FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, October 27, 1997

• 0907

[English]

The Acting Chairman (Mr. Paul Szabo (Mississauga South, Lib.)): Good morning, ladies and gentlemen. In accordance with its mandate under Standing Order 108(2), the committee resumes its study of the report on the task force on the future of the Canadian financial services sector, commonly known as the MacKay task force report.

This morning our first witness is Mr. Donald Stewart, president and chief executive officer of the Sun Life Assurance Company of Canada.

Welcome, Mr. Stewart. We welcome your comments, and following your brief presentation the members I'm sure would like to ask questions of you. Please proceed.

Mr. Donald Stewart (President and Chief Executive Officer, Sun Life Assurance Company of Canada): Thank you. Mr. Chairman, honourable members, on behalf of the Sun Life Assurance Company of Canada I'm delighted to have the opportunity to appear before you today to offer comments on the report of the task force on the future of the Canadian financial services sector. I commend Mr. Harold MacKay and the members of the task force for producing a very valuable and comprehensive road map for the future of the financial services sector within Canada.

Notwithstanding our favourable view of the report, we have some reservations about the application of aspects of the recommendations as they apply to Canadian international life insurers. Given the dominance of the large Canadian banks, which have an aggregate share of total financial sector assets of 37%, it is unsurprising to find the commensurate emphasis on banking issues throughout the report.

Although we are encouraged by the task force's belief that Canadian life insurance companies can become a very significant force in the Canadian financial services sector, there are major competitive challenges to making this vision become a reality. It is our view that the background report, The Changing Landscape for Canadian Financial Services: New forces, new competitors, new choices, has a noticeably less optimistic tone and places greater emphasis on the competitive challenges faced by the life insurance industry.

My principal point is that if Canadian life insurers are to fulfil their potential they will need the full support offered by those proposals and recommendations that remove restrictions currently applying to the industry. I need to place my remarks in perspective by briefly describing Sun Life's market position, as this has an important influence on our views.

• 0910

On September 28, 1998, the Wall Street Journal published its annual list of the world's top 50 insurers. Once again, Sun Life was the only Canadian company to appear on the list, coming at number 46. This indicates we are a large company by worldwide standards. However, the majority of our business is international, as opposed to global. For this purpose, we define an international business as one where products and services differ across borders, in contrast to a global business, which would market a similar product or service in different countries. Hence, for us, day-to-day competitive realities are based on individual country standings and not on the aggregate of multinational business presences.

Based on these realities, Sun Life faces significant competitive pressures within Canada, as we rank number five in the Canadian life insurance marketplace, with a current market share by premium of 8.4%. This is approximately 50% of the market share held by the leader.

So we speak today as a company that has a mid-market insurance operation in Canada, and which welcomes the new opportunities the task force's report recommends. We are focused on having an ongoing ability to operate as a successful international financial services company, meeting the lifetime financial security needs of our customers in all of the countries where we operate.

I shall comment briefly on seven specific issues. These are consumer compensation, the Canadian payments system, corporate structure, capital taxes, demutualization, insurance retailing and consolidation and mergers. I will begin with consumer compensation arrangements.

As described in the report, some aspects of the Canada Deposit Insurance Corporation confer competitive advantages on deposit takers relative to Canadian life insurers. We welcome the task force's recommendation on eliminating the competitive imbalance between deposit takers and life insurers, which results from two different compensation arrangements, and we hope the government will act on this recommendation in the near term.

On access to the payments system, we are encouraged by the task force's consideration of the regime governing the Canadian payments system. Developments in technology, consumer expectations, and increased competition now make access to the payments system a necessity in order to retain and attract customers. Canadian life insurers will be in a much better position to compete if their customers can make payments on the basis of funds held with the insurer, without first having to convert these funds into accounts at another institution.

As the report points out, maximizing the competitive potential of existing players requires open access on reasonable terms to other networks. In particular, we very much support the proposal that functionality in the Interac system be broadened.

In the area of permitted corporate structures, we support the recommendation already reflected in the Department of Finance's August consultation paper proposing a demutualization regime for Canadian life insurance companies. We believe there are potentially significant business advantages to the holding company structure, including more efficient regulation, greater flexibility for raising capital, and the potential for greater value for shareholders of the holding company.

We recognize that from the regulatory point of view there are legitimate concerns associated with holding companies in the financial services sector. However, we support the conclusion of the task force that increased organizational flexibility is attainable without unduly compromising safety and soundness.

• 0915

We are pleased that the task force has acknowledged the inequitable tax burdens faced by the financial services sector vis-à-vis other business sectors and competitors abroad. For example, in 1996 regulated financial institutions paid nearly $1 billion in special capital taxes not levied against other sectors. Moreover, these capital taxes are almost unique to Canada.

We strongly endorse the recommendations of the task force that these special capital taxes be eliminated, or at the very least be reduced. We also support the call for the federal and provincial governments to work together to alleviate the negative impact of double taxation, such as sale and premium taxes, which significantly increase the cost of insurance products.

With respect to the proposed demutualization regime, we support the task force recommendation that life insurance companies be subject to a general size-based ownership regime. We endorse the 10% ownership rule proposed for large, demutualized life insurers.

As Sun Life proceeds to consider demutualization further over the next year, subject to board, regulatory, and policyholder approval, the demutualization regime proposed in the task force report and the recent federal consultation paper on demutualization has the potential to provide a strong basis for ensuring the fair treatment of policyholders and added flexibility for Canadian life insurers to grow and compete.

We applaud the task force's emphasis on the consumer and on competition. As previously mentioned, there are a number initiatives designed to assist the Canadian life insurance industry to compete, including access to the payment system and the levelling of the playing field with respect to compensation arrangements. In keeping with the overall goals of the task force report, it is consistent that consumers have broad access to insurance products.

If insurance retailing is to be permitted in bank branches, we place great emphasis on the need for common licensing requirements across the entire financial services sector, protection of privacy for consumers, and strict rules prohibiting tied selling.

On the general question of mergers, we very much support the view expressed by the task force that mergers need to be assessed on their individual merits, taking into account the overall context in which they are put forward. The insurance sector has seen significant merger activity over the recent past resulting in major shifts in market ranking.

For example, the precedent-setting acquisition of London Life by Great-West Life in 1997 has created a very strong, new market leader in Canada. Given Sun Life's current position in the Canadian market, it will be essential for us to be able to acquire other companies if we are to become one of the life insurance competitors envisaged by the report. The same may well be true of mergers.

In conclusion, we have concerns over any perception created by the task force report that Canadian banks and Canadian life insurance companies possess similar levels of competitive powers. While we do not actively oppose the granting of additional powers to Canadian banks on the basis of promoting increased competition, it is of vital importance these be accompanied by strong safeguards, as described in the report.

In addition, effective access to the Canadian payment system and electronic financial services networks will be critical if life insurers are to meet the industry challenge laid down by the task force.

Finally, as previously indicated, it will be essential for companies such as Sun Life to be able to engage in consolidation and merger activity if we are to become one of the competitive forces envisaged by the task force report.

Thank you for the opportunity to present a prepared opening statement.

• 0920

The Acting Chairman (Mr. Paul Szabo): Thank you, Mr. Stewart. Your presentation has been quite comprehensive. I'm sure the members would like to discuss some of the points with you.

We'll start our questioning with Mr. Crête.

[Translation]

Mr. Paul Crête (Kamouraska—Rivière-du-Loup—Témiscouata—Les Basques, BQ): Thank you for your presentation. I wish to say first that Sun Life, in my mind, stands for some very special things. This is the company that insured my grandfather many years ago, when I was 10 or 12 years old, but this is also the company many Quebeckers had a very negative image of, at one time, because of its decision to move its head office. Because of all this, the company is perceived rather ambiguously.

This is what I'm interested in this morning. In your brief, you say that, if the banks could get into the markets, they would have to be quite closely regulated. Notably, you make a remark about linked banks, where you say that this would have to be very clear. Does that mean that you prefer the model whereby people can enter others' markets, provided they are regulated, over a model whereby it would be possible to have a financial holding company that would consolidate banks, insurance companies, mutual fund dealers, etc.? These businesses would be in the same holding company, but each one would have its field of activity. Am I to understand from your brief that you are more in favour of the model proposed in the report than of one which, to my mind, would be more favourable to greater competition, especially in non-central areas in Quebec and Canada?

[English]

Mr. Donald Stewart: That's a—

[Translation]

I'm sorry. I prefer to speak English.

[English]

The question you ask is a very sophisticated one. You would obviously be aware that the report has rejected the concept of functional regulation simply as being impractical. It has come down in favour of regulation by entity.

In terms of the specific models we prefer, as an international company, we see a variety of models around the world. On the specific topic of the banks retailing life insurance, the safeguards on which we lay a very strong emphasis are indicative of the kind of model we would prefer. So providing that the necessary safeguards are in place for the customer, the exact industry structure for providing products and services is, in our view, less important.

Therefore, the report, which generally proposes to extend powers to existing financial institutions that they don't already have, is a model we're content to accept, subject to an emphasis on the safeguards to which I referred. I hope that goes some way toward answering your question.

[Translation]

Mr. Paul Crête: I think that, in future, it would be preferable to ensure the viability of the system by means of pressure from competition among the stakeholders, rather than regulation. Probably we're going to go through the same thing in that area as we did in telecommunications. Nowadays the CRTC tries to keep up with technology as it develops. I get the feeling that in your world, the financial world, we're sort of heading in the same direction and it's much more a matter of setting the rules of the rink to play by, and letting the players get on with the game, than to make it so that everyone just has a part of the rink to do their job in.

[English]

Mr. Donald Stewart: I very much agree with the philosophy the honourable member just expressed. We saw the report as promoting competition by eliminating some of what one might call the friction by different regulatory streams.

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For example, the insurance industry has lacked certain powers in the area of the payment system; it lacks certain equivalents in the area of deposit insurance. The report proposes to eliminate these imbalances. But equally, the report in total proposes to extend the competitive powers of the banks. I believe that the recommendations taken as a whole advance the Canadian financial services sector in the direction you espouse, which is simply to minimize regulatory intervention and to permit the various players to compete across the financial services sector.

So we are in agreement with the philosophy, but we also believe that the report does take some fairly significant steps in that direction.

The Acting Chairman (Mr. Paul Szabo): Mr. Nystrom.

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): I want to welcome you, Mr. Stewart, to the committee this morning and ask you some questions about the competitive nature of the system between the banks and the insurance companies.

Before I was re-elected to the House of Commons back in June 1997, I did a fair amount of work with Crown Life in Regina, so I have a little bit of familiarity with the life insurance industry. I did some work in terms of their government relations issues, and so on.

One concern that I want to ask you about is the recommendation that the banks be allowed to retail insurance from their branches.

Last Friday in my riding I met with 17 P and C brokers who, because they are very small operators, are very, very concerned about the banks being able to retail out of their branches property and casualty insurance. I want to ask you what your position is on that and what concerns you have. You mentioned it in your opening comments, and I want you to elaborate a bit more on that—whether or not there would be a level playing field, and what the circumstances are under which it should be allowed, and so on.

Mr. Donald Stewart: I should perhaps begin by making it very clear that my remarks are driven from a life insurance perspective. As a company, we have no property and casualty business whatsoever, so I would remain an agnostic on that front and my remarks would be directed to the business of retailing life insurance. Nonetheless, I imagine that some of the issues coming before you are quite general, so let me address myself to the life insurance part of these.

Our position is we are not opposed to the retailing of life insurance through bank branches, primarily on the grounds that coming from a philosophy of supporting competition and supporting consumer choice, we would find it difficult from an intellectual framework to be opposed to that. The report's recommendations are holistic and go in the direction of improving or extending or increasing competition, so our philosophical perspective is based on the underpinnings of customer choice and increased competition.

Having taken that basic position, we see the necessity for equivalent licensing requirements to what already exists in the functional stream of life insurance as a very vital and necessary and important step in any bank extension, as well as protection of privacy, particularly given the potential extension of the financial relationship, where a bank will already have a financial relationship with a customer, so privacy concerns would increase, and likewise, strict rules to prohibit coercive sales practices. These are the three planks that we see as being very important to fulfil in this lack of opposition to the retailing through bank branches.

Mr. Lorne Nystrom: Are you concerned about the relative size of the insurance companies compared to the banks? There are five or six big banks with assets in the hundreds of billions of dollars, and many, many more insurance companies. Of course the consolidation on the insurance side is really being speeded up since the collapse of Confederation Life and the merger of different companies in your field as well, but you're still very small compared to the banks. Doesn't that give them an unfair advantage?

• 0930

Also, they're right on the front line, and people walk in and deal with them on a mortgage, and all the information is there. You mentioned privacy concerns and so on. Isn't it a bit like a David and Goliath situation, or does that make you more efficient?

Mr. Donald Stewart: Perhaps it makes us try harder. But we definitely have a concern about the relative size of the sectors, and in our case the relative size of our company vis-à-vis the leading banks. The ratio is not terribly different in asset terms—that is, ten to one, with ten being a leading bank and one being the Canadian presence of leading insurer.

We have been successful in competing with the banks across a wide range of financial services, and we believe that with the extension of the competitive powers envisaged plus a continued intensity on the customers, we can continue to compete successfully in the Canadian marketplace. But it will not be easy, and the challenge will grow. So we very much respect the banks, but we believe we can continue to compete in the foreseeable future, based on the track record over the past decade or so when powers have been extended in other ways.

Mr. Lorne Nystrom: I wanted to ask you a question in your capacity as CEO of a very large insurance company. If the mergers go ahead, the Royal Bank with the Bank of Montreal and the CIBC with the TD, we'll have companies there that have assets of hundreds of billions of dollars. In terms of the rest of the financial services sector in this country, what would happen if one of these big banks were to fail? That's one of the concerns we're asked about quite often, that they might be too big to fail, and it would force a tremendous bailout by the taxpayer or a takeover perhaps by a huge American bank, such as Citibank.

In your opinion, what would happen? I assume that they won't fail, but that assumption could be wrong. We see what's happening in Japan and other parts of the world. None of us is perfect, and something can happen. There could be a catastrophe. What would happen to the Canadian financial services sector if one of these huge banks, with assets of $500 billion or $1 trillion, were to fail? What would it do to the rest of us?

