[Recorded by Electronic Apparatus]

Thursday, September 19, 1996

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[English]

The Chairman: Order.

Under the rules of procedure we have waited the required time, so I recognize a quorum.

The finance committee of the House of Commons is beginning its review of the 1997 white paper proposals for the financial sector legislation.

We welcome before us officials from the Department of Finance, who are going to give us an overview of the proposals for change.

Our witnesses are Mr. Bob Hamilton, assistant deputy minister, financial sector policy branch; Mr. Frank Swedlove, director, finance sector division; Martine Doyon, chief, policy development section; and André Brossard, director, legislation and precedents division.

We welcome you and thank you for being with us.

Mr. Hamilton, are you going to start?

Mr. Bob Hamilton (Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance): Thank you very much, Mr. Chairman. It's a pleasure to come in front of the committee to, as you indicated, provide an overview of the 1997 review of the financial sector legislation, the proposals that were put forward in the paper that Secretary of State Peters tabled on June 19 and had a discussion about with this committee on the following day, June 20.

We have prepared a handout that takes you through, in an overview way, the paper as it's presented. I'd like very briefly to walk you through that hand-out. I won't go into it in detail. I'll leave that to the questions that you may pose that I and my colleagues will do our best to answer.

Before turning to the handout, let me set the context briefly.

In 1992 there were very sweeping changes to the financial institutions legislation, removing many of the restrictions that prevented financial institutions from fully competing with each other, allowing them to diversify into new lines of business - a very fundamental set of changes to the financial sector statutes.

Because of the breadth and the scope of those changes, it was decided that there should be a review of that legislation after five years, and a sunset clause was put in the legislation such that it would expire on March 31, 1997. That brings us to the deadline we have in front of us. The proposals we're putting forward in this paper, subject to consultation, hopefully will be implemented by March 31, 1997, before that sunset date.

If you look at the developments that have happened since 1992, there have been several causing us to look at this legislation. There certainly has been a restructuring and a consolidation within the financial sector in Canada. Obviously there is the internationalization, the globalization of the way in which services are provided, the technological increases; there have been significant developments since 1992. Also since the 1992 reforms a set of legislative proposals has been brought forward in Bill C-15 to enhance the safety and soundness of the system. So we have had changes since 1992 that we've had to incorporate in looking at the legislation as it stood.

When we entered into the 1997 review process we had two basic questions in mind, given the sweeping nature of the changes that were there. One was if the legislation was functioning as intended. There were ideas as to how the legislation should function when it was put in place. Are those being realized, or are there areas in which it's not working as it should and therefore it should be changed? Secondly, in light of the developments that had taken place since 1992, was the legislation still adequate? So, if we look at the developments that I referred to earlier, did those require any changes to the legislation to make sure it was still working appropriately?

That's how we began the review process. There was a considerable amount of consultation throughout this. In March 1995 we called for submissions from interested parties, received over 30 written submissions, and held many discussions with a wide range of groups, including members of the financial sector obviously, consumer groups, and individual firms.

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The overall conclusion, if I can state it just very broadly at this moment, was that the legislation that was put in place in 1992 was generally working well, that there wasn't a need for a fundamental reworking at this stage. So at this five-year review it was really more a case of making some important adjustments to the legislation but not rethinking the whole underlying framework and structure that it put in place.

That's obviously a very broad statement and within that it's fair to say that a number of issues were raised by parties and some of them have led to the kinds of changes we are proposing.

One of the important areas that was raised was the whole issue of concentration and competition. We did a considerable amount of work through the consultation process in talking to academics, experts, and people at the Competition Bureau to try to understand if the framework that was put in place was generating a competitive environment.

Again, overall the conclusion was that although there had been some increase in concentration in certain parts of the sector, we felt there was a competitive environment in all areas.

It's important here to say that when one looks at this, competition is the key issue. You can have some degree of concentration while still having a very competitive industry. If we look at the sectors from the perspective of product market types, we see that there are in fact a lot of competitors in these areas and there is a competitive environment. So we didn't feel that at this time there was a need for a fundamental reworking to address issues of a non-competitive sector.

That was an important issue that came up and one on which we did a considerable amount of work.

Another issue that came up was that of business powers. As is indicated in the paper, it was decided that this was not the right time to change in any significant way the business powers, what different institutions could or could not do.

As I mentioned, some of the other issues that came up did lead to some changes that were put forward in the paper.

I'd like now to turn to the handout that I provided to take you through what is in the paper very much an overview sense, and then we'll follow up on some of the details through some of the questions you may ask.

The first page of the paper gives you a summary of what's in there. As indicated, coming out of the consultations the direction taken was to put some specific changes in this paper to be implemented by the March 31, 1997 deadline, proposals to strengthen consumer protection, looking at the area of privacy and improving access to basic services and information. I'll talk more about these in a moment.

The second major area is proposals to streamline and update the legislation; that is, as we look at the legislation as it performs, are there some areas where we can make some changes that will make it work more efficiently without changing the basic intent and other areas where it needs to be updated in order to reflect some of the developments that have taken place over recent years?

The final element on this page, and perhaps in many ways a very important one, is the implementation or the proposal to set up a task force to look very broadly at the financial sector and the policy framework in Canada for the financial sector. As we looked at this through the 1997 review, many piecemeal issues came up that were being debated in a very isolated and piecemeal way. The conclusion was that, in light of the changes that are taking place in the financial sector internationally and domestically, it would be necessary at this time to set up a task force that could take the broadest look at the sector that it could and figure out in light of the international environment what kind of a policy framework should be implemented in Canada to try to ensure that the financial sector is both vibrant and a healthy part of the economy, providing consumers with the best services possible at the lowest prices. Obviously it also would ensure the safety and the security of the financial system.

There was a very broad mandate for this task force.

