well as a comparison with the United States.

I assume you already know the millions of dollars that have been spent on the submissions by the interested parties and the stakeholders. They've done this in an attempt to alter and reset the fiscal policies of this country. You should know that when my name was released as a witness to speak before you, I received a telephone call from a company claiming to be the governmental advisory agency on behalf of their financial institution clients. They called me and wanted to know what I was going to say to you today. I think the stakes in the changes to the Bank Act must be incredibly high for someone to actually spend the money to phone me to ask a question that the local bank manager or my local insurance agent could have asked me for free.

I did a lot of research on this. I didn't have the benefit of a research group, so I have a lot of sticky notes everywhere, and I learned some incredible things before I came to address you here. Did you know that the purpose of the Bank Act in Canada, the reason the government of the citizens of Canada created it, was to build a national economy? We did it by protecting certain institutions from competition. We did it by financing tax breaks - I can't even pronounce that; we small businesses don't get many of those - research and development grants and depositor insurance from the public coffers. It was certainly successful in building some of the strongest financial institutions in the world. However, in recent years it has not been successful in creating a national economy.

In order to build a national economy, in my opinion, you require access to capital for your businesses and access to capital for your citizens at reasonable interest rates and reasonable security requirements. You need your people to be able to access loans not on the whim of a banker, not on the spread of the interest rates, not on the particular industry type, but based on the strength of the security, the viability of the enterprise and the creditworthiness of the citizen. You need published, standardized loan criteria and security requirements, non-discriminatory lending practices and a requirement that the financial institutions meet certain mandatory responsibilities...that the privileges we have given them have allowed them to become the strength and size they are.

Contrary to a lot of these submissions, we don't have that in Canada. We really don't. The white paper doesn't address any of these issues. It goes a long way on a lot of issues, but it doesn't address how we get access to capital as a small business or just as a Canadian. I'm afraid that even when you make the rules, the fiscal policy of this country is being set and altered at will by people we Canadians did not even elect.

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The fact of the matter is that in every economic release from the banks and in statements from their CEOs, the blame for the current poor state of the economy is put on the government deficit.Mr. Barrett, CEO of the Bank of Montreal, points out in an interview that it's due to so-called lack of visionary leadership.

In my opinion, a very large portion of the blame lies squarely in the laps of the lending institutions of this country. But I guess the government makes a great scapegoat when you need to redirect attention from your own practices, and that, frankly, is what is going on.

I'm here today to tell you that the government deficit is of concern to businesses in Canada and to people in Canada. But its impact on the Canadian people is secondary to the impact of lack of access to capital.

There are over 930 small businesses in Canada and we employ over 5 million Canadians. Without access to capital we can't hire any more, and therefore the economy and the unemployment rate will not improve. Since the majority of government revenues come from personal income taxes, the deficit would be beneficially affected if legislation were in place that would guarantee Canadians access to the capital they need to build our businesses, that we need to employ our people and to improve our standard of living.

It appears that discrimination is rampant in the banking industry. There is discrimination against small businesses based on the risk-reward balance and on the adjusting of the required security and performance requirements at will.

There is discrimination against women in their business lending practices. Women have 20% higher refusal rates and pay 0.5% to 1% higher interest rates.

There is discrimination against the Canadian people by not providing personal loans at reasonable interest rates - instead substituting credit cards at 13.5% above prime, just to begin with.

Try to go to your financial institution - don't tell them you're on the committee - and ask for a $2,000 personal loan. You will not get it. You will get a credit card with a $2,000 limit, but you will not get a personal loan rate for $2,000.

Banks have discriminated against the competing brokerage firms in their access to capital - the capital they require just to meet federal security requirements. There is discrimination against the small investor now. Ever since the banks took over the brokerages the Canadian small stock purchaser pays 6% in and 6% out - 12%. Which Canadian stock moves that much?

There is a lot of discrimination against low-income Canadians by the requirements for identification that most people do not have, just for the basic services. People have spoken here before me about this.

Quite frankly, there is also a form of discrimination against the government. The banks continually put forth their higher yielding savings instruments over Canadian bonds.