Mr. Donald Stewart: I shall attempt to answer your question as respectfully as I can. It is a question I have not given a good deal of attention to.

In principle, if a very large bank, such as those that would be formed as a result of the mergers, were to fail, the likely cause would be in the bank's intermediation operations, which is basically the relationship between its deposits and its loans. That would bring into play in large measure the Canada Deposit Insurance Corporation. Undoubtedly, as has happened in the past, it would place a great strain on that organization, and it's there as to whether or not the potential hypothetical failure's impact on the rest of the financial sector would come. So it would be primarily through the underwriting by the crown corporation, as indeed has happened on a much smaller scale through the failure of various trust companies in the last two decades. It would be of considerable concern to us as to the risks of this reverberating through the rest of the financial services sector.

But we believe that cushion, that mechanism for handling the failure, could underwrite one failure of that magnitude, with obviously extraordinary measures being required. But it is a concern, because there is a concentration there that goes against the general diversification of having many institutions, or at least sufficiently large numbers. That would be our perspective on it.

Mr. Lorne Nystrom: Mr. Chairman, if I may, I'd like to follow up on that—une pêtite question.

You're saying this would be extraordinary. It certainly would be. It would be so massive that there would have to be a huge public underwriting or bailout. Does that not then put that institution at an unfair advantage in terms of competition? The ordinary citizen knows they're almost too big to fail, so there would be some support from the public, compared to that for a smaller institution such as yours. Doesn't that give them an unfair competitive advantage, even one big megabank vis-à-vis an ordinary sized bank?

Mr. Donald Stewart: It does to some extent, although given the report's positioning on the general question of deposit insurance being underwritten by the crown through banking versus the privately underwritten CompCorp, we believe that's at least as big a disadvantage at present, and the additional nuance by the “too big to fail” potential would be hard to discern in the public mind because there would always be some element of uncertainty. So I would regard that as an extremely difficult question to answer.

• 0935

The Acting Chairman (Mr. Paul Szabo): Thank you, Mr. Nystrom.

Mr. Valeri, please.

Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Mr. Chairman.

Mr. Stewart, you talk about corporate structure in your presentation, specifically holding companies. Who do you think will take advantage of the new system? Would it be the large schedule I's, or is it going to be the mutual fund companies? And what is it that they'd be able to do under that structure that they're not able to do now?

And you did talk about some safety and soundness concerns, but you didn't mention how perhaps OSFI might address and what some of those concerns might be. Could you address that? That's my first question?

Mr. Donald Stewart: Primarily in the area of corporate structure our focus has been on the structure after any demutualization, because obviously that is where the reality of any proposals come at us. So it's more been in that context rather than the more general one that you opened your questioning with. If you'll permit me to try to address the question in the context as to what comes at the life insurance sector, I think that might answer the question generally.

We primarily see that as an area of simplicity and some advantages rather than a sweeping major advantage. In our case, we have a parent corporate entity that has about 70 subsidiaries worldwide. So the parent corporate entity functions both as a constituted life insurer and as a holding company. Separating the two into a pure holding company and an operating life insurance company would be a clarification. It would then be clear which piece belongs where. So we see it as primarily cutting through some complexity where two functions are merged into one company at the present time.

In terms of any safety and soundness issues, the holding company under the proposals in the report would be a regulated entity, and it's through that approach the necessary safeguards would be in place. If that were not to be the case, the holding company could engage in businesses that were outside the review of OSFI and thereby have the potential to contaminate or spread contagion among the rest of the group.

In our case it's a simplicity. We are told that the flexibility whereby the holding company can more easily raise capital is an added advantage in the marketplace. It's mechanically easier to do. And we're told that the set-up would add value to policy holders in the event of forthcoming demutualization.

Mr. Tony Valeri: You also go on in your proposal to say that it would be essential for Sun Life to be able to engage in consolidation and merger activity if it's going to become a competitive force as envisioned by the task force. Given your size, after demutualization and then going forward, do you have any concerns with the public impact statement process, the merger process that McKay has put forward? Is it too onerous? It talks about legal undertakings and all these others types of initiatives that may fall into an actual merger proposal. Can you comment on that?

I know you're looking to the future, but that's what this is all about.

Mr. Donald Stewart: Indeed.

We can comment on that, and the essential answer would be that given a relatively small size in Canada—remember we're number five in Canada, with assets in the region of $20 billion, which is roughly 10% of that of a major Canadian bank in Canada—the public impact statement would be much less of an issue because of the company's relatively, and I emphasize the word “relatively”, small standing in the community. So while there might be a number of requirements in the public impact statement that would be a little challenging to fulfil, we see that essentially not having a pervasive impact on the community would really mitigate against these being too hard to meet. We would be able to meet these, we feel.

Mr. Tony Valeri: Do you have any difficulty with the process itself?

Mr. Donald Stewart: No.

• 0940

Mr. Tony Valeri: No.

This is my last question. It has to do with another solution that MacKay put forward with respect to the ownership rule and the widely held requirement on companies like yours after demutualization. Mr. MacKay put forward a solution of grandfathering some closely held companies and organizations as we move into the future. Can you just comment on that? Do you have any issue with that? Is that a good option?

Mr. Donald Stewart: It seems to us that it's essentially practical and fair.

Mr. Tony Valeri: I'm sorry?

Mr. Donald Stewart: It's essentially practical and reasonably fair to grandfather. It's always difficult to impose rules that have retroactive effects. I'd have trouble with that in other ways. It's hard to oppose it in this one, so we would see it as fair.

Mr. Tony Valeri: Good. Thank you.

The Acting Chairman (Mr. Paul Szabo): Thank you, Mr. Valeri.

We have Mrs. Redman for a final segment of questions.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chair.

In your brief, you talked about access to the payment system. You mentioned being encouraged by the task force considerations, but you also pointed out reasonable terms for other networks, and you make the point that it should be as soon as possible. So really my question is, being able to access ATMs and do direct deposits, from an insurance point of view, who should establish the fees it would cost? Should this be the CPA members? How would we establish it so we could ensure that the fee structure would not become a barrier to financial institutions trying to come into that system?

Mr. Donald Stewart: There's an existing fee structure in place. Perhaps I should clarify that the corporation I represent has access to the payment system and is a member of Interac through a subsidiary. It would be much more practical and seamless to be able to incorporate that capability and those powers into the parent because it would be easier to present a more united face to the customer.

But within the existing structure and framework, there are fees that we believe are a reasonable guideline for the future. It would mostly apply. If that scale is maintained, or more or less maintained, along with the governance structure that's already in place, that would be satisfactory to us. So existing rules, as they exist, are acceptable. Our concern might be if there were major changes to them.

Mrs. Karen Redman: Could you also address the timing issue? You talk about it happening as soon as possible. Obviously the MacKay task force, with its 124 recommendations, is much more far-reaching than bank mergers. Would you see this as something that should be in place if bank mergers should happen before a merger issue was looked at?

Mr. Donald Stewart: Indeed, we see that a number of the recommendations have a later date, 2002, attached to them. A number have no specific date, but there are several we would like to see implemented early, and that's very much one of them.

Mrs. Karen Redman: Thank you.

The Acting Chairman (Mr. Paul Szabo): Thank you very much, Mrs. Redman.

Mr. Stewart, you have well articulated your position on some very important issues before the committee, and we thank you very much for that input.

Colleagues, as you know, there's a vote today. I believe there are bells at 10.05, and then the vote will be at 10.35. Therefore, I'd ask you to hold your seats. We'll simply allow the next panel to take their seats.

Mr. Stewart, thank you again so much for your input.

Mr. Donald Stewart: May I express, on behalf of the corporation I represent, my thanks for this opportunity. It's very much appreciated. Thank you.

• 0945

The Acting Chairman (Mr. Paul Szabo): We now have, from the Laurentian Bank of Canada, Mr. Henri-Paul Rousseau, president and chief executive officer; and Ms. Céline Blanchet, senior manager, public affairs.

Welcome, Mr. Rousseau. We look forward to your presentation, following which I'm sure the members would like to discuss some of the points you raise with us.

Mr. Henri-Paul Rousseau (President and Chief Executive Officer, Laurentian Bank of Canada): Thank you, Mr. Chairman.

We are delighted to be here this morning. I have given you copies of our presentation, so I will be very short in my presentation, giving you most of the time you need for questioning.

Our position on the MacKay report has been known, and I'd like to repeat that we have a general view that this report is a very important one. Overall, we think the report focuses on the major issues and a lot of their recommendations will change the financial sector in a good way.

We think the first priority of public policy in that context should be to promote more competition in the financial marketplace, and as policy-makers you have basically three roads to go.

The first road would be hoping that more competition will be coming from external sources, and that will be related to the 10% rule in ownership. We exclude that approach for the moment.

The second approach would be that you would be favouring the entry of new participants in the marketplace. We think a lot of the MacKay recommendations can and should be implemented, but we don't expect this will change very rapidly and substantially the nature of the marketplace.

Our view is that you should focus on a set of policies and recommendations that will have an impact on more competition, and that has to do with the capacity of players in the market that are already there to consolidate and have cross-pillar transactions such that these tier two institutions like us and other banks and other entrants, mutual funds companies and fund managers, can regroup and create true economies of scope and more competition in the marketplace.

There is a lot in the MacKay report in that direction. Basically the first set of recommendations, from one to 40, goes in that direction. Our recommendation would be that your report should propose to the federal government a process, and that process should be in three phases.

The first phase should be as soon as possible, and I would expect that should be around February 1999, at the time of the budget. I would hope the finance minister would table a policy paper very close to sets of laws that will give us—and when I say “us”, it's all the players in the financial marketplace—the sets of rules under which we can combine our businesses and the sets of rules concerning both the regulatory framework and the legal and the accounting rules for such transactions.

That phase one would then give the players a set of rules, and during that phase you will see as policy-makers a bunch of new transactions appearing. In these transactions, you will have new sources of competitors in the marketplace.

Phase two would be somewhere between the middle of next year and the end of the year, when you will be having the formal approval process whereby these transactions and the one concerning the two bank mergers would be looked at.

• 0950

Phase three should be the phase where, given the new rules of the games and the new players in the marketplace, you will look at the other issues concerning consumer protection and other regulatory aspects. I want to stress here I'm not proposing a process for cherry-picking. I just want you to know there is some logic behind this.

I believe if the MacKay report had been written under the assumption that the first 40 recommendations would be implemented, they would probably have had a different view on many of the other aspects. The reason for this is you need a lot more consumer protection if you don't have enough competition in the marketplace. If you have a lot of new competitors in the marketplace, you may have a different wording and different regulations concerning competition, because competition is a way for policy-makers to make sure consumers have choice, value, and can really compare offers from different institutions.

More precisely, we think the legal framework we now have in place is such that it is no accident that the only proposed transactions you see are the two big bank mergers. This is not the result of something up in the air. It's something that comes precisely from the legal framework we have plus the accounting rules we're facing.

Any one of us—be it a bank, a trust, an insurance company, a broker, a fund manager, or a mutual funds company—that would like to buy or amalgamate with another institution is facing a big challenge concerning both the legal framework and the accounting rules. Because of that, we are proposing, as MacKay is proposing in his report, that there should be more flexibility in corporate structure with regard to the holding company concept. I think the minimum should be the bank holding company concept, which is the one we see in other regulations.

In fact, when you look at the Bank Act right now, a bank is in fact a bank holding company. The only problem with the Bank Act is if you're a bank, the only way to evolve is to own subsidiaries. The bank doesn't have the capacity to be a subsidiary of the holding company. So I think the minimum should be to create in the federal Bank Act a group of bank holding companies, and if the regulators want to go further, we can have less regulated financial holding companies.

On the accounting rule, we think leadership should come from Ottawa on that issue. If you wait for all the accounting people of the world to get together and agree on something, it will take too long. Right now Canadian institutions are not on the same level playing field as other institutions, be they in the U.K. or the U.S. You should be moving very rapidly to make sure we have the same capacity as other people in other jurisdictions, and moreover that we also have the capacity to regroup within Canada.

My final point is that given our approach, we propose that the focus of the policy should be for Canadian institutions to have a chance to really regroup and create what I call tier two community forces. If this is the main objective, I don't think we should be pushing too rapidly to change the powers and the capacity of any one group of institutions. I'm referring here to the capacity to retail insurance, lease autos, and other aspects. You should keep some differences between institutions in order for them to have incentives to regroup.

Those are my opening remarks. I'm ready for your questions.

[Translation]

The Vice-Chairman (Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.)): Have you finished, Mr. Rousseau? Thank you very much for your presentation.

We'll go now to the members' questions. I would ask Mr. Forseth of the Reform Party to ask his first question.

[English]

Mr. Paul Forseth (New Westminster—Coquitlam—Burnaby, Ref.): Thank you very much, and welcome today.

You have addressed the issue of bank ownership, but we have the rule of 10% and that bank ownership should be widely held. You say that should be addressed. If it shouldn't be 10%, then what should it be? What should the nature of holding regulations be?

• 0955

Mr. Henri-Paul Rousseau: We pretty much agree with the MacKay proposal. One of the big pluses of the MacKay approach to these questions is they introduce some flexibility in their own thinking and approach. They're not looking for a standard and unique approach to those questions. I agree with most of the recommendations from the report concerning the less than $1 billion, $1.5 billion and $5 billion and over approaches. I think it will create some incentives and new competitors in the marketplace, and this is precisely what you want.

There is some nuance in this report to make sure most of our Canadian system remains in the hands of Canadians, and this is the 20% rule. I don't think the move from 10% to 20% would be a big deal. I don't think it would change much except for accounting purposes in some specific transactions and alliances.

Mr. Paul Forseth: I think it's clear you would like the financial climate to be able to have the rules to proceed with mergers. I will put it to you directly: Does your bank anticipate any merger or takeover?

Mr. Henri-Paul Rousseau: I cannot answer that. The rules under which we're governed right now are such that the only types of transaction we can consider are the ones that are legally quite difficult or economically quite impossible because they would create a lot of goodwill. This is why we've been asking for more flexibility in the corporate structure. Given that corporate structure, I tend to believe there will be in the Canadian marketplace a certain number of new transactions concerning regrouping of institutions in different fields.