It was indicated in the paper that the details of the task force would be coming forward in the fall, and that is still the intention. I'll talk a bit more about the task force towards the end of discussion of this handout.

Also, not listed on this page but a part of that exercise was the appointment of a payments advisory committee to do a review of the payments system. The payments system had not been reviewed for a number of years. Obviously there have been very significant developments in technology, and we expect that those will continue. So an important part here was to set up a committee to look at payments systems issues, and again I'll speak briefly about that in a moment.

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Let me turn to the individual elements. I'll just give you a flavour of the kinds of measures in each area.

If we look at strengthening consumer protection, clearly this was one of the messages we heard in the consultations. Is the legislation acting to ensure consumers' interests are being best served? It's an important area for consumers. We recognize financial institutions have made efforts in this area. They've participated in developing the code for the Canadian Standards Association and they are adopting that. What we wanted to do here was to formalize that somewhat and build on these advances that had been made. We're going to propose introducing privacy regulations that would see the institutions have a code of conduct, have reporting to the superintendent; those kinds of measures, trying to build on the progress that has been made there but to formalize it somewhat.

We're also cognizant of the fact that Industry Canada and others are looking more broadly at privacy. We want to make sure we do what we feel we need to do now in putting in place a solid privacy regime, but we also want to be conscious of the fact that this is being looked at from a broader perspective. As those changes come down the road we want to make sure we have the flexibility to adapt to the broader framework that may be put in place. So in here there are some important initiatives in the privacy area.

The second area mentioned on the page is cost and availability in the disclosure of financial services. It has come to our attention that in some cases it can be very difficult to access basic services, particularly for low-income individuals as they attempt to open accounts and other such things. In this area the paper does not propose legislative solutions but instead proposes that we work together with financial institutions and community groups and consumer groups to try to find solutions to these tricky issues. It's not always straightforward to determine how one can improve access to accounts. There is always a balancing that goes on.

I've already started discussions with certain groups to try to find ways by which we can bridge these gaps and find creative solutions to the kinds of issues that are out there and being brought to our attention. As well, we are talking to banks and consumer groups to try to find some way to improve and simplify the information on fees that banks charge, again, not taking the legislative approach but trying to find ways by which we can improve the information out there so it's understandable and accessible to consumers.

The other proposals mentioned here, tied selling and the right to prepaid mortgages, are areas where we've indicated we want to talk further. There isn't a specific proposal in the paper, but in the area of tied selling we have heard some concerns about coercive or tied selling on behalf of some financial institutions. This is obviously a delicate area, because one can go from one end of the spectrum, where products are linked together and that can convey very important benefits to consumers, to the other end of the spectrum, where one does worry about a situation where there is coercion or restrictive activities that limit competition.

The Competition Act does have safeguards against anti-competitive behaviour. We wanted to talk to the interested parties further, to try to get a sense whether the current regime is working properly or there is a need for some additional measures.

The second area mentioned is the right to prepay mortgages. Currently we have a differential situation where in mortgages of less than five years there is no legislation on the prepayment penalties and options, whereas for greater than five years there is legislation and a maximum penalty of three months. We have put forward the idea here that we want to consult on trying to eliminate that distinction in term and come up with a standardized way of calculating these prepayment penalties and options.

On the next broad category of easing the regulatory burden, again as I mentioned earlier, this is where we've looked at the regulations and tried to find areas through our analyses and consultations where we could simplify and streamline the area without changing the basic intent. Here we've listed a number of areas that are indicated in the paper.

The first is overlap and duplication between the federal and provincial regulations. This is an ongoing exercise we are engaged in. Obviously progress in this area has been somewhat slow, but we are seeing some signs of progress. The areas identified in the paper are the trust and loan area, where there has been some movement forward. We do intend to introduce some minor changes in the legislation in that area and discussions are ongoing.

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In the securities area, we are discussing with the provinces the idea of a Canadian securities commission. This is an idea about which the provinces have talked to us. At the recent first ministers meeting there was an indication from eight of the provinces that they were interested in pursuing this idea further, and we're undertaking those discussions now.

The third area is in the regulation of credit union provincial centrals. Federally we regulate the national central; the local credit unions are regulated at the provincial level. At the provincial central level there is regulation by both levels of government, and in the paper we've put forward that we're willing to discuss with the provinces a way whereby we could get out of regulating those provincial centrals and leave it to the provinces.

The next area worth mentioning is the subsidiary requirements in the legislation. As it stands, there is a requirement that financial institutions can undertake certain activities but only through subsidiaries. We have looked at those provisions and have put forward a proposal that says that, for data processing activities and specialized financial corporations, those activities can now be carried on in-house.

Originally these subsidiary requirements reflected either solvency concerns or an uncertainty in a new area as to how it was going to evolve and what some of the risks were. We've looked at it, and in these two areas we're comfortable that these activities can be carried on in-house in order to help reduce the operational costs of carrying out these activities.

The next area is the deposit insurance opt-out. Here large wholesale banks have indicated to us that where they have large corporate customers, many of which exceed the maximum threshold for CDIC insurance, there was no need for them to be CDIC members. In being members, they're subject to all the requirements that CDIC imposes on them: reporting requirements and others. So it was mentioned that perhaps they could opt out of CDIC insurance in those cases where they weren't undertaking retail activities. We put forward in the paper a proposal that they should be allowed to do that, and we're now discussing with the institutions exactly what the requirements would be, what the conditions would be, how that would work, and how it would be enforced - but, again, as a way of reducing the burden for those institutions where we feel the burden perhaps does not justify the benefits it would convey.

Finally, there is the foreign bank entry regime, which hasn't been significantly altered in a number of years. There had been concerns about the approval process and if there were ways in which we could streamline that, and about inequities between domestic and foreign institutions. We've suggested some changes in this area to try to address some of those concerns.

