FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, November 5, 1998

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[English]

The Acting Chair (Mr. Paul Szabo (Mississauga South, Lib.)): Welcome. We're resuming our deliberations in accordance with our mandate under Standing Order 108(2). The committee is dealing with the report of the Task Force on the Future of the Canadian Financial Services Sector, known as the MacKay task force.

In this panel we have representatives from the Canadian Association of Financial Institutions in Insurance, the Canadian Direct Marketing Association, and the National Council of Women of Canada. I'd like to welcome you all.

As is our custom, we would ask you to make some opening comments of five to seven minutes' duration, and then the members would, I'm sure, like to have a dialogue and ask some questions of you.

In the order shown on the agenda, I'd like to welcome Mr. Dunbar Russel, chair of the Canadian Association of Financial Institutions in Insurance, who is accompanied by Mr. Bernard Dorval, vice-chair. Welcome, gentlemen. We look forward to hearing your comments.

Mr. H. Dunbar Russel (Chair, Canadian Association of Financial Institutions in Insurance): Thank you very much for inviting us to this meeting.

I'd like to start off by talking a little bit about CAFII and who we are, since we're relatively new to the members. CAFII is the only insurance organization today spanning all major lines of business. Our members include the largest provider of travel insurance and the two largest direct response insurers in the country. CAFII's membership base is broad. It includes retail representatives, such as J.C. Penney; cooperatives, such as the Desjardins group; insurance subsidiaries of banks; insurance subsidiaries of trust companies; and others.

We're creating new jobs every day, nearly 2,000 since 1993. Our vision of the industry is focused on customers. We want to offer them the greatest possible range of product choices, multiple channels of access, low costs, and good value. Along with choice and value, consumers deserve respect and information. Creating jobs for Canadians is a natural outcome of our growth and service to consumers.

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We applaud the task force recommendation to allow consumers to buy insurance through branches of a deposit-taking institution and to receive information tailored to their needs. There are three main consumer benefits: lower distribution costs, enhanced service delivery, and improved access to insurance for more people.

The task force also specifically supported the appropriate use of customer information for insurance marketing. Under current rules we have to market to the whole universe of customers. This is wasteful, expensive, and a nuisance for consumers who could not possibly need or want the product being offered. We support these recommendations as well.

Our association understands that privacy is a very important issue for consumers. This is why all our members have policies in place to ensure that customer information is treated with the utmost care. We support the goals and spirit of the task force recommendations in this area and look forward to working with government officials as specific policies are developed. We would add that we support the approach taken by Industry Canada in the current privacy bill that's being drafted and before the House.

With regard to coercive tied selling, CAFII members do not condone it and have developed policies to ensure that coercive tied selling does not happen. This is a serious matter. However, it is critical to distinguish between cross-selling or product bundling, which can be beneficial to customers, and coercive tied selling.

The task force outlined the market impact and benefits of giving consumers increased choice through these recommendations. An example in Canada is the province of Quebec, where the following impact has been recorded. Prices have moderated. A $10,000 life insurance policy sold in Quebec costs $240 on average. In the rest of Canada the same product costs $324. Property and auto insurance prices have also grown more slowly in Quebec than elsewhere in Canada.

This has resulted in the market growing. Quebecers own more life insurance per capita than any other province. For all of Canada, over 47% own no life insurance whatsoever. Contrast this penetration rate of 53% in Canada to Europe, where you see more insured people, 60% to 63%—60% being the Netherlands, a small country like Canada.

Many of the uninsured in Canada are lower or middle-income families, often headed by single women. We believe these are grossly underserved markets in the current system.

As a result of this growth, jobs were created. When the opportunity to retail insurance was given to the caisse, roughly 5,500 people worked in insurance in Quebec. Ten years later that figure has grown to 6,500, nearly a 20% growth in jobs. In Europe our research indicates the same impact: more choice, leading to competitive prices; market growth; and ultimately, new jobs being created. We should keep in mind that bank insurers do not dominate the European market. In most cases their market share is in the 5% to 15% range.

To summarize, all research and international experience points to the following impacts: more customer choice results in prices becoming more competitive, resulting in overall market growth; and bank insurers, who are offering many of these new options, do not dominate the market. The task force recognized these things, and that is why they recommended allowing deposit-takers to sell insurance.

We now have a privacy bill before the House and the Bank Act tied-selling provision. As an association, we support these initiatives. With these efforts well under way and now with the comprehensive task force recommendations, it is time to move beyond yesterday's debate and get on with the work of competing for insurance customers. We hope the committee will work to implement the balanced package of recommendations expeditiously. We should resist cherry-picking and further delay. Only in Canada and South Korea do they have broad bans on selling insurance through branches of deposit-taking institutions. Within Canada a resident of Quebec has more choices in buying insurance than most residents of other provinces. This committee has the opportunity to act to end our patchwork approach to insurance retailing. It is time for Canada to position itself in line with the rest of the world. It is time to give all Canadians more choices, better access, and more competitive prices for their insurance.

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Thank you very much.

The Acting Chair (Mr. Paul Szabo): Thank you very much, Mr. Russel. I'm sure there's going to be some discussion on your enthusiasm.

I'd like to now welcome, from the Canadian Direct Marketing Association, Mr. John Gustavson, president and CEO. Welcome, sir. We look forward to having your comments.

Mr. John Gustavson (President and CEO, Canadian Direct Marketing Association): Thank you, Mr. Chairman.

The Canadian Direct Marketing Association represents some 750 corporate members involved in information-based marketing. They include more than 100 banks, insurance companies, mutual fund companies, and other organizations that offer financial services. These members will be significantly affected by the implementation of the policies recommended by the task force.

There are a lot of issues for you to consider in the task force report, but I'm going to limit my comments to chapter 7, the section of the report that deals with consumer protection, particularly the issue of privacy.

The CDMA is the largest association in Canada for information-based marketing. Its members represent over 80% of the $12.4 billion in goods and services Canadians bought from direct response marketers last year. CDMA members use a wide variety of media to speak, communicate, and hear from their customers, including the Internet, print media, and television.

Since the early 1990s, this association has taken a leadership role in the protection of consumer privacy through self-regulation. In 1993 the CDMA was the first major national association to impose a mandatory privacy code on its members. That was based on the Organization for Economic Cooperation and Development privacy principles that Canada agreed to by treaty in 1984.

The CDMA code gives the consumers the right to have their names removed from telephone and direct mail marketing lists, the right to consent before their name is transferred to a third party, the right to access information held about them, and the right to correct erroneous information.

From 1991 to 1995, the CDMA was an active participant in the development of the Canadian Standards Association model code for the protection of personal privacy, a code that represents a delicate compromise between the interests of many diverse parties, including consumer advocacy groups, business, and government.

In 1995 the CDMA was the first major national industry association to call upon the federal government to introduce national privacy legislation to protect the consumer while at the same time ensuring the growth of Canadian business. We asked the government to legislate in the area of privacy for three reasons.

First was our belief that there would be no widespread self-regulation. To the best of our knowledge, no other association has made privacy codes compulsory for its members.

Second, there was growing concern within the marketing community that consumers would increasingly be nervous about sharing personal information without a guarantee of security about its ultimate use.

Third is the belief that it is better to introduce and discuss privacy legislation in a calm and thoughtful manner, not in the face of some crisis or blatant misuses of personal information.

We have supported every move to develop this legislation, and we are very pleased with Bill C-54 now before the House of Commons.

Consumers are becoming more and more wary about sharing their personal information with no guarantee of its security or ultimate use. Our members operate in a world where customer relationships are everything, and we recognize that building consumer confidence is essential for the growth of commerce in Canada.

One of our members, the Royal Bank Financial Group, recently commissioned an Angus Reid survey, which indicated that consumers are very concerned about privacy. In fact, 80% think personal data should be kept strictly confidential.

We are in agreement with the task force recommendation that the protection of personal data be legislated, as the current environment does not provide enough consistent protection for consumers. While some voluntary codes are in place in the private sector, legislation is needed to create a common standard for all.

We believe, however, that the debate around this issue is more properly held in the context of Bill C-54, privacy legislation that will apply to all commercial transactions in the country.

I'm going to pause just for a moment to say that to a great extent the media have mischaracterized this bill currently before the House. It is not a bill simply about electronic commerce, which the media love to talk about. The bill will apply to all commercial transactions in the country.

The federal government has gone so far as to include in the legislation a provision that will apply to the provincially regulated private sector after three years if the provinces do not enact their own legislation.

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We believe Bill C-54 strikes the right balance for consumers and businesses and incorporates the principles of the CSA model code for the protection of personal privacy.

While we strongly support privacy legislation, we do not believe a separate, more restrictive code is needed for privacy in the financial sector. In particular, we do not concur with the task force recommendations in chapter 7 that consumers must give express consent for financial institutions to use their personal information for purposes not set out in detail at the time of the first transaction, and that this consent must be in writing before an institution can contact its own existing customers for marketing purposes.

When a customer establishes a relationship with an organization such as a bank, sending details of a new product or service is not misuse of the information. It's neither realistic nor necessary to expect companies to seek written approval for every contact with an existing client about a new product or service. Certainly consumers should be made aware of potential future uses of their information, but in some situations there'll be uses of something not being contemplated by the client or the organization.

For example, if a client opens a bank account and agrees to receive further information about car loans or mortgages, the bank may later introduce new home and insurance services that may interest this customer. Under the task force recommendation, however, before the institution can contact its existing customer it must seek this positive consent in writing. Multiplied by hundreds of thousands of customers, this process would not only be costly, it would prevent the bank from letting customers know about new products or services that may very well be of interest to the customer.

I'm not talking here about the exploitation of sensitive, confidential information. In fact, our own privacy code puts serious restrictions on using personal information that would be considered confidential or sensitive. But it is important to recognize that the financial institutions are attempting to build a long-term relationship with the customer. They do not want to offend or alienate customers and certainly would act on any complaints. As pointed out in the task force report, there is no indication of widespread systemic failure concerning consumer data in the financial industry.

The current privacy bill before the House of Commons was developed to set a common set of rules. It is a delicate compromise between consumers, businesses, and government officials negotiated over a four-year period. We believe that bill is a realistic and comprehensive piece of legislation that can be applied broadly and consistently to all sectors dealing with consumer information. As a result, we do not believe separate privacy provisions are necessary for the financial circumstances in the face of Bill C-54.

Thank you, Mr. Chairman.

The Acting Chair (Mr. Paul Szabo): Thank you, Mr. Gustavson, for your comments. I'm sure the members will want to discuss some of those issues with you.

I'd now like to welcome, from the National Council of Women of Canada, Elizabeth Hutchinson, president; Helen Saravanamuttoo, vice president; and Shirley McBride, economics convenor. Welcome to you. We look forward to having your presentation. Please proceed.

Ms. Helen Saravanamuttoo (Vice-President, National Council of Women of Canada): We thank you very much for giving us the opportunity to present to you today. It really is very valuable to be able to talk to you.

We'd first of all like to tell you a little about our organization. I'll ask Elizabeth to talk on that.

Ms. Elizabeth Hutchinson (President, National Council of Women of Canada): The National Council of Women of Canada was founded in 1893. Together with the brief, the members of the committee got a copy of a document we prepared for our centennial a few years back, which you can look at in your leisure.

Ever since that time, we've been working particularly for the good of women, children, and families in society. We represent women from right across the country, and our policy is established by means of discussions at local councils across the country, which then come to our annual meeting. We say nothing in public, as the National Council of Women policy, that hasn't been discussed by groups of women right across Canada and voted on at an annual meeting. So we feel we represent a very wide selection of citizens of this country.

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Ms. Helen Saravanamuttoo: Before we get into our brief, we'd like to make just a brief statement of principles. We believe a strong, credible banking sector is essential to the prosperity of Canada. Since the abolition of the gold standard, we feel the financial sector is built on consumer confidence. So we're pleased to see from the task force report that financial institutions get high satisfaction grades on some counts.

Taking it from here, we see that the financial institutions really play the role of a public utility. As such, while they have the responsibility to remain financially viable, they must also be good corporate citizens. So the public needs accessible and affordable banking services, the community needs investment, and the banks need to be seen to serve these constituencies.

The workings of financial institutions must be transparent, there must be effective public accountability, and consumers need the opportunity to work together to balance the power of the financial institutions. So we strongly support regulation of financial institutions in order to ensure a viable financial sector.

As we were preparing this brief, I happened to go over again reference 4 in my paper, the North-South Institute information. They talk about how the financial services sector is inherently more risky than the sector that deals with the production of goods. I would really like to emphasize that.

Now I'll turn it over to Shirley.

Ms. Shirley McBride (Economics Convenor, National Council of Women in Canada): I'm going to address the issues raised on pages 2 to 5 of our brief, where we talk about stability in and Canadian control of the financial sector, competition, overlap between banks, investment firms and insurance companies, and the proposed bank mergers.

The present time appears to be one of high risk to financial institutions, as witnessed by the current international currency volatility and the more frequent failures or near-failures of major banks associated with the use of new financial instruments, such as hedge funds. The National Council of Women urges government to proceed with caution in areas affected by the global situation until the impact on our financial sector can be more clearly determined.

We agree with the task force recommendations on sound corporate governance and continued Canadian control of the large regulated Canadian financial institutions. We support measures that would make it easier for new banks and credit unions to be established to create competition that would encourage existing participants to provide better service to consumers.

We do not support expansion by banks into areas not traditionally thought of as banking services until adequate consumer protection measures and regulations are in place.

While we recognize that the greater blurring of the division between deposit-taking institutions, firms selling securities, and insurance companies is a worldwide phenomenon, this practice has been seen in the past as inherently risky because it makes it easy for trouble in one sector to spread into the other two.

The National Council of Women does not believe that allowing mergers to take place between large banks is in the public interest. Merged banks can be even more vulnerable to global upheaval. Should the proposed mergers proceed and one of the new mega-banks run into trouble, would either failure or a takeover of the remaining bank be a viable option, or would we be looking at either a massive government bailout or a takeover by a foreign bank?

To recap, the National Council of Women supports measures that would increase stability in and Canadian control of the Canadian financial sector; increase competition to improve service to consumers; discourage overlap between banks, investment firms, and insurance companies; and not permit the proposed bank mergers to proceed.

Ms. Helen Saravanamuttoo: We believe the section on empowering consumers is the most important one. We note the continued dissatisfaction on the part of consumers toward the banks, particularly with respect to bank charges and level of services. This is particularly important when we saw earlier that, to a large extent, the banking sector depends on consumer confidence for its viability.

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We believe adequate disclosure by financial institutions is necessary. We note that Canadians are angry about lack of disclosure, particularly with respect to the level of bank charges; the policies of banks, which may strictly limit loans to small businesses, including women entrepreneurs; and the rate of loan default, which we really don't know. We believe that maybe the large institutions are defaulting more than small and medium-sized businesses, but we really don't know that.

What we're recommending is a community reinvestment act. This reinvestment act would, similar to the one in the U.S. that has been operating for 20 years, require several things. It would require disclosure of the cost of doing business related to bank charges, the number of applications for loans, and a report on how they're dealt with, which means that if the applicants are discouraged before they make a formal application, we'd like to know that. It would require disclosure of information on the loans granted, analysed by gender, neighbourhood, age, size of loan, and other appropriate demographic data; loans refused, by similar demographics; and, loan defaults, analysed by similar demographic parameters, especially by the size of the loan, which I've just referred to.

We think this community reinvestment act should hold the banks accountable by requiring financial accountability statements, as well as proof of compliance for their performance related to these statements.

We want to press for access to bank accounts by Canadian residents. I am a social worker and I have visited rooming houses where you see people living in rooms with just flimsy locks on their doors. These rooming houses are often quite violent. These people, if they do manage to cash their cheques without losing too much, then may very well lose the money they have to withdraw for the whole month. We just don't think it's acceptable that there are Canadians who don't have access to bank accounts.

I also would like to point out that we live fairly close to here and I walk along Rideau Street fairly often. At all times of the day, we see people in the bank cashing firms. These are people who really cannot afford the fees charged. So we recommend the government work closely with the banks to ensure all Canadians have access to bank accounts and bring in legislation to ensure compliance. We feel this legislation is really important because the banks have been promising us for two years that this would happen and yet nothing has happened.

Elizabeth.

Ms. Elizabeth Hutchinson: Helen mentioned access to bank accounts, but this also involves access to banks, or at least to bank machines.

I live in the Laurentians, and it's quite a considerable step to any settlement of any size at all and to any bank. I am relatively hale and hearty, and I have a car, so I can get to the bank, but there are many people who can't. I know there are areas in Montreal, for instance, such as Pointe Saint-Charles or Verdun, where almost all the major banks have been closing their branches. This means people living in these disadvantaged areas don't have access to a bank branch.

We mention in the brief the case where an electric bank machine was being closed because the bank said it was not sufficiently profitable for them. I don't know how much money it actually costs to run an electronic banking machine.

There was a case recently in the veteran's hospital in Sainte Anne de Bellevue, where the bank was going to close the banking machine until the veterans all rose up in wrath and said they really needed this service. In fact, because there was a lot of publicity, the decision to close it was rescinded.

We do feel it is important that people not only have access to a bank account but that there are actually banks or bank machines where people can get at their accounts.

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Ms. Helen Saravanamuttoo: We believe it's really important to have consumer redress measures. We note the task force report recommended an independent ombudsman, with this office to report directly to Parliament through the Minister of Finance. While we're delighted with this, and while we do believe the first step is an internal ombudsman, we recommend the office be capable of making binding decisions.

We made a presentation just before this to the Senate committee. They were asking us about this particular issue and they thought it was really important to follow up. They asked why the people are not ready to use the existing ombudsman. We feel this is a very good question. We need to look into this. Particularly, we need an independent office here.

We believe a financial consumer organization is essential. We agree with the task force that this should be self-supporting and should be really able to manage its own affairs. But we think that in order to increase the possibility of such an organization being set up, the banks should enclose a one-page flyer in their mailings without delay, and they should continue to do so, inviting consumers to join consumer-directed financial organizations.

The facilitation of micro-credit is really important. This is a different sector altogether. I have seen this in operation in Sri Lanka and it was absolutely wonderful. The Calmeadow foundation here in Canada is doing some great work in the Maritimes and in Vancouver. I believe they're starting up in Toronto and with the aboriginal community. We feel all measures should be taken to encourage the development and use of micro-credit.