We have to understand here that if Great-West Life is buying London Life, there is a lot of goodwill in that transaction, but that goodwill could be compensated for by a lot of synergy, given the fact it is a transaction within the same group of business—insurance.

If we're talking here of regrouping an insurance company, a bank and a mutual fund business, these are three different businesses. They can share a lot of the common fixed costs of marketing, training, and capital management, but there won't be as much cost synergy as there would be in other types of transactions. Because of that, the accounting rule we're facing precludes such a transaction. This is why you have in front of you now only these two big transactions. The market has reacted to the types of rules you've been giving us.

Mr. Paul Forseth: I have a third and final question for this round.

The Vice-Chair (Mr. Nick Discepola): There will only be one round. We have 35 minutes, and I'll try to distribute it equally. But take your time; you have about another four or five minutes.

Mr. Paul Forseth: Thank you.

You talked about the international level playing field. I believe in Canada the capitalization, the secure types of holdings the bank must have, is around 10%. Yet foreign banks often struggle to get to even the 6% level, and even the component of that 6% would not meet Canadian standards. So when you talk about a level playing field at an international level, what are you talking about, especially—

Mr. Henri-Paul Rousseau: I'm talking, precisely as we tabled in our report, about the accounting rule concerning business combinations. As you know, right now the accounting rule in Canada is such that if you have a transaction of unequal companies in terms of market capitalization there will be goodwill, and that goodwill is erased for regulatory purposes from the capital base, so you have two worlds.

The balance sheet as it is looked at by the regulators is such that the goodwill is not part of the value of the company. On the other side, you have the Canadian accounting rules that say you have to keep that goodwill on your balance sheet and amortize it over the future years of the company. There is a difference in accounting rules between the regulator and the accounting world. Compare that with the U.S. rules, where you can have a business combination—a pooling of interests of companies of unequal size—and treat the goodwill directly off the balance sheet. In that situation you don't have two balance sheets—one for the regulator and one for the accounting world. That is one example.

• 1000

If you compare these rules with those in the U.K. rule, it is the same thing. In the U.K. goodwill is treated like another asset. It depreciates in the balance sheet only if the value goes down.

So these are technical issues, but they are very important for policy-makers. The problem we're facing is that financial institutions are highly regulated institutions, and the accounting rules we're facing are the ones that are common to other Canadian businesses. What we're saying in our report is that there should be a move from Ottawa, from the regulator, from OSFI, putting in place a set of accounting rules that will be such that any company like ours or others that want to combine their business with others will be using these accounting rules. This is where the difference is of major importance.

Mr. Paul Szabo: Thank you.

[Translation]

The Vice-Chairman (Mr. Nick Discepola): Thank you very much, Mr. Forseth.

Mr. Crête.

Mr. Paul Crête: Hello, Mr. Rousseau. Hello, Ms. Blanchet. You say in your brief:

The MacKay Report must be put on the fast track; in other words, the rules aimed at enhancing competition must be adopted as soon as possible—

So, in your opinion, the Canadian market could, in scarcely a few years, be reorganized around eight to ten financial groups. Your theory is that, since the SMEs have made a point of saying they wanted more competition, these consolidations would allow for enhanced competition. This is a model other than the one of having competition just among banks.

I have a twofold question. I'd like you to tell me whether you had any feedback from SME associations about this way of viewing the competition. Second, I'd like you to outline what's going to happen if we don't adopt the fast track, if we go slow, rather. What would be the disadvantages of taking several years to put the future Canadian system in place?

Mr. Henri-Paul Rousseau: As far as your first question is concerned, I have had few contacts with the SME associations, but I've had a lot of contacts with the SME executives who are our clients. When we explain to them that, if we brought together several players who now perform various roles— We all know that an insurer, a broker, a bank and a trust perform different roles, but we all have one thing in common, namely expertise and capital that could be put to the use of SMEs. The typical example that I give is that, if you consolidate these organizations within the same company, you're going to have a new player in the market, and this new player is going to compete in each of the locations where he is, which is not the case at present.

So, I haven't talked to the associations, but I've spoken with clients. I've occasionally met the heads of associations, with whom I've shared some ideas, but their concern is more about bank mergers than alternative models of competition.

As far as your second question is concerned, you ask me what the consequences would be of keeping the status quo, if I understand correctly. Assuming there are other regulations included in your question, I'd say that the worst thing that could happen to the financial system would be the following: there's no change to the rules of the game and, at the same time, you introduce, as members of parliament, a series of new regulations respecting consumer protection. That worries us a lot. For instance, one of the conditions the federal government could impose on the big banks that wish to merge would be to ensure better protection of consumers. Then we would have the worst of both worlds. We would have a very concentrated world and a world in which the cost of competition among organizations like ours would be very high. In fact, it would threaten our ability to compete.

So, instead of adopting a public utilities approach, that is, a model a bit like the one used in air transportation, telecommunications or other areas of economic activity in Canada, let's try right away to get a model that allows more competition among the players. There aren't many sources of competition. Either you open up to the outside in the hope that others will come and buy the system, which is not very likely in any case, or you say to yourself that about half the capital of the players in place, of the major banks that are there, could be consolidated to serve the new competition. That's what we're proposing.

Mr. Paul Crête: Mr. Chairman, Mr. Loubier is going to ask the next question. I'd just like to say we should take a look at the model you propose in the regions where there is already less bank competition.

• 1005

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Mr. Rousseau, hello. I apologize for being late. People are often late here. Thank you for being here.

Yesterday, I made a presentation as a witness to the Finance Committee. I decided to do so in order to express my opinion and especially my party's opinion on the MacKay report as a whole. We agree with your presentation. Things should take place in stages. There are some priorities that are more important than others among the 124 recommendations, including those respecting consolidation and ownership regimes.

Yesterday, when I presented this aspect of the Bloc's brief, there were some skeptics around the table who said that even if conditions were created regarding ownership regimes and the possibility of strategic alliances or meshing of various sectors, this wouldn't necessarily give rise to this type of consolidation. What do you say to that?

Mr. Henri-Paul Rousseau: My answer to that is very direct. First the downside is non-existent. You won't have any negative consequences if government policies allow such consolidations. I don't see any. That's the first thing.

The second is as follows: how is it that you have before you today two proposals to merge major banks? Let's ask the question: what causes this? It is in the economic interest of these businesses to consider such consolidations, but this economic interest is guided by the legal and accounting incentives that you, members of parliament, put in place. So, it must be assumed that, if you change the rules whereby consolidation can take place, you are going to see transactions in Canada, just as in other countries. I'm not coming up with anything original here. If you go to England, Europe and the U.S., you'll see that organizations like the ones I'm talking about exist. Furthermore, there are already some in Canada. Think about Power Financial, which is a perfect example of an institution that handles both insurance and mutual funds. But Power Financial is a holding company, just like the ones we are proposing, and this company competes in various fields of activity, but takes advantage of a number of things that are pooled, which are the ability to share the brand name, the ability to share capital and the ability to share technology. So, Power Financial is a good example of what can happen. There could be seven or eight others in Canada, but you won't see such transactions in the present context; they're only going to appear if you say to people: "Here are the rules of the game."

Finally, what motivates company executives? We all have many goals, but the primary goal is to make sure that the shareholders, who are the company owners, get a good return.

Often we can't do the transactions we'd like to, even if they are in the interest of our shareholders, because the rules of the game prevent us from doing them. I claim that, if you change the rules of the game, the company executives are going to seize the opportunity immediately to do such transactions, but today, it's suicidal, either because it's legally impossible, or because it's totally unjustified in accounting terms.

So all we say in our proposal is that Canadians have to be given a chance to play according to the same rules as the rest, whether in the U.S. or England.

Mr. Yvan Loubier: Mr. Rousseau, for you, are regulatory changes and the creation of consortiums like those you've mentioned an absolute prerequisite for any decision concerning the merger of the four major banks?

Mr. Henri-Paul Rousseau: I think that, if the Canadian government and Parliament adopted the same rules of the game for financial institutions and left the market some time to react, you would see bank mergers, just like Canadian public opinion, in a totally different light than if the status quo were maintained.

Mr. Yvan Loubier: How much time do you give us?

Mr. Henri-Paul Rousseau: What's important is that the public policy be known. That's why I hope we'll have quite a firm policy statement on these points by February at the latest, when the budget comes down. Second, I think that four or five months later, you're going to see transaction proposals appear very quickly.

Listen, it's not an open secret: there are lots of company executives from various financial areas who talk to each other, but no transactions can take place because you're giving us rules that don't allow us to do such transactions.

Mr. Yvan Loubier: Thank you.

The Vice-Chairman (Mr. Nick Discepola): Thank you, Mr. Loubier.

I'll now ask Ms. Leung to ask her question.

• 1010

[English]

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you for your fine presentation.

You mentioned a third phase, to make recommendations for consumer protection. Today we heard a lot of different opinions, especially about how there is a lot of fear for job losses after merger, and again on the very humanistic point of view of how it would affect many thousands of people. Another area is that the rural services will definitely be affected. In regard to those two areas, would you comment on how you would improve or protect the consumer services in that?

Mr. Henri-Paul Rousseau: I would hope that the guidelines you will be using to formulate the policy vis-à-vis these very important issues would be ones that have to do with making sure that in those local areas you maintain some competition. It is a quite different perspective when you look at the financial market globally versus locally. Even though in the branches the human interaction between our employees and the clients has been reduced over time due to technology, it is still very important. So I would recommend that for the rural areas and local areas where you want to maintain competition, the Competition Bureau and the federal government, when it comes time to approve these bank mergers, should see that there is some disinvestment by those who plan to merge in order to maintain some competition.

If the other approach was taken—that is, we will force them by some rules to have services in all areas after the merger—if you take an approach of let's say public utilities, you can be sure what will happen: the cost of doing business will increase, and institutions like us will not be able to compete. Not only will we not be there locally, but we would probably not be there. If you put too much competition on the system in order to let the bank merger be acceptable, it will be a terrible error.

Second, what is the best thing for the customer? Take for example the cellular phone business. There's a lot of competition, and you can even say there's too much, because we recieve so many offers. The point is that if you are a consumer and you're looking for a cellular phone, you have a lot of choice. Why do you have a lot of choice concerning price, services, and quality—whatever? It's because we do have a highly competitive market.

This should be the objective you're looking for in the financial industry: how do you get that? Because if this is the case, then the consumer will be well served. How do you maintain and increase competition? It is precisely by adopting very rapidly the first 40 recommendations of the MacKay report. Do that first. Once you have done that the world will change, the market will change, and you can come back on other aspects of the regulations if you want to and there are no acceptable situations. The worst scenario would be to maintain the status quo and impose a lot of regulation for consumer protection, which would be basically a public utility approach and highly inefficient.

Ms. Sophia Leung: In the rural area, we're assuming that after merger there will be much less choice for the consumers. Would you or any bank be willing to go there to provide better service to ensure the quality of service?

Mr. Henri-Paul Rousseau: When I said that we would be hoping that if you do approve the mergers you will ask these merging banks to sell some of their activities to others, we would certainly be there to buy some of these activities. We have been growing through a lot of acquisition over time and in different areas, both in Ontario and Quebec. We have been buying and growing institutions by doing this, and we'll certainly be there to serve new clients if we have the capacity.

You have to be careful how you will handle the disinvestment aspect. It may be the case that you want to make sure that those who buy the branches buy all the branches in the specific areas; otherwise you may just be buying air, because the consumer can move rapidly from one bank to another.

Ms. Sophia Leung: Thank you, Mr. Chair.

The Vice-Chair (Mr. Nick Discepola): Mr. Valeri, you have four minutes.

Mr. Tony Valeri: Thank you, Mr. Chairman. I'll be relatively brief.

The purpose of my question is really to get some clarification and understanding on the accounting rule. I just want to paint a scenario for you.

• 1015

You have two companies. One is $4 billion and the other is $2 billion.

Mr. Henri-Paul Rousseau: One is $4 billion?

Mr. Tony Valeri: One is $4 billion and the other is $2 billion in terms of book value. Then they decide to merge.

Mr. Henri-Paul Rousseau: Yes.

Mr. Tony Valeri: In Canada, you have a situation where the $4 billion and $2 billion could possibly become $8 billion with respect to goodwill. I just want to walk through this and see if it's correct in my mind.

Essentially, what you have is a bump-up under the accounting rules in Canada. Subsequently, that bump-up is depreciated against income. I just want to understand this for the purposes of the committee. Initially, you're given a gain, and then subsequently, it's taken away slowly. In essence, you've got almost an accounting fiction here.

In the U.S., contrary to that, they would take a look at this potential merger and say that $4 billion and $2 billion is $6 billion, which is the book value afterward.

You say that the Canadian situation really only occurs in a merger of unequals. So you have a situation in Canada such that two companies of equal value tend to consider merging because this accounting rule does not affect them. It only affects companies of different sizes, such as a larger company looking at a smaller company.

Essentially, we're only looking at half of this accounting fiction. You're saying there's a problem with the accounting rules because it doesn't work for two companies of unequal value, yet the market actually overvalues your shares initially by the way they treat this goodwill. Is that correct?

Mr. Henri-Paul Rousseau: No. I'll take your example of two companies. One has a book value of $4 billion, but let's say the market value of that company is twice that, so it's $8 billion.

Mr. Tony Valeri: Is that goodwill?

Mr. Henri-Paul Rousseau: No, this isn't goodwill, this is the market value given by the shareholders.

Mr. Tony Valeri: Okay.

Mr. Henri-Paul Rousseau: In that company, the value of all the profits coming from the past that have been reinvested in the company and not issued as dividends is the book value. That book value is equal to all the assets minus all the liabilities. This is what the accounting rules say for book value.

The market value is what the market out there gives to that specific company. It's based on an expectation of future profit, the future of that company, and its demand and supply, basically.

So let's say company A has a $4 billion book value and $8 billion market value, while company B has a $2 billion book value and a $4 billion market value, applying the same multiple.

Just looking at it, the only thing this says is that company A's market capitalization, the value assessed by the market, is $8 billion, which is twice its book value, while the market value of the other one is $4 billion, which is twice its book value.

If you're in Canada, and company A is buying company B, the rules of the game, the accounting rules in the financial industry, will be the following if you are a federally regulated company.