The next broad area is fine-tuning the legislation. Again, these are areas where we're not suggesting major changes but want to look at making adjustments to reflect either changes that have taken place since the 1992 legislation was put in place or areas in which perhaps it's not working quite as well as it was intended to work.

Just briefly on corporate governance, provisions were updated in 1992 and I think that generally we feel they're working well, but they need to be changed to reflect the evolving standards. There has been a considerable amount of work and attention in the corporate governance area, and there are some proposals in the paper that try to update these provisions to reflect those changes.

On joint ventures, there are now restrictions on what financial institutions can do by way of joint venture, the so-called 10/50 rule, in place largely for solvency concerns. We've had a careful look at that and have decided that we can remove those restrictions to provide more flexibility for financial institutions to enter into joint venture arrangements, particularly offshore.

The third area is the access to capital for mutual insurance companies. In 1992 changes were made to allow these companies to issue preferred shares and allow small mutual companies to convert to stock companies or demutualize. In this exercise we're looking at further changes that would allow these companies to issue participating shares of a special type and provide more flexibility in the demutualization regime and extend it to large companies.

Finally, there are some amendments to the Bank of Canada Act, which are largely technical changes trying to remove outdated provisions and update that portion.

That represents the end of one part of the exercise. Those are the changes we're either proposing or discussing right now that would be implemented as part of the new legislation to be put in place before the March 31 sunset.

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As I indicated in the paper, there are two other key components, one of which is the task force on the future of the Canadian financial services sector. I won't go back over that same ground, but obviously there was a feeling that we need to take a careful look at the policy framework for financial institutions as we head into the 21st century. A task force will be struck. We indicated the mandate and the composition of the task force would be coming forward in the fall, and I would expect over the next month or so we would be coming forward with those details. The idea would be to take the broadest possible look at the sector and also to reflect the international developments and the changes in technology that are out there and taking place.

The other area, which I did mention briefly, is the reviewing of the payments system. It's obviously a more technical and specialized area than what the task force will be looking at, but nevertheless very important, an important part of the good functioning of the Canadian financial system. We have indicated we would review this with the help of an advisory committee. A press release was issued and it indicated who would be on this advisory committee. We hope to set up the first meeting of that group at some time over the next month or so. That group consists of members from the banking insurance industry, from retailers, consumer representatives. It really does take a broad look at the sector and we're trying to incorporate input from all avenues.

It is recognized that the payments committee will be looking at some issues, particularly access to the payments system, that will be of interest to the task force. We are making sure there's a good link between the activity of the payments committee and the activity of the task force, so when the payments committee looks at an issue of significant magnitude it's going to be important to the task force that we have that good link established. The payments committee will look at many other issues of a very technical, specific nature, but they will not likely be of interest to the task force. That group will undertake its work over the next fifteen months or so.

That takes us through what's in the paper. Just in closing, I would say we called for submissions by August 30, and to date we have received over fifty submissions, I believe, on the proposals that are in the paper. If I could generalize very briefly, I think the overall sentiment is supportive of the changes we're proposing to introduce and the importance of making some of those changes in time for the March 31 deadline. It's also supportive of having a group look very broadly at the financial sector and the policy framework that needs to be put in place.

Obviously many other specific issues have been raised and we are looking at them and discussing them. I'm sure in the course of your hearings you'll hear from many of those people.

We aim to table legislation or introduce a bill in the House by the end of this year, to try to meet the March 31 sunset date. I look forward to the input of this committee.

Now my colleagues and I would be happy to try to answer any questions you may have.

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

We'll start with Mr. Grubel, please.

Mr. Grubel (Capilano - Howe Sound): Thank you very much, Mr. Chairman.

As I look at what you have done and what is to be done, I have the feeling that all the hard questions have been deferred to the task force to be established. I just wonder why there has been this delay. Now you're going to be rushed in order to get this into play. Why was this task force not formed at the time when the mandate was given? It looks to me as if I could have predicted the globalization of financial markets, increasing the use of technology, and changing competitive landscapes were going to be the big issues you faced two years ago when you started all of this, or whenever it was, so why was this deferred?

Mr. Hamilton: The reasoning behind the way we proceeded is that a set of changes such as the ones I've described were important to put in place now. As you say, they're not the broad and in some cases very difficult and complex issues the task force will look at, but they are changes that are important to many parts of the financial sector. It was decided that we would try to get those changes in place, put them forward before the sunset date, and take the time to establish a task force to look at these complex issues.

You're right that in many ways they're very difficult. We wanted to make sure we allowed sufficient time for that. That's why the task force process was put in place. We know they'll take 18 months or whatever time. That's our expectation now. It could be slightly more or slightly less.

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We hope they'll make a very thorough review and analyse these issues. In putting forth changes for March 31, we didn't think we should try at that time both to do the work of the task force and also to come up with changes that could be implemented in time for that.

So we really are on a two-track process. Let's assess a set of changes that are important and will be important for the financial sector and look at the very difficult, tricky, complex issues via the task force and give it sufficient time to report.

I can't debate your basic point that many of the issues that one thinks about as being very broad and difficult will be assessed by the task force.

Mr. Grubel: You keep saying ``broad and difficult''. They will remain broad and difficult. They were broad and difficult two years ago.

It seems to me as if the way they are being written now is just playing politics. We know that in 18 months the election will be over. This government will have successfully avoided doing what is right for Canada, by not looking at things that are being demanded by many sectors in the market. We know that world development in technology and competition would require that we adapt our own legislation for this.

Why was this not done so we could have the answers to those questions before the election, when the legislated mandate was that you should be coming down with answers to those things?

Mr. Hamilton: As I indicated, all I can really repeat is the approach we're taking. I'm quite hopeful that the task force process will produce a very thorough review and that at the end of that process there will be good recommendations as to what kind of a policy framework we need in Canada.