It would take me an hour to go through my business banking history, but there's one example in particular I think you should hear. These are the conditions under which a Canadian financial institution will lend $150,000 on an operating line secured by a $150,000 cash GIC deposited in their institution: security over cash credit balances and deposit instruments; general assignment of book debts of the borrower registered in each jurisdiction in which the borrower carries on business; general security agreement, personal guarantees in the amount satisfactory to the bank from the principals; corporate guarantee in an amount satisfactory to the bank from Round Top Window Corporation and Round Top Window Products B.C., Inc.; assignment of general business insurance; letter of acknowledgement from any secured creditors; such supporting certificates and opinions as the bank shall reasonably require; internally prepared forecast income statements, balance sheet, and cashflow statements for the next fiscal year; financial statements of Round Top Window Products Org. and Inc.; confirmation that all applicable taxes are current; personal financial statements of the principals, the security documents completed, and, where necessary, registered in a form and manner satisfactory to the bank;

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The following conditions shall apply as long as the borrower is indebted to the bank: the principals of the borrower will provide the bank the right of first refusal on the opportunity to bid for all their personal banking requirements; annually, within 90 days, accountant-reviewed financial statements combined on audited financial statements; internally prepared financial projections; and a late reporting fee of $500.

These are the conditions under which the bank will give me $150,000 in which I already have deposited $150,000 in a GIC in their institution - a cash-secured loan. Is this unusual? No. Is this incredible? Yes. Is this standard practice? If you don't complain, yes, because guess what? One letter to a president and CEO of that institution and 14 minutes later there were only two conditions.

That, in my opinion, is just discrimination - period. If Canadian cash isn't good enough, what kind of security is good enough?

For ten years I've gone, like tens of thousands of small businesses, to the banks. I've gone with my hat in my hand and my head bowed, just to access capital. I'm willing to do anything at this point. So you can absolutely imagine how shocked I was when Mr. Robert Korthals of the TD Bank, in an interview in The Toronto Star - he's now retired so I guess he can say this - admits that the Canadian banks have systematically discriminated against small business people and small business loans even with the access and the taxpayer support to the Small Businesses Loans Act.

By the Bank of Canada figures, the banks removed $3.6 billion from the hands of small business during the last recession.

We wonder why the unemployment rate is so high, or why the economy is so slow, or why the recession is so deep. I don't know. The small business sector creates eight out of every ten new jobs. How many jobs does $3.6 billion represent? What happens if the banks aren't in a position where they can discriminate against small business, or any other sector of the economy, or any other person in the Canadian populace? I would think that government deficits would become less of a problem, as would bankruptcy rates due to the high-rate money. Unemployment would become less of a problem and so would the ultimate control of the financial institutions.

I realize that banks are corporations, that they don't have a heart, they don't have a soul, they don't have a conscience, and that their prime objective is to make money for the shareholder. I want to remind you that these banks are buying back their shares in record numbers. Perhaps they don't figure that in the future there will be a need to have a shareholder to justify their actions to. Their unique position of past and current protection gives them a responsibility to participate in the economic growth of this country. They have a responsibility to eliminate these apparent practices of discrimination, or my government has a responsibility to do it for them.

Neither the chartered banks nor the insurance companies have done a particularly good job of servicing Canadians. We're forced through lack of competition - and I mean lack of fair, equal competition - to deal with these institutions, in general. Do you realize that there are Canadians out there who don't have homeowner's insurance because they've had two or more claims and they can't get it? Do you realize that there are Canadians who don't drive a vehicle and don't insure their personal belongings in a rental unit because the insurance rates are completely unaffordable? Competition may deal with this, but it's not fair and equitable competition when you allow the banks into insurance with $819 billion worth of assets, into a market where the total combined players have $179 billion. To me that's kind of like hitting a flea with a sledgehammer, and unfortunately we Canadians are the fleas in line to be hit next.

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The white paper proposes to remove subsidiary requirements to allow specialized in-house financing. I'm not sure about everything that takes in. I have a question to ask that I haven't heard asked anywhere in my research or in any of the submissions to you: when is enough enough?