First, assume we're just paying the market value. This is just an assumption. It doesn't matter. It's just to simplify things and not have too many numbers this morning. What will happen? Company A is buying a company for $4 billion whose book value is $2 billion.

Mr. Tony Valeri: Right.

Mr. Henri-Paul Rousseau: When company A includes company B in its company, we integrate the two. Legally, company A is buying company B. In terms of accounting, what will happen is that the difference between the $4 billion market value and the $2 billion book value of company B then becomes goodwill. There's nothing wrong with that. That goodwill is the same evaluation that you would have in the U.K., U.S., and Canada.

Where does the difference start? If you're a Canadian company, the rules of the accounting profession will say that the goodwill you have created is a real asset. It's on your balance sheet.

• 1020

So if you had the two companies, the resulting company will have in a new asset, goodwill, $2 billion—book value of the bought company, $2 billion. So you have these two assets there. And you will have a book value on the other side of $4 billion more. We put the two together, right?

Mr. Tony Valeri: Yes, right.

Mr. Henri-Paul Rousseau: What the accounting rules will say is because this is a real asset, but because it is an asset you have created through a transaction by giving a higher value than the book value, that goodwill has to be depreciated over some period. Let's say it's 20 years. It will be between 15 and 30 years, in most cases.

The year after, the resulting company will have profits from its operation, and one of the new expenses will be the percentage of the $20 billion, which will be, if it's over 20 years, 5%. Five percent of that $20 billion will be a new expense. That will be depreciation of the goodwill, amortization.

So over the lifetime of the resulting company, we will have an expense on the profit and loss statement that will be there every year. These are the accounting rules. There is nothing wrong with that. We can live with that.

Where does the problem start? If you are a federal financial institution, OSFI will say to your company at the end of the year, from day one that you make the transaction, that goodwill is not an asset. It has to be reduced from your regulatory capital. This is the rule. So that's the first part of the trouble.

On the accounting side it is a recognized asset, but on the regulatory side it's not an asset. So we create the first difference between the accounting balance sheet and the regulatory balance sheet. This is what a Canadian institution will be affected by.

Moreover, since as a buying company you are acquiring another financial institution, you need additional capital to support that business. This is the rule. So not only do you need additional capital, but part of the cash that you paid has disappeared because we don't recognize the goodwill as an asset. We have a double-whammy situation.

Why is it that the two big banks can merge and don't have that problem? It's because the accounting rules have a little nuance that says if you're not acquiring a company but you're merging companies—

Mr. Tony Valeri: A merger of equals.

Mr. Henri-Paul Rousseau: Merger of equals is defined more or less as the same market value. If you do this, and you qualify for merger of equals—that is, pooling of interest, accepted by all the accounting people—then you don't create any goodwill, so you do it.

You have a fantastic new company. You don't create goodwill, so you won't have to amortize these expenses over the years. Moreover, you don't destroy capital, and you're precisely in a business where the only thing you really need for a start is capital. This is precisely why you only have these two transactions in front of you.

Assuming that we don't have equals, that we have unequals, then you won't do it. This is precisely why we say you have to change these rules and adopt those of either the U.S. or the U.K., where in these situations you will have the capacity to merge unequal companies by pooling of interest. But there are differences.

I was a little bit long, but I think it's crucial.

Mr. Tony Valeri: It is very important, but in the U.K. and the U.S., then, you don't create the goodwill—or is it that the regulatory authorities recognize—

Mr. Henri-Paul Rousseau: In the U.S., the nuance is that the pooling of interest rules are different, and you don't have to be of equal market cap to qualify for pooling of interests. There are 72 very complex criteria. But you can have transactions whereby one company buys the other one by paying with shares, and if you pay with shares and you respect a bunch of other rules, you will have a transaction—a combination of companies—without creating goodwill. This is the U.S. rule.

• 1025

The U.K.'s is quite similar to the Canadian one except that on the accounting side, you will not have to depreciate goodwill. You only depreciate goodwill if it's no longer good. It's treated like land or any other asset, so it is on the balance sheet as a good asset as long as it is a good asset. So if you did a good transaction, you don't have to do that.

[Translation]

The Vice-Chairman (Mr. Nick Discepola): Thank you, Mr. Rousseau.

Mr. Nystrom, please.

Mr. Lorne Nystrom: Welcome, Mr. Rousseau and Ms. Blanchet.

[English]

I wanted to ask you just a quick follow-up on that to begin with. When you talk about the merger of two equals, I mean the Royal Bank and the Bank of Montreal are roughly equal— There is a greater difference between the TD and the CIBC, isn't there? But aren't they still equals as well? Where's that cut-off—

Mr. Henri-Paul Rousseau: Well, the criteria are concerning the market value.

Mr. Lorne Nystrom: Yes.

Mr. Henri-Paul Rousseau: So at the time of the transaction— The criteria are also a little bit nuanced. You can be let's say between 45% and 55%, and it's acceptable. You have a 5% range—

Mr. Lorne Nystrom: That's what I—

Mr. Henri-Paul Rousseau: So at the time of the announcement TD and CIBC were almost equal. Nowadays, given the change in the value—

Mr. Lorne Nystrom: Of the stock.

Mr. Henri-Paul Rousseau: —of their stock, the issue is whether the same deal is still acceptable for the shareholders, and all this. But that's a consequence of market adjustment and timing of approval.

Mr. Lorne Nystrom: So it's the time of the announcement— I mean, hypothetically, let's suppose the mergers go ahead next May but the announcement was made say last March—that's about 14 or 15 months. Is it the time of the announcement? The stock can go up, the stocks can go down.

Mr. Henri-Paul Rousseau: On the accounting side it is the time of announcement, but on the side of the shareholders' approval.

Mr. Lorne Nystrom: Yes.

Mr. Henri-Paul Rousseau: There can be shareholders down there in let's say May or June, and they'd say “Well, we would have agreed with that deal a year and a half ago, but we no longer agree”. The issue is if you change the deal, you may no longer qualify for the merging of equals. And that is getting complex. This is one reason that time delay may be destroying these mergers if the market value changes too much. These are the consequences of regulatory approval. It does happen also.

Mr. Lorne Nystrom: So it might be a different reality in a few months.

Mr. Henri-Paul Rousseau: Yes.

Mr. Lorne Nystrom: I wanted to ask you a little bit about the size of your bank compared to the proposed mergers of the Bank of Montreal and Royal Bank. What are your assets and what are their assets?

Mr. Henri-Paul Rousseau: The Royal Bank as it is right now is producing the equivalent of Laurentian Bank every year. That gives you the answer. These companies are 40, 50, or 60 times larger than we are. We're a $13 billion asset bank. We manage another $13 billion for others, assets under management. These companies are already a lot bigger than we are, and we're facing competition from companies that are 20 or 40—

For us right now, we live in a world of a lot bigger competition. Honestly, if the merger went ahead, they'd be bigger. But we're already a small player, and we cannot be smaller than we already are. So the relative sizes, I mean, it's a matter of— We already have a strategy of a small player. We're a niche player and we define where we go. And we cannot attack the big banks in the same way, given our size.

Mr. Lorne Nystrom: So what does the merger mean to you? Does it make it more difficult? Is it irrelevant? They're already big, but they'll get bigger. I mean, it's a—

Mr. Henri-Paul Rousseau: A lot will depend on what comes with the mergers. For example, if the mergers approval comes with an approach whereby we have a lot of new regulations, and banks in fact become public utilities, then given the number of new regulations we'll be facing— Well, the question would be “What is the minimum size you need to be a public utility in that business?” And I don't know the answer.

• 1030

On the other side, if you have the bank mergers approved and at the same time we get new rules of the game concerning capacity to combine and also the regulators and bureau impose on some of these banks to de-invest in some areas and we can pick up some piece of it, we can turn this into a real opportunity.

Again, we are a company that fills a certain niche, and we have to behave as a very small company all the time. Because of that, that merger would have some consequence for us. But it would depend more on the public policy reaction than on the merger itself. That will be the major point.

Mr. Lorne Nystrom: I was asking the insurance company this morning about the whole concept of a bank being too big to fail. If they were to become very large and they were to fail, it would have real consequences on the rest of the industry. Does that put them at an unfair advantage in terms of competition? The public would know that because they are so big, the government wouldn't allow them to fail. There might be a bailout or some other arrangement in terms of a foreign takeover. Therefore, isn't it a bit safer to deal with them than to deal with you? If you failed, it would be a disaster, but still it wouldn't be the end of the world in terms of the country. Does that put them at an unfair advantage because the level playing field is no longer level?

Mr. Henri-Paul Rousseau: Yes and no. I think we already have that problem. The merger will just add marginally to this. We already have big banks, and I would be surprised if any Canadian government would let any of the big banks fail. So we already have that problem.

How do we cope with that problem right now? Deposit insurance is key. The precise reason we have the deposit insurance system in Canada has to do with making sure that independent of size, you have minimum protection when you deal with financial institutions, and that is the key. If you were to exclude or change the rules and no longer have deposit insurance, then it would create a lot of unfairness. The reason the Canadian policy has put in place deposit insurance is precisely because of what you just said.

Mr. Lorne Nystrom: What would actually happen? You're appearing here this morning as a CEO of a bank. What would happen if a disaster did occur and this big megabank were to fail?

Mr. Henri-Paul Rousseau: Banks are highly regulated. We are producing reports to both the central bank and the federal government through OSFI on a regular basis. You have to know the Canadian public is well protected because that flow of information occurs almost daily. Now, this is precisely why when financial institutions get into trouble, the regulators come in very rapidly.

The type of scenario you seem to be talking about is one where we'll be surprised by a failure. That has never happened. It has always been a case of it coming through a process, and during that process the government comes in and you have a bailout through our deposit insurance system. Look at what happened in the trust company area in the early 1980s.

Mr. Lorne Nystrom: I have one last question. In this morning's Globe and Mail, which I don't have with me, Matthew Barrett is almost threatening us by saying that if these mergers don't go ahead, there will be jobs lost, branches will close, and so on. Is that just posturing by a guy who likes to posture a lot, or do you think what he is saying is reality? I don't know whether or not you or your colleagues would wish to comment on that.

Mr. Henri-Paul Rousseau: You're right, I don't make too many comments on what the other guys are saying. The only thing I will say, sir, is that it is one way of approaching this issue of mergers, but the main point—

Mr. Lorne Nystrom: But it's really a threat, isn't it?

[Translation]

Is the Canadian Parliament threatened?

[English]

Mr. Henri-Paul Rousseau: Mr. Chairman, I won't comment on that.

The Vice-Chair (Nick Discepola): The CDIC is proposing moving towards risk-based premiums for deposit insurance. So if a small firm has a higher risk, at times they'll be paying almost twice the premium. I'd like to know what your opinion is on that.

Mr. Henri-Paul Rousseau: In theory this is a very good concept. In practice, as to the types of rules we've seen, we can live with that. But one has to be careful not to be too smart.

• 1035

The precise objective of CDIC is to make sure that if you're a newcomer or a small player, you bring competition. If you're getting so smart that you are imposing through the premium system a lot of obstacles to growth, then you won't get the result you're looking for. So yes, it's a good thing to have some adjustment in the premium versus the quality of the asset and all this; it's prudent. But at the same time, we should make sure—how do you say it—

[Translation]

that we don't throw the baby out with the bath water.

[English]

The Vice-Chair (Mr. Nick Discepola): Throw the baby out with the bath water.

[Translation]

Thank you very much, Mr. Rousseau. Unfortunately, our time is limited since there may be a vote. We would like to thank you for your testimony. Our decision will be easier because of people like you, but it's still a very difficult decision. I think we're going to be making it soon and we'd like to thank you for your testimony this morning.

Mr. Henri-Paul Rousseau: Thank you, Mr. Chairman. Thank you, ladies and gentlemen.

The Vice-Chairman (Mr. Nick Discepola): I would now ask Mr. Robert Astley to come forward if he is here.

Colleagues, we have about 40 minutes left. Would you like a one-minute break? All right.

• 1036

• 1038

[English]

The Vice-Chair (Mr. Nick Discepola): I'd like to now welcome, from the Mutual Group, Mr. Robert Astley. Unfortunately, Mr. Astley, we may be called to one or two votes. We probably have a half-hour warning bell, which means we might be able to get through in about 40 minutes. So if you'd like to present your comments for about 10 minutes, it would leave about 30 minutes for questions. But I'll be flexible, depending on when the vote is called. So if you hear a bell, it's because there's a vote in the House.

I'd like to welcome you and ask you to proceed immediately, please.

Mr. Robert Astley (President and Chief Executive Officer, Mutual Life of Canada): Very good. Thank you, Chairman.

My name is Bob Astley. I'm president and chief executive officer of Mutual Life of Canada, which is the lead company of the Mutual Group. We're very pleased to have the opportunity to speak to you this morning. With me are two of my colleagues: Mr. Dick Biehler, vice-president, Ottawa operations; and Mr. Frank Bomben, manager of government relations.

I will try to be brief, Mr. Chairman, in order to leave time for questions. But I thought it might be useful just in 30 seconds to give you a capsule summary of the Mutual Group. First of all, Mutual Life of Canada was formed as a mutual insurer 128 years ago in the small Ontario town of Waterloo, at that time, where we continue to have our head office. We now serve two million individual Canadians and some 5,000 corporations. We rank in Canada as the second largest insurer, based upon Canadian operations. We're predominantly a Canadian company. About 85% of our operations are in Canada. I would note as well that in December 1997 Mutual was the first of the large mutual insurance companies to announce its intention to seek policyholder approval to demutualize.

Let me turn now to the task force of which we're all speaking. Mutual supported the creation of the task force as an effective means to scope out the framework for the future of the Canadian financial service sector. We've participated in that consultation process, and we look forward to the next stages. In general, Mutual supports the focus of the report. We endorse the four themes around which the 124 recommendations are grouped.

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Today I'll speak briefly about a small number of these issues. I'll comment first on the recommendations that we believe should be acted on immediately, and secondly on some others that still require further examination and consultation.

I'll mention briefly five issues that we believe call for immediate action. The first is in respect to demutualization.

The MacKay task force report strongly supported the demutualization process and urged that the regime be finalized and put in place so that the demutualization could proceed. I might say that this will benefit, in the case of Mutual Life of Canada, some 900,000 Canadian policyholders from coast to coast.