As you say, we're now in an environment in which things are changing technologically. The way in which business is done is changing. We've seen indications of it now, and I expect that we're going to see more as we move into the future. So I hope that will be a focal point for the task force.

Mr. Grubel: The American system is changing and we're lagging behind. The European systems are changing; we're lagging behind. Mergers are taking place everywhere, new products are developed, but we restrain entry and competition.

I'm very disappointed. Of course, I know you are a civil servant and you're doing what your masters are telling you. What I just put out as politics is, of course, for the record so people will understand that in fact it is a political decision that has produced this outcome and that the hard answer, the answer that consumers and the industry want, will not be forthcoming until well after the next election.

The Chairman: Mr. Grubel, I'm sure if you have suggestions as to which financial institution should have enhanced powers, this committee would welcome those views with interest and would be prepared to report on them. Thank you very much.

Ms Whelan.

Ms Whelan (Essex - Windsor): I have a couple of questions. I don't want to be seen as following along the same line as Mr. Grubel, but I'm a bit concerned about the talk about the entry of foreign banks into Canada's market. I'm not concerned because I think they should be blocked, but I wonder if you could explain what the serious complaints about the existing rules are so we could have a bit of background in that.

Mr. Hamilton: Okay. Perhaps I'll start, and I might ask Mr. Swedlove to supplement with some details.

There are two aspects. We have to recognize that foreign banks are operating in Canada through subsidiaries, schedule II banks that are there. One of the issues that had come up through the consultation period was whether we would also allow branches to operate, and that's one set of issues.

Secondly, there was the question of, in terms of foreign bank entry into Canada, whether with the current process there are some difficulties or some inequities.

So I would separate it into two questions.

On branching, it was decided at this time that we didn't want to make changes to the regime to allow branches to operate, although, as I mentioned, there are subsidiaries that can operate in Canada on the same basis as Canadian banks do. That is a legitimate question for the task force to look at in terms of what the role of foreign institutions is in the Canadian economy. So that decision was taken.

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Then there were also some changes proposed here to try to streamline the foreign bank entry regime. Perhaps I would ask Mr. Swedlove to outline those changes and what the concerns were and why we have proposed changes.

Mr. Frank Swedlove (Director, Finance Sector Division, Department of Finance): As part of our desire to reduce regulatory burdens, we looked at the foreign bank entry regime. We thought that several improvements were possible.

One area we had a desire to deal with was the issue of banks that are regulated as true banks in their home jurisdictions and how they should be treated when they wish to operate in Canada. What we have stated in the paper is that if these banks wish to carry out banking types of activities in Canada, then they should enter into Canada as regulated financial institutions.

Also, with respect to financial institutions or institutions that are not regulated as banks in their home countries, often called near-banks, these were subject to a fair degree of regulation in Canada. While they are defined under the Bank Act as foreign banks and therefore are required to seek approval for entry into Canada, we felt that once they had entered into Canada a lot of the restrictions that applied to these near-banks - and these are companies like GMAC and Ford Credit and GE - should no longer apply. So the regulatory burden that applied on those types of institutions will be reduced.

Ms Whelan: When you say that the white paper did not propose to allow foreign banks to enter Canada as branches, I'm concerned from the standpoint of consumer protection and from the standpoint of the value to the consumer and the number of small communities that depend on the branch network in Canada and the local economies that revolve around that across Canada because of the remote communities.

How can we anticipate what's going to happen with virtual banking? I understand that you've asked the task force to look at certain questions, but the recent announcements of ING in VanCity speed up the process dramatically. I'm concerned that the branch network that's out there could be dramatically affected. I believe that a number of communities in Canada depend on those branches and the survival of the branch system.

I'm just wondering if the Department of Finance will be looking at these issues at the same time as the task force will be.

Mr. Swedlove: There is just a bit of confusion when we talk about branching into Canada. The issue to which Mr. Hamilton referred is the question of the ability of a foreign bank to establish a branch in Canada without establishing a subsidiary operation. There are no real restrictions that we apply to foreign banks in terms of their ability to establish the subsidiaries and then to branch widely across Canada. Non-NAFTA countries need to seek an approval to establish new branches, but those approvals have always been given. So there's no inability for, for example, the Hongkong Bank to continue to expand its branch network throughout the country.

What Mr. Hamilton was referring to was the ability of a foreign bank not established in Canada to establish a branch operation without being incorporated in the country.

Traditionally, when foreign banks have established a branch in another country, they have tended to establish it in the largest centres of the country and to provide services to their corporate clients. So it's quite different from when one talks about the branch network of our major institutions.

Ms Whelan: I'm not sure you're understanding my question exactly. My question is beyond the issue of just foreign banks. With virtual banking on the horizon, how are we preparing to deal with that?

I understand that certain questions are being referred to the task force. I'm just suggesting that certain institutions are suggesting that they're going to be here much sooner than the task force recommendations are. So we have to be prepared for that. I'm very concerned about the Canadian consumer and their abilities and the focus in small communities, especially in rural Canada, across this country around the branch network that presently exists. If the possibility of virtual banking arrives sooner than we'll have dealt with it, what's going to happen to that and how are you preparing for that?

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Mr. Swedlove: Indeed, I think we're on the verge of seeing virtual banking. There have been several announcements in the press recently about existing banks establishing operations on the Internet or through telephone banking, and then, indeed, whole new banks that have no bricks and mortar at all.

This is all permitted under the existing legislation. Indeed, I think from a Department of Finance perspective we see this as being an advantage in terms of providing greater choice to consumers and an ability to service more consumers in their homes.

I think we're on the verge of seeing that. We don't really have to establish anything new in legislation.