Is it enough to let the banks into insurance? Will that be enough? Perhaps, once they have insurance, we should let them into fiduciary services. Is it enough once they get their own mortgage privileges and legal service rights, household appliance and furniture leasing, and maybe auto leasing? How about house building, retail or manufacturing?

When do we say ``Stop; you cannot compete against the people we have federally chartered you to service''? I think you need to say stop, and I think you need to say it in this legislation, right here.

There already are what appear to be violations by the banks, not only in the government-set conditions, but also in privacy aspects.

The banks were forbidden by our government to use bank customer files to feed leads to their insurance subsidiaries. This is from the CIBC Insurance Corporation to me, and I quote: ``This protection has been developed specifically for CIBC customers and their families''.

My privacy has been violated. The government conditions have been violated. The minute the CIBC Insurance Corporation is made aware that I am a CIBC customer, my privacy has been violated. I didn't tell them, I can assure you.

Privacy safeguards, like all laws, must have a punishment, or there is no incentive to adhere to them. There are other documented cases in which customers have been told which insurance companies to get insurance from, as a condition of the loan.

We in this room all know that that is contrary to subsection 416(5) of the Bank Act, but how many Canadians actually know that portion of the act or even know it's a violation? Privacy is of the utmost concern, and legislation should control it.

We should not depend on corporations who are bent on the bottom line to decide which is enough protection. Tied selling and coercion have become standard in the banking industry with service package fees and with loan conditions to small business.

You heard my first example earlier, ``The principals of the borrower'' - not the borrower - ``will grant the bank the right of first refusal''. This example is even more blatant: ``All banking business to be conducted with the Bank of Nova Scotia''. You couldn't get more coercion than that, could you? It's not even ``Please, could you do all your banking with the Bank of Nova Scotia?''

As far as the principles of the way the banks deal with their staff, they reward and review their staff based on how many services and what multiple services they sell to customers. We're sitting here listening to what they have to say about tied selling and everything else, coercive selling, and they're saying ``No, we don't really do it and it will go away''. I'm telling you it won't go away. It won't go away until their staff are rewarded and reviewed in a different manner.

Tied selling and coercion selling, just like privacy, cannot be left to self-regulation. The stakes are far too high for us to do that.

I came here today knowing that my comments on all of these issues may very well prevent me from obtaining any financing from the Canadian banks. Like all other Canadians, I do require access to banking services. These are services that can be and often are refused under normal circumstances, but I think it's necessary for people to speak out, regardless of what the consequences may be on issues that will affect this generation and the next, issues such as changes to the Bank Act - and not making them strong enough will definitely affect the next generation.

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I ask you to keep in mind that the chartered institutions clearly state their intention to derive 50% or more of their income from abroad. Look at their foreign acquisitions over the last five years. Where does that leave the Canadian market in terms of generating enough revenue to change the risk-reward balance upon which the banks decide on the approval or refusal of a loan, or on the ability for you to even get a particular service?

While I have really strong opinions on self-dealing regime and subsidiary requirements, deposit insurance opt-out and opening the borders wide to foreign competition, I'll certainly be happy to answer any of those questions.

I really think it's important that you ought to know - it should be said on behalf of Canadians, not just myself - that we want to improve our lot in life, we want to build our businesses, we want to provide a better future for our children, provide and protect our retirement income, increase our standard of living. Do you know what? We can't do these simple things unless the fiscal policy of this country is set, administered and controlled by the people we elected.

As a Canadian, I give you the power to decide the economic future of this great country. I really hope that you will legislate a future that does not include six institutions controlling every financial decision a Canadian makes and a future that eliminates the possibilities of these six institutions controlling the decisions of our government, the decisions on our fiscal policy, just by the very extent of their $122 billion investment in our government paper. As Canadians, we sincerely hope you're listening, because unlike all of these people collectively, we don't give you anything in writing.

Thank you very much.

The Chairman: If I might summarize what I think I heard, you have not had, in your opinion, satisfactory relationships with Canadian bankers.

Ms Waterhouse: I and many, many millions of Canadians.

The Chairman: With all due respect, we've heard one side of it. You did not mention the circumstances under which this loan was denied to you. You did indicate to me before we met that you started your business in 1987 with $2,700 that you borrowed from family.