We believe there should be consumer representatives on the boards of the major financial institutions, and that their role as a public utility goes far beyond only the interests of shareholders. We need consumer representatives. We believe a financial consumer organization would be really good at filling this role.

We believe gender equality issues are very important. We referred earlier to loans granted being analysed by gender. We think the financial institutions should also be required to subject to gender analysis their business decisions related to human resource policies, because without women at the upper levels of the major institutions, there is no guarantee the interests of women will be noticed and paid attention to.

We too believe privacy concerns are a matter of great concern. We encourage the government to bring in comprehensive legislation to protect the privacy of consumers. We also encourage the government to bring in legislation to ban coercive tied selling on the part of the financial institutions and to ensure they fulfil their responsibilities to consumers. Thank you.

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): Thank you very much, Ms. Saravanamuttoo.

I will now begin a question and answer session with Mr. Epp.

Mr. Ken Epp (Elk Island, Ref.): Thank you.

I'd like to first of all apologize for what you must think is a lack of attentiveness to your presentations. I am distracted because they haven't finished cloning yet and I have to be in two places at the same time. With my shape and size, it's hard to move so fast that it gives the appearance without it being a fact. My apologies.

I'd like to first of all address Mr. Russel and talk a little about his report. I heard very little, since I wasn't here for that much of it.

I think I heard you right when you said basically it's okay for the banks to sell insurance and use whatever means they can to do that. If they have lists from their financial records in the banks, they can use those to target their advertising and for mailing lists. Is that correct? Am I hearing you right?

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Mr. Dunbar Russel: Absolutely right, sir. Our premise starts with the consumer, your constituent. We believe in consumer choice, and we believe that our members market insurance through a number of distribution channels, the agency system, the Internet, and direct mails. We would like to be extending the access so that consumers have additional places to go that are convenient to them, and we believe that the implementation of extending the number of access points for purchase of insurance will result in a more competitive market, lower prices, and more value to the customer, and will grow the market and result in more jobs.

So we believe this is a win-win situation for everybody.

Mr. Ken Epp: Sometimes we hear the conjecture that if the banks are allowed to do this, then all of the individual insurance brokers and sales people who work in insurance will be driven out of the market simply because, with the scales of economy and the fact that the banks are dovetailing on top of already existing business, the others will not be able to compete fairly, and so within a short time they'll be driven out of business due to the fact that they can't make a living at it.

Then, when the banks have the field to themselves, of course, they can do whatever they want with the prices, and ultimately consumers will not have greater choice at all. There will not be more competition; there will be less. And the service to the consumers will not be assured at all. What's your response to that criticism? I'm sure you've heard it.

Mr. Dunbar Russel: Yes, we have, and one of the reasons we're here is to discredit that kind of information with some facts, because we feel facts are what we should be looking at here.

First, we took a look at the province of Quebec, which in 1986 or thereabouts opened up their insurance to the same kind of recommendations that MacKay is talking about. What actually happened in Quebec is that there was a growth in the market and the job situation increased.

For instance, we know there were roughly 5,100 independent brokers, who you're talking about, ten years ago, and today there are a couple of hundred less. But we also know that in terms of the financial institutions ten years ago, there were 400 employees and there are now some 1,600. When you put this together, what's happened is that the market's grown and employment has grown in terms of jobs. These are facts from one of our members, the Caisse Desjardins, which was very active in this particular process of opening up the market in Quebec.

We also have some facts here in terms of the European experience. They are 20 to 25 years ahead of Canada in terms of even the Quebec situation. What's happened in all of those situations is that we've seen a more competitive, growing market and more jobs being created.

Concerning the comment that the banks will be so dominant, this in fact has not happened. In Europe, the bank insurers have between 5% to 15% of the insurance market and seem to have peaked at 15%. I'll tell you why we think this is the case. It's because there are certain customers who might wish to buy from a branch of a bank or might want to buy direct from the customer list, but there are others who want to buy from an insurance agent in a face-to-face sale.

All we're advocating is to let the customer choose. If the customer doesn't wish to buy, they'll go somewhere else. If a customer does wish to buy, then the market will grow, as we've seen it growing in Europe and in Quebec.

Mr. Ken Epp: But where are they going to grow? Do you really think you're going to sell insurance to a bunch of people who now don't have any insurance? That would be growth. But if all you're doing is taking insurance business away from those who are already there, then in fact there is not real growth, just a transfer.

Mr. Dunbar Russel: Yes, sir, and that's one of the messages that—and by the way, we do intend to file a longer, more formal document with a number of statistics.

What we found is that the current system of distributed insurance very much favours the wealthy and the higher-income groups. This is because much of our insurance today is sold through agents who are paid commissions, and for them to earn enough money to put bread on the table they have to sell larger policies.

In fact we know that the insurance industry is selling average policies in the $130,000 bracket, whereas for instance with some of our financial institutions, which interestingly enough are catering to the mid-market and the smaller market, their average size is $30,000. So there's a whole market in the low, mid, and the higher lower-income markets that is underserved in Canada. We have a number of statistics, which we'd be happy to present to the committee, with regard to this.

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So we think if you opened it up, the market is going to grow as a total, and it's going to grow from these underserved groups. Examples are women, especially single-parent women who run families. This is a market that isn't well served because of where their income happens to be, yet they have a need for insurance just like everybody else does.

So we believe there's lots of room to grow. Penetration in Europe, for instance, as I was saying in my report, is about 8% to 9% greater than it is in Canada, and we believe that when the market grows that 8% or 9% it's going to create a more vibrant market and generate the jobs you're talking about.

Mr. Ken Epp: Now I want to ask both you and Mr. Gustavson the question with respect to privacy and the use of data. When I go into a bank, if I want a loan, for example, I have to tell them pretty well my financial situation. They want to know how much I owe, how much my wife owes, how much I have co-signed for my kids so they could get an education. They want to know everything about me. As a financial institution from which I have to purchase, or to which I have to disclose all of this information in order to be able to qualify for a loan, they can then turn around that same information to target me as a client for their insurance or in fact even require, maybe even subtly—as you know, MacKay says no, you can't do tied selling. But how are you ever going to enforce that? If that bank manager—and I wish we were on TV now, Mr. Chairman—says “I'm sure you'll want to buy your life insurance from us, won't you?”, all he has to do is say it like that and I get the message. The message is no insurance, no loan. There was never any suggestion, there was never a legal requirement, because it was just stated that way, and now I'm a victim. I cannot now move. You're taking away my choice. You're not giving me more choice.

Mr. Dunbar Russell: Mr. Dorval will answer from our side.

Mr. Bernard Dorval (Vice-Chair, Canadian Association of Financial Institutions in Insurance): I think that statement would actually imply our employees would be engaged in an activity that is not legal in terms of forcing people to have relationships they are not ready to have with the institution. I think we have strong codes of conduct in place in all our member institutions that prevent this from happening specifically. I think the marketing rules for any financial institution, any commercial institution, will tell you that the basis is that the more products a customer buys willingly from you, the longer the relationship with you will last. So your example would suggest that any institution would take a very short-term view of the customer relationship that's ahead.

I may say that the banks have the information you mentioned, but every day in traditional insurance agents' offices, they are privy to very similar information. A life insurance agent has access to a lot of information when he does a financial plan for his customer—detailed information, even going to the will and the tax return. So they have equivalent or even more information, and they constantly have the opportunity to suggest to the customer that they could handle their other affairs, whether it's car and home insurance or whether it is even a mortgage.

So any person who is dealing with the financial affairs of customers has access to about the same amount of information, or as sensitive information, and they constantly will try to have more of a relationship with the customer on a willing basis. What we're mentioning here is that in this regard the playing field should be level so that the financial planners who work in the bank branches have the opportunity to offer the same range of services that the traditional industry has, using the same information, within very strict compliance rules that we have voluntarily put in place over the years.

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Mr. Ken Epp: Thank you. That was a good answer.

Mr. Gustavson, do you have anything to add to that?

Mr. John Gustavson: I might add a couple of comments.

Let me start with this. A few years ago, at a very well-known video rental chain in this country—the name certainly would be familiar to you—when you signed up to rent videos from them and you started filling out the application form and supplying information, you found yourself answering questions like, “Do you own your own home, and if you do, do you have a mortgage and how much is it?”, and things totally unrelated.

Mr. Ken Epp: But you know you're not supposed to answer those questions.

Mr. John Gustavson: No, and it was also improper to ask those questions, because it had absolutely nothing to do with the purposes for which you were conducting business with that particular company.

The privacy commissioner had a few things to say about it when it became public, and so did we, and they no longer do that, of course.

My point is, it's amazing how many people in this country are willing to give away personal information that has absolutely nothing to do with the purposes for which they want to do business, and certainly no financial institution should be collecting information beyond that necessary to approve or disapprove the loan or whatever other thing it is conducting.

But to go back to your original example, if that institution takes that information and says, look, we could put together a very nice package for this customer or this group of customers and offer them a discount if they brought other things to us, and here's a nice, tailored package that meets the financial needs of that family, I see absolutely nothing wrong with that.

What you said about tied selling or coercive tied selling is, of course, wrong. But on the general principle of allowing an institution to use the information they have to create a new product or service tailored to the needs of that customer or that family, I see nothing wrong with the basic principle of that.

Mr. Ken Epp: Okay. Well, my purpose in questioning is not for me to argue with you but for me to hear clearly what you're saying, and I think I've achieved that.

Mr. Dunbar Russel: If I could make one additional comment, we should all remember that the organizations we represent in our association are customer-market driven. It would be suicidal for us to operate in a way that made those customers extremely dissatisfied, because then they'd move somewhere else.

In the insurance marketplace, there are 130-odd companies from which they can purchase insurance, and so we have to be very careful, and our members have been careful and have put in place probably much more strict guidelines and policies than the insurance industry has in terms of privacy and tied selling that you're talking about, because even if it's a perceived tied sale and the person feels uncomfortable, they're going to take their insurance business elsewhere.

Mr. Ken Epp: They are going to if they can. Unfortunately, millions of our citizens live in small towns or in the rural parts of the country where the only financial institution they can get a loan at is their local bank. There's only one bank in town. It's 80 or 100 kilometres down the road to the next one, and I'm afraid the pressures are sometimes a little bigger than what you're showing here.

Those of us who live near cities, as we do, or in cities, of course, have the advantage, because there are more. After the banks merge, then, of course, there will be even less choice.

So in this committee, we need to balance that off, and those are concerns that I certainly have.

Mr. Chairman, how much more time do I have?

The Chairman: Plenty of time.

Mr. Ken Epp: Good, thank you.

Mr. Dunbar Russel: We should also realize that certainly our group of companies is very supportive of what the government is doing in the privacy area, the tied selling area. Tied selling is a difficult process to regulate 100%, but I believe there's a spirit among our group to attempt to meet the standards of the customer in terms of privacy of information as well as tied selling.

Part of that is education—education of our employees and education of the customer on what coercive tied selling is so that they recognize when they should be feeling uncomfortable. I believe our group is very active in both of these areas.

Ms. Helen Saravanamuttoo: We would like to add our concerns. It was just after the Depression that the sectors were made to be kept separate. What we're feeling is that this was to prevent the trouble between the sectors when one sector is spreading to the others.

We feel it is such an inherently risky time at present. Look at what has happened in the Barings Bank incident and the recent incidents in the United States with the hedge funds. We think it's really important not to move too quickly on any of these issues, because we just don't know what's going to happen with all the globalization changes that are happening. So we want to really express a lot of concern and recommend that we move slowly in this area.

• 1620

We would also echo the concerns about confidentiality. Already, anecdotally, we're hearing about people who really don't want to give information to the banks because they're concerned about what's going to happen. They're going to know about this. Will I get my loan withdrawn if they find out about this information? So there is real concern in this area. We just want to urge caution.

Mr. Ken Epp: Very good.

I'd like to say to the women who have given us their presentation that it's a very well written and coherent report. I appreciate it.

I have some questions for you also. You're suggesting that the workings of financial institutions be transparent. Those are your words. I believe government should be transparent. I believe when the government is spending the taxpayers' dollars, there has to be full and open accountability.

But to what extent do you want to extend this to private enterprise? A bank or a credit union is, after all, a private enterprise. I know that under certain rules they already have to disclose their financial picture. But when you speak of transparency, that almost says to throw open the records. Later on you say, we want to know how many women applied for loans, how many loans were granted, how big they were, and then at the other end, two years later, how many of all those loans given to men and how many of those loans given to women were paid off, and let's make this all public.

I know why you want to do that. I've read about you women.

Ms. Helen Saravanamuttoo: I don't think we want to get into such—

Mr. Ken Epp: I've read that women are better business people and more successful on average, and what you want to do is use that to build the case that you are not getting the loans you want from the banks. I think that's why you want to do it. Am I right?

Ms. Helen Saravanamuttoo: Perhaps we should put it this way. First of all, we see the banks and the other financial institutions playing an important role in the life of Canada. In the whole Canadian economy, we see that the banks are more than just private institutions. We see them as fulfilling the role of public utilities, and to that extent we believe they must be accountable to Canadians. We find that we don't know any of these things. We don't know if they're accountable, we don't know the cost of doing business with regard to bank charges, we don't know how many applications were received from women or from men, and we don't know if they come from low-income areas. We don't know what's happening.

What we do know is that the banks as a proportion of their lending are lending more to big business. We don't know if those big businesses are failing more than the small and medium-sized businesses. So I think this is very important, because the whole Canadian economy depends on small business. They're creating 90% percent of the jobs, I believe.

A voice: About 85%.

Ms. Helen Saravanamuttoo: Okay. So this being the case, how can we say that banks that choose to increase their lending to corporations with loans of over $1 million are serving their communities? What's happening? The whole future of Canada depends on having investment in local communities. That's what we're saying. So we have to know that.

Mr. Ken Epp: Thank you very much. I think my time is up. I should probably volunteer to quit.

The Chairman: Yes, while you're ahead.

Mr. Ken Epp: Thank you.

The Chairman: Madam Guay.

[Translation]

Ms. Monique Guay (Laurentides, BQ): Ladies, I'm pleased to meet you.

Ms. Hutchinson, I believe you're from my beautiful area of the Laurentians.

Ms. Elizabeth Hutchinson: Yes.

• 1625

Ms. Monique Guay: Right now, we're talking bank mergers and banks who want to sell insurance. Outside urban areas, like the Laurentians where I come from, there are all kinds of small villages. There are insurance brokers in some specific areas and we have fewer and fewer bank services. When they talk about bank mergers, that means—

I, for one, have had people from the Royal Bank, the Bank of Montreal and the CIBC come to my riding office to tell me that they thought the mergers were interesting, but they also said that they'd have to close either the Bank of Montreal branch or the Royal Bank branch in Saint-Antoine. So, once again, we're cutting down on services.

So there are concerns in those areas and I think that banks aren't giving a full explanation of what's going to happen. We're worried about greater centralization of services. Outside the urban centres, people are already served from Montreal but it will be even worse. Actually, from now on are we going to be served from Toronto rather than Montreal? In a way, it's worrisome.

Second, when it was mentioned that banks might sell insurance policies directly, some brokers came to see me. They earn their living in small villages where they offer an almost family-based service. They've been earning a living that way for a few generations. They earn a good living. They're not millionaires, but they live well. The people in their communities trust them.

By sticking your nose into that, you can be sure that you're going to be hurting them. Don't start telling us stories here, because you can be sure that many brokers will suffer from this. Everybody looks out for their own interests. It's true that there's been quite an evolution in the insurance sector in Quebec. You're right in saying that Quebeckers are great insurance consumers, but I think that at this point the market is saturated and there's no room for banks to interfere with insurance sales. That's my personal opinion. I don't know how you're going to manage not to harm those small brokers who've been established there for years and even generations and who are properly established especially if the banks interfere in an area that belongs to them.

I'd like to hear your opinion on that.

Ladies, a while back you talked about a bill on community reinvestment. You know that one of my colleagues, Mr. Réal Ménard, from the Bloc Québécois, has tabled a bill to that effect. Perhaps you could address that bill if you don't mind.

I would also like to have Mr. Gustavson's opinion, or the opinions of the others, on a bill on community reinvestment.

Not too long ago, on television, in Quebec, there was a program on a welfare beneficiary trying to open a bank account in Montreal, in the Côte-des-Neiges area. It made quite a lot of noise. I don't know if you saw it. In some banks, he was being asked for a $75 deposit just to have a file opened for him and other banks were asking for a $50 deposit. That amount wasn't to be deposited to his account; this was just to cover the cost of opening a bank account. It's totally illogical. Everyone should have the right to have a bank account. This sort of situation I find totally abnormal.

I'd like to hear from you one after the other. I've said a lot, but I would also like to listen to what you have to say.

Ms. Elizabeth Hutchinson: As far as I'm concerned, I didn't see the program you just mentioned because our TV is on the blink for the time being. We live outside the urban area and we don't get much on TV. However, I'm sure that some people have to pay to open a bank account. I find it's totally unacceptable. It's true.

[English]

Ms. Helen Saravanamuttoo: I think it should be not only opening a bank account but also a low-cost bank account, because so many people are living really close to the edge these days, as we see from the increased use of food banks, etc. So it's really important to remember that they must be low cost as well.

• 1630

Ms. Shirley McBride: I was going to go back a bit to the transparency in bank charges, because you raised it in saying how much this person had to pay to open a bank account.

Bank charges at the moment seem to be rather steep. I'm referring to service charges. Do we have any way of telling whether these are reflecting failed loans that have been given to businesses in other countries or failed loans given to large businesses in Canada?

It seems to me incomprehensible that it's going to cost any bank $75 to open a bank account. This makes no sense at all. We're thinking that one of the reasons we would like more transparency is to find out why this costs so much. Why do you have to pay a dollar if you're at another branch to get money from a bank machine when you do all the work yourself? It doesn't—

Mr. Paul Szabo: Can I clarify this? Are you saying it's actually costing money to open an account or there's a deposit requirement of $75?