Mutual and the three other large mutual companies have worked cooperatively together with the federal government to create a working framework. As you would know, draft regulations were released in August. Since that time, Mutual has consulted widely with policyholders to educate them about the demutualization process and to address concerns, through letters, toll-free telephone lines, our interactive website, 12 policyholder meetings across the country, and policyholder research conducted by Angus Reid. We have provided summaries of all of this to OSFI, the regulator, and have been very pleased with the feedback.

We believe it's urgent for the government to finalize the regulations and make some minor legislative amendments that would allow this process to proceed. This is a good-news story for policyholders and for Canada. We believe this process can and should be done before the end of 1988, that process being the finalization of regulations and the technical amendments to the Insurance Companies Act.

Let me move on to the second item, regarding ownership regimes in the MacKay task force.

In general, we support the new ownership regime proposed for financial institutions, including the relaxation of the 10% rule to 20%, and a single common regime for all financial institutions, based on size of equity.

With respect to demutualized insurers, we agree that they need to be free from both takeover bids and amalgamation overtures during a short three-year transition period. This is broadly consistent with the draft regulations released in August.

Finally, though, we disagree with the MacKay recommendation that would allow voluntary amalgamation transactions during that three-year transition period. In practice, amalgamation overtures can be as coercive as takeover bids. We believe demutualized companies need to be free from having to defend themselves for a short period.

The third item among the five I'll speak to in this section is the elimination of capital taxes on financial institutions. We strongly endorse this recommendation that capital taxes should be eliminated. Note that financial institutions account for 20% of federal capital and income taxes, but for less than 6% of total corporate profits, so the load is very heavy. Indeed, the current system increases the cost of products and services for consumers, provides disincentives for companies to retain capital, and increases the cost of existing capital.

The fourth item I'll speak to is with respect to the Canadian payment system. I'll say quite simply we strongly endorse the recommendation to allow insurers to become members of the Canadian payment system. We see access as being very important for all financial institutions to meet the growing needs of customers.

Finally, in the number of issues on which I would urge early action is consumer insurance plans. We agree that CDIC and CompCorp should be put on an equal footing because the current government guarantee through CDIC does provide greater comfort and confidence for deposit-taking customers. So we urge this committee to recommend to the government that either of the two models would be acceptable, and that early consultation should take place to choose one and to implement it.

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Let me move on briefly, Mr. Chairman, to two issues that we believe require further discussion or consultation. I'll speak to the issue of bank retailing of insurance.

The task force's recommendation to expand retail insurance powers in the branches of deposit-takers and to allow the use of customer information files is premature at this time. It will take some time for the positive impact of the proposed changes to CDIC and to payment system access to take place. There are still great competitive inequities between insurers and deposit-takers due to the sheer size and market concentration of the large deposit-takers. We support the recommendation that regimes for coercive tied selling, privacy, and the licensing of intermediaries are necessary preconditions to any changes in the current framework.

The second and last topic I'll speak to in this segment of issues that should be put over for further consultation is the broad topic of empowering consumers. We certainly support the need for enhanced customer knowledge of financial services products and transactions. That's part of our business. We support the need for best practices with respect to disclosure, corporate citizenship, and accountability.

However, we do not support further regulations and compliance measures to legislate behaviour. Financial institutions are already among the most regulated institutions in the country. The proposals in MacKay, while well intended, are onerous and costly and would not necessarily enhance the public interest. We believe that self-regulation and collaboration with consumer groups, which have gone a long way in the last few decades, are the best ways to ensure compliance and to preserve competition and innovation in the marketplace.

Mr. Chairman, let me conclude by saying that overall, Mutual Group is pleased with the focus of the MacKay report. It provides all of us with an excellent reference point and guide for the important public policy debate that will ensure Canadians can achieve a financial services sector that's competitive, innovative, secure, and responsive.

Thank you for the opportunity of being here today, Mr. Chairman. I would be pleased to respond to any questions.

The Vice-Chair (Mr. Nick Discepola): Thank you very much, Mr. Astley.

I'd like to quickly turn to Mr. Forseth for his questions. We'll start with five minutes for questioning, please.

Mr. Paul Forseth: Thank you.

On page 4, under the title “Bank Retailing of Insurance”, you say:

The Task Force correctly identified the important public interest issues that must be taken into account in assessing changes— The proposed regimes for coercive tied selling, protection of customer privacy and licensing standards of intermediaries should be put in place as a pre-condition to moving forward with any recommendation changes to the current rules for banking retailing of insurance. Such regimes need to be structured in a manner that is manageable and enforceable.

You've certainly thought about this. Do you have some idea of how this regime would work out, especially under the title of “enforceable”? How would you see that working?

We've had previous presentations with concerns about standards of training and accreditation. Then there's the ongoing management of this two or three years down the road. A lot of things can be done up front, promises can be made, and the appearance of a level playing field can be developed, but how do we get to this enforceability and assurance such that all the wonderful things that were supposedly done up front will happen four, five, six years down the road? Can you outline this contemplation that you've obviously foreseen, this enforceable aspect?

Mr. Robert Astley: I think you're hitting on a very important point: laws can be created, but the enforcement of those laws at the individual customer transaction level is not always as transparent or as enforceable as might be desirable.

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I do think it would be essential to have practical consultations about what privacy regimes can be put in place, regimes that would prohibit coercive tied selling from practitioners who are involved in day-to-day provision of financial services.

There then need to be sanctions and consumer redress mechanisms available. It is all too easy in the area of coercive tied selling for innuendo and presumption to impact on customers, individual consumers, and that's the very hard part to regulate. That's why I would argue that one of the necessary conditions is not simply to have the theoretical laws put in place, but to have actual practitioners participate in the construction, the framework and all of the consumer information that would be provided.

Mr. Paul Forseth: What about the other aspect of ongoing training and accreditation? Property and casualty people have all their specialties, the life underwriters have their credentials and ongoing accreditation; how would you see that happening inside a bank branch at the community level to ensure a level playing field?

Mr. Robert Astley: One of the strong positions we would take is that any intermediary that is providing a financial service must have adequate training.

In the case of the sale of insurance and securities particularly, those standards of proficiency are provincial standards and those would need to apply equally to all distributors, to all intermediaries, regardless of what kind of financial institution they were working for. This is a very important point. Looking across the country, we would see an essential need for common licensing and proficiency standards throughout the financial services industry for products that are essentially the same in the minds of the consumers.

Mr. Paul Forseth: I have one last question.

On page 3 you talked about the elimination of the capital taxes on financial institutions and you say very clearly: “the Mutual Group endorses Recommendation 44(b)(i) of the Report that recommends the elimination of special capital taxes on financial institutions.” And you say: “The current system of arbitrarily taxing the capital of financial institutions has several negative impacts.”

So I would like you to comment on what is the international context for this circumstance. How does Canada compare, and is it indeed a major international drag on our economic development? Is it a problem for Canada that other countries do not impose?

Mr. Robert Astley: I am not an expert on international taxation of insurance companies, particularly domestics of other countries, but I do believe the capital tax regime in Canada is substantially heavier than those in most other countries around the world. The reliance on capital taxes has really been a feature of the Canadian financial institution regime for the past seven to ten years.

Right now, at a time of good economic circumstances, those capital taxes for a company like mine set a very high minimum level of tax. As it happens, because these are good economic times the Mutual Group is paying more profits taxes than those minimum levels of capital taxes. However, if we should move back into recession and financial institutions are not enjoying the level of profits that they are today, those capital taxes would be a very serious burden.

So looking at the international scene, I'm sure that my colleagues at the Canadian Life and Health Insurance Association could provide some additional detail about international comparisons, but I would make the point that particularly in recessionary times the capital taxes are far too onerous and inhibit the good functioning of the financial system.

Mr. Paul Forseth: Thank you, Mr. Chairman.

[Translation]

The Vice-Chairman (Mr. Nick Discepola): I would ask Mr. Loubier to ask his questions.

Mr. Yvan Loubier: I have four questions to ask our witnesses.

First, I come back to Mr. Forseth's question about the sale of insurance in bank branches. On page 4 of your brief, you say that it might be premature, but you are not deeply opposed to the possibility that, one day, with the deregulation of financial institutions and the proposals made in the MacKay report, but also by others in Canada, we find ourselves in a situation where Canadian banks sell insurance.

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Second, given your concerns, are you aware of the existence of Bill 188, in Quebec, which covers the whole issue of consumer protection, thanks to a board that oversees the matter and imposes sanctions if there is non-compliance or if consumers' interests have been abused by tied sales or otherwise? Do you also know that there are quite stringent requirements concerning the professional training of insurance brokers? So are you aware of the existence of this law and, if so, what do you think about it in relation to your experience in your industry?

I'll have two more questions to ask you in a minute.

[English]

Mr. Robert Astley: Thank you.

With respect to the comment that the sale of insurance through bank branches and the use of customer information is premature, we take that position in part because no one can foresee what the future would be, what consumer requirements are going to be, and how the structure of the financial services sector will evolve, so it would be improper for me to say that it would never be an appropriate step for the federal government to take.

I do note that the current structure of the financial services sector features a very high concentration of economic power in the hands of the large banks, the large deposit takers. We note the issues of coercive tied selling, privacy and the proper licensing and training of intermediaries as very important issues at the consumer level. So those we see as important parts of the entire puzzle.

This is not to say that I would see that the change in this regime would be automatically coming at a certain date, but I would say that it's impossible to predict the future for a very long time.

The second part of your question related to Bill 188 in Quebec, and yes, I and my colleagues are familiar with that bill. It has addressed some of the issues, but in my understanding it does not deal with all of the kinds of issues we have identified. It has gone some distance towards dealing with some of those issues and concerns, but it has come somewhat short of a fully competitive regime that would allow equal rights to all players and fair consumer treatment.

One of the fundamental issues in any of this is the use of personal information for purposes other than the purpose for which it was intended. And, in particular, in the deposit takers they do have access to a very large amount of information about individual consumers, and the misuse or potential misuse of that information is a very important topic.

This is an area that needs to be explored. We know that Canadians have a very deep level of concern about the privacy of personal information.

[Translation]

Mr. Yvan Loubier: Mr. Astley, how can you say that Bill 188 hasn't settled all the problems, when obviously it's only through use that we can tell whether a law settles certain problems or not, and Bill 188 has only been applied for five months?

At first glance, what I see is that, in Bill 188, there's everything necessary to protect consumers and oversee the development of the various players in the insurance market. There's also a system of sanctions provided for non-compliance. There are professional requirements on either side, which with regard to the Desjardins brokers, are equivalent to the normal professional requirements found elsewhere. How can you affirm that this model could not apply elsewhere in Canada, when, at first glance—it will become clearer with time, in the coming years—, all the problems you have mentioned seem to be covered by Bill 188?

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[English]

Mr. Robert Astley: Mr. Loubier, as you point out, Bill 188 has been in force for some five months. It is a comprehensive approach and has many good aspects to it, but I think the experience at the consumer level is not yet proven and tested. It does not apply to all players in the market in Quebec. We will want, as a country and as a people in Quebec in particular, to see how that regime works in practice before we can judge whether it will be effective. I understand your point.

[Translation]

Mr. Yvan Loubier: I prefer your second answer. I'd like to ask another question, if you allow, Mr. Chairman.

In your brief, on page 2, you say with regard to rules of ownership:

We do not object to the recommendation to replace the 10% Rule with a 20%/45% rule, based on the size of shareholder equity.

You know that, with negotiations for the North American Free Trade Agreement, there was a rule that existed until quite recently, the 25% rule. The 25% rule said that foreigners could not hold more than 25% ownership of a Canadian financial institution. At present, the only safeguard we have to protect us from foreign control is the 10% rule.

Mr. MacKay says that we have to drop the 10% rule for institutions that have shareholder equity evaluated at between $1 billion and $5 billion. Don't you think that, through this opening, foreign control over mid-sized financial institutions would be encouraged?

Second, I'd like you to justify further your support for recommendation 44 in the MacKay report concerning the elimination of income tax on financial institutions' capital. This brings in hundreds of millions of dollars a year. What do you suggest to the federal government to make up for the income losses stemming from the elimination of tax? It is understandable that capital tax may create some distortions and have a bad influence on business decisions, but something has to be suggested in exchange, it seems to me.

[English]

Mr. Robert Astley: With respect to the first question on the ownership regime for large financial institutions and the question of foreign ownership, the current 10% rule does help to ensure that our large Canadian financial institutions will essentially remain controlled and managed by Canadian interests. That was recognized as a valid public interest objective by the MacKay task force.

In my view, the relaxation of the 10% rule to a 20% rule, subject to ministerial approval, with the 45% applying collectively to all large shareholders, would not materially change that and would not cause the large financial institutions to, in effect, be controlled from elsewhere. It would permit some more creative share alliances, cross-border transactions and those kinds of things. So broadly speaking, I would be in support of that relaxation. I do not see that it would threaten the public policy objective of maintaining Canadian control of the large financial institutions.

With respect to what we'll call the mid-size institutions—those between $1 billion and $5 billion of equity, which is where Mutual Life of Canada would fall, I might add—the regime proposed by MacKay makes a good deal of sense in that it provides flexibility subject to the 35% public shareholding rule. It provides flexibility to make alliances with other institutions, whether they be domestic or foreign, insurer or other kind of financial institution, that may very well be necessary and appropriate in the future to allow a company like mine or other similar-size companies to compete and be aggressive in the marketplace.

That is my view. I don't know if I've answered your question fully.

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You also asked a question about capital tax and where the government should move to find the revenue it might have lost. The answer would be, in an effective measurement of real economic profit from financial institutions. That is possible. A good deal of progress has been made by the Department of Finance in the last few years.

One of the reasons capital taxes were put in was because the Department of Finance was not satisfied there was a valid measure of profitability. I believe a lot of those concerns have been dealt with. Fundamentally, it's our view that most of the taxes should be based on income.

[Translation]

Mr. Yvan Loubier: Mr. Astley, given that the financial sector is constantly evolving, and demands, and is going to demand, more and more capitalization and investment in high technology, etc., don't you think that, with the whole issue of deferred income tax, even with the best calculation of profits, companies like yours will never pay income tax to the federal government? Even if the best profit measure in the world were established, it wouldn't work. I find your argument a bit biased, just as capital tax may be.