Having said that, of course even a virtual bank will need to meet all of the regulatory requirements in place. They will have to keep the proper books. They will have to be regulated by the Superintendent of Financial Institutions.

So it's not a matter of waiting for change in order to permit virtual banking to take place. I think we're on the verge of virtual banking and we will be seeing that.

To what extent virtual banking will lead to a very different kind of structure of our banking sector over time - I don't think it's going to be anything overnight - is something that I think the task force will want to address, because it will eventually have an impact on the structure of the banking sector and the way in which financial service is delivered in this country.

Mr. Hamilton: To add to that, although the task force obviously is going to look at these issues and watch the development, it's not the case that we at the Department of Finance or at the superintendent's office are not going to be paying attention to these developments as they go on and seeing how things are developing. If problems start to emerge - not to say that we think they will - then obviously we're going to be paying attention.

A lot of developments are going on out there, and it's not the case that only the task force is going to be looking into that. We are going to be monitoring and keeping track of what's going on and making sure that we're aware of any problems that are arising because of the different ways of doing business.

Ms Whelan: I guess my concern again - and I'm going to raise it so you understand what I'm talking about - is the small rural communities that we have in Canada, remote communities that, because their communication links just are not there, will not have access to virtual banking if it arrives on the horizon within six months or a year.

So the reality is that service charges and service fees that Canadian consumers are presently subject to are the same across the country based on the service and level of service that exists. If there's a threat to that service, what's going to happen to those small and remote communities?

I think we're talking about the issue of consumer service and consumer protection. I'm very concerned that when we talk about banking, we seem to focus on large industrial centres or large centres in Canada. You can't forget that our entire service industry extends across all of Canada.

Where are we going?

When we talk about virtual banking, let's not forget that we have to look at the remote areas of Canada and ensure that they're going to be adequately serviced in the future and not at a large cost. So if we're talking about dramatically changing the way in which we do banking in this country, we had better ensure that there are some types of regulations or stipulations that allow all Canadians to be serviced equally and affordably. That's my real concern and my real question.

When we talk about virtual banking, I don't see anyone focusing on the entire country. I see people talking about the ability to get into areas that are well serviced now. We forget how this country was built and why systems exist in the way they do. I'm just concerned that we might forget about that in the process.

Mr. Hamilton: Yes. I certainly think that through the task force process that will have to be an important issue for the task force, not only how strong and vibrant the Canadian financial sector is but also if it is providing services to Canadian consumers in a way that Canadian consumers want. I think that should be an important part of what they will do in recognizing these new changes that are taking place.

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The Chairman: Mr. St. Denis.

Mr. St. Denis (Algoma): I, for one, totally agree with the intention as outlined in the white paper to have a task force to look more deeply at some of the issues. Any suggestion that some of the tough questions have been put off is totally bogus. In fact, no doubt the processes that have been put in place will lead to solutions.

Because the industry is so dynamic and things are changing quickly, any decision made today might not make sense a year from now in any event.

As well, it's been only five years since the legislation was passed. I, for one, think that now is not a time to make sea changes in the situation - my colleague's comments notwithstanding.

I would like to ask about some of the consumer-oriented initiatives in the white paper, because consumers are very concerned about, for one thing, bank service charges. We all need banks in one way or another.

One very interesting notion is the right of consumers to prepay mortgages without the penalties they now face, if they have the opportunity to get a better rate somewhere else and have to pay a penalty to the bank that now holds their mortgage.

Can you review for our benefit some of the options that might be looked at and whether it's your sense that the industry is ready to make some moves that are very consumer friendly? Most families have a mortgage, or many do anyway, and those who often pay out of proportion to their income are the younger families. I think any positive moves on this front will be of benefit to a lot of Canadians.

Could you talk about the mortgage prepayment scenarios that we might see coming in the near future?

Mr. Hamilton: Let me start, just to give you a quick overview. Mr. Swedlove can certainly talk about this at much greater length.

In this area it's a case of striking a balance between making sure that there is a good mortgage market and making sure that there are provisions and adequate restrictions to protect consumers. What we're trying to do here, at least in the kinds of discussions that we're having and that we're going to have, is to recognize that the system that we have now does make a differentiation between mortgages of less than five years and those of more than five years.

In the mortgages for longer than five years - -

Mr. St. Denis: Is it less than or equal to five years? Is a five-year mortgage in the low group or the high group?

Mr. Hamilton: I don't know the answer to that. I always think of it as less than and greater than. I don't know where five years stands.

Mr. St. Denis: The five-year mortgage is probably the most popular one.

Mr. Swedlove: Five years is under.

Mr. Hamilton: Five and under.

Mr. Grubel: It's very important.

Mr. Hamilton: I understand that it is five and under. So if you've got a mortgage of five years or less, there's no legislation, the institution does not have to permit prepayment, and there are no limits on penalties, whereas if it is greater than five years we do have the legislation in place and there is a maximum penalty of three months' interest.

What we're trying to look at is if there's an opportunity both to preserve the mortgage market and to have provisions in place to monitor it to restrict the penalties. I know there are a number of options that one could think of, but maybe looking at a standardized approach that goes across the term doesn't differentiate but matches the penalty basically to the length of the term.

Maybe with that I could turn it over to Frank to talk about, if you'd like to get more detail on some of the options and what some of the reactions might be.

Mr. Swedlove: I guess the complaints that we have received are with respect to both five years and under and over five years. For mortgages of five years and under we have received complaints that people are not aware of what will be the mortgage prepayment - it seems to be rather arbitrary in terms of taking that decision - and also that there's not the right to prepay a mortgage that is five years or less.

For the greater-than-five-year mortgage, where there is a three-month penalty provision, there is the view that that market is not very well developed because institutions are concerned about the fact that if interest rates change significantly then it's conceivable that they will be at a significant disadvantage if consumers do prepay with a three-month penalty.