Ms. Shirley McBride: I was referring to Madame Guay—

[Translation]

Ms. Monique Guay: To clarify what I was saying, Mr. Chairman, some Montreal banks were investigated. A welfare recipient was chosen to try to open a bank account. Because of that person's personal situation, the bank was demanding a certain amount of money to open the account although it's not supposed to do that.

[English]

Mr. Paul Szabo: That's a deposit.

[Translation]

Ms. Monique Guay: No, it wasn't a deposit, it was a payment. That's where the difference lies. It's an amount of money they were asking to open the person's file whether it's accepted or not. It raised quite a stink in Quebec.

Mr. Bernard Dorval: I can't comment for the banks. Our members are all in the insurance field. We just take care of insurance.

However, I would like to answer your question about the brokers for whom there's a lot of concern and who are being talked about frequently. On that subject, I think that the studies cited in Mr. MacKay's report show that when banks start offering insurance services, the traditional insurers won't disappear. Moreover, the same studies which were done in Quebec where the Desjardins Movement has already been active in insurance for 12 years now, since 1986, show that employment in the insurance sector has increased and not decreased overall.

As for your riding and Quebec in general, it is clear that the financial institutions that are most present in smaller towns and villages are the caisses populaires. In fact, the caisses populaires already have the right to sell insurance in their branches.

Ms. Monique Guay: They're not doing too much. They have the right to do it, but they're not pushing. The service exists in the caisses populaires, and you're quite right about that but it's not a service that you have to use. The people who are used to doing business with brokers continue to do so.

Outside urban areas, the caisses populaires are small ones and often, like in my village, they don't necessarily sell insurance. They sell it in another branch somewhere. So that service isn't necessarily offered and I'm quite happy about that because our brokers, in those villages, manage to survive.

Mr. Bernard Dorval: And you might get the same thing with the banks, Madam. There's no difference. Why would banks act differently from a caisse populaire in this field of insurance? There's no reason for that.

To get back to the brokers, it's important to remember the example of our life insurance brokers. Today, life insurance brokers get two thirds of their income not from selling insurance products but savings products. In that context, it's clear that the brokers, over the years, have changed and adapted to the needs of their consumers. Increasingly, they are offering diversified products. From the point of view of services being offered to consumers, that was beneficial.

• 1635

On the other hand, the financial planner in a branch, as I was mentioning, can't offer the same service. So I think that the brokers have available— Studies and experience elsewhere in the world serve as evidence that markets can coexist and we're quite convinced of that. Besides, we represent a group of insurers who offer their products in different ways whether through brokers or direct distribution and who would also like to have access to the branches of deposit-taking institutions to sell their products.

Under these circumstances, I think that you're seeing a problem where one doesn't exist. Experience shows that this has not created any significant problems anywhere in the world. On the contrary, markets have increased, especially for life insurance products, because the supply is greater.

I submit these points as food for thought.

Ms. Monique Guay: Do you have anything that you wish to add Mr. Gustavson?

Mr. John Gustavson: Yes, Ms. Guay. I'm sorry, but I will have to answer you in English.

[English]

I have members on different sides of several of the issues you raise. We represent a broad cross-spectrum, and as you are aware, within the financial services sector there is not always agreement on all these points.

We simply say we're here for one specific point; that is, the need for a legislative framework to protect personal information, whether it be held by a financial institution or any other business in this country. We believe Bill C-54, now before the House of Commons, provides that legislative framework, and we certainly encourage its swift passage, because Canadian consumers need that assurance and need that confidence that their personal information will be protected and properly held.

[Translation]

Ms. Monique Guay: I fully agree with you. I also asked you a question about legislation dealing with community reinvestment. I'd like to hear what you have to say on the matter as a representative of the banks.

Mr. Bernard Dorval: As I said, as an association, we work in the insurance sector. Personally, my field is insurance. Consequently, I don't think that I'm in any position to discuss investment policies.

Ms. Monique Guay: You don't have any personal opinion on the matter?

Mr. Bernard Dorval: With respect to—

Ms. Monique Guay: With respect to banks reinvesting in the community, for instance.

Mr. Bernard Dorval: I think that you should put this question to the Canadian Bankers Association or to the bankers themselves.

Ms. Monique Guay: Very well, thank you. Thank you.

[English]

The Chairman: Thank you.

Ms. Bennett.

Ms. Carolyn Bennett (St. Paul's, Lib.): Thank you, Mr. Chair.

My first question is for the Canadian Association of Financial Institutions in Insurance. Can you give me a list of your members? I recognize that you said you were new, but is there such thing as a list of your members?

Mr. Dunbar Russel: Yes, there is, and we intend to give you not only a list of our members but a more formal submission. We're translating it now. We're basically a virtual association, so all of us work at real jobs and then we come down here and try to communicate on some of the issues that concern us.

I'll give you some examples. We have members such as the insurance subsidiary of J.C. Penney on the retail store side that direct-markets insurance to its customer bases. We have Bernie's company, which is an insurance subsidiary of Canada Trust. In the credit union cooperative movement, we have organizations like Desjardins. We have insurance subsidiaries of the chartered banks. We have life insurance companies like Canada Life. We have reinsurance companies. So there's a fairly broad base.

What we all tend to share together is a very market-driven customer focus in terms of attempting to give the customer choice to do what they wish.

I do have a list right here that we'd be happy to give to the clerk to get copied.

Ms. Carolyn Bennett: You said you couldn't comment on the banks, but there are banks that belong.

Mr. Dunbar Russel: There are insurance subsidiaries of banks that belong. For instance, I work for one of those. I work for the subsidiary of Toronto Dominion Bank, called TD Life Insurance, and I would not wish to comment.

Many of our members are outside of the banking community. I think your questions in terms of community reinvestment, and so on, or mergers, or those issues, are better asked of the people who can answer them appropriately.

• 1640

Ms. Carolyn Bennett: But if we could see that membership, I guess, in terms of thinking the banks should be able to sell insurance— a number of your members actually are banks.

Mr. Dunbar Russel: Absolutely. To start with, the reason isn't necessarily the membership. It's a different look at the marketplace as well.

The members of our organizations are fairly new, and we've created about 2,000 jobs in the last four or five years in Canada. We are very consumer focused versus the traditional agency focus, and when we start looking at the consumer, our information tells us what they want is choice. They want to be empowered, as MacKay said. They want choice. That's all we're asking the committee to support.

Ms. Carolyn Bennett: Does your organization have any role in property and casualty insurance?

Mr. Dunbar Russel: Yes, it does. We have a number of members who distribute as well as manufacture or underwrite property and casualty insurance.

Ms. Carolyn Bennett: Was there an opinion on whether banks should be selling property and casualty insurance in their branches?

Mr. Dunbar Russel: Yes, we have unanimous consensus that we should be extending the options to branches of financial institutions, as well as allowing the use of the customer information database to more effectively reach customers in terms of offerings for P and C insurance.

We believe the consumer, if left with the choice, will purchase where they feel is best. In fact, I know other groups who have come before you have said—as the other gentleman said earlier on—this is a disaster from a jobs point of view, in terms of the independent brokers. Facts—real facts—tell us that isn't the case.

Ms. Carolyn Bennett: What would the facts say?

Mr. Dunbar Russel: The facts say, for instance, that 10 years ago in Quebec when they opened up the property and casualty marketplace to the financial institutions, particularly the Caisse Desjardins, what ended up happening is a total employment of say 5,500 in the insurance area grew to 6,500 10 years later.

So there weren't a disastrous number of jobs lost. In fact the jobs grew. And there was some switching from independent brokers into the institutions. Some of these licensed P and C agents decided they wanted to sell for the institutions. But the overall market grew and the jobs grew.

Ms. Carolyn Bennett: There was net growth.

Mr. Dunbar Russel: Yes, of 20%.

Ms. Carolyn Bennett: The people who stopped the independent brokering and came to work for your member organizations—

Mr. Dunbar Russel: There were more of them.

Ms. Carolyn Bennett: Were they counted twice?

Mr. Dunbar Russel: No.

Ms. Carolyn Bennett: How does that work?

Mr. Dunbar Russel: They weren't counted twice. These are different animals we're counting. On one side, there are those independent brokers, and on the other side, there are those who are working for financial institutions that in essence are working in the insurance marketplace.

So what we saw was a growth in the market in terms of jobs from 5,500 to 6,500 in that decade following the opening up of the marketplace in P and C insurance. By the way, we've seen this in Europe too. So this was no surprise.

Ms. Carolyn Bennett: I think how this situation has been described to the committee is that the independent broker may have lots of employees. If that independent broker then goes to work for a bank, it may well be that those services would be provided by the bank, and it would be the support staff jobs that would be lost. So we're not necessarily measuring just brokers.

Mr. Dunbar Russel: Yes. And I believe our statistics, which were supplied by Desjardins, include both those kinds of people, and there was an overall growth in employment.

In fact, the way these statistics were generated is that when we appeared before the MacKay task force and made a general comment, we were given the challenge—as I'm sure others were—to come up with facts that would substantiate that. We did come up with a number of facts, and because one of our members was very deeply involved in this process—Desjardins in Quebec—we were able to supply the MacKay task force with exactly the facts we're talking about.

I believe that's one of the reasons they suggested an opening up of the marketplace and discounted the fact that there would be tremendous job loss. We have not seen any facts from anyone else that show there are going to be 5,000 jobs lost, or 10,000, 20,000, etc. We'd be interested in seeing them. They don't exist. There actually was a growth in employment in Quebec when they opened up the market.

• 1645

Ms. Carolyn Bennett: Thank you.

I have a question for the National Council of Women of Canada. I really enjoyed your presentation, as I have in a number of places that you've presented. It's a thorough examination and a holistic approach, which is terrific.

We heard from the ombudsman's office this morning. I think they recognize that they have a perception problem, that people think they are part of the CBA when the banks pay the invoices. But they're very proud of the fact that they have a majority of independent directors. Certainly the calibre of the independent directors looks pretty impressive to me.

The other thing they said was that the ombudsman has never made a ruling that the banks haven't agreed to and put into effect; that there is huge moral suasion in that office; that one of the advantages of it not being statutory would be that it's done informally but it seems to always work; that if you set it up in a very legalistic way, then people would feel they'd have to have a lawyer before they'd come before them because perhaps the transcripts would be used later for litigation; that you might actually set up a barrier to people being prepared to come to the ombudsman if they didn't have a lawyer—all those sorts of things.

I wonder if you had any experience or whether people had talked to you about it.

Ms. Helen Saravanamuttoo: We've heard that people are not willing to use the bank-based ombudsman.

Ms. Carolyn Bennett: Each of the banks has their own ombudsman, but on the one that was set up only two years ago, certainly Mackay says that 40% of Canadians know about it, and in speaking to their office, it looks as though people seem to be coming forward and seem to be quite satisfied.

Ms. Helen Saravanamuttoo: We can only report on anecdotal evidence, and we hear that people are not willing to go. There are again the privacy concerns that really are important.

We fully support the use of internal mechanisms first, and we think only when these cannot be resolved should it move to an external ombudsman. We think this is absolutely essential to ensure real impartiality.

Ms. Carolyn Bennett: As you know, each of the banks has an ombudsman, and then there is this sort of supreme court of ombudsmen where the banks send the ones they couldn't solve.

Ms. Helen Saravanamuttoo: Quite frankly, we think that should be independent of the banks. We think whether they see themselves as independent or not, if their salaries are paid by the banks—

Ms. Carolyn Bennett: I think that's the key point we are trying to make. Only the independent directors get to set the budget for that office, and then they just send the invoice to banks. The banks have absolutely no say on actually how that works. That supposedly is the way it's set up at the present.

You would still have some discomfort with that?

Ms. Helen Saravanamuttoo: We can only report anecdotally what we hear.

Ms. Carolyn Bennett: And that is, again, that people have a perception.

Ms. Helen Saravanamuttoo: Yes, people have a perception of this, and we think we really support the idea of reporting independently to Parliament through the Minister of Finance. We think that really will ensure complete impartiality.

Ms. Carolyn Bennett: Thank you very much.

The Chairman: Thank you, Ms. Bennett.

Next is Mrs. Redman, followed by Mr. Szabo.

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

I would like to ask Mr. Russel's group a question—and I apologize; I wasn't here when you started your presentation. Are you members of the Canadian Life and Health Insurance Association?

Mr. Dunbar Russel: Some of our members are and some aren't. Our particular insurance organization is.

Mr. Bernard Dorval: Ours is too.

Mr. Dunbar Russel: From that you might conclude that we have some different opinions from the Canadian Life and Health Insurance Association, who represent, for the most part, the traditional insurance. Five or six of them dominate the Canadian insurance market, and what our members tend to represent to them is the new competition that's actually taking market share from them. So we do differ on many of these issues we're talking about here; we do agree with some.

• 1650

Mrs. Karen Redman: You mentioned international models. I come from the Kitchener-Waterloo area, which is a hotbed of insurance companies and head offices. I believe it was the English model that was disastrous when you looked at the number of job losses. I could be remembering this wrongly because I'm doing it by memory, but when you talk about the international scene, is the U.K. one of the places you reference?

Mr. Dunbar Russel: The answer is yes. There are a number of other European countries for which we actually have some statistics in terms of what happened there. There was quite a transition in the U.K. when they expanded into financial institutions. I think one of the real problems they had over there was disclosure, which you're still reading about in the press today.

Some of our competitors—Sun Life, for instance, has some significant issues in terms of disclosure, and you probably read this in the paper. Some of our competitors in Canada have those same issues.

Fortunately, our membership supports the appropriate market conduct in terms of disclosing to customers what they're buying. We do try our best, even though we're not perfect by any means. As someone suggested at the table, to try to be very consumer friendly, our organizations, for the most part, are very market-driven, not by a distribution force.

I can speak for that. I've been in the insurance industry for 25 years on the other side. I'm sort of schizophrenic now, as I'm part banker and part insurance person. I'm never quite sure which one I am. Depending on what part I'm in, they kind of call me one or the other, but it's always the reverse.

So one of the major problems in the U.K. had to do with pensions. It actually didn't have to do with life insurance.

Mr. Bernard Dorval: If I may, with regard to the job issue in the U.K. situation, many financial institutions in the U.K. have been actually authorized to retail insurance products for a very extensive period of time. That's something that has been there for a long time.

As we mentioned in our presentation, Canada is one of only two countries that don't authorize the retailing of insurance by financial institutions yet.

Just for your information, our organization opened its insurance operation in your own riding of Kitchener. It's headquartered actually in Kitchener. We created 60 jobs. That's just the start, because we just started about six months ago.

Mrs. Karen Redman: That's nice to hear. You're in good company in our area, to be sure.

If I could, I'd like to ask Mr. Gustavson something. It sounds like you don't agree basically with recommendations 64 through 67, which deal with privacy issues. One of them deals with the ombudsman and the redress process and the other is on medical information. Yet I think I heard you say that you do support Bill C-54. Is that correct?

I guess if you don't agree with self-regulation and you talk about regulation, how is the medical information covered? It's covered in recommendation 67, but how do you see that covered by Bill C-54?

Mr. John Gustavson: We believe there have to be some fundamental privacy principles established for the national legislature that will govern commercial activity in the country.

We still think there's a role for self-regulation with detailed sectoral codes. Within each sector, these codes would provide the details of how those principles would actually operate and come into force. There is also, of course, the regulatory process under the act after it's passed to ensure that this is done.

So what we're saying is that we need a consistent set of rules, not a different set of legislative requirements, by sector. We need a consistent set of rules that everybody has to comply with. Then within that, you can tailor those for each sector as you move forward.

In this particular case, there's a recommendation we dislike. We don't agree with the one saying that before you speak to your own customer, you must get written consent in every case for every single subject you wish to speak to them about. Certainly we believe the transfer of information, even within an organization, must be controlled. It must be open and transparent to the consumer. But our problem is simply the impracticality of it if every time you want to go talk to your new customer because you have a new product or service, you have to go and get written consent before you can do so.

• 1655

Mr. Dunbar Russel: Mr. Chairman, can I wade in and make a comment on medical information? I think this is the hot button in terms of insurance, financial institutions, and privacy. What we found as we talked to people is there's a misunderstanding of exactly what happens within the insurance industry.

The insurance industry has a consistent policy within it relative to medical information. Whether you're part of a bank insurer or whether you're a normal life insurer or whether you're a retailer selling insurance, there are very stringent, strict privacy rules. Only certain people who need the information have access to this information. I'm talking here of underwriters who have to assess the risk of the case, and at the end of the process, the claims people who have to assess whether the death claim or disability claim should be paid and so require medical information.

The information is not available to people out in the field. It's not available to all other people within the insurance entity, and certainly it's not available to anyone in the financial institution that might be associated with the insurance area. I have never seen, in the company I'm president of, medical information on any of our customers.

I know this is an issue that tends to be brought up. There are very stringent regulations and controls that the industry has adapted in terms of the use of medical and health information, and all of our members strictly follow those, just as the industry does.

The Chairman: Are there any further comments?

Mr. Szabo.

Mr. Paul Szabo: Thank you, Mr. Chairman. I just wanted to join my colleagues and congratulate the National Council of Women of Canada for a very good report. I look forward to reading it more fully. I know we got the high points, but I think you've brought some very important perspectives to our work.

The MacKay report has basically said merging is a legitimate business strategy in the financial services sector. I think that is probably a truism when you consider where our current major banks came from in the first place. They were a result of mergers. I know that you don't want to be techno on us. Then we could play little games about whether credit unions should be able to merge now, etc. I think the message you brought in—I just want to confirm this—is we have some domestic problems you want to see addressed so we get our current banking situation in shape before we take on more complexity within the system.

Ms. Helen Saravanamuttoo: Certainly that's part of it. The issues we've addressed in our brief that really need to be looked at are disclosure and access, particularly. What we feel is that the proposed bank mergers are going to really outbalance the whole economic system. Paul Martin and the Superintendent of Financial Institutions have both remarked within the last month or so that if this merger takes place, bearing in mind that the larger banks have historically engaged in the highest risks, and if they become involved in risky endeavours, then what's going to happen?

The size of the present banks is really enormous in comparison to the economy. The concentration, I believe, is 81%. I think those are the MacKay figures. So if we have three banks instead of five, and one of these banks is in the process of failing, what happens?