[English]

The Vice-Chair (Mr. Nick Discepola): Do you want to respond, Mr. Astley, briefly please?

Mr. Robert Astley: I don't agree with that. I believe it is quite possible for the taxing authorities to define a method of taxing insurance companies or other financial institutions that is fair and appropriate and reflects the real economic activity.

Yes, our businesses are changing and evolving, and yes, that will require continued updating. But just as the accounting profession continues to evolve and provide rules for disclosing to the public what the actual results of a financial institution are, I believe the taxing authorities can do the same.

On that basis, I would argue for an effective income tax regime to supplant and replace a capital tax regime that has all the wrong incentives built into it.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Astley.

I'll now ask Mr. Szabo to ask his question, please.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you, Mr. Chairman, and thank you, Mr. Astley, for your presentation.

Earlier in the proceedings, some weeks ago, representatives of Great-West Life were before us and, in a very blunt fashion, stated they were afraid to have to compete against the banks on what they call an unlevel playing field. They were very concerned about significant job loss and about other negative impacts should bank mergers go forward and banks be permitted to market their life products through the branch system.

On the other hand, this morning Mr. Stewart from Sun Life Assurance came before the committee and in his summary remarks articulated basically the principles he supports. He supports the stimulation of a more competitive marketplace with more competition and the promotion of more consumer choices. He concluded that since he supported those principles within the financial services sector, he could not oppose bank mergers or the recommendation to allow banks to market their life products through the branch system.

So we have two opposing views from the same sector—very different. From your presentation, I gather you lean more to the Great-West position than to the Sun Life one.

Maybe you would like to comment specifically on the concerns you would have if the branch system of banks were a vehicle for marketing life products.

Mr. Robert Astley: Perhaps I could comment on the two issues you have raised, Mr. Szabo.

With respect to the issue of bank mergers, I have spoken out in the past and argued against approving the bank mergers, in part because of the concentration of economic power, but also because the policy advantages that have been given to the banks over the years have given them a rather privileged position in the financial services sector today. So we would argue that the playing field does indeed need to be levelled before further advantages can be given to the large banks.

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I would also say that if the bank mergers are approved there's no going back; there's no unscrambling the omelette, so to speak. We, the people of Canada and the Government of Canada, can't say in two or three years that we made a mistake and reverse it; it just wouldn't be possible. So on that score, I have argued that the case has not been made to allow the bank mergers. As I've said in response to some of the other questions, it's impossible to know what the structure of financial services will be in five or ten years, so it would be wrong to say “never” to anything. But at this time we would not support them.

Mr. Paul Szabo: My final question is something I have thought about, and I'd be very interested in your opinion. It seems to me it would be very difficult for two substantive businesses to prepare a proposal for a merger or a business combination without first knowing what rules of the game, restrictions, terms and conditions would be imposed if it were approved. There seems to be a logical order here, and quite frankly, the order doesn't appear to be in place right now.

Mr. Robert Astley: Speaking for my own company, one of the greatest worries about any transaction or set of strategic actions is uncertainty. If I were proposing to my board of directors a certain strategic direction, the certainty or lack of certainty of being able to proceed down that path over a reasonable period of time would be a very important factor. I can't put myself in the shoes of the four chartered banks to speak on their behalf, but I know that issue is a very important one.

On that score, it is therefore a conclusion that if the government can have in place clear rules on what will be allowed under what conditions, it will benefit everyone, rather than having a rather vague set of rules and possible understandings. So I agree with that concern.

Mr. Paul Szabo: Thank you, Mr. Chairman.

The Vice-Chairman (Mr. Nick Discepola): Thank you, Mr. Szabo. I now ask Mrs. Redman to ask her series of questions, please.

Mrs. Karen Redman: Thank you, Mr. Chair, and welcome.

I'd just like to zero in on something for a moment. You make the case, and I certainly agree with it, that the 124 recommendations are looking at the future of the financial sector. Can we talk for a minute about—and I looked at your Angus Reid poll on annex 2—the fact that the people who have a vested interest, the policyholders, are depending on you providing the why. What were the reasons for looking at demutualization as a company?

Mr. Robert Astley: The first and foremost reason was because it serves the best interests of the policyholders. I know some people have said that sounds a little high-minded and self-serving, but it is not. In the case of Mutual Life of Canada, our reason for being for 128 years has been to serve the interests of our policyholders, who are also our owners. So we've done a number of things over the years, including issuing special ownership dividends to participating policyholders to reflect that.

It was our belief, after years of study and seeing the experience in other countries around the world, that the best way of serving policyholders was to propose demutualization. That was the first and foremost reason. The second reason was we believe, in the rapidly changing environment of financial services, having a shareholder-owned structure would be more effective, flexible and responsive to the emerging environment.

So the first reason was to serve our owners, and the second was to look to the future in creating a regime that would be most competitive going forward.

Mrs. Karen Redman: One of the themes throughout the whole MacKay task force is the collapsing of the four pillars, and we are asking the financial institutions to be more entrepreneurial. I appreciate the fact that you've gone through and picked out some of the recommendations you think need to happen sooner rather than later.

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Do you think the MacKay task force, notwithstanding the fact that you agree and disagree with some of the recommendations, is striking the appropriate balance that government needs to allow for that entrepreneurial spirit in all financial sectors to occur?

Mr. Robert Astley: Broadly speaking, I'd say yes. It's a very thoughtful report. There was a great deal of research done, much of which is contained in the background papers. That doesn't mean we agree with every recommendation. But broadly speaking, we believe the balance and the emphases were about right in the MacKay task force report.

Mrs. Karen Redman: I'd also ask you if you could clarify for me the one recommendation you disagreed with, which was the friendly takeover or acquisition within that three-year window of opportunity. I find it really interesting that amalgamation overtures can be as coercive as takeover bids. I guess it gets back to that old conundrum of tied selling, which we looked at in the spring as a committee.

Are you talking about friendly takeovers or amalgamations? I think of the Mutual Group and the Metropolitan Life. Is it just a matter of timing? Why is your objection there?

Mr. Robert Astley: Perhaps I could just provide a little bit of context. The recommendation in MacKay says that for a period of three years after conversion, after demutualization, no outsider or other party can bid for control of the company. So during that three-year period the converted company would operate as a free-standing stock company and would seek to grow its shareholder value to serve customers.

They also said, though, that during that three-year period it should be possible for the board of directors to bring forward a voluntary transaction. We say that is not realistic. The reason is it puts the board of directors in a very difficult position. If a proposal is made in private that says your stock is trading currently at x, and we are going to offer you a significant premium if you voluntarily agree to this, then the board of directors may be put in a very difficult position. Even though the value of the shares may not have fully recognized the potential of the company, they would be put into a very difficult position. So that's the reason why.

Also, during that three-year period following demutualization, the converted company really needs to find its feet, find its way in the marketplace, and begin to act as a stock company after a period of acting in a very different corporate form. During that period there are a lot of things to be attended to, and we believe, as MacKay does, the converted company needs to have a period to get its act together and to fully perform in the capital markets.

Mrs. Karen Redman: Thank you.

The Vice-Chair (Mr. Nick Discepola): I think, Mrs. Redman, you opened the door for my question.

Mr. Rousseau from the Laurentian Bank claimed that allowing such friendly takeovers or amalgamations would quickly enhance competition—competition that we're striving, as a committee, to address. I'm wondering how we allow such smaller institutions, for example— I think they represent the best potential for creating competition for the banks, and I see your proposal of a three-year moratorium stifling that competition.

You seem to be adamant on the three-year timeframe even for friendly takeovers. What's preventing you from approaching another small institution and merging? Why are you overly concerned? From the competition perspective, how would we encourage competition, then, if you're saying for the first three years the banks have almost a monopoly situation?

Mr. Robert Astley: My concern is really based on the fact that demutualization is such a fundamental change for a company that in the period immediately after conversion, and within a short time following that, it requires time to effectively perform and to create value for shareholders and customers during that period.

The Vice-Chair (Mr. Nick Discepola): Are you

[Editor's Note: Inaudible] about that point?

Mr. Robert Astley: Potentially, yes. We are saying, in agreement with MacKay, that transition period of three years is an appropriate time—not too long, but not too short as to be not meaningful—that would allow the company time to really show what it can do and to solidify its position in the marketplace. Three years is not a long time in the history of financial services, and the converted mutual companies do represent somewhat of a special case.

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The Vice-Chair (Mr. Nick Discepola): Should we be so restrictive that we say we will forbid all even friendly amalgamations? Or should we be flexible?

Mr. Robert Astley: We have argued that, for the converted mutual companies, friendly amalgamations should be prohibited. For example, I would argue against prohibiting Mutual or Sun or Manulife or Canada Life from making acquisitions in the United States market in order to grow there and to create value. What the MacKay recommendation was specifically addressing would be mergers among the four mutual companies. That's what that one provision relates to.

The Vice-Chair (Mr. Nick Discepola): Thank you very much. I'd like to ask Mr. Valeri for his usual short question.

Mr. Tony Valeri: Yes, it's the responses that take a long time.

I just wanted to take note of the comment in your presentation that says recommendations 53 to 111 essentially would prove to be too onerous in terms of regulation. There are things in here that Mackay essentially felt would be empowering consumers to a great degree. If you look to a future that's obviously changing, I believe you would agree that the status quo was not acceptable, as MacKay said. The status quo is not something that he sees as a future for the financial services sector. There is change, there is demutualization, and there are other things going on. Is there nothing between 53 and 111 that you feel would be valuable contributions in terms of empowering consumers?

Mr. Robert Astley: Within those sets of recommendations, a number of topics are dealt with that are already in law and regulation in different forms, and in industry guidelines and codes of practices. Those include such issues as protection of privacy, and coercive tied selling. What I was arguing was that we should not accept all of those just holus-bolus and move forward. There needs to be more consultation. We need to place more reliance on industry collaboration and on voluntary guidelines, and put in legislation really as a last line of assuring proper behaviour. Legislation in some of these areas is a very blunt instrument and isn't particularly responsive to the nuances of day-to-day life.

A great deal of progress has been made in many of these areas, and as I said, there is legislation in place. So what I would be arguing for is a somewhat cautious, go-slow, thoughtful approach to all of these areas, rather than accepting them all as being good for the consumer and therefore putting them all in. Indeed, many of the extensions would be of questionable value to consumers but would add significantly to cost.

Mr. Tony Valeri: So you would then be supportive of the committee recommending a staged approach to MacKay: do some things, but don't necessarily take the report in its entirety and move forward. That's versus the opinion of other individuals who have said that if we don't take it in its entirety, it tends to fall apart.

Mr. Robert Astley: We would very much agree with that. The staged approach makes a good deal of sense. There are elements that deserve to be acted on very quickly; there are other elements that require further study and are not appropriate at this time.

Mr. Tony Valeri: I guess the challenge we face as a committee is that most often when individuals come before the committee, they talk about the importance of consumer protection as perhaps being the first stage: if you're going to move on anything, let's ensure that consumer protection is in place before any of these other changes go on. You're arguing essentially that this type of legislation would in some ways impede the innovation of the industry and the ability to compete. I just find that a bit of a challenge from our part.

Mr. Robert Astley: It is a challenge, and what I'm arguing for is striking the right balance. I would put forth that there are very significant consumer protection measures in the ways in which companies currently operate, voluntary codes of compliance put out by industry associations, laws in certain areas such as licensing standards, training, and all of the other proficiency elements. So we're saying that continuing to strike the right balance is an important act. Overall, we saw the section on empowering consumers in the MacKay report as moving too quickly and using legislation as too much of a blunt instrument to achieve those ends.

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Mr. Tony Valeri: Do you have that same feeling about the actual public impact process? In a world of mergers, are you also suggesting that the recommendations about having a full-blown set of public-impact statements, perhaps legal undertakings as well, are too regulatory and too blunt an instrument as well?

Mr. Robert Astley: No, I wouldn't put that in the same category. The public interest assessment process, properly handled, is a valuable way of surfacing the issues for appropriate debate.

The one point I would make is that this process needs to be timely and move forward in a fairly quick fashion. As I said earlier I think in response to Mr. Szabo, uncertainly is one of the most debilitating factors for any organization. So having a very long process doesn't serve the interests of any party, but having a focused public interest assessment process is a good idea.

Mr. Tony Valeri: Thank you.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Valeri.

I'd like to turn to one of your recommendations, Mr. Astley, where you said that the proposed regimes for coercive tied selling, protection of consumer privacy, and licensing standards should be put in place as a precondition before making any recommendations for banks getting into retailing of insurance. You closed that by saying that such regimes need to be structured in a manner that's manageable and enforceable. I'd like your opinion on how we could structure it so that these are enforceable and manageable.

I had a disturbing—I thought it was isolated—case in the hearings in the maritimes. I made some phone calls over the past three or four days and found out that it wasn't an isolated incident. I found that business people have been asked, directly or indirectly—I'll give them the benefit of the doubt—to make favourable recommendations on behalf of some of the banks. When you delve into the matter a little bit more, you find out that they either have a huge line of credit with one of the banks that has proposed a merger or that they do an awful lot of business with the major banks. You see that subtlety that the banks are exercising right now, which leads me to think that the stakes must be very high. If they're using gentle persuasion, or whatever you want to call it, I still think it's coercive representation.

I'm very concerned that no matter what legislation we try to envisage as parliamentarians, maybe we'll not be able to enforce it or even police it. I do believe that there's an awful lot of stress possible on small business people looking for the renewal of lines of credit or consumers, for example.

We know that Mr. MacKay made a recommendation of a $100,000 fine and a jail sentence, but I'm open to your suggestions as to what you feel could be those manageable and enforceable regimes we could put in place or that we should look at.

Mr. Robert Astley: These are very difficult areas to get into because they fundamentally come down to individual behaviour, what people perceive, what they hear, and innuendoes. There are legitimate cases where the combined affairs of a customer and a financial institution, or any other institution, should be taken into account in the pricing and provision of services. The real challenge is to identify those instances where coercion has taken place or is perceived to have taken place.

This is why I responded to Mr. Forseth in saying that those regimes would need to be considered by practitioners, people who understand what's actually happening, and by customers. And then find ways of ensuring that they actually work. When we get down to the individual customer level, there does need to be some effective measure of redress, and that has to be at the individual level.