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Unlike what we have had historically, that being mortgages that are of five years and less with really not a lot of product out there for mortgages greater than five years, that's not what we find in Canada now. It's the view of quite a few observers, including the Canadian Real Estate Association, that if we were to bring in a fair and equitable mortgage prepayment formula, we would see the development of a mortgage market that has terms of greater than five years.

The favoured concept, I think, is generally a concept whereby one takes the difference in the interest that is in place at any point in time relative to the length of the term, takes the present value of the difference between those interest rates, does a present value calculation, and comes to a number that would serve as the prepayment penalty. That would be fair both to the consumer and to the financial institution, who would of course have to reinvest the money in a new mortgage for, say, an equivalent period of time.

Mr. St. Denis: You would split the difference, basically.

Mr. Swedlove: But there is a fair amount of discussion about how precisely you would do the calculation and some of the conditions that would apply, and that is at the basis of any discussion on what a prepayment mortgage penalty would be.

The Chairman: Thank you, Mr. St. Denis.

Mr. Duhamel.

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

Thank you for your presentation. I actually have two questions.

The first is aimed at helping both me and perhaps other Canadians who are not yet as familiar with this as they would like to be - and I include myself as part of this group. Could you sketch briefly the key actors who would be interested in this exercise? I have a fair sense of that, but who are the people who should be watching this, and could you make a little, brief statement as to why? Obviously there are the banks and the consumers - those are the most obvious - but who else?

The second part poses a couple of questions related to the consumers. I'd be interested in knowing, because a number of services are a bundle - I think they are, or at least that's been my experience. I find it extremely difficult to make comparisons if I want to try to get the best deal, so what are we going to do in that area, or what would we like to do, or where do you think it might end up? That's one question.

The other question is not only for low-income families who are not always involved with financial institutions, but there are two components. There are low-income families obviously who are not, for certain specific reasons, but there are probably others as well. Do we have a feel for how large those numbers are - low-income and others who are not? Is there an educational component? For example, if I've never been involved with an institution, how do I not only get involved, but what's involved so that I am able to deal with the situation in a way that's not going to be dysfunctional to me?

The final question with regard to the consumer stems from the fact that I'd like to hear somebody talk a bit about tied selling. How extensive is the problem? Do we have examples of abuse in that area, meaning examples that can be related?

Those are my questions. Merci.

Mr. Hamilton: I think I have them all noted. I'll try to deal with them as best I can.

On the first question, which asked about who should be interested in this process, let me split it into two. I would say that this process involves not only the changes that we're talking about putting in place for March 31, 1997, but it also involves the task force process. Probably the first of those is of much more interest to the financial community, if I can put it that way, but also to consumers, obviously, because we think we have some important items in here for consumers. But I suppose it's of much more interest directly to the financial institutions operating now and to consumers and businesses that deal with them. It's still a very wide swath of the Canadian economy, but it's nevertheless a little bit more focused on the specific issues of how financial institutions operate and deal with their customers - and I would say that's a fairly broad group.

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Then if I turn to the task force exercise and the payments committee, universally, I think, everyone should be interested in that. The task force will be looking at these questions from the broadest perspective possible. They will have an effect on the regulated financial sector, such as banks and insurance companies. There's a non-regulated sector that obviously, in many cases, is competing with this sector. It will be of interest to that sector. Consumers will be a very important part of the task force's work and will be very interested in how the task force proceeds.

So I think that exercise would be of interest to a very wide group of people, both in Canada and abroad. This exercise we have in front of us today about the changes for March 31, while still very broad-interest because of the various changes, would perhaps be of more specific interest to those people.

Mr. Duhamel: When you talk about financial institutions, could you just give some specific examples? You talk about financial institutions from outside the country, those referred to as banks and near-banks - I believe that was the expression - and you talk about insurance companies within and without the country. I'd like to get a better grasp of those. Are you talking about credit unions, caisses populaires...?

Mr. Hamilton: That's right. In both this exercise and the task force exercise it is of interest to banks, both domestic and foreign, insurance companies, including life, property, and casualty, both domestic and foreign, and credit unions, such as caisses populaires, which operate in Canada, and consumers - as I mentioned, they should be very interested in this exercise - as well as small business, for which there are items of interest in here. So I think it is very wide.

If I understood your first question on consumers, when you look at the services provided and how they're priced, how they may be bundled and at how there is often a lot of variety in the types of services provided, I think that is a very valid point. We've indicated in this paper that we're going to try to find ways to better disseminate information.

Our sense is to try to put in place a competitive environment where consumers can shop and find and choose the best prices for the services. But one of the areas in which we'd like to see if we couldn't do better - not in a legislative way but working together with the institutions and their customers - is to find ways to better communicate information on fees and prices so that it's not such a confusing area, so that people can make good choices and disentangle what services are offered, what the prices being charged for them are, and how one can take that information and perhaps compare it in another way. We are going to try to make some efforts to improve that, and I think that will help. Better information is always very important in a competitive environment to allow consumers to make choices.

You talked about access to basic accounts, that in some cases it's for low-income individuals and in other cases it's for others. I don't have a good feel for that other category, but perhaps I could ask Ms Doyon to elaborate a little bit on that access to basic financial services, the kinds of concerns that are there and what's being proposed in the paper.

Ms Martine Doyon (Chief, Policy Development, Financial Sector Division, Department of Finance): In terms of access, I would just mention that in the context of our consultations on the review, a number of consumer organizations have brought to our attention concerns about low-income Canadians having difficulty accessing banking services.

It's a little bit difficult to know the extent of the problem. I have heard of surveys indicating that between 5% and 10% of Canadians did not have bank accounts, or accounts with deposit-taking institutions. Of course, part of this percentage would include people who, for various personal and other reasons, don't want to have such accounts.