We know who paid for many of the bank failures in the 1980s. The consumers paid. To a certain extent, the government did bail them out. They lowered the reserve ratio. They brought it down to zero, in fact, from quite a lot higher. So we know that what happens is they're going to be merged out. They're going to be too big to fail.

• 1700

So we see these present bank mergers as a real threat to the Canadian economy per se. We think future mergers, such as between credit unions, could very well be subject to a process that would say whether they were good for a community or not.

Mr. Paul Szabo: This last point is very important because the public impact assessment and the public interest certainly are most important. I don't think there is anybody who has ever come before us who even suggests that anything should happen without expanding or opening up the banking system to provide more competition before that would happen. So I think you're right on.

I wanted to address our insurance issues. I can tell you quite frankly, Mr. Russel, that I thought your presentation was very convincing about the prospects from a business perspective and the fact that there is real evidence jobs can be created and growth can occur. That's good, and I think we should not ignore those prospects.

You had a figure that only 53% of Canadians have life insurance.

Mr. Dunbar Russel: That's right.

Mr. Paul Szabo: As of what date is that, roughly?

Mr. Dunbar Russel: We have a study guide here. It was 1997, sir.

Mr. Paul Szabo: Do you have any comparatives on how this might have changed, say over the five or ten years previous?

Mr. Dunbar Russel: Not with me, but we'd be happy to supply it to the committee.

Mr. Paul Szabo: What would be your expectation?

Mr. Bernard Dorval: It's been pretty flat.

Mr. Paul Szabo: It's been pretty flat for some time.

Mr. Bernard Dorval: Right.

Mr. Paul Szabo: All right. Now if that's the case, you'll have to help me. I don't understand how you can say you created 2,000 to 4,000 jobs without taking those jobs away from somebody else, if in fact the percentage of Canadians with life insurance has basically been flat.

Mr. Dunbar Russel: The key to what we're saying is that there are large underserved markets in Canada today, especially at the mid-market and the top part of the lower-income markets that aren't being well served.

Let me explain. In terms of insurance sales today, the majority of insurance is being sold through agents. I particularly want to refer to the life insurance business, which is what I'm most familiar with.

Agents are paid a commission on every sale they make. In order for them to have an increasing income to keep up with inflation and demands, they need to sell bigger and bigger policies. What has happened is the agents are targeting, like any business person would, markets where they can maximize their commission income. And the number of agents has been reduced significantly in the current marketplace.

What's happening is the served market—say the entire market we started with—is now moving to the upscale market. And those of us in the mid-market, or slightly below the mid-market, aren't receiving the service.

We know from our marketing organizations' statistics that 20% of the people who have insurance today feel they're underserved and don't have sufficient insurance.

I don't have them in my hands today, but we know the percentages of people who have no insurance. So in essence what we're saying is there's a market out there that isn't being sold insurance today, and that if we offered additional options of access such as lower prices, greater access—

Mr. Paul Szabo: I did hear your presentation, but I think I have not been given the answer to the question I asked, and I think I know why. So I'm going to move on to another question.

Can you give me—

Mr. Dunbar Russel: We are not here to try to— We're trying to answer your questions the best way we can.

• 1705

Mr. Paul Szabo: I know that. But you said to me that, to the best of your knowledge, the percentage of Canadians who have life insurance coverage has been relatively stagnant in the past.

Mr. Dunbar Russel: In the past. Yes.

Mr. Paul Szabo: But you said that now, through the subsidiary marketing of insurance, you have already created 2,000 to 4,000 jobs. That makes my ears go up because that's good. Real growth of jobs is good for Canadians. Real growth in the economy is good for Canadians. But I wanted to know whether or not we have had any change. If the life coverage in Canada hasn't changed, then I can't believe the number of jobs providing that service has increased.

Mr. Bernard Dorval: That's why I wanted to offer a comment of explanation. The statistics about the job creation are hard facts because we pay these people. So obviously when we say we have created 2,000 jobs, these people work for people in our organization.

Mr. Paul Szabo: I believe you.

Mr. Bernard Dorval: Precisely to your point, we have started most statistics between 1993 and 1997, so it's a fairly recent phenomenon. What this has created is new corporations with research departments, systems departments. A lot of infrastructure has been created by our member companies with the objective of offering different products in a different way to the Canadian marketplace.

So there have been a lot of very well-paid research and technology jobs created through that process. I don't have the figure, but I can tell you that it's a big percentage. That is clearly net job creation at the same time when the traditional life insurance industry was consolidating, and the highly paid head office jobs, on the contrary, were not going in the same direction.

Second, I can cite you another anecdotal number from our own sales. More than 50% of our sales today, of new business, are to people who did not have insurance before. This is the type of product that we sold before. This is net increase in the insurance coverage, and the other policies we sell are upgrades and up-sells over existing policies.

Mr. Paul Szabo: So you can understand that if you tell me that the percentage of Canadians with life insurance has been flat and you've created all these jobs, obviously they haven't been productive jobs. Or what it has been is you have been selling insurance, but at the expense of others not selling insurance. You've taken those jobs from others.

Mr. Bernard Dorval: I'm going to respond to this, because that's exactly my point. I tell you 50% of the policies we sell are new policies. This is not a replacement of existing policies; it's a new policy. So it's a net. Somebody has just acquired a new policy, and what is happening is that the traditional insurers are today less and less interested in the sale of life insurance because they're concentrating on the sale of other financial products. So the traditional insurance agent is not going out of the business. He's still in that business, but more and more involved in the sale of financial products as opposed to insurance, because it's not fundamentally economical for them to sell those products. That would be the explanation.

Mr. Dunbar Russel: Can I make one comment?

Mr. Paul Szabo: This is a long time to answer a simple question.

Mr. Dunbar Russel: I know, but I think I have some facts here that would help. The policies sold per agent have declined from 47 in 1988 to 34 in 1997. So, first, what we're seeing is the traditional method of selling and buying insurance per agent is declining. The new ways of distributing such as direct marketing through call centres, etc., are replacing the business that was being sold by agents.

So if we didn't have these new entrants to the marketplace, the market would be declining. Now it's level. Our point is, sir, that what we're asking you is to give us the tools to grow the market. We're asking you to open up the distribution system, allow us to have branches that we can distribute through, have more direct marketing that's more effective, and in that way reach those markets that aren't being served by the current distribution process. That's what we're asking, sir.

• 1710

Mr. Paul Szabo: Thank you, sir. That was the gist of your presentation, and as I say, I compliment you. I think you were positive and you were substantive in your presentation. Quite frankly, I have no doubt whatsoever that you can, by having the facility of branch distribution, go after those unserviced areas and squeeze out that little bit of business.

I'm a little bit concerned about how you're going to sell expensive life insurance to single moms, but that's for another day. I'm also sure if you're a businessman and your profit motivation is intact—and it should be, because that's your job for your shareholders and for your business growth—you don't stop at looking at untapped niches. Necessarily, once you have the tools, you have to go and take from the competition. And you know that Mutual Life and Great-West Life, as examples, have basically come grovelling to the committee and said, if we allow distribution of insurance products through the banks, we are going to be devastated; our brokerage network, our advice-based stuff, is going to be impaired; we are afraid of going out of business.

In your stead, Sun Life came before us. My constituent, Mr. Don Stewart, said, bring 'em on. I'm a good company and I have good products; I can market and I can compete.

So it's not universal, but you have to understand that from the public's perspective there is this bogeyman within the banking sector that says if you give them the tools, and if technology is reducing the dependence on the branch system and we have excess infrastructure, they can do two things. They can either consolidate and close branches or they can find something else to do in there. Insurance seems like a pretty good thing, because they are already doing it through subs. Let's bring it under the same infrastructure. And, son of a gun, if they get the auto leasing in there, they can also sell auto insurance for the people they're leasing cars to.

This is excellent business strategy. There is only one flaw that you haven't convinced me of yet, and you may. That is, what is the impact on the brokerage business out there? What is the impact on the auto dealer network? What is the impact on those with whom you will compete?

It appears, or the fear is, that there will be contraction. There will be job loss. There will be disruption. You may cherry-pick. If they open up the branch distribution network, dollars to donuts you would go around to all the competitors and steal their very best employees, and you would crush them.

Now you can respond.

Mr. Dunbar Russel: Can I answer a couple of things?

Let me start with the mystery that the committee must have been wrestling with when Mr. Astley from Mutual Life came in grovelling, I think you said, to the committee, yet Mr. Stewart, who is a constituent of yours— I guess Mr. Astley is a constituent of another member here—

An hon. member: He didn't grovel.

Mr. Dunbar Russel: I didn't think he would. But Mr. Stewart commenced with “Let them come in”. You should realize that these companies are a little differently positioned in the market.

Mr. Astley has a very strong career agency system across the country and distributes his own products through it, whereas Mr. Stewart is pretty smart; he says these financial institutions may have other forms of distribution that complement my other forms. In fact, our particular insurance company distributes products for a number of life insurance companies that may have come in front of you—probably the ones that said let them open up the system.

We're interested in satisfying a customer. If a customer comes to us and says “I'd like a Sun Life policy or a Maritime Life policy”, we'd like to make them happy, so that's exactly what we do. In fact, a large percent of our business is not sold on TD insurance policies. It's actually sold with other policies.

In terms of your second point, my one point is we can be complementary to many of these insurance companies and in essence form another distribution avenue. In fact, in the creditor life business in our particular company we distribute for Mutual Life, Mr. Astley, for Aetna, and for Prudential. All our policies are written on their paper; they're not on TD insurance paper. Many of our members who are financial institutions follow the same practice. In other words, we're distributing for them.

• 1715

In terms of our dominating the market, all we can say is if we look to other areas of the world where they've opened up the market and look at their experiences, we are finding that the bank insurers end up with, at the most, 15% market share. There's a good reason for that; it's because different customers prefer to do different things.

When you purchase your food, some of you may go to Loblaws or a large store; others may wish to use the boutique or specialist somewhere else because you think they give you better service or different benefits. We found there are certain people who wish to use financial institutions for one reason or another, and there are many others who like to use the other distribution systems. We believe experience has shown and facts—which we're prepared to put on the table—will show that banks aren't going to be dominant in this. They will have a market share in it.

In terms of jobs, which I know is a concern for everyone and is one of the reasons why we opted to come here and talk about this subject, the Quebec experience demonstrates that when you open up the system there is a creation of jobs, not necessarily a loss of jobs. There is some switching. In my own business, for instance, all of our selling is done by licensed brokers and agents who happen to be part of TD Insurance right now. Many of them were independent brokers at one stage. They still have jobs; they may be in different places.

The experience shows there are more jobs created, so I guess those who come in front of you are painting a picture that is the wrong picture when we look at the facts. That's all we're trying to communicate to the committee.

Mr. Bernard Dorval: Let me add two statistics, if I may. The life insurance industry, as per their latest statistics, derive 70% of their premiums from annuity and savings products, not from life insurance products any more. Half of the balance of the premiums they get are from group insurance products as opposed to individual insurance products, so it's not an individual sale to an individual, but through the employer. The theoretical exposure of that industry is very minimal, especially given the fact that we are selling, on top of that, to new markets not covered.

This is a very minimal issue, and it varies of course between insurers. This statistic is for the industry overall. That's why you may get different answers from different insurers. It's a very different picture in terms of the exposure.

Mr. Paul Szabo: I look forward to receiving your supplementary submission. Thank you, Mr. Chair.

The Chairman: Thank you. I have some questions for Ms. Saravanamuttoo. What are you trying to achieve with this community reinvestment act? What does it do? Do you have any proof that things are really that bad in our communities, as far as banking is concerned?

Ms. Helen Saravanamuttoo: We don't know, first of all, how bad they are, but we hear a lot of anecdotal evidence about people being refused loans, for instance. Shirley has a great story about that.

Would you like to report it now?

Ms. Shirley McBride: This just came up in the last hearing we were at. About three or four weeks ago I was talking to a friend in another part of Ontario, a single lady in her early 40s who had taught business management. She had the wherewithal, her own money, to set up her own small retail business, but she needed a loan. She prepared the business plan they asked for with great diligence, had a certain amount of her own money, jumped through all of the hoops that were required, and went to a number of banks in sequence seeking a loan. She went in sequence because she kept being turned down. In fact, in some ways she was treated in what she felt was not a happy way. One of the banks said “Would you like to talk to our women's loans manager?” Others were quite patronizing.

She finally found a bank that would give her a loan. Later, in doing further research, she discovered that some of the banks that had allowed her to come in and spend her time giving a presentation for a loan and subsequently turned her down had a pre-established policy at head office at that time—it was a few years ago—not to provide loans to small retail businesses, period. They allowed her to come in to make a presentation, because if they had announced that, it would have been public knowledge. But it was behind the scenes.

• 1720

If you think about it, how many people who have been turned down for a loan want to go out and discuss it with anybody? They would feel humiliated and it wouldn't be something they would want to admit. That's why I think the statistics are so very hard to garner.

The Chairman: If you get a loan, do you go around advertising that?

Ms. Shirley McBride: Not really.

The Chairman: I don't think so. You're right.

Ms. Shirley McBride: They are statistics that are almost impossible to get.

Ms. Helen Saravanamuttoo: We want to ensure that small business has a fair crack at the capital available, because as we said, increasing percentages are going to the very large businesses. They are not going to small and medium-sized businesses, as is shown by the Canadian Bankers Association's own figures.

We want to ensure the viability of Canadian communities. We want to ensure that business is done on a fair and equitable basis. We want to ensure that consumers have a real opportunity to share knowledge and get together so there is really true competition between the banks and consumers. At the present time there is a great differential in information available. We don't know about so many of these things, as we've already mentioned.

The Chairman: Do you think if we have to put all these facts on a piece of paper we'll get competition?

Ms. Helen Saravanamuttoo: We think they need to submit financial accountability statements as well. The MacKay task force talks about communities defining their own communities and needing the investment in them. It talks about how this will be seen.

In the U.S. they've had their Community Reinvestment Act for 20 years. A Canadian bank merged with a local bank in the U.S. that had disclosed these figures and hadn't been living up to its accountability. As a result of this they were able to say “You can't merge until this is done”, and the bank policies were actually changed. They got a turnaround in investment in the community.

We really want to ensure the economic vitality of communities. We don't want to see only big franchises coming in or only big corporations coming in with their branch accounts. We want to see money invested in small business in the communities, so Canada can grow in a way that will benefit all Canadians, and not just large businesses that don't invest in the community and take the capital out of the community.

The Chairman: Thank you.

Ms. Redman.

Mrs. Karen Redman: I just want to pick up on a point you made. We had a presenter yesterday that was very much in favour of the bank mergers. She was saying they needed to be bigger in order to give real attention to small and medium-sized enterprises. She was a female entrepreneur and also talked about the fact that female-led businesses are certainly making most of the jobs, and young entrepreneurs are creating their own jobs and that's a growth market.

My question to her was “Doesn't it just make good sense that financial institutions will invest in what is creating 80% of the new jobs in Canada?”

We also had another banker come here who told us—and I can't remember what financial institution he was with—that when government regulates, people do it to the letter of the law, and self-regulation is much better. I'm just picking up on your community investment program. He maintained that a lot of financial institutions do very good work. This female entrepreneur was talking about the Royal Bank and the fact that they had been very attentive and had invested in both female entrepreneurs and young entrepreneurs in very substantive ways. She said if that's already occurring, do we need the legislation in place to ensure it occurs?

Ms. Helen Saravanamuttoo: Then why is the proportion of money loaned to small and medium-sized businesses going down? That's the bottom line, isn't it? They may be talking the great talk, but it's not actually happening.

• 1725

Mrs. Karen Redman: So if we strengthen credit unions and allow insurance companies to maybe look more like banks and open up those opportunities, will that create the kind of competition that would lead to greater opportunities for the small and medium-sized businesses, or is it something, in your estimation, that needs government to legislate or foster in order to have it occur?

Ms. Helen Saravanamuttoo: We believe the government needs to strengthen and foster, chiefly because— First of all, on disclosure, there are two parts here. Yes, women entrepreneurs are becoming very successful, but how many aren't getting loans? We don't know that. We don't know how justifiable these increased bank charges are. We don't know how many people looking for loans have been turned away. We don't know how many people have come to the branches and been discouraged from making loan applications.

So I think we need to know these things. As we said earlier, the banks are playing such an important role in our Canadian economy that they are really becoming like a public utility. So we have to give them the responsibilities as well as the benefits, I think.

The Chairman: You don't think they're a business?

Ms. Helen Saravanamuttoo: I think they are a business, and we would not encourage banks not to be competitive in any way. We believe loans should only be granted if they are sound business loans, but we think the playing field should be level for small businesses, as it is with the major businesses. We look at these figures—and I think somebody suggested 30% of the loans should be to small businesses, but in 1997 the percentage of loans under $250,000 was 6.5%, and for loans between $250,000 and $1 million, it was 7.17%. Really, how can you get a truly vital Canadian economy with those figures?

The Chairman: I just want to look at the loans under $250,000. I think it's on page 6. It's 7.17% of what?

Ms. Helen Saravanamuttoo: It's 7.17% of all the loans granted. They probably did lend more to small businesses; we don't know. But at the same time, as a percentage of the GDP, for instance, they're lending less. This is the percentage of all their loans, but when you translate that from all their loans, the GDP is growing at the same time. So they're actually getting a smaller percent of the money available. Do you understand?

The Chairman: I'm just trying to see if there's a greater outlay of money by the banks or not.

Ms. Helen Saravanamuttoo: There possibly is, but it's certainly not very much. When you look at the greater outlay of money to the large businesses over $1 million, you see that's where the money is being concentrated. It's 87%, or something like that.

The Chairman: I think you have a very important point vis-à-vis women entrepreneurs. In the past 10 years I've noticed an immense growth in women entrepreneurs. Is that correct? Are there more women in business today than there were 10 years ago?

Ms. Helen Saravanamuttoo: Yes.

The Chairman: I would venture to say the majority of them probably weren't independently wealthy when they started.

Ms. Helen Saravanamuttoo: Exactly.

The Chairman: Therefore, I would have to assume they obtained financing somewhere. Judging by who lends money in our country, I would say a good portion of that money probably came from the financial services sector—banks and whatever. Right?

Can you explain that to me? Why is that happening?