• 1130

So I don't have any magic bullets, but I would say these are very important, subtle issues and they need to be thought through, not as legal problems but as behavioural issues, ones that would have consequences attached to them.

The Vice-Chair (Mr. Nick Discepola): Do you think enhanced powers to an independent ombudsman could alleviate some of the concerns we have?

Mr. Robert Astley: Yes, indeed, I believe they could. In the case of the industry, through the association we have had a consumer information toll-free line for some 25 years, and we've expanded that service in the past few months to provide the kind of ombudsman service that would assist in helping to resolve complaints on a more proactive level. So yes, we do believe those kinds of mechanisms, properly structured, can be helpful.

The Vice-Chair (Mr. Nick Discepola): Thank you very much, Mr. Astley. I believe there are no further questions, and the bells are ringing for our vote.

Mr. Astley, you said in your presentation it's impossible to know what the structure of the financial services sector will be five, ten, fifteen years down the road. That's the decision we are faced with as parliamentarians. We have to make sure we can be visionary, that we can put in place the regimes and the structure so we will have a worldwide competitive financial services sector. It's not an easy challenge, as you know.

I would like to thank you, on behalf of my colleagues, for your input, because it's through your type of input that we will be able to make the recommendations to the Minister of Finance and to the government.

I would like to thank you again, on behalf of my colleagues, and I'd like to remind colleagues our next guest is already present amongst us. So right after the vote in the House of Commons, I would ask you to quickly come back so we can hear the next testimony.

I'd like to suspend until after the vote.

• 1132

• 1301

The Vice-Chair (Mr. Nick Discepola): Good afternoon. Mr. Heeney, I'd like to thank you for your patience during the two votes.

We are now going to resume the pre-budget consultations, and with us we have from the National Dual Council Representatives, Mr. Doug Heeney. He's also from the Ford Motor Company national dealer council, dealer co-chair, customer service national action team.

I'd like to welcome you and ask you to make your presentation, and then we will have an exchange with the various members of Parliament. So again, thank you for being patient, and I ask you to start with your presentation.

Mr. Doug Heeney ( National Dual Council Representatives; Dealer Co-chair, Customer Service National Action Team, National Dealer Council, Ford Motor Company): Thank you very much. I trust the vote went very well for everybody.

Mr. Chairman, honourable committee members, I stand before you today first as a technician, second as a businessman, and third as a member of Ford of Canada's national dealer council. Specifically, I am the dealer co-chair for the customer service national action team, whose responsibility revolves around the parts and service departments of our dealerships.

During our winter meetings last February several dealer submissions were made highlighting the need for stronger recognition and support of our technicians, an extremely valuable resource in each of our dealerships.

Two specific resolutions were passed that day. One was for the implementation of a master technician recognition program, recognizing technical excellence. The other was that Ford of Canada and its dealers strongly and actively support the joint effort to gain technician tool tax deductibility.

With your permission, I'd like to run through the brief and answer any questions you may have. It is my hope we will foster a relationship that will enhance the communications between our two industries, and that we will find the means to assist our most valuable high-tech commodity, the automotive technician.

Our goal is to implement a tax deduction that would provide targeted tax relief for automotive technicians and apprentices who must incur large mandatory expenses on technician tools as a condition of their employment. Ideally, this relief should be included in the 1999 federal budget. The issue is that as a condition of employment, automotive apprentices and technicians working in the automotive industry must purchase and maintain a set of tools in order to be able to perform their jobs. The average auto technician invests about $15,000, and many invest as much as $40,000. Ongoing costs required to keep up with the changing technology average about $1,000 per year for replacement tools.

Entry-level apprentices must purchase a starter set of tools valued at about $4,000 before they can even get their first job. At the current first-year apprentice's wage of $9.50 per hour, a new apprentice can expect to spend 27%, or over three months of his or her annual income after taxes, on the tools required to keep his first job.

Special provisions currently found in the Income Tax Act allow artists, chainsaw operators, and musicians to deduct the cost of large, mandatory employment expenses from their income. Unfortunately, however, automotive apprentices and technicians, because they are not self-employed, are not allowed the same treatment. To deny this tax treatment to apprentices and technicians in the automotive industry is not only unfair, but it imposes a barrier to employment, especially for young people who might be interested in pursuing an apprenticeship. The post-secondary school financial burden is already too large for most graduates. The potential for additional tool expense at job start-up just diverts many high-calibre candidates away from our industry at a time when they are most needed.

• 1305

The Canadian automotive repair and service industry is a major contributor to the Canadian economy, providing employment for about 341,000 people through about 30,000 employers. The industry injects about $52 billion annually into the Canadian economy. This sector is not only a major employer and contributor to the present economy but also a key part of Canada's future competitiveness.

The sophisticated nature of the vehicle we drive today demands sophisticated tools and up-to-date skills. Tax deduction will ease labour shortage. The automotive repair industry currently suffers from a severe shortage of skilled labour. Automotive dealers are finding it increasingly difficult to attract and to keep technicians. Many employers are expressing concern that lower enrolment rates in apprenticeship programs combined with high attrition rates among the existing workforce will soon place the industry in a severe shortage of skilled labour.

The absence of a tax deduction is seen to be a major disincentive and impediment to young people seeking to make the transition from school to permanent employment. Allowing automotive technicians to deduct the cost of their tools would ease the current labour shortage by increasing enrolment in apprenticeship programs and by encouraging more technicians to stay in our trade.

Lower tool prices will increase tool sales. A tax deduction for tool purchases would effectively lower the price of tools to the automotive technician. Lower tool prices will encourage increased tool sales in general, as well as increase the purchase of more sophisticated tools. This will lead to increased customer satisfaction for vehicle owners through enhanced problem-solving capabilities, and increased productivity and efficiency on the part of the automotive technician will save the consumer time and money. Improved skills will protect jobs in the long run.

The automotive industry has come a long way in the last 90 years. Modern vehicles are essentially computers on wheels. A vehicle today contains more computer power than was on board the Apollo mission to the moon. Automotive technicians must keep up with these changes in technology in order to stay competitive and to ensure that we continue to have jobs in this industry in the future.

However, the cost of this competitiveness is high. Tools must be continually replaced as a process becomes outdated and tools become obsolete. A tax deduction will enable automotive technicians to remain current in their technical skills by encouraging them to continually upgrade their equipment. Up-to-date skills will ensure that the Canadian automotive technician continues to remain competitive and employable in the future.

In summary, we as automotive technicians are not asking for special treatment. Rather, we are asking for equal treatment with other professions. We have already been granted a tax deduction for large mandatory employment expenses.

The legitimacy of our concern has long been recognized at a number of different levels. In fact, the finance committee, in their submission for the 1998 budget, recommended that steps be taken to correct this inequity. We recognize the government's concern about finding an appropriate tax treatment for this expense, as well as the government's concern over the loss of tax revenue. We believe, however, the resolution of this inequity is critical to the long-term health of the automotive technician profession, and we are eager to work with the government to find a fair and equitable solution.

I also attached an excerpt from a recent article in Service Station and Garage Management—it's attachment A—and I thought I'd just touch on that for a moment, if I could. It highlights a few comments from technicians in the trade across the country and their current intentions toward tool purchases.

Technician Craig Cook takes a thorough approach to his own equipment purchases. He studies the trade magazines, discusses the pros and cons with his network of fellow technicians and with instructors at training sessions, and scours the Internet and posts his questions in the appropriate forums. And well he should approach his purchases with extreme care. In his own arsenal of diagnostic equipment Cook has a lab scope and a laptop computer, plus software that allows the two to communicate. Last year alone, Cook spent $7000 on diagnostic equipment. On top of that there was about $1500 in training. He estimates the shop he works for spends another $9000 a year.

Likewise Ray Yergeau. This technician has his own lab scope, scanner and other diagnostic equipment. “Expensive for me,” he allows. “But I'm glad I bought it. I've fixed all kinds of cars with it, including troubleshooting for other shops, for other mechanics. And sometimes I get reimbursed for that”. Yergeau's main reason for these major purchases: “I didn't want to left behind as far as technology goes. I wanted to teach myself on these things, so I was willing to pay for everything myself.” Afraid to keep track of the actual spending, Yergeau says tool suppliers get at least $100 a month from his pay.

• 1310

Ross Merrow, “I'm Constantly buying updated scan equipment to give me the ability to re-program onboard computers, which I never needed a year ago”. Merrow invests about $3500 a year in new equipment, on top of some $1500 for the updating of existing scan equipment.

Latest buys.

Eli Melnick's most recent acquisition is a frequently used $1500 vacuum line leak detector that uses pressurized smoke to pinpoint problem areas. Adrian Vander Graff just bought some fuel injection maintenance equipment and a transmission-flushing rig. But the real sweetheart of his shop is the Simu-Tech, a PC-based breakout box that improves his shop's diagnostics capabilities, most particularly ABS testing. Ray Yergeau spent $1000 for the bottom half of a tool box that he can wheel around the shop, unlike the monster box he used before. The new one has a wooden top that doubles as a workbench. Ross Merrow bought a laptop computer for the express purpose of displaying his database of repair information.

All of these things go towards meeting the technology that is being presented to these technicians because of the competitive nature the manufacturers are facing now for a variety of reasons.

I have attached other items. Attachment B basically includes highlights of the resolutions from our dealer council meeting in February. Attachment C is a copy of the highlights of the masters technician program we implemented with the Ford Motor Company.

I also took a couple of excerpts regarding the performing arts from the book called Preparing Your Income Tax Returns, the 1998 edition, by Arthur Anderson, Canada's best-selling tax guide—that's quoted on the cover. I'm not sure if everybody is fully cognizant of the special status that is applied to these people. I'd like to mention the fact here that:

Revenue Canada is attempting to strike a balance between its usual position that transportation from home to place of business is not a business expense and the special needs of performers.

There are a variety of quotations like that throughout these pages, and I won't get into them all. But it demonstrates that Revenue Canada is certainly willing to take a look at many situations and to try to foster a situation that would develop harmony and generate the goodwill we're looking for from the government and the department in order to try to ease the burden and generate the competitive nature we're trying to get out of this so that we can enhance the training and get more people into our traditional trade right now. I'm not sure if everybody totally understands the evolution our industry has taken over the last 10 or 12 years.

That's basically all I have at this point for a prepared presentation, but I'd be happy to answers any questions you might have.

The Vice-Chair (Mr. Nick Discepola): Thank you very much, Mr. Heeney.

I'd like to turn to Mr. Forseth for his series of questions, please.

Mr. Paul Forseth: Thank you very much.

Thank you for coming today.

The problem you pose certainly has quite a history to it, and I would cite it as somewhat of an anomaly. Some could say this particular tax treatment, or lack of it, kills economic activity and distorts the marketplace by perpetuating an unlevel playing field and that really it's a perverse disincentive.

Perhaps we might be able to take the converse and look at what is the real naughty behaviour we're trying to discourage through this type of historical treatment. You've cited the issue as one of comparability, the lack of a level playing field with other workers, and you cite the example of the musical performing arts and some of what they are required to do.

Let's just look at why there has been such historical resistance to change. There is a story there, and perhaps if we looked at the specific reasons that have been given in the past by government and looked for other ways to directly look at why they're reluctant to move the boundary—because I take it it's an issue of boundary—as to what's to be included and what isn't as a business expense—

• 1315

We could look at someone who works in a bank, and say, well, a certain standard of clothing is required to be presentable to meet customers, and therefore my suit and my haircut, whatever, are all conditions of employment. That might be questionable, but then we go to someone on a construction site who can't get a job, and who can't enter the site, without a hard hat and steel-toed boots.

Where is that boundary line of protective clothing or whatever?

So there has been a historical dispute. This particular request has, I believe, come to committee many times before and it's a long-standing issue, and yet there has been a reluctance for any move. So you've certainly contemplated all the answers that have come back from the other side, and perhaps you could address those and maybe knock those down one by one, and maybe we can get to a better answer or a better definition of where we need to go.

Mr. Doug Heeney: We've had some discussion regarding that and wondering what some of the apprehension is, and one of them would certainly be the potential for abuse, the large-scale administrative aspect. One of the things we looked at is possibly putting it through an employer base, whereas if you had approximately 100,000 technicians out there and you were doing it through a personal income tax deduction, that's a lot of administration, a lot of potential audits, a lot of reviewing of materials and everything else. If you did it through the business base, the employer, the payroll deduction basically, then you've reduced it basically to 10,000 employers.

We also, at that point, have a system of checks and balances, ways and means, to truncate any shortfalls that may fall through the system as far as administration is concerned in those situations. So receipts would have to be given to the employer for supporting of documentation. There's a group of checks and balances that are already there through a number of the payroll aspects that we already do in industry.

One of the things the United States is doing right now in a number of states is that a portion of the technician's wage is being paid for rental of his tools, as much as 30% depending on which state he happens to be in. In other words, if he made $1,000 that month, he'd pay tax on $700 and $300 would be paid to him tax-free, and that's basically the rough parallel of what we're looking at in those situations. That's one thing we really haven't had a lot of opportunity to discuss, on our side of the fence or yours, in terms of how can we go about that. I think the first thing we need to do is sit down at the table and say, yes, I think there's an inequity here; we need to do something, and let's figure out how we can do it.

But I think the commitment first has to be made—let's identify it, let's make a commitment, let's do it.

My salespeople, for instance, if they're on salary, get no tax deductions; if they're on straight commission, they get a boatload of tax deductions. We have service technicians who are on straight time. We have service technicians who are on flat rate, which is piecework, who are basically small business individuals handling their own destinies, setting their own time, basically a small business within our organization, handling their own future in every way other than the fact that they don't have capital cost allowance deductions.

So from that point of view, flat-rate technicians could be viewed the same as a commission salesperson within the dealership level. So again, there's a point of definition there.

Mr. Paul Forseth: In the example you cite with musicians, you say that in the regulations this is perhaps the most comparable one that could be used as a definition to help you out.

Mr. Doug Heeney: It seems to be one that is mentioned by advocates time and time again. The reason I attach it to this form is I hadn't seen any submissions with any printed material from the act attached to it.

Mr. Paul Forseth: Can you cite what is the main objection from finance and the government, and why the boundary has not been moved in spite of this request being made year after year? What are we trying to prevent here? Why is there no movement?