Ms Waterhouse: Yes, and a garage we borrowed from a friend.

The Chairman: You now have a business with three manufacturing facilities: one in Oregon, one in Vancouver, and one in Ontario.

Ms Waterhouse: Yes.

The Chairman: Employing over 40 people.

Ms Waterhouse: That's correct.

The Chairman: You recently wished to expand to create 58 new jobs in Canada.

Ms Waterhouse: Yes.

The Chairman: You couldn't get the credit. What were the reasons given for denial of that credit?

Ms Waterhouse: Actually, the financial institutions recommended we speak to venture capitalists because they are venture financiers. I say I've already had my venture. I've had my venture over the last ten years; I'm not looking for venture capital.

The Chairman: How much money did you need to expand?

Ms Waterhouse: I needed $1.4 million.

The Chairman: What type of security could you have given?

Ms Waterhouse: It was fixed assets, a brand-new building and certainly all three plants that we currently have and all the equipment in them.

The Chairman: So what would have been the total security that you could have pledged for that $1.4 million loan?

Ms Waterhouse: I would say if you took into consideration all of the equity in the corporation and all of the equipment, probably about $3 million.

The Chairman: That's interesting.

Mr. Fewchuk: [Inaudible - Editor]

Ms Waterhouse: That's not true at all. Not only are they really not willing to lend money, but they're certainly not willing to lend it at reasonable interest rates.

When I first started out in business, everything was guaranteed under the Small Businesses Loans Act. The government guarantees 85% of it, I put up the remaining 20% of it, and then they ask me for 200% security. I want to know where their loan loss provisions come from. How do they possibly lose when they have everything?

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Mr. Fewchuk: I've been down that road with you as a small businessman, and sometimes my heels got very hard for some of the managers. As you say, you could have your property and your house and everything to cover the loan and they still tell you no because they feel they know better. So I sympathize with you, but on the other hand, as I sit here I hear them saying that they, the bankers, make it their interest to lend money to you and if the collateral is there, they will.

I'm glad you came forward today because you're the first one to really say as a businessman exactly what's going on out there. Thank you.

Ms Waterhouse: It's really a shame because it's not even so much the fact that there is no standard for how much security is accepted or required. It's the fact that this can change with the wind.

When I first started my business I had six or seven loans with the Royal Bank ranging from 14% to 18%. As you buy a piece of equipment, you need a small business loan. Then you try to roll it all into one so that it makes one payment, one month, one interest rate, and they won't do it. So I approached the Business Development Bank back in 1992, and they said to me that this proposal included the understanding that the Royal Bank would normalize its remaining advances with normal security requirements. Here is one institution saying another institution is out of line. It's not just me sitting here and telling you this goes on; it's other banks telling other banks they're out of line. I think we need to bring them back in line. There's only one way to do that, in my opinion.

The Acting Chair (Mrs. Brushett): Thank you, Ms Waterhouse. I truly appreciate your coming here this morning and expressing your concerns and giving us the reasons why you've been denied the loan at rates you've indicated.

I too have been in small business in the Atlantic region and the experience there has been, particularly as of late, that women entrepreneurs have been quite successful and as a result have been able to acquire access to capital. You indicated that yours has been 0.5% to 1% greater demand because of your female gender. However, we found in the east that as of late, women entrepreneurs have been so successful that they have been almost getting their access to capital at 0.5% less. I think it's only fair to present the other side as well.

Ms Waterhouse: You're correct, but do you realize that the reason for that was a government study that came out researching the double standard? It was published in March of 1995. In the autumn of 1995 the banks started coming out with these little flyers that were supposed to make us feel nice and warm and fuzzy - ``Gender and Money: Why banks are making women customers a priority''.

It's great that they're doing these things. It's great that over the last six months all of a sudden there's money out there for small businesses, except that's only for as long as you are reviewing the changes to the act. The minute you stop reviewing the changes to the act and nothing is coming up that might modify their behaviour, it will revert to the way it was.

The Acting Chair (Mrs. Brushett): Thank you for presenting those views. We will certainly be mindful of your concerns and the difficulties you've had accessing capital as we review the Bank Act.

If there are no further questions, we will dismiss this morning's session.

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