• 1730

Ms. Helen Saravanamuttoo: Despite what's happening with the banks—this is what you're saying, right?—with the way the loans are being granted, we're saying how many more businesses would have started being successful if the policies had been equitable?

Shirley's example tells you. This is anecdotal, but it's a real example of what's happening. We don't know because the figures aren't available, but at the same time we think the possibility is happening.

We look at our communities and what's happening to the local-based businesses. Most of them are being taken over by large firms. We think this is decreasing community vitality, and we think money should be available for small legitimate business in communities by independent people. We see this is not happening at the present time because of the amount that is being loaned.

The Chairman: In reference to the survival of small businesses, you're saying if you have Price Club or Home Depot moving in, you might reduce the chances of Joe's Hardware Store surviving.

Ms. Helen Saravanamuttoo: It's true.

The Chairman: Why doesn't Joe's Hardware Store survive, do you think?

Ms. Helen Saravanamuttoo: There would be a way to help Joe's Hardware to survive, and that would be if there were cooperative buying clubs or what have you; I don't know.

The Chairman: I'm saying the consumer doesn't go to Joe's Hardware Store, doesn't purchase his product, and Joe shuts down his hardware store because he can't survive in the business.

Ms. Helen Saravanamuttoo: Yes, but what I was going to say was—

The Chairman: What do you expect the banks to do? They can't go out there and get Joe clients.

Ms. Helen Saravanamuttoo: No, we're not suggesting that for one minute. We're suggesting that there are a lot of niche markets, and there's a lot of maybe high-tech firms that are not getting the loans. Banks are notoriously bad at lending to new technologies. They just don't have the process for looking at the loans.

What we're saying is, if we had disclosure and if we had accountability to communities, then maybe the banks would look again at their lending policies and develop new criteria for lending.

It's sad to see the Joe's Hardwares closing down, and maybe they will inevitably. Maybe there are other things that can be done to help them, as I say, with cooperative buying or what have you. But there are other businesses that will spring up that we believe are not getting the chance to.

The Chairman: That's if you do this CRA.

Ms. Helen Saravanamuttoo: Yes.

The Chairman: So you're saying reinvest the money—

Ms. Helen Saravanamuttoo: In the community.

The Chairman: —from that community back into the community.

So if you're a poor community and you don't have much money in there, you'll just reinvest that little amount of money, because the argument will flow provided it applies only to certain areas. You don't want the rich communities to reinvest only in the rich communities; you want some—

Ms. Helen Saravanamuttoo: No.

The Chairman: That's what you'd like to do, right?

Ms. Helen Saravanamuttoo: No.

The Chairman: Otherwise Joe doesn't stand a chance.

Ms. Helen Saravanamuttoo: We're not saying there should be any ceiling on any area; what we're saying is the low-income communities quite often now are not getting investment, and we want to enable that to happen. If there are a lot of entrepreneurs with good business plans that really look effective, then I'm sure under a circumstance like this, with these disclosures, the banks would invest.

What we want to do is make it possible for us to really keep our communities viable.

The Chairman: Thank you for those comments.

It has been a very interesting panel. One of the challenges we face, of course, is that we have to balance all sorts of things, and one of them is also regulation.

Regulation is extremely important in safeguarding consumers' rights, but it could also become a burden that the consumer ends up paying at the end of the day, and we certainly have to keep that in mind, whatever decision we make and whatever recommendation we make.

On behalf of the committee, thank you very much.

We're going to suspend until 6 p.m.

• 1735

• 1809

The Chairman: I will call the meeting to order and welcome everyone here this evening.

• 1810

We have the pleasure to have with us from the Business Development Bank of Canada, Mr. François Beaudoin, chair and CEO, and Mr. Michel Vennat, chairman of the board.

Welcome.

As you know, you have approximately 10 to 15 minutes to make your introductory remarks, and thereafter we'll engage in a question and answer session.

Mr. Michel Vennat (Chairman of the Board, Business Development Bank of Canada): Thank you very much, Mr. Chairman.

On behalf of the Business Development Bank of Canada, the BDC, I would like to thank you and your colleagues for inviting us here today to present our views on the future of Canada's financial services sector as it relates to small business financing.

We would also be pleased to provide your committee with an update of BDC's activities, especially from three years ago when Parliament gave it a new legislative mandate.

[Translation]

Mr. Chairman, as Canada enters the 21st century, our financial services sector will play a fundamental role in determining how prosperous we are as a nation. We have seen in other countries, even in highly-industrialized countries, that a flawed financial services system can create obstacles in the market place, obstacles that inevitably lead to economic disruptions.

Fortunately, Canada has a strong and progressive financial services sector and I may add, with a lot of credit going to the work you and your predecessors on this House committee have done over the years.

But times do change and greater sophistication and information technology, the pace of change has accelerated. The suppliers of Canada's financial services have no choice but to evolve rapidly, stay ahead of their competition and continue to ensure that all Canadians, and I stress the word "all", have access to the best and affordable financial services in the world. This includes, of course, the nation's small businesses.

[English]

Mr. Chairman, you and your committee have heard it is important that access to financing for small business not deteriorate. May I suggest you have the opportunity to go much further and improve the small business financing environment in Canada.

Despite being a dynamic and growing sector, too many small businesses still feel access to financing is less than adequate. Mr. Chairman, this sector is a vital contributor to job creation, innovation, and overall GDP. So improving access to financing can promote economic growth in all regions of Canada.

Thus I urge you, when assessing the financial services sector and preparing your conclusions, to give priority to the interests of our small businesses from coast to coast, and ensure they have access to competitive and efficient financial services.

Mr. Chairman, small business is BDC's business, and BDC has delivered on the mandate you gave it three years ago. Since joining BDC as chairman in June of this year, I have been quite impressed with the types and level of service the bank is providing to Canadian small businesses.

Even though it is owned by the government, it operates in a commercial, business-like fashion, a quality that is much appreciated by its clients. It has also been quite innovative, especially since 1995.

BDC is now recognized as a leader in addressing long-term and growth-capital requirements of small businesses, especially those of knowledge-based industries, and exporters.

[Translation]

As the financial services sector evolves, BDC is well positioned to ensure that small business financing needs are addressed, competently and effectively. Further, I can assure you that the Bank will respond quickly to any new needs that may develop in the market, as it has in the past, through innovative services and partnerships with others. With your permission, Mr. Chairman, I will now ask Mr. François Beaudoin, our President and Chief Executive Officer, to present his remarks on behalf of BDC. Thank you.

Mr. François Beaudoin (President and Chief Executive Officer, Business Development Bank of Canada): Thank you, Mr. Vennat.

Mr. Chairman, members of the committee, the challenges and opportunities facing our financial institutions are many, and complex, and I praise the MacKay Task Force for laying them out in a straight forward manner for Canadians.

• 1815

The Task Force also laid out the need for change—change in the way our financial services sector is structured—so that Canadians can continue to have world-class and affordable services as well as strong, viable financial institutions.

At the Business Development Bank of Canada, we dealt with change three years ago, when Parliament gave us a new legislative mandate. Its primary thrust was to make the Bank a more active provider of financial and management services to Canadian small businesses.

[English]

BDC is a self-sufficient, commercially oriented institution that doesn't cost taxpayers a single penny.

With the full support of the government and the Minister of Industry, the Honourable John Manley, I am pleased to report that BDC has delivered on its mandate, and I would like to quickly bring you up to date on our activities.

On this first chart—and I hope it's visible to the cameras and all the members—what we have here is basically our loans and guarantees authorized per year for the period 1993 to 1998. In 1993, for instance, we authorized $641 million to Canadian small business. This number in 1998 was roughly $1.4 billion. Basically, we more than doubled our activities in that period, and you can see the rapid growth that took place ever since we obtained our new mandate.

Another element is the amount of so-called equity, because we're involved in venture capital and in what we call quasi-equity in offering products such as venture loans and patient capital, which are hybrids between term loans and venture capital. This was also an area where there was significant growth because this goes to technology companies, knowledge-based industries.

You can see the split for 1993. It was basically $11 million for venture capital and $11 million for quasi-equity. There is almost a nine-fold increase in 1998, where you see that the numbers are in the range of $184 million when you sum the two numbers of $67 million for equity and $117 million for our quasi-equity.

Another focus of our new mandate was to support knowledge-based industries, the so-called KBIs, and the small exporters, and a percentage of our activities every year is going to these sectors. So this chart shows the percentage of the authorizations that were shown before, for instance, the $1.4 billion in 1998. As you can see, this element of our mandate has been fulfilled, where we were at 15% and we're now talking about 39% of our activities, our new loans, going to knowledge-based industries and small exporters. We see in the future roughly an even split between knowledge-based industries and exporters in traditional sectors.

An element of any financial institution is to generate sufficient earnings to be able to continue to grow, and this element shows our profits, our net income, and the dividends we've been able to pay to the Government of Canada, our shareholder, over this period of time. As you can see, what we've been able to demonstrate is that taking high risk can be done on a profitable basis. Our profits totalled last year $45.5 million, with a $6 million dividend paid to the shareholder, the Government of Canada. So this was an important element as well of our new mandate.

[Translation]

Mr. Chairman, in addition to increasing our annual financings, BDC has become the primary source of innovative small business services in the market.

[English]

Our quasi-equity financial products, which I mentioned before, that is, venture loans, patient capital, and working capital for exporters, are market leaders. We designed them especially to meet the specific and special financing needs of those knowledge-based industries, KBIs, and exporters.

We were also the first to find a solution for providing capital to high technology projects still in the early stages of development. With partners across Canada, we established last year seed capital funds. These funds finance projects to the stage where they're also attractive to conventional venture capitalists.

• 1820

[Translation]

Mr. Chairman, BDC has extended its reach to small businesses in all regions by entering into partnerships with all major financial institutions. We have ongoing programs with chartered banks to support youth entrepreneurship and knowledge-based industries.

Last July, we entered the electronic business age with BDC Connex. This service makes us a virtual bank on the Internet. A client doesn't have to come to our offices to deal with us. He or she can do so through electronic means. And to assist small businesses in making smooth transitions to the new millennium, we have Year 2000 Ready, a comprehensive program that includes diagnostic questionnaires and financing for software and hardware conversion for the year 2000.

[English]

Mr. Chairman, when we look at Canada's small businesses today, we see a sector that is more dynamic and innovative than it has ever been before. At BDC we've had the opportunity and the pleasure, I may add, to be associated with some of the most dynamic Canadian companies. We were one of the very few early investors in Ballard Power, for instance, when its technology was just coming out of the lab. In Atlantic Canada, BDC has financed Seagull Pewter; in Quebec, BDC was an investor in a then young company called Cinar; in Ontario, we have financed Roots; and on the prairies, BioStar is a client of BDC.

I give these examples because at the time we were involved with them, their financial needs were seen by many as risk capital, even high risk. But as the only institution specializing in small business financing, BDC saw these needs as growth capital, development capital, for promising dynamic businesses.

Mr. Chairman, I've also cited these BDC clients because they represent the kinds of companies that are the future for Canada and, moreover, the kinds of companies Canada's financial institutions must support.

The McKay task force report on the future of Canadian financial services states:

The Task Force urges Canadian financial institutions to be prepared to make credit available to higher-risk borrowers with more innovative financing packages and appropriate pricing.

[Translation]

We fully support this recommendation. I might add that the Task Force also noted the strong role BDC is playing in small business financing, and its records as an innovator of new risk-sharing instruments, particularly quasi-equity instruments.

[English]

Small businesses are major users of financial services. In fact, they are quite dependent on these services for their livelihood. I'm hopeful, therefore, that as you consider the McKay report and your own conclusions, you will give specific attention and priority to how the evolution of the financial services sector will affect small business.

One of the key concerns of small business is the potential merger of the chartered banks. I know they're quite apprehensive about how the industry will evolve, and they have a lot of unanswered questions. Small businesses are asking, if chartered banks are allowed to merge, what will it do to my line of credit? What will it do to choices I have for financial services? These are the bread-and-butter questions they're asking, and they're waiting for responses in the months to come.

Mr. Chairman, I'm sure it's not surprising to you and your colleagues to hear that many small businesses feel that access to financing is already restricted by the limited number of sources in the marketplace. Compared to the start of the decade, small businesses have fewer financing options today. For example, trust companies and insurance companies used to be active lenders, but they have since left the market. In this regard, I support the McKay task force recommendation to attract new financial institutions into the market, both within Canada and from abroad.

• 1825

What is required is a level playing field to encourage the establishment of institutions that would serve the small business sector. New entrants into the banking industry would promote competition and enhance innovation. Thus, I would urge you to consider the rules of entry into the Canadian banking sector and to see how the interests of small business can be promoted.

Placing a clear focus and priority on small business will, in my view, improve access to financing for small businesses across the country. Thus, I also support the concept of a specialized small business bank that has been proposed by two of the chartered banks.

At BDC, small business is our only business. This has allowed us to focus on small business needs and to respond in innovative ways while being profitable. It is this focus that is needed in the marketplace, and specialized small business banks could provide this focus.

The McKay task force report has highlighted that Canada is a very concentrated market. Regardless of how the bank merger issue is resolved, we need more alternatives in the Canadian marketplace. Today, BDC is a complementary source of term financing and equity capital for small and medium-sized enterprises. In a changing landscape, BDC can be called on to play an even greater role in this market. Our clients are telling us that they expect BDC to be more broadly based and to offer a wider array of financial products to meet their needs. We are responding to those expectations to the limit that our mandate allows.

In conclusion, Mr. Chairman, I believe BDC has served small business well. As we face the next major restructuring of Canada's financial services sector, BDC will surpass itself. It will utilize all its means to anticipate changing needs and to provide new and innovative financing solutions. We're present from coast to coast, and we're focused on the businesses that will become Canada's industry leaders of tomorrow.

[Translation]

Thank you very much.

[English]

The Chairman: Thank you, Mr. Beaudoin. We'll now have a seven-minute round of questioning, beginning with Mr. Epp.

Mr. Ken Epp: Thank you, Mr. Chairman.

Mr. Beaudoin, thank you for coming tonight. I appreciated your report. Of course, having taught mathematics for 31 years, I love graphs, so you really impressed me.

I have just a few questions that I'd like to ask you. You say you're government-owned. Is that the source of your capitalization? When you say you have $1.3 billion out in loans, is that all taxpayers' money that you've lent out?

Mr. François Beaudoin: Absolutely not. First of all, the figures that are reported were the new loans extended to small business last year, and there were $1.4 billion in new loans.

Our assets that we're speaking about are in the $5-billion range. With the way the bank is structured, we're not costing the government and taxpayers a single penny, because we are borrowing in world markets in Canada and abroad. We're then lending to small business in Canada.

The profits that I've reflected in one of the charts are basically the surpluses that are generated after the year is over, after paying for all our expenses and for loan losses, and they even include a dividend that we've started to pay on the equity that the government has invested in the bank. So we're structured like a commercial financial institution in that respect. The difference is that we have one shareholder, and it's the Government of Canada. All Canadians are basically shareholders in the bank.

Mr. Ken Epp: Okay. My next question is about your total portfolio now. If I just do a quick addition here, it looks like you probably have about $6 billion or $7 billion out.

Mr. François Beaudoin: Actually, the figure is $5 billion in assets.

Mr. Ken Epp: Is your rate of repayment of loans or, conversely, your default rate higher or lower than that of the usual commercial banks?

• 1830

Mr. François Beaudoin: Over a cycle, when we compare the good and the bad economic times, our experience has been that our loan losses are three times higher than what the chartered banks experience.

You're going to ask how we survive. The way we survive is to charge interest rates that are commensurate with the risk we take on. Increasingly, we will also get into participation in the profits and success of the firms we support, and this is also adding revenues to the bank's income statement.

Mr. Ken Epp: I have a question that I know is very risky for me to ask, because it means I have to admit ignorance in the presence of my colleagues here. I have no idea what patient capital is. I see the word “patient”, and I think it has something to do with a doctor hovering over a patient. What is it in your business?

Mr. François Beaudoin: Patient capital is, first of all, a registered trademark of the BDC in Canada.

Mr. Ken Epp: I noticed that, yes.

Mr. François Beaudoin: This is a financial product that we have developed specifically for technology companies that are in the early stages of development, when you need patience. The word “patient” is from the concept of “patience”, because these companies require a lot of cash to conduct research and development in their early stages. They have lots of potential, but you need to expect repayment perhaps starting three or four years after inception. Therefore, what we designed is an instrument that reflects this pattern and the patience we need to reflect in this sector.

Mr. Ken Epp: Well, thank you for that explanation. Actually, that makes a lot of sense, because that would be a very important role to play in terms of your legislative mandate and what you're trying to do to help research and development particularly.

In your graphs, you start in 1993, except when it comes to net income. Is this because you always had losses prior to 1993 and didn't want to show them on your graph or because your computer program didn't show negatives?

Mr. François Beaudoin: No, we wanted to show you a five-year rising on all the graphs, but the situation in prior years was basically a break-even situation until that time. I think it would therefore have been a very flat line.

Mr. Ken Epp: So you did that just so it looks prettier.

Mr. François Beaudoin: It started to grow around that time.

Mr. Ken Epp: Well, I think that's very interesting.

You indicate in your report that consumers, and especially small businesses, need more alternatives, and MacKay said that. I guess you've said as much explicitly, but I presume you are thereby in favour of allowing even foreign banks to enter into the field here. That doesn't bother you?

Mr. François Beaudoin: I think we need foreign banks—we need domestic players, as well, but that may be in financial services, not in banking—to consider lending to small business, because this is an area in which we see a limited number of players in today's environment. This is what is needed to support the growth of small business.

Mr. Ken Epp: But if you had a greater share of that market, which you will lose if other players come in—you will either lose some of the business you have now, or you will fail to get some business that they are going to take—could you not generate more profits and more capital to lend back to let our country grow?

Mr. François Beaudoin: My objective here today is to present what I see as the best interests of the small business sector. It's basically beyond the interests of our organization. It's really the small business sector, based on the discussions I have with small business owners.

The other point I must mention is that competition brings the best out in people. I think it would be an even greater challenge for BDC to be innovative and bring the right solutions to small business.

Mr. Ken Epp: Right now, you have no competition.