• 1320

Mr. Doug Heeney: I think the first thing is probably fear of the size of the tax deduction that's there. I think previous presentations, like the one on October 2, didn't actually recognize the potential increase in tool sales and the benefit to the economy that would subsequently be there. Anybody who is going to be granted a tax deduction has to do it from the perspective of how to grow the business. That's why we're all here. We want to grow the Canadian business, be that through employment growth, job securities or selling more tools, but how are we going to do that? Is this tax deduction going to foster the environment to do that? Yes, I think it will. The people I have talked to have definitely indicated that.

After the October 2 presentation, which didn't actually indicate that, I sat down with some industry leaders and I went to the tool people. I specifically asked them if they would sell more tools if the technicians had a tax deduction. They all indicated that they would, by anywhere between 5% and 15%. There's no actual study, so it's sort of a shoot-from-the-hip type of guess.

I talked to several technicians, ones I trust from a valuable, sensible judgment point of view. One of our technicians actually bought a scan tool. He told me that he had just bought this tool for a diagnostic. It cost him $150, but he had to compromise. It was not exactly the one he wanted, and it was not exactly the one that will do all the functions that he needs it to do, but it's the only one he could afford. The one he needed is $450. If he had a tax deduction, he would have bought the proper one.

I thought that story was a very compelling one just the way he presented it, and I think we would find there are a great number of stories like that. With that situation, he would improve his productivity, he would improve his efficiency, and we're going to save the consumer money. We're also going to make my business and everybody else's business in the automotive industry that much more productive as far as competition is concerned—and we're seeing competition in our industry from areas that we have never seen before.

Mr. Paul Forseth: If I could just ask one final question, are there any particular vested interests on the other side that would have the ear of government to keep the status quo? Generally when there's a boundary line and there's no movement, there are interests or vectors on either side of the question. I'm wondering if there is anyone else outside of government who would like to keep things the way they are.

Mr. Doug Heeney: It's a hard question to answer, isn't it? If we were to take a look at it, name me one employee who is faced with the same burden to keep his job. I can't think of anybody—none of my friends, nobody I went to school with. I mentioned post-secondary expenses for the average individual. He's paying back $25,000 for a student loan. Those individuals are not going to look at a $4,000 or $5,000 start-up. I don't know anybody who is going into a law firm or going into a medical environment who has to spend that kind of money for their start-up job.

Mr. Paul Forseth: Dentists do.

Mr. Doug Heeney: Under those situations, though, dentists are allowed to establish themselves as a business, so they get all the capital cost allowances.

Mr. Paul Forseth: That's right.

Mr. Doug Heeney: So I have to disagree with that.

Mr. Paul Forseth: There's not comparability.

Mr. Doug Heeney: Yes, I'm sorry.

Mr. Paul Forseth: Thank you, Mr. Chairman.

The Vice-Chair (Mr. Nick Discepola): Thank you.

[Translation]

Mr. Loubier, please.

Mr. Yvan Loubier: Thank you for your presentation, especially for having given it to us in French and in English. It is very interesting.

I have just one remark to make. If, last year, you managed to have your concern included in the Finance Committee report, it is because you convinced all those who were around the table of the validity of your request.

• 1325

For my part, I can assure you, and I am probably going to have the support of Mr. Forseth and Ms. Redman, that when the next report is written, we are going to recommend again that the Minister of Finance correct this inequity, perhaps with more arguments than the last time. You convinced the people around the table. I was there myself when you made your presentation, last year. Therefore you can count on us to support your demand, because it is very legitimate.

[English]

Mr. Doug Heeney: Thank you very much. I appreciate your support, and I apologize if there's any error or omission in the French translation. My wife and I did that on the weekend, so—

[Translation]

Mr. Yvan Loubier: That's fine. That's very, very good.

The Vice-Chairman (Mr. Nick Discepola): Do you have a question, Mr. Loubier?

Mr. Yvan Loubier: No, just a remark. As I said, Mr. Chairman, last year, we included this as a concern. You were there too. I hope the same thing will be done this year because it's something that has to be settled. It is very important.

The Vice-Chairman (Mr. Nick Discepola): Fine.

Ms. Redman, please.

[English]

Mrs. Karen Redman: Thank you, Mr. Chair.

Yes, it certainly was in the recommendations last year, and I guess I would just like to put in a bit of a context. In part of your presentation, you talk about employment for 341,000 people through 30,000 employers. That's a large number of people. Have you done any costing in terms of what the financial picture would look like if the government went ahead and did this?

Mr. Doug Heeney: I haven't from that point of view. Our position has focused basically on the 5,265 technicians and apprentices who are registered within the Ford system. I think you'd find that the car industry people have looked at more of the after-market. It's certainly an area that we could look at to further support the movement.

Mrs. Karen Redman: If I could continue, employees are asked to supply their own tools. Why don't employers supply them?

Mr. Doug Heeney: There's a level of personal need. There's a level of protection against theft. To some level, each individual in a dealership will be a specialist, be it a brake specialist, an automatic transmission specialist, a steering specialist, or a front-end alignment specialist. A lot of these individuals will therefore need tools that are specific to their own specialty.

Technicians don't like to loan tools, and they like to be able to control their own domain, if you want to call it that. The service bay is their own domain. It's their workplace, it's their office. They like to set it up, have their tools, have their equipment. If the dealership has one, for instance, and we happen to be doing two or three of those jobs in the dealership that day, then the technician has to wait. Some technicians will have a preference for a particular tool and will choose one brand over another. In some cases, that's just a matter of efficiency. They'll find that one suits them better, or one is better in their opinion.

There were comments here about laptop computers. Some technicians will keep a database of their technical results or diagnostics and their sources of information so that they can be better than the other individual, so that they can improve themselves. That's because they are, as I mentioned, becoming a small business entity within the dealership. They will sell themselves. They will leave a business card in the car saying that the vehicle was serviced by Bill, and to please ask for Bill next time.

They totally control what happens within their service bay. From that standpoint, they're selling themselves, and they don't want to have their tools broken or loaned or lost by somebody else. So there's a level of protectionism there, but there's also that need because it's kind of hard to have six of one particular type of tool.

Mrs. Karen Redman: I really did appreciate the fact that you gave us specific illustrations. I think that really helps with fleshing out the understanding of the fact that with some of the tools—the diagnostic tools specifically—as one of the people said, they may need them now but wouldn't have needed them a year ago. I think that really demonstrates that technology is impacting every sector of the economy and many people's lives. They may typically not be the first people you would think of as needing a computer.

• 1330

I hear this, and I also hear, Mr. Heeney, that you're representing a specific group. While I appreciate that, I go back to Mr. Forseth's illustration of the dentist and why that isn't a parallel structure that applies to the people you represent. Then I start to think about carpenters and other people in trades who may have higher technological needs as well as tool needs. I wonder if they wouldn't be in a similar— I'm not saying we shouldn't do it for this group, because they would need it, but have you turned your mind at all to other sectors that may be in a similar parallel situation, where they too would have to purchase tools?

Mr. Doug Heeney: As a matter of fact, when I came down from the upper Ottawa valley this morning I stopped on Elgin Street and had a coffee with my sister-in-law. Her husband works as a carpenter, and I told her what I was doing today. She said, “Well, what about his hammer? He works for a company that supplies all the tools to work in the shop and what not, but he has to buy his own hammer and saw and what not.” She told me he probably has $800 tied up in tools. The economies of scale don't apply to the carpenter the same way as they do to the automotive technician.

When we talk about a technician today with $15,000 worth of tools, those are probably tools purchased five or ten years ago. I have a technician in my shop whose tool box cost him $5,000. He happens to be an automatic transmission specialist and needed a rather large one for a number of special tools. So $15,000 would probably be on the low side, and you're probably closer to a $25,000 average. I just don't think you can put the $800 figure in with the $15,000 or $20,000 figure. The economies of scale are just not comparable at this point.

Mrs. Karen Redman: I come from Kitchener and we have a huge industrial and manufacturing sector. You talk specifically on page two about the fact that allowing automotive technicians to deduct the cost of their tools would ease the current labour shortage. It's not necessarily that this specific issue or even the income tax structure would fix this, but I know there are manufacturers in my riding that say they just cannot get the skilled labour. You touch on it a little bit when you talk about apprenticeship programs. But I just wonder, from your point of view, are there other things that need to be attended to?

Mr. Doug Heeney: I'll give you a first-hand example. In 1990 in Renfrew in the Ottawa valley I advertised in every newspaper across the country for an automatic transmission specialist. I worked for the Ford Motor Company for 12 years as the district service engineer before I bought my dealership, so I have a lot of connections with dealerships. I should have been able to find a surplus automotive transmission repair specialist somewhere. I couldn't, so we actually brought somebody over from England. It was easier for me to get a surplus technician from a Ford dealership in England than it was to find one, or even find a candidate and train him in-house. It's a rather large obstacle to try to find the candidate, bring him into the system, and bring his skills up to what our customers are demanding now, as far as efficiencies, cost-effectiveness and the quality care aspects are concerned.

We've evolved very rapidly from backyard mechanics or—a term I dislike immensely—grease monkeys to highly skilled electrical engineers. Electronics is integrated into just about every component we have in our cars. We have truly smart cars. The automatic transmissions, engines and steering components are now electronically controlled. Emission control systems, which are key to everybody, are electronically controlled.

An unemployed technician came to me in 1992 looking for a job. I said “Gord, there's no room in this industry for anybody who doesn't have an interest in electronics.” He took the Algonquin College course for PC circuit board repairs and did very well at that. After he finished that, I was able to give him a job and work him into our system, and he went into the Ford training system. Because he learned how to repair the circuit boards on PC computers, he went into the Ford training and was able to succeed in it very well. The service training instructors at Ford Motor Company were calling me to say that this guy was getting 100% on every one of his things. He understood all of the areas. He could repair one of these computers in Ford cars because he had the proper training and understanding. That's the type of individual we need in our industry.

• 1335

I have dealers calling me because I'm a representative on the national dealer council. They say they're losing technicians to other less-skilled trades because these people feel they're not being treated well.

They're feeling the evolution of our industry. As a dealer, I'm experiencing changes like I have never seen before in our industry. If I were in a technician's environment and saw the changes that were happening to a dealership, I'd feel as though I was in a whirlwind. I wouldn't know how to understand or deal with it. A lot of people are saying that the training's not really readily available for them—that's unless they're in a dealership, for instance—the cost of tools is so expensive, and there are no tax deductions, so they wonder what people are doing for them.

One of the reasons I'm here today is because of an article in Service Station and Garage Management. The wife of a technician in British Columbia wrote an editorial about her husband, who had been a technician in a Ford dealership for 20 years. She didn't feel that the people in the industry who were able to speak for him were being responsible and doing their job. When somebody who is the head of a company or organization can go and speak on her behalf to somebody who can influence the powers that be, then she will start believing in the potential of something happening. She was responding to a CARS article about wanting to make a presentation, make some changes, and have some influence.

Otherwise, what good is it? Here I am, just a small person trying to do my thing, and the people who can do the most for me are not helping me. I'm a person in a position. I'm a technician first, and I always have been. I'm a business person. I'm in a position with Ford Motor Company such that I can make a presentation here today and hopefully bridge the gap of communications so as to foster some understanding between the political environment and our automotive industry.

That's one of the things we do at the national dealer council between the dealer body and the manufacturer. It's dialogue like this that I'm hoping will foster an environment in which we'll be able to sit down and hammer out some type of an agreement that will help the technician. That's why I'm here.

Mrs. Karen Redman: I think you've presented the case very well, and I thank you for coming.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mrs. Redman.

[Translation]

One last little question from Mr. Loubier.

Mr. Yvan Loubier: It's not a question.

The Vice-Chairman (Mr. Nick Discepola): Another comment.

Mr. Yvan Loubier: Mr. Heeney, it's a remark. A while ago, when you said that your wife and you did the translation, I didn't have the time to react to your statement. I have reread the text. You told me you hoped there weren't any omissions. Tell your wife that I congratulate you both on having done this text, because the translation is perfect. That's all I wanted to say to you. Thank you very much.

[English]

Mr. Doug Heeney: Thank you very much.

The Vice-Chair (Mr. Nick Discepola): Mr. Heeney, when the technicians use these tools, do they not get a premium for the use of them?

Mr. Doug Heeney: No, they don't.

The Vice-Chair (Mr. Nick Discepola): Okay. I know that in our municipality we used to pay the mechanics an hourly premium for the use of their tools. Is that a general trend in all the industries or does it just depend on the employer?

Mr. Doug Heeney: Basically what happens is that a technician who is on flat rate, for instance, would make $19 an hour, and a technician in a similar facility and marketplace would make, say, $13 or $14 an hour.

The Vice-Chair (Mr. Nick Discepola): So they do get compensated for the supply of their own tools.

Mr. Doug Heeney: They get compensated for the fact that they are not guaranteed a 40-hour week. They are controlling their own business environment and are being paid for what they produce basically by an industry schedule. So there are some fluctuations as far as the labour rates go.

The other thing is that the difference in rate also applies to skill levels. A lot of dealers are paying that based on— If you take a look at the master technician program there are eight different levels of certification, and in the Ford environment a lot of dealers are paying a little bit extra for each one of those certifications. So the scale will go up.

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The Vice-Chair (Mr. Nick Discepola): One of the reservations that I would have is obviously the sheer numbers in being able to audit such a change in the modification, and I'm wondering why the industry hasn't come up with a way whereby they could administer the program, thereby allowing Revenue Canada to only audit the 10,000 businesses that you'd established?

Mr. Doug Heeney: I think we are here today to say that, at least from the point of view of the Ford dealers and the dealer council, we would be willing to work with the government on that type of a program.

The Vice-Chair (Mr. Nick Discepola): All right. Thank you.

Are there any other questions from colleagues? No?

In that case, I'd like to thank you for being patient again and thank you for your presentation. You can rest assured that you have a favourable ear on this side of the table. Considering that we approved the recommendation last year, I presume we'll do the same thing again this year.

Mr. Doug Heeney: Great. Thank you very much. I appreciate the efforts that all of you put in on a daily basis. Thank you.

The Vice-Chair (Mr. Nick Discepola): Thank you.

We adjourn until 3.30 p.m.