But our understanding is that a proportion of the Canadian population has a problem accessing basic financial services. We found out through our discussions with community groups and consumer associations that the main problem appears to be that at the time they open accounts, they have problems because they don't have the ID requirements. In the past we have heard about institutions requiring a driver's licence and credit cards. It may be the case that not everybody has those types of identification. That's one of the areas in which we have heard of problems.

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We are aware that the financial institutions have started working on more flexible identification requirements, but in our view still more work needs to be done in the sense that there has to be some assurance, if I can put it that way, that the policy will be implemented in the deposit-taking institution's branches. Identification is one of the problems.

The other element of the problem seems to relate to the approach of the deposit-taking institution's staff to people from different backgrounds. I understand that the financial institutions have started working in that area.

There's also quite a bit of work done at the community level to help low-income people better understand what kinds of services exist, how they can access them, and how they can access the cheaper services that suit their needs more.

Basically, there are three kinds of problems. It's very much a three-pronged approach to deal with the issue.

Mr. Duhamel: I need just a little clarification on that last point, Madame. I was also trying to establish whether or not that group that does not have a relationship with the bank or financial institution is primarily made up of those whom we would classify as low-income or if there are others as well. Do we have a sense of that? You've given me reasons why not and those are very helpful. And I understand that those would be found within the low-income groups, but are there others - not necessarily low-income groups - that are not in association with a financial institution?

Ms Doyon: I cannot give you a precise answer to that question. The representations we have had have been from consumer groups and they have basically raised concerns with respect to low-income people. We have had the same representations from community groups. It was basically low-income people.

But my reading...you asked a question about tied selling and how -

Mr. Duhamel: Yes, about the extensiveness and whether or not there are examples of abuse.

Ms Doyon: When people talk about tied selling, they usually refer to different practices, like cross-selling, bundling or packaging, and a third type, which is coercion. This third type is basically that you cannot buy a product unless you buy the other one.

To go back to the first type I described, in packaging or bundling, a customer will be offered a cheaper price for three products, cheaper than the price for acquiring the three products separately. That is viewed, of course, as being beneficial to the consumers, and I understand this takes place quite extensively, whether it is in the financial services sector or in other industries for goods and other types of services.

In terms of the abusive types of coercion, I am not aware that it is a major problem. There have been representations, and some groups have told us that this happens. It is not my understanding that...for example, a group tells me that this may happen, but we haven't seen concrete evidence of it. I know the Competition Bureau has the mandate to review those instances when somebody approaches them. It is not my understanding at this stage that they have been presented with concrete evidence of extensive coercion taking place in the financial services industry.

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

Mr. Schmidt, welcome.

Mr. Schmidt (Okanagan Centre): Thank you very much, Mr. Chairman. It's my first appearance at the finance committee and it's a pleasure to be here.

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I really want to thank you for the presentation you made this morning.

I have a couple of specific questions. Some of them have already been asked, but there is one I find rather interesting. I'd like to ask if you could explain why, when it comes to foreign banks, they perform as schedule II banks, if you will, and they cannot use a branch system within Canada with regard to their parent bank. But when it comes to the securities aspect, if a schedule II bank, for example, has a securities part of its business, it is not subject to the same restrictions the subsidiary of the banking operation is subject to.

Why did you propose a change in this securities business?

Mr. Swedlove: Sir, I'm not sure I understood the question precisely. Could you clarify?

Mr. Schmidt: The schedule II bank must be a subsidiary of the larger bank that exists somewhere else.

Mr. Swedlove: Right.

Mr. Schmidt: This is not the restriction placed on the securities part of a schedule II's operation. In other words, they can apply directly to the parent bank. There are no restrictions to that operation. So if it goes wrong or something else happens, the restrictions that apply under the banking operation do not apply under the securities part of this operation.

If you want to look at your own reference, it is on page 22 of your paper.

Mr. Swedlove: Yes. This is always a very difficult area to comprehend. Maybe it is best to start with the existing rules. Now, if a banking operation wants to have a securities company, then this securities operation must be a subsidiary of the schedule II bank. So a foreign bank has a schedule II bank in Canada. Then there is a further subsidiary, which is the securities operation, and under Canadian law this would be a provincially regulated financial institution.

The federal law requires that the securities subsidiary be under the schedule II bank. We are proposing in the paper that there would no longer be a requirement for the securities subsidiary to be a subsidiary of the schedule II bank. Rather, it could be the subsidiary of the parent bank in the foreign country or indeed of the parent bank's securities operation in a foreign country.

Mr. Schmidt: My question is why are you making this suggestion?

Mr. Swedlove: We're making the suggestion because we think there is no particular reason to require the securities subsidiary to be a subsidiary of the schedule II bank for regulatory purposes. Originally I think one of the reasons we had this in place was that we applied a 12% asset ceiling on all banking operations, on all operations of a schedule II bank. Sorry, all foreign banks in Canada were subject to a 12% asset ceiling in their entirety and we removed this as part of our commitments under the World Trade Organization. So in order to implement this 12% asset ceiling we no longer need to have the securities subsidiary under the schedule II bank.

Mr. Schmidt: Does this create certain other kinds of difficulties, then? I'm going to use one of the chartered banks, the CIBC to be specific, as an example. In their last annual report they consolidated the operations of their securities business with the bank's operations so that in fact you could not tell where the major revenues or costs were coming from.

Does this create a difference in treatment between the securities section of a domestic bank and the securities section of a schedule II bank?

Mr. Swedlove: Maybe I'll ask André Brossard from the Office of the Superintendent of Financial Institutions to respond.