Mr. François Beaudoin: We have. The chartered banks are involved in the market, and we have a number of other institutions as well. We work with them, as a matter of fact, but what we need is more players. The demand is high and the sectors are numerous. The more, the better. We currently have too small a number of institutions.

Mr. Ken Epp: But you don't even deal with a client unless he or she has been turned down by another bank.

Mr. François Beaudoin: That's not the case any more. Since 1993, our legislation has been changed to be a complementary lender. That means we work with a chartered bank at finding a solution.

• 1835

Typically, for instance, a chartered bank will prefer lending to a business on a short-term basis, providing the short-term financing. We will get into the equity or long-term financing. That's the typical approach that is taken to supporting a business nowadays.

Mr. Ken Epp: Okay. Of all of the things in the MacKay task force report, which one item concerns you the most? Which one do you think we should, as a committee, steer away from?

Mr. François Beaudoin: I think it's clearly the issue of making more alternatives available to small business. But I'd like to mention a point. As the MacKay task force is indicating, we have a very solid financial services sector in Canada. It's one that has served the country well over the years. And this is something that should be pursued in the future.

Mr. Ken Epp: Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Epp.

Mr. Desrochers.

[Translation]

Mr. Odina Desrochers (Lotbinière, BQ): First of all, I would like to also thank Mr. Vennat and Mr. Beaudoin for their presentation. You know that there are a lot of small businesses in Quebec. You have told us that, right now, these small businesses obtained their financing from the big chartered banks, the Mouvement Desjardins and your institution. Do you have any statistics on this breakdown? You talk specifically about the small businesses. Your record is very attractive. But what about the chartered banks and the Mouvement Desjardins? As a percentage, what kind of support do they give to small businesses?

Mr. François Beaudoin: I don't have exact numbers. However, small businesses represent an important sector for all of these banks and caisses populaires. Over the past few years, they have been providing increased support to this sector. The numbers for this sector have been fairly impressive.

Growth has been good. The economy has finally been relatively healthy over the past few years. Were it not for the commitment of all the financial players, we wouldn't have had this economic growth.

All of the players have participated in the growth of the economy by helping small businesses. In terms of market share, it's always difficult to establish since the statistics are not always presented in a format which allows us to do the type of comparison you asked for. Generally speaking, I can tell you that over the past few years, based on our experience, just about one small business out of five has dealt with the BDC. Consequently, in some sectors, we estimate our market share to be about 20%.

Mr. Odina Desrochers: You expressed some reservations about the two proposed mergers that are currently in limbo. Do you think that these mergers could restrict small business access to credit?

Mr. François Beaudoin: The small businesses have been concerned about this with respect to the proposed merger. They're not against the mergers taking place. Last week it was Small Business Week, and I met several companies over the past two three weeks. The small businesses are not against the principle of the merger; they themselves have merged on several occasions. They're not against it from a moral perspective. However, since the market is limited, they are afraid that certain alternatives may disappear. They're wondering what will happen when they have to renegotiate certain financial commitments if there are fewer players in the market. They are afraid that they will find themselves in a vulnerable situation. And they are saying that perhaps it would be more desirable to open up the borders, to encourage the other players to participate in this market, which would increase their options.

Mr. Odina Desrochers: Would this be under the current regulations or would this be a different piece of legislation?

Mr. François Beaudoin: As the MacKay Report indicated, I believe that at the legislative level, you have to really open up the borders so that foreign players— We talked about tax implications, for instance. We discussed withholding taxes. The MacKay Report talked about simplifying the regulations. All of these aspects need to be reviewed so that interested players will find it worth their while, whether they come from another country or Canada. And I would emphasize that there are several players in Canada who should be interested in supporting small businesses.

Mr. Odina Desrochers: Would you be interested in setting up your company in a foreign country or are you bound by your charter to remain in Canada?

Mr. François Beaudoin: The bank charter mandates the bank to support Canadian businesses. This is an important aspect of its charter. As we belong to all Canadians, we have to focus on Canadian businesses.

• 1840

Nevertheless, one aspect of our mandate that is growing in importance is the support given to Canadian small businesses as they expand to other countries. Indeed, in order to be successful today, you have to develop your exports and expand activities to other countries. The BDC will have to play this role in order to ensure that businesses are successful.

Mr. Odina Desrochers: In establishing financial partnerships, does your organization, the bank, recruit partners outside the country?

Mr. François Beaudoin: We have ties with most of the development banks in the world. We have agreements with the small business development bank in France as well as with development banks in different Central American countries and in Mexico. Through these agreements, we are able to exchange a great deal of information about the financing available to foreigners who would like to set up shop in Canada, as well as to Canadian businesses that want to set up shop abroad.

Mr. Odina Desrochers: If ever a bank specializing in small businesses were created—and this is the wish you expressed in your brief—aren't you afraid that the small businesses will be more inclined to knock on the door of this new bank, which may hurt the competition provided by other non-specialized banks?

Mr. Michel Vennat: On the contrary, I think that this would ensure better services. It is in the interest of each niche market to have institutions that are as specialized as possible.

We are not afraid of competition. We feel that with greater competition in the financial services sector, the small businesses will be better served and there will be greater development and investment.

Mr. Odina Desrochers: That's enough for me, Mr. Chairman. Thank you. Thank you, Mr. Beaudoin and Mr. Vennat.

The Chairman: Thank you, Mr. Desrochers.

[English]

Ms. Leung, followed by Ms. Redman

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Mr. Chair.

I enjoyed your very well-prepared presentation. I'm also very impressed by your growth and development within four years. Your profits have increased from $4.1 million to $45.5 million. You paid $6 million in dividends. That's quite a good record.

I understand you serve small and medium-sized business. I guess you have a kind of special niche then, right? Okay.

You did mention you also specialized in financing and venture capital, and I'm very interested in the venture capital area. I'm from B.C., so I've heard a lot about your success. I just wanted to hear it from you—you especially.

I'm sure when you go into venture capital, there's a lot of risk involved. I'm sure it's calculated risk. Will you tell me what percentage of failure you experience in venture capital? What really gives you the growth?

Mr. François Beaudoin: There is a rule in venture capital we call the two-three-five rule, and it's the fact that out of ten investments in venture capital, two will give you fantastic returns, fantastic success—the Ballard type of success, the Blackcomb type of success; three will be sort of average—good, but nothing exciting; and five will be below the average rate of return you should be making, and in some cases there will be failures.

This is really why it's called high risk, because it's only a limited number of investments that will permit you overall to make a worthwhile portfolio, a worthwhile return on investment. I've talked a lot about our successes. I could tell you about some of our unfortunate losses in venture capital. But when you make the right selection it is so rewarding, because you can see the progress of a company. And the financial reward, for a financial institution, is also greatly appreciated because it compensates for the losses.

Ms. Sophia Leung: Good. I have one question. I'm interested in the structure of your administration and board. How do you select your board directors?

Mr. François Beaudoin: Maybe I would ask our chairman to—

Mr. Michel Vennat: Our shareholders select our directors. We do make recommendations, but our directors are selected on the basis of regional representation. One of the criterion of the other is experience in small and medium-sized businesses. I think there's a common thread amongst our directors that they have experience in small and medium-sized businesses.

• 1845

Ms. Sophia Leung: You have a very close relationship with the ministry of industry, don't you? How much influence would that be?

Mr. Michel Vennat: Well, we report. We are part of the portfolio of crown corporations for which the Minister of Industry is responsible, and of course, since the minister is our shareholder, we have close relations. His deputy minister sits on our board also. But the majority of the board members are from the private sector.

Ms. Sophia Leung: I have one more question.

Right now we're facing the changing needs, changing market. Are you feeling any threats, or are there any you're facing? Which groups may be your most competition?

Mr. Michel Vennat: I don't think we're facing a threat so much as that we see the demand for our services is increasing, and therefore we will require more capital. But we don't feel there is a threat or anything. Quite the contrary. We think the types of services we are giving are going to be in great demand, and the push will be for us to give a broader set of services to the small and medium-sized businesses.

Ms. Sophia Leung: Thank you.

Thank you, Mr. Chair.

The Chairman: Thank you, Ms. Leung.

Mrs. Redman is next, followed by Mr. Szabo and then Dr. Bennett.

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

I, too, really appreciate the fact that you've come to advocate on the people you serve as opposed to your specific role, which I see as fairly well-defined and in some ways almost a niche market.

In regard to the question I would like you to respond to, banks really act like banks, so whether it's a small bank or a big bank, a bank is a bank, and that's possibly one of the reasons we need people like the Business Development Bank of Canada, to fill the need for high risk that other banks don't feel they can go into.

Are we missing an opportunity? I'm not a great card player, but when you play poker you put something on the table to ante up. You've already referenced that some of the people you've talked to don't have a moral obligation to mergers, because mergers happen in the business world in a lot of sectors. The MacKay task force is really dealing with mergers in quite a generic sense, whether or not it makes good business sense for banks to be able to merge if they can make their case.

Are we missing an opportunity when we look at the small and medium-sized business sector, which we hear time and time again could be served better than they currently are? We hear about the rules being changed and having more competition and allowing insurance companies and trust companies to look more like what we see scheduled banks looking like and doing today.

Are we missing an opportunity? If the chip is on the government's side, mergers may be a legitimate business strategy for banks to go into, but these are the things that we see need to be in place that will protect the consumer, that will be good for small and medium-sized businesses.

We've already had some of the major players come forward and talk about creating a small and medium-sized business bank specifically. The need has been identified. It's there. You speak to that need by your very existence, and yet they haven't moved in that direction yet.

So are we missing an opportunity to look at this comprehensively?

Mr. Michel Vennat: We should see this as an opportunity; I think you're quite right. There's nothing magical about mergers and non-mergers. What is important is to use this exercise as increasing access and creating the conditions that will favour new players so that the overall business community, in particular the small business community, will be better served.

So instead of concentrating on the threats, I think we should really concentrate on creating and encouraging new players. Our view is that the more competition and the more services there are, the better the business community will be served.

Mrs. Karen Redman: I do appreciate that, and I heard you say that. I'm also saying, is it an opportunity for the schedule I banks to reinvent themselves so it's not only new players, but they may play the role in a very different way?

Mr. Michel Vennat: They are the biggest players, and two of them have suggested a new institution, and we applaud that. The more the scheduled banks will be involved in the small and medium-sized businesses, the better the country will be, and we certainly would support any of their moves. Indeed, we have joint ventures with all of the Canadian chartered banks. We constantly exchange information. We exchange clients. We're very happy when one of our clients becomes independent enough to go to a chartered bank and not need our services any more. So there's no opposition there. It's a question of making sure we have all the tools in place.

• 1850

Mrs. Karen Redman: I just have one final question, if I can. Given that there is an articulated need—certainly we hear from small and medium-sized businesses that they're not being served well—why aren't these things happening now? If the need is there now, why aren't small and medium-sized businesses getting the kind of attention in funding and venture capital they feel they need?

Mr. François Beaudoin: I think one of the reasons is that Canadians have realized, first of all, that small business is really the engine of growth for the country. This was not always the case. Large organizations and corporations were perhaps more important in the overall GDP of Canada, and this has changed in the last 15 years. Therefore, there's recognition that more needs to be done.

Second, in terms of why there aren't more players, I think we have to look at the legislation that has guided the entrance of new entrants into Canada or from other sectors within Canada to provide the right set of incentives and enticement to come into Canada to serve that specific sector.

The MacKay task force report, for instance, talked about the capital tax situation. It has correctly pointed out that we need to revisit that element. Perhaps that could be used as an incentive to get new players into serving small business.

Mrs. Karen Redman: Thank you.

The Chairman: Mrs. Redman, I'll just follow up on this particular issue vis-à-vis start-ups and the entrepreneurial spirit that Mr. MacKay talks about and how this country in fact needs to speed up in that particular area.

Do you think that mergers can in fact stimulate that type of entrepreneurial spirit? If you have a merger of major banks or any firm in the financial services sector, you obviously create some voids that may in fact be filled by the entrepreneurs MacKay is talking about.

Mr. François Beaudoin: I think you need to have a level playing field for the other players. That's a precondition to having new entrants.

Second, one of the elements that has been properly identified in the MacKay task force report is the fact that these mergers can produce cost savings that can therefore be utilized for new initiatives that perhaps the banks would want to get into.

The other element in the merger discussion is the fact that we've been fortunate to have a national system that serves all sectors and segments of industry in Canada. This is an asset we need to be preserving in the years to come.

Other countries have a very fragmented financial services sector. We need to find a way to preserve this foundation we have in Canada while making sure that the needs of small business through increased competition are well served.

The Chairman: Mr. Szabo.

Mr. Paul Szabo: Thank you, gentlemen. I want you to know that the manager of your branch in my area came to visit me. I was left with all the material and was encouraged to support, in whatever way I could, small business by referring them to her. That was in Mississauga, which is the sixth-largest city in Canada, by the way. It's just ahead of Vancouver, Sophia.

Mr. Michel Vennat: She did not go there by chance: we have a program whereby we invited all of our branch managers to go visit all members of Parliament of all parties.

Mr. Paul Szabo: That's excellent.

Mr. Michel Vennat: We think it's very important for them to be in touch with you and hopefully keep you informed.

Mr. Paul Szabo: Yes, and I appreciate it. I made the time. I know my colleagues also made the time because of the important work that the Business Development Bank does in moving out of its former image, which I think was a big move for your organization.

• 1855

Let me be a little bit more focused here on some fundamentals we're dealing with. Help me out. What was the average prime rate during the 1998 fiscal year, which ends March 31?

Mr. François Beaudoin: I'd say 6%.

Mr. Paul Szabo: About 6%, which is the rate at which you would loan money to the highest credits, the best credits possible. What was the average lending rate of the Business Development Bank during that period?

Mr. François Beaudoin: Our rate at the bank starts at 2% above prime. This is the level at which we start discussing business. We're not the Price Club of the industry. We're basically there to support higher risk, and therefore we need to reflect that risk premium in our interest rates. And depending on the type of situation we're dealing with, we will have a premium added to even that base rate I've described.

Mr. Paul Szabo: But your average lending rate for the majority of your business, the bulk of your portfolio, is what relative to prime?

Mr. François Beaudoin: I've just been handed the annual report, and in the last fiscal year it was on average on a floating basis—because we offer floating and fixed—9.24%.

Mr. Paul Szabo: Okay.

Mr. François Beaudoin: So if the average had been 6%, it would be basically 3.24% above the prime rate.

Mr. Paul Szabo: And that's on average. Some could be substantially higher than that and some could be lower. Even 14% wouldn't be an unreasonable rate for some risks.

Mr. François Beaudoin: What we try to do in these situations is not to charge a straight interest rate but have the participation in the success of the firm, and we take a royalty on the sales or the profits that are generated by the business. They win, we win. We take the risk, though.

Mr. Paul Szabo: And the average size of your loan portfolio?

Mr. François Beaudoin: Our average size of loan is—

Mr. Paul Szabo: The whole portfolio.

Mr. François Beaudoin: The whole portfolio is $5 billion in assets.

Mr. Paul Szabo: So on $5 billion of portfolio we made just under $50 million—about 1%.

Mr. François Beaudoin: Yes.

Mr. Paul Szabo: But we're charging on average about 9%.

Mr. François Beaudoin: Yes.

Mr. Paul Szabo: And after allowing for all the overheads and all the other good things, it would indicate to me that the loan-loss levels are fairly high.

Mr. François Beaudoin: I should point out that from this 9% we need to pay the deposits we raise in the money markets and capital markets. So for the loan losses, you're right, we're talking about, per year, a ratio of roughly 1.3% or 1.4% depending on the position in the cycle, which on average is three times higher than what the chartered banks will experience over a cycle.

Mr. Paul Szabo: And that's really the area I want to get to. You're in a risk-filled scenario. It's fundamentally small business lending, and an awful lot of the discussion of those who want to talk about the future of the financial services sector is about access to capital.

I wanted to ask you whether you felt we are really at a point where there is not enough capital to service small business, or is there enough capital to service small business to the level of reasonable risk that anybody should be prepared to take? There must be a threshold, there must be a ceiling, and I'm wondering how close we are to that ceiling. Is there really this additional capacity for reasonable risk-lending to the small business sector?

Mr. François Beaudoin: The issue is that for the level of risk certain institutions take— The chartered banks have depositors; they have a fiduciary responsibility to their depositors. They have to pay interest on the deposits. The level of risk will be at a certain level.

What we are missing in Canada, which the U.S. has, is specialized lenders that have different risk appetites, that are willing to go above the risk levels of perhaps the big players and take a chance but also get the reward in return.

• 1900

As has been pointed out in previous studies, the interest rates that are being charged in Canada are very attractive. When you get a loan from a Canadian bank, it is normally at a lower margin than what would be charged in the U.S., for instance. Therefore, it's very attractive. What we need is perhaps a better spectrum of players that would be willing to take higher risk for different types of businesses perhaps in different industries. This is the type of environment that would be more conducive to having a dynamic sector.

Mr. Paul Szabo: Is Wells Fargo a virtual institution that has an appetite for higher levels of risk than you would take?

Mr. François Beaudoin: Wells Fargo is a virtual bank. We introduced last July BDC Connex, which is open 24 hours a day, seven days a week. It's growing. We go beyond what Wells Fargo is able to do. Wells Fargo goes up to $100,000. We will provide through our virtual bank our full range of commercial lending products up to $5 million.

I'm glad you raised this question. Canadians need to know about this tool, made in Canada for Canadians, which is available as we're talking now and will be all night. The risk profile they are willing to take in Wells Fargo is about the same. I can't say that we have an edge there. We have an edge in terms of the service levels and also the amounts we make available through our virtual bank.

Mr. Paul Szabo: But by virtue of the fact that they basically send out broadcast letters, they're not going after just those who are turned down by everybody else. By virtue of their rate requirements, they can cherry-pick as well, as could you.

Mr. François Beaudoin: That's right. But the approach they've taken for loans at the $100,000 level or below is a profile we can easily match within BDC.

Mr. Paul Szabo: Okay.

I have one last question. With regard to your chart on your net income for the five years, the trend line is still a positive slope for the five year on average. It was during the period in which Canada enjoyed some healthy economic fundamentals. We haven't thrown out the textbooks totally, I assume, which means that we could maybe go into recession, depending on things such as what happens to the automobile sector. As we approach 1999, I think this is where the U.S. is suggesting that this could be a threshold period for determining that. Fifty million dollars' worth of profitability is not a hell of a lot in a downturn.

I assume that the Business Development Bank also has to be prudent in terms of the financial winds, as it were. Does that mean you're going to have to improve the level of credit risks to be able to protect your bottom line? I'm really interested in how much latitude you have. If you're going to continue to at least break even, you may not be able to operate under this generous risk-taking scenario that maybe you've been experiencing over the last couple of years.

Mr. François Beaudoin: First of all, I should share with you our outlook for the Canadian economy, which is still very positive. We're confident that we have the fundamentals in the right order in this country for continued growth. It may not be as strong as what we've experienced in recent years, but our forecast is for 2%-plus growth in the coming year. This is not exactly a downturn. Rightly or wrongly, and we'll know eventually, this is the outlook we're taking when we're supporting our businesses.

• 1905

But let me reassure you in terms of the prudent financial management we have in place at the bank, because in all the years where we made good profits, we made sure that we properly reflected the risk level we were supporting and set aside, through provisions, moneys that will serve us when our losses are higher than they are perhaps in a good economic time. So we think we're properly structured and prudently managed to sustain downturns and also to continue providing support to businesses that will need us during those downturns.

Mr. Paul Szabo: It sort of sounds like the government's line, too. I think we are.

Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Szabo.

Ms. Bennett.

Ms. Carolyn Bennett: Thank you, Mr. Chairman.

You're a 54-year-old, made-in-Canada solution. I'd just like to know what happens in the rest of the world. If they don't have a BDC, who looks after this sector in other countries?

Mr. François Beaudoin: Let me say, first of all, that this is a unique organization in the world. No other country has put under one roof the combination of financing, venture capital, and consulting. I haven't talked an awful lot about consulting, but we do $20 million worth of consulting work per year with small business. Now, under one roof, this is quite unique in the world.

What has happened in most other countries is that they have a lot more institutions that are playing in what I would call the grey zone, the grey market. Therefore, the need for having an active player such as BDC has not been as evident in those countries, because you do have the conditions that permit the different risk levels that can be accommodated commercially being attended to.

Ms. Carolyn Bennett: It's clear that you can make money doing what you're doing. Is it that the banks don't feel they make enough money doing it?

Mr. François Beaudoin: I think it's a different approach. One approach is related to the fiduciary responsibility banks have to their depositors and also the volume of transactions they need to be handling versus a case-by-case project-management approach that we can underwrite.

Our involvement in business is very labour intensive. We support businesses where there are no tangible assets. The company maybe doesn't have tangible assets, but they have intellectual capital. So we need to invest the time in order to understand the sector, the industry, and the people working there, and our expenses reflect that. Therefore, we need to be getting better returns from these companies to reflect the investment that is being made. So it's very labour intensive. We've been established to perform that task versus a volume-oriented approach, where you need to be using perhaps ratios and formulae to determine the level of risk you can underwrite.

Ms. Carolyn Bennett: As a family doctor, and in knocking on doors, I've seen that people have dreams and ideas, but they are inexperienced perhaps in putting together a business plan. They go to a bank and get turned down, and they are then not sure what to do.

I think there was some feeling that banks should maybe be providing some of the consulting services that a bank like yours is providing in terms of workshops or those sorts of things. When looking at the future of financial services, do you think banks ought to provide some consulting in order to help people make better business plans?

Mr. François Beaudoin: The announcement from the Bank of Montreal and Royal Bank for their small business bank includes the provision of consulting services in that new bank that would be created. So they've certainly been reading our annual report.

Ms. Carolyn Bennett: Thank you very much.

The Chairman: What happens if the merger doesn't occur? Will they be reading your annual report?

Mr. François Beaudoin: I think if the mergers don't take place, the concern that was being expressed by the financial services sector when I was in Vancouver and meeting with the credit unions there was that they're afraid of the banks pulling out of some sectors of the economy in certain regions. The credit unions are therefore perceiving this as an opportunity for basically new business. But this is perhaps the one element that we need to consider in this environment, given the very solid presence that banks have had at the national level for centuries.

• 1910

The Chairman: You've heard of the public impact statement that MacKay advocates for any proposed merger, of course. The issue of employment is an issue that is part of the criteria. I'm wondering if that's still a valid point when you deal with new technology being introduced, when you deal with the fact that there may be job losses because of the merger but there might be job creation because of other spinoffs. What do you think?

Mr. François Beaudoin: I must admit that I was in a chartered bank for sixteen years, and we went through reorganizations, perhaps not as significant as the ones that are being proposed with the mergers. We were in a growing industry with more opportunities, and in those days we were able to accomplish really a redeployment of resources to new areas that were growing. Of course, the organization is not static, but the resources can be redeployed if it's a growing economy and a growing industry.

What we're lacking in Canada in many cases is qualified resources, and the banks have qualified resources. Therefore, I must admit that on the issue of employment, I believe it's possible to redeploy resources internally and maintain levels of employment, as has been indicated by some of the banks.

The Chairman: Since this is an exercise about the future of the financial services sector, do you see the emergence of large banks in the future?

Mr. François Beaudoin: The emergence of large banks?

The Chairman: Larger than they are now.

Mr. François Beaudoin: This is a phenomenon that has started. If it doesn't take place in Canada as we're speaking, it's going to take place elsewhere in the world. This is a process that we'll not be able to reverse in the world, and what could ultimately happen is that the presence of these large players will have a bearing on the Canadian economy. They will be coming into Canada whether or not we change the legislation, because they will be coming through the Internet and they will be coming in through what I would call suitcase bankers. They will be coming one way or the other.

The Chairman: On behalf of the committee, I would like to thank you very much for your presentation. It was very insightful, and we'll be using the knowledge acquired from you to make recommendations to the Minister of Finance.

We're going to suspend for approximately two minutes, and we'll be right back.

• 1913

• 1920

The Chairman: I'd like to call the meeting back to order, and to welcome, from AGF Management Limited, Mr. Blake Goldring; from Mackenzie Financial Corporation, Allan Warren, president of MRS Trust Company; and from Trimark Investment Management Inc., Ms. Kathleen Young, vice-president and treasurer.

Welcome. As you know, you have approximately five to seven minutes to make your presentation, and thereafter we will engage in a question and answer session.

We will begin with Mr. Goldring.

Mr. Blake C. Goldring (President and CEO, AGF Management Limited): Thank you, Mr. Chairman, for your introduction, and thank you, members of the committee, for including us in your review of the future of the financial services sector.

Before I get into the substance of the presentation, I would like to introduce our group and who we represent. Our companies—Mackenzie, Trimark, and AGF—are three of Canada's largest independent mutual fund companies. Together we're responsible for managing over $66 billion in assets for over 5 million unit-holder accounts. We do business in all provinces and all territories through a combined network of large investment dealers and independent financial advisers.

In short, while we do business on Bay Street, most of our business is really done—and our client base is—on Main Street.

[Translation]

The growth in our industry has been most remarkable. Canadian consumers have continued to increase their levels of investment in mutual funds, clearly demonstrating that they are very comfortable with this investment vehicle. For example, in 1987 our industry had net assets under management of some $20 billion, however by 1997 that figured had soared to $322 billion. Not only had the value of assets under management grown substantially, but also the number of shareholder accounts grew from just under $20.5 million to almost $33 million in the same time frame.

[English]

As you can see, ours is an industry that has grown and met the challenges of growth along the way. Mutual fund investments have become better understood, and our customers certainly have shown a higher level of confidence in our funds than ever before. Moreover, the competitive marketplace has forced us, as individual companies, to provide levels of comfort in both the security of investment and customer service that results in maximum benefit to the consumer.

We're here today to talk to you about the future of the financial services sector. In doing so, we want to talk to you about ways that we feel the consumer can be better served if independent mutual fund companies are allowed to compete on a more level playing field.

This would be possible if our money market mutual funds were granted unfettered access to the Canadian Payments Association and Interac. More specifically, we want to talk to you about why we feel money market mutual funds should be allowed full membership in both the Canadian Payments Association and the Interac Association, and why this has to happen as soon as possible.

Our companies joined forces to make representations to the MacKay task force on the subject because we believe our industry has grown and matured to the point that we can safely and competitively enter the payments system with our money market mutual funds.

The Canadian consumer deserves more choice when evaluating how to get the best return on their investments. At the same time, they want to have immediate and convenient access to that money. In our view, allowing customers direct access to the money in their money market mutual funds without having to make phone calls, bank transfers, etc., provides not only a more competitive alternative but also a consumer with a more efficient alternative. This is one of the reasons we feel that membership in both the CPA and the Interac go hand in hand.

Simply put, Mr. Chairman, we believe Canadian consumers have the right to direct access to their money, invested in money market mutual funds, through the ability to write cheques or use debit cards. We also believe the changes we're proposing will produce a more competitive marketplace by levelling the playing field that is currently tilted against us and our customers.

This summarizes the key themes of our submission to the MacKay task force. We had two key points: one, to provide customers with greater access to their money and to make more investment choices available to them in the marketplace; and two, to produce a marketplace environment that is more competitive with equal access for all participants.

Our submission to the task force made eight recommendations, all of which fell within the scope of these two key themes.

• 1925

I'd now like to call upon my colleague, Allan Warren, from Mackenzie Financial, to speak to the report of the task force itself.

Mr. Allan Warren (President, MRS Trust Company; Mackenzie Financial Corporation): Thank you, Blake.

Thank you, Mr. Chairman, for the opportunity to speak to you this evening.

We were extremely pleased by the endorsement of our submission by the MacKay task force. In our principal objective, the report was clear: money market mutual funds must be given full access to the Canadian payments system.

My colleague, Ms. Young, will touch on the conservative attributes of money market funds that qualify them for this access.

On a secondary but important principle of fair play, tied selling was also specifically addressed in the task force report. The elimination of tied selling practices will give the 50,000 life agents, brokers, dealers, and financial planners who sell investment products a fairer competitive environment in the towns and cities in which they live and work. The practice of tying the replacement of an independently selected mutual fund with a bank's investment product to a loan application is abusive, and should result in clearly defined regulatory action.

We are anxious to work with all levels of government on these issues, and swift movement is crucial to our industry. The banks are already well established in the money market niche. Further delay in granting access to the payments system to money market mutual funds could virtually lock fund organizations out of this business.

There is one final issue that was dealt with only obliquely in the MacKay report. Although the broader definition of the payments system includes both the Canadian Payments Association and Interac, the task force recommendation does not specifically deal with Interac membership for money market mutual funds. This is a crucial element to providing our customers convenience and ease of access to their money.

Access to Interac is critical. We need transaction-based entry fees that are level, and the ability to utilize our own debit and credit cards. We would also need to be equal partners in developments that move toward a system, as recommended by the MacKay task force, that has the ability to accept deposits by automated teller machines that are not proprietary to the institution who owns them.

Some of the services we would like to provide are available from participants in the U.S. mutual fund industry. As a result, the money market business in the U.S. is approximately 40 times as large as the attendant Canadian money market business—and more importantly, the business is not dominated by one financial service segment, as it is in Canada—solely as a result of the more competitive environment for financial services. Opening up competition for money market services will also have important positive liquidity ramifications for government securities.

Without addressing Interac within the context of the Canadian payments system, consumers will not be able to have direct access to their funds, and membership in the CPA will not provide the benefits intended by our submission and the MacKay task force.

We need full and equal membership, without any bank, other than the Bank of Canada, guarding the gate, just as the task force recommends, in order to provide the customers we serve with the same secure and convenient access to their funds as bank customers currently enjoy.

Thank you.

Kathleen.

Ms. Kathleen Young (Vice-President and Treasurer, Trimark Investment Management Inc.): Thank you, Allan.

Good evening. It falls to me to conclude our presentation, and in doing so I will touch on two specific issues.

The first issue has frequently been raised by those who are concerned that entry into the payments system by our industry will bring too many risks to the stability of the payments system. We understand these concerns, and would not want in any way to reduce the high levels of confidence that Canadians, and indeed financial markets around the world, have in our payments system.

Safety in the payments system means that participants have both the incentive and capacity to identify and manage the risks to which they are exposed and that the system is governed by a comprehensive and transparent regulatory framework, robust in the face of adverse shocks. In short, the stability of the system is really based on the stability of the participants.

In our case, the participant will be the fund itself, not the company or the manager.

To clarify this point, where the fund is a mutual fund trust, it will act through its trustee, who is its legal representative and in essence its mind and management. The trustee and manager are often the same entity, but it is the assets of the fund that will be called upon to satisfy the obligations arising out of CPA membership, not the assets of the trustee or the manager.

We are talking here about admitting only money market mutual funds, which are comprised of holdings with high security and low volatility. We are well regulated and governed to the point that we believe we bring safety to the payments system as opposed to risk.

• 1930

I will not take the time to go into this in greater detail at this point, but perhaps during the questioning we can discuss this aspect of our presentation.

The other issue we would like to highlight and leave with you this evening is basically two-pronged—that this proposal will bring a more competitive marketplace into being, and that the timeliness of change is very important.

As my colleague mentioned, the banks are already starting to move into the market niche we have identified. Just a month ago, the Royal Bank announced a new type of chequing account—full chequing and Interac privileges with interest rates linked to money market fund rates.

In announcing this account option, a bank spokesperson said:

Many people have funds accumulating in separate savings and chequing accounts, and in short-term investment vehicles such as money market and T-bill funds, T-bills and short-terms GICs. RateLink replaces the need to transfer funds between all of these and lets them save, spend and earn high rates of interest all in one place. It simplifies their cash management so they can earn more while working less.

This, ladies and gentlemen, captures the essence of our arguments in a practical, product-specific form. There are other advantages that the banks have and will continue to enjoy as full service providers. However, allowing money market mutual funds full access and board membership on both the CPA and Interac can reduce these advantages.

If the government accepts our proposals, your constituents will have the ability to work with their local financial advisers and planners to plot their investment strategies, while having at the same time direct and instant access to their funds, in much the same way they would with the Royal RateLink account, as just described. They will be able to pick and choose the right investment for them, safe in the knowledge that they do not have to go through a bank or other intermediary to access their money. They will be able to come straight to us, or any other mutual fund company of their choosing.

Who wins in this proposal? Everyone. The marketplace will be more open, consumers will have more choice, companies will have to be more competitive with their products, and the financial services sector will move forward into the 21st century strong and vibrant. But the playing field needs to be level, and the required changes need to happen soon. The longer the delay, the more time the current CPA membership has to build alternative systems and market products that others cannot now provide. The winners in that scenario will be the current members, and the losers are both the smaller players and, more significantly, the Canadian consumer.

We look forward to pursuing these and other issues with you in the time allotted to us. Again, thank you for the opportunity to present our case.

Mr. Chairman, we'd now be pleased to take any questions the members may have.

The Chairman: Thank you, Mr. Warren, Mr. Goldring, and Ms. Young.

We'll now proceed to questions, first with Mr. Epp.

Mr. Ken Epp: I thought Ms. Redman had to leave; I was going to yield to her.

The Chairman: You're absolutely right.

Mrs. Karen Redman: Thank you, Mr. Chair, and thank you, Mr. Epp.

I do have one question, and that is about the fees that would be established by the CPA members. I know you mentioned in your brief that you'd like to have full membership on those boards. What fees should be charged to new members, and how can we ensure that structure isn't a barrier to financial institutions?

Mr. Blake Goldring: The issue of fee is very important, because of course we as an industry were not allowed to join Interac when it was first set up. If a fee were to be imposed on us now—say, some form of amortized cost—to pay for a system that has long since been built and paid for, we believe it would act as an effective barrier to independent fund companies actually participating.

So it is our submission that we're all prepared to pay ongoing transactional charges. We don't want a free ride, and that's not what we're asking for. What we really have to have is access without a punitive penalty, if you will, to pay for the cost of building the system.

Mrs. Karen Redman: So what's a mechanism to decide on a fee that's mutually agreeable?

Mr. Blake Goldring: I believe the Minister of Finance would have to actually make a direction to put that change into effect.

Mrs. Karen Redman: Okay. Thank you.

• 1935

The Chairman: Ken Epp.

Mr. Ken Epp: Thank you.

I appreciate your succinct presentation. It's well written. It's one of those I can easily highlight with my highlighter to see the main points, and I appreciate that.

I've always wanted, by the way, to meet these people who manage these billions and billions and billions of Canadians' money. They just sit there and smile. It's quite interesting.

I think your presentation is quite clear. You have just a couple of issues that you want to emphasize. On one MacKay talks about, I think you want to strengthen it, and on the other one, he seems to be on the other side. Is that right?

Mr. Blake Goldring: It would be the Interac access as well as the Canadian Payments Association access, linking those two, and also the immediacy of having that happen.

Mr. Ken Epp: Okay.

You talk about all of these different things that will happen if you get access, but isn't it true that the real reason you want it is that you don't want to any longer have to pay fees to the banks to process your funds' transfers? Because that's what happens, isn't it?

Mr. Blake Goldring: No, I think we've competed against the banks, and we believe we can compete and win against the banks. So it's not against; it's really to allow us to grow and thrive as independent organizations.

Mr. Ken Epp: I'm talking about transfers. I mean, as mutual fund companies and as investors, don't you also sell annuities?

Mr. Blake Goldring: Well, perhaps I could defer to my colleagues. AGF does not.

Ms. Kathleen Young: No, Trimark doesn't.

Mr. Allan Warren: No.

Mr. Ken Epp: Oh, you just take money and save it.

Ms. Kathleen Young: That's right.

Mr. Ken Epp: So you don't ever pay it back.

Ms. Kathleen Young: Whenever you want it, you can have it back.

Mr. Allan Warren: Getting the money back is perhaps one of the points of our presentation, and part of our case, because we wish to provide our customers with easier access to get their money back from us, through much the same way one could get their money back out of a bank account.

Mr. Ken Epp: Let me just ask you specifically, then, if I were to invest with you and I would make, say, an annual payment into the fund as well as its growing with interest and the investment value, when I come to that point in my life where I have to, say, roll this RRSP thing into a RRIF, can I do that with you or can't I?

Mr. Allan Warren: Into a RRIF, yes, but none of our organizations provide annuities in the sense of a life annuity.

Mr. Ken Epp: So you can draw on the money as long as it's there, and when it's gone, “gazingo”.

Mr. Allan Warren: Correct.

Mr. Blake Goldring: Perhaps I can add, though, that if you think of your example, in the case here, cheques currently would have to be drawn on a large bank. In other words, your personal information has to be shared with another third-party organization as opposed to you dealing and interacting directly with one of ours. And that's really the bone of our contention here.

Mr. Ken Epp: Okay. What I was thinking, you see, was that right now, if I want to give you some money, I have to write you a cheque. That costs us a transfer fee—either you or me, or both of us—in order for you to get my money. Later on, when you want to give it back to me, we once again have to go through the banks. If you were a full member of CPA and the Interac, then we could dispense with the banks and we could make our own money, right?

Mr. Blake Goldring: We could work through your financial adviser and we could work directly that way as opposed to having your financial information shared with another financial institution.

Mr. Ken Epp: But there would be a cost saving.

Mr. Blake Goldring: We would hope so, sure.

Mr. Ken Epp: Yes, a substantial one, I would think, in terms of the total number of dollars you are transferring pretty well on a daily basis. I would think so, unless— Are you trying to tell me you're just small operators? I don't think so.

Mr. Allan Warren: That's an important point. All cost savings in a mutual fund environment do go to the account of the customer. So cost savings would not accrue to the mutual fund managers such as us. It would go to the mutual fund unit holder.

Mr. Ken Epp: That's basically why the banks, under the present scenario, have an advantage over you, because they don't have the same costs you do, even in just the transfer of the money. Is that right?

Mr. Allan Warren: That's definitely one advantage.

Ms. Kathleen Young: They also do not have to deal through an intermediary or another party in between their customers and themselves. We now have to have that bank positioned between the two of us, which adds costs and infrastructure and acts as a barrier, in essence, for the client to deal with their money on a very efficient and effective basis.

Mr. Ken Epp: Tough question: Have you tried to get into the membership?

• 1940

Mr. Blake Goldring: Frankly, that's what really united the three strong and very largest Canadian independent fund companies. We're all members of the Canadian Payments Association. We all have trust companies. But think of this as really a two-tiered system. It's like belonging to the country club but you can't use any of the facilities. You can't use the dining room. You can't do anything.

Why? Because all sorts of little rules built into the Canadian Payments Association render us as observers, basically, to the association. As a result, there has to be fundamental change. That's why we're here before you today.

Ms. Kathleen Young: I might also add that there would be legislative changes required to the Canadian Payments Association Act itself to allow us to become members, because at the moment, membership is restricted to deposit-taking institutions. We are not a deposit-taking institution.

Mr. Ken Epp: Right now, CPA is basically owned and run by the banks. Obviously, it's in their best interests to make it tough for people like you to get in, because it gives them an advantage out there in the marketplace.

Would you like to see the payments system taken totally away from the banks and run independently by, say, the Bank of Canada? Is that what you'd like to see?

Mr. Blake Goldring: Certainly the principle of having, say, the players of the club making all the rules is something we don't agree with, because we'd be at a real disadvantage, again. I know some of my colleagues have played active roles previously in the Trust Companies Association and things, where really they had difficulties effecting a lot of change, or impacting. As you say, the people who write the rules, or who make the rules, are all the key banks.

Certainly, some form of independence or some rebalancing of association membership— and you can continue right through into organizations such as our industry association, which will not appear before you because, of course, there is a heavy bank element in our industry organization. As a result, we've come together as independents to make this appeal to you today.

Mr. Ken Epp: Okay.

I have a concern with respect to the consumer. I don't really believe what I'm now going to say, so please measure this carefully. I guess what I'm saying is that basically I'm against government having myriad rules and regulations to protect us from ourselves, but isn't one of the dangers of having full Interac ability with mutual funds and other investments that it reduces the security of that as a long-term investment to the individual?

If they have an account balance of, say, around $13,000, which, according to my figures, is your average, and they want to buy a stereo, it's, “Hey, just run 'er through the old Interac”, and they have their money. Now their investments will grow more slowly simply because of lack of discipline, whereas those people who invest with you now find it a little more difficult to get at that money, which really helps them to build for the long term.

Ms. Kathleen Young: I think the focus here is on the money market mutual fund, which is meant to be a fund that is set aside for short-term liquidity. We're not asking for access for equity funds or bond funds or anything like that, where that's meant to be your long-term investment. The access here is only on what we call “open” accounts, which are not registered saving plans as well. So it's open, short-term liquidity money that you're putting aside for that stereo or that boat or that car. It's simply that type of money we're looking at.

Mr. Blake Goldring: One other point is that, in a way, you can look at our three companies as wholesalers in some respect. We manufacture investment products for Canadian investors, coast to coast. However, we sell through the 30,000 independent financial advisers in every single community. These are the people who would be working with presumably your constituents in deciding and helping to moderate any pulling money out to buy stereos or whatever, obviously depending on their circumstances. So there's somebody there to help them.

• 1945

Mr. Ken Epp: Okay.

Now, you want in—and this almost sounds like the Reform Party logo when we started out, “The West wants in”—to the payments system. How much do you want to open it up? If you get in, so does everybody else get in. Is there not a limit to how many players you can have in that scheme?

Mr. Allan Warren: I think you have to look at the underlying security and liquidity of the underlying assets protecting the Canadian payments system. In the case of money market mutual funds, they're restricted to very highly rated liquid securities. To suggest that every other proponent that wants access to the payments system can support it with an equal asset is questionable, but in our case, we feel what we're proposing meets the qualifications to maintain the security and liquidity of the Canadian payments system.

Mr. Ken Epp: We had a presentation from an individual who has a relatively small business—it's just a little smaller than some of the banks here in this country—running a payroll system. If he wanted in, would you object to having him in as a player?

Ms. Kathleen Young: I think that would depend on what regulatory regime the organization was subject to. Mutual funds are subject to very specific regulations with respect to the types of investments, the diversification of assets and that type of thing. We are also registered with the securities commissions all across Canada.

So I think you have to look at whatever regulatory regime exists for a specific organization and whether they can satisfy certain requirements. Are there some oversights and supervision? Is there a framework under which they operate? You have to determine if that would protect the safety and soundness of the payments system.

Mr. Ken Epp: So if there was a proper framework, you wouldn't object.

Ms. Kathleen Young: As I say, you would look at the criteria and say, yes, they do, or, no, they don't.

Mr. Ken Epp: Because if the Bank of Canada were to run this thing, undoubtedly they wouldn't let in anyone that would jeopardize its safety, I would think.

Ms. Kathleen Young: Obviously, yes; absolutely.

Mr. Ken Epp: That sort of goes without saying in this environment.

Mr. Chairman, I have a mental blank here. What was I going to ask next?

Oh, yes: How important is it to you to have instant clearing of your funds? Is that a factor?

Mr. Allan Warren: Could you explain “instant clearing”?

Mr. Ken Epp: It's instead of having to wait until tomorrow if you are processing a cheque, either to receive it or get it. If you receive it, and you deposit it, it's not good until the next day for us ordinary Canadians. Does that affect you at all? Is that one of the other reasons you want into the payments system?

Ms. Kathleen Young: I don't think it's a matter so much of getting the money in, because that part of the system operates well for us. I think it's a matter of giving the consumer a choice to get their money out easily. This is what the focus is on in terms of getting access.

I don't believe much would change at the front end in terms of depositing cheques coming the other way, but there would be a significant change to the consumer in terms of how they could deal with their redemptions. They now wouldn't have to request a cheque for us that has to go in the bank. They could write their own cheque or use their own debit card.

Mr. Ken Epp: This sounds very altruistic. You seem to be just saying you want to help the customer, the consumer, and don't really care about yourselves. All your emphasis seems to be that it has a great advantage to the person dealing with you—and I guess to keep them away from the bank's doors.

Ms. Kathleen Young: We believe it will level the playing field in how we deal with the banks across the country, and it gives the dealers and planners who deal with the consumers a better way of establishing a fuller relationship with their clients that does not include a bank, necessarily. So it gives the dealers a better opportunity to do that and to focus on their client more efficiently.

Mr. Ken Epp: Okay.

Well, thank you. I appreciate your answers.

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

[Translation]

Mr. Desrochers.

Mr. Odina Desrochers: Many of the witnesses who have appeared here before us have talked about the MacKay Report and about the services, competition and things that they could provide to consumers.

• 1950

In your particular case, what advantage could you provide to consumers by having access to Interac and, like the banks, the power to issue a credit card? Will it be less expensive? We know that, right now, most credit cards charge the same interest rate. If you were given the opportunity to compete with the credit cards currently available, would there be any advantages for the consumers? We often hear you say that you are ready to provide services and to penetrate the market, and we're wondering what priority you give to the interest of the consumer.

[English]

Mr. Allan Warren: There are three main benefits to the consumer. First and foremost is higher yield in their deposits.

As my colleague said in her presentation, the banks are only now responding to the competitive threat to bring out products linked to money market investments. Historically, as we all know, yields on savings and chequing accounts have not even approached money market yields.

Second, perhaps every deposit with a bank currently demands deposit insurance, which is costly, and that cost is passed on to the consumer. In money market mutual funds, there is no deposit insurance because of the high quality of the investments. Therefore, that cost would not be passed on to the consumer.

As my colleague answered previously, the primary benefit is quicker and more immediate access to the client's money as opposed to the two-stage process they now have to go through to get at their money in the money market mutual fund.

[Translation]

Mr. Blake Goldring: Another aspect of things is to give them a wider choice, which is also extremely important. At present, choices are limited and it is important to give Canadians more choice.

Mr. Odina Desrochers: If I understand correctly, then, the people who would have access to Interac or to a credit card from you would be expected to put money into your companies first. It would be a closed group. I am saying that the services that you would offer would not be available to the general public but only to those who invested money with you.

[English]

Mr. Allan Warren: I guess in the sense that an investment with us would be the equivalent today of a deposit in a bank account, it would be not exclusive to any one group of Canadians in the sense that they could have their paycheque deposited directly into a money market mutual fund, yielding a higher rate of return than had that money been deposited directly into a bank account, and had the same access to that money via Interac.

[Translation]

Mr. Odina Desrochers: I would like to come back to the credit card. Would it be your intention to offer it to all clients or only to those who invested money in your companies?

[English]

Ms. Kathleen Young: We're not planning on offering credit cards at all. It's debit cards, the cash equivalent. We're not looking at credit at all at this point. It would only be debit card.

[Translation]

Mr. Odina Desrochers: Thank you very much.

[English]

The Chairman: Thank you, Mr. Desrochers. Ms. Leung.

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

I enjoyed your presentation. Certainly as relating to mutual fund management, you have had pretty good success and a good track record, and I'm sure you're doing well now. Of course, your concerns are very realistic ones, but in the meantime, I feel maybe your concerns are overrated.

I'm assuming most of your investors are of middle and upper-middle income, and—

Mr. Blake Goldring: Excuse me, but that's not the case.

Ms. Sophia Leung: You don't think so?

Mr. Blake Goldring: Absolutely not.

Ms. Sophia Leung: What figures do you have?

Mr. Blake Goldring: The average investment portfolio somebody has is in the $7,000 range. Annual investment during RRSP season is way below the $14,000 maximum. It's about $3,000.

In fact, if I might suggest, there's no more democratic investment product than a mutual fund, because people can invest $50 a month in PAC plans and they can save for their retirement. So it appeals to all Canadians at all levels.

• 1955

Now, we do have a high-net-worth group in our company, but I can assure you, the average mutual fund investor—and I'm sure my colleagues would agree—

Ms. Kathleen Young: Yes, that holds true for our company as well.

Ms. Sophia Leung: I'm trying to measure here what kind of investor it is—middle range or lower range or higher range—when you talk about competing with the bank.

Mr. Allan Warren: Historically speaking, perhaps it was more excluded to higher income, but with the growth of the independent dealer group, totalling now some 30,000, and 50,000 if you include life agents, they've done a great job of servicing the Canadian consumer, and now a higher proportion than ever before of Canadian consumers own mutual funds.

Ms. Sophia Leung: I see. Perhaps this is based on my limited experience, but I think most knowledgeable or educated investors do not go to banks—and maybe this is an assumption I have—but still use financial advisers, investor brokers. That's probably quite true. You don't just go to a bank; the bank is where you make deposits and payments. I guess the confidence still lies with your brokers.

I hear your concern very loud and clear, but what is the solution? You have suggested a few things, that's true, but as the government, how can we intervene in some way?

Mr. Blake Goldring: You can play a key role by making sure our submission, our appearance, is part of your report, linking these two points, and I think urging action by the Minister of Finance to effect the changes necessary.

Irrespective of the bank mergers, I want to make a point that we feel very strongly about. We have no fear of banks coming together or not, because we compete against them today. We competed against them last year and the year before. We also compete against the most major American companies who are up in Canada. So competition is something that, for all of us here, we're not strangers to, but we do really have to get some immediate changes as quickly as possible in advance of what happens with these mergers. That's going to follow a very important process, but if we could have one wish, it would be that changes were done as quickly as possible.

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

The Chairman: Ms. Bennett.

Ms. Carolyn Bennett: In the changes around CPA and Interac, I mean, you're offering a pretty safe product, and I guess one of the things we've been wondering is whether or not you think you would then need to be a member of CDIC.

Mr. Allan Warren: As president of a trust company—and we are a member of CDIC, but here we're representing the mutual fund part of our business—I would say we don't feel that insurance is required. A deposit-taking institution takes that money as its own money and reinvests it in a range of investments. That would range from residential mortgages to commercial real estate, and lately to hedge funds. Money market mutual funds invest in only high-quality liquid securities. So we don't see the obvious need for a layer of insurance on top of that. And as we all know, the cost of insurance inevitably flows down to the consumer.

Ms. Carolyn Bennett: I guess that's what I was wondering, that if you were with the CPA and Interac, then somehow the consumer wins if there's not that additional cost.

Mr. Allan Warren: Correct.

Ms. Carolyn Bennett: Okay.

In this mélange of federal-provincial regulation, you are regulated provincially, correct?

Ms. Kathleen Young: That's correct. We are registered with all of the securities commissions across Canada in every province and territory, but the securities commissions also act in concert on many of the rules that affect the mutual fund industry. We have the Canadian securities administrators, and they have issued policy statements with respect to mutual funds that apply across Canada. They are the same rules all across the country.

Ms. Carolyn Bennett: And do you think there would be a place for a national securities commission?

Ms. Kathleen Young: I think ultimately we're going to see some movement in that direction, or a more cohesive group working together.

Ms. Carolyn Bennett: In terms of a federation or something.

• 2000

Ms. Kathleen Young: That's right, yes.

Ms. Carolyn Bennett: It's interesting that you say that most people come to you via a financial adviser. I realize there's an institute of financial advisers, but there are lots of people who call themselves financial advisers. Do you think we as a government should have any say as to who gets to call themselves a financial adviser? Is that something that's done?

Mr. Blake Goldring: That's actually being done at the provincial level right now. There are also national organizations. I know with the Stromberg report there's been a real call towards stronger education.

I talk to all of the major independent firms across Canada who are selling mutual funds, among other investments, and their compliance departments have really beefed up. The education component is really right up there at the top of the list.

So I think that's going to happen regardless.

Ms. Carolyn Bennett: And do you think consumers are well served now in terms of knowing who they're getting advice from?

Mr. Blake Goldring: It's certainly much better, I think, and it is improving. It's dramatically improving, I'd say.

Ms. Carolyn Bennett: As a physician, I've always thought that one of the problems with perhaps the chiropractic college was that there were good ones and then ones who wandered off into things they weren't actually trained to do. Maybe they weren't as good at tugging the leash, so they ended up with a reputation because they were off in areas they didn't really understand, whether it was naturopathy or things they weren't trained to do.

From a consumer point of view, you want to know, when you go to somebody, that this is actually what their expertise is in. But you feel the consumer is well served.

Mr. Blake Goldring: Absolutely. Apart from the individuals having to be registered in the province in which they're operating, their firms also have a compliance officer, who's responsible for making sure— The “know your client” rule is number one. It's such an important touchstone—

Ms. Carolyn Bennett: But you haven't seen any examples of— There seem to be a lot of people who are leaving other professions, taking weekend courses, and calling themselves advisers, when actually they're insurance salespersons, or come from very many different areas.

Do you think it's fine when, really, their only expertise is in one area, and they're steering their clients mainly to annuities, or mainly to one segment of the buffet?

Mr. Allan Warren: There's no doubt that with the continued increase in demand for financial advice there has been a dramatic increase in the number of people in the financial advice-giving channel. The recent creation of the Mutual Fund Dealers Association is a response to that, and it will result in quite an increase, in fact, in regulation of mutual fund dealers, which will address some of the concerns and perhaps observations you've made.

Ms. Carolyn Bennett: When people want to buy an RRSP and their accountant tells them to go and borrow the money from the bank to do this, because they'd be better off financially to go and do that, do you find there's been any problem with the banks lending the money to buy your RRSP?

Mr. Blake Goldring: That's clearly an issue, and it's one we were delighted to see dealt with in the MacKay report. We feel strongly about prohibiting tied selling. This is actually one of the points we raised in our submission to the MacKay commission. It can well be an issue, because anecdotally we've heard cases, and I'm sure if we dug deep enough we might find some actual cases. So certainly it's a real issue.

Ms. Carolyn Bennett: This is my last question. There's a section in MacKay on financial holding companies. We haven't really heard anybody who wanted one, in terms of the people who have come before us, but would you take advantage of such a new system, and what would it allow you to do that you can't do now?

Mr. Allan Warren: I think the issue of financial holding companies is particularly a concern for banks because of some of the restrictions in the current Bank Act. I don't think any of our organizations are currently affected by those restrictions. All three organizations are mutual fund companies to begin with, and we all hold trust companies in addition. In addition to that, some of us have securities dealers and mutual fund dealers. So we've never been obstructed by the limitations that perhaps the banks are referring to.

• 2005

Ms. Carolyn Bennett: Thank you.

The Chairman: Thank you very much, Ms. Bennett.

On behalf of the committee, I'd like to thank you very much for an interesting panel. We'll certainly use your advice as we make recommendations to the Minister of Finance on this very important issue.

The meeting's adjourned.