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Mr. André Brossard (Director, Legislation and Precedents Division, Department of Finance): I'm not sure what the concern is. But if the concern is that a foreign-owned institution would not have the ability to consolidate its securities operations or its banking operation, I must say I do not think the proposal would lead to this. The proposal would still allow a schedule II bank, if it wanted to, to retain the existing structure of having a security subsidiary owned by its schedule II bank and to consolidate these operations.

What is being proposed is to give them the option of effectively having it structured this way if, for good business practice reasons, they feel this is the way to go. If they prefer, they could integrate existing Canadian securities operations with their worldwide securities operations. They would have a more natural link with the people in this industry and also have the commercial banking operation integrated with their worldwide commercial banking operations.

Mr. Schmidt: Related to this, Mr. Chairman, is the suggestion that the wholesale banks not be subject to the requirement under the CDIC. We have the CDIC as a deposit insurance system. But under the Investment Dealers Association of Canada we have an investment dealers' protection fund, or something like that. Both of these are insurance-related things to protect the investor at the securities end of it and the depositor in the first instance.

When these kinds of things are put together you exempt the wholesale bank, which is, in some cases, a schedule II bank, and a part of its operation is wholesale operation. You now separate these things out. Will there be an implication as to the different treatment in their contributions to CDIC and CDFA, or whatever the acronym would be for that?

Mr. Swedlove: No, fundamentally there wouldn't be. If you are an investment dealer, then I believe it is CIPF.

Mr. Schmidt: It is CIPF. That's right.

Mr. Swedlove: This does apply. If you are a client of the investment dealer then you are covered by the CIPF division.

The CDIC opt-out would mean, for example, if a schedule II bank chooses not to offer retail deposits and remain in the wholesale deposit market, then its customers would not be covered by deposit insurance. But if this schedule II bank still had a security subsidiary to the extent that you were a client of a security subsidiary, then the CIPF would still apply.

Mr. Schmidt: The final question on this particular series has to do with the consolidation of reports.

It seems to me with the consolidation of the reports there is a temptation, or there could be a temptation to attribute a certain volume of business, which I think is the basis on which CIPF premiums are calculated. There might be an opportunity for a bank operating both in securities and in the banking business to attribute to one side of the balance sheet a certain volume that for people who are investment dealers or who are outside a bank would be a different volume. So the relative proportion of the premium that would be required of a chartered bank, for instance, that has a securities dealer and an independent dealer would be different. The burden of providing for this protection fund would be different for the independent dealer as compared with the bank.

Mr. Swedlove: I think you raise an interesting issue.

There have been concerns expressed in certain sectors because there is some overlap in the kinds of activities a securities dealer and a bank can engage in. A bank owning a securities dealer has the choice of putting it either in the banking operation or in the securities operation. Because of the way the premiums are collected by the CIPF - I believe collection is based on those revenues, unlike with CDIC, where it is based on level deposits - it may be attractive for a bank to put some of those activities on the books of the bank as opposed to putting them on the books of the securities dealer.

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Mr. Schmidt: Or vice versa.

Mr. Swedlove: Yes, or vice versa, I suppose, if it's a deposit kind of instrument.

Mr. Schmidt: That's right. Sure. It works both ways.

Mr. Swedlove: I suppose it could work both ways.

So this is an issue that the CIPF has been looking at and giving some consideration for. I don't know if they have any plans for looking at their assessment process. Because that is regulated at the provincial level, it's not something we're particularly familiar with.

Mr. Schmidt: But you are implicated, I think, in this particular recommendation here.

Mr. Swedlove: No. I think this recommendation doesn't really change that fact. Right now what is required is that the securities subsidiary be a subsidiary of the schedule II bank and that permits some of that movement of activity from one institution to another.

The fact that the securities subsidiary could now be the subsidiary of a foreign institution might, if anything, make it more difficult to do that, although maybe not. So I don't think it has an impact in that area.

[Translation]

The Chairman: Thank you, Mr. Schmidt. Mr. Bélisle, if you please.

Mr. Bélisle (La Prairie): On page 9 of your document, there is something about overlap and duplication between federal and provincial regulations. I was wondering whether your directorate or department has identified elements of a solution. In your opinion, what particular steps should be taken in order to minimize this overlap and duplication between both regulations?

[English]

Mr. Hamilton: Yes. In this area, in the paper we've talked about three areas. I mentioned them earlier. The trust and loan sector is one; the second is securities regulation; and the third is in the area of credit unions.

In the trust and loan area, discussions have been ongoing with the provinces to try to come up with a more harmonized and rational system for regulating trust and loan companies in the country. Some progress has been made. It's been a slow process, but there have been some signs of progress. We've indicated in this paper that we're going to amend the Trust and Loan Companies Act to reflect some of the changes that have been agreed on so far.

As well, in the recent Ontario budget they announced that they would be eliminating the equals approach whereby they apply its standards to extraprovincial companies operating in Ontario. That's perhaps a very positive development to which we can look forward.

But we do see in the trust and loan area that there have been discussions, with some progress thus far, and we're hopeful that through continued discussions we'll be able to carry it the rest of the way.

The second area is securities regulation. As I mentioned earlier, this is an area that has been looked at in terms of if there is a way of having the provinces delegate their responsibility for securities regulation to the federal government and have a national Canadian securities commission. It still is very much in the discussion stage, and from our perspective what we're doing is engaging in discussions with the provinces to see what kind of interest is there, what sorts of issues crop up, how it might be handled.

The kind of option that is being looked at currently is an opt-in approach. In other words, it wouldn't be necessary for all provinces to do that delegation. Provinces would be able to choose whether they will delegate or not, and there's been work to try to flesh out how such an option might work. But it's very much at the discussion stage, although at the first ministers meeting there was an expression of interest by, I believe, eight provinces to pursue this idea further to see if we can find a way to have a more efficient system of regulation of the securities industry within the country.

The third area is in the credit union centrals. Here we've put in the paper an indication that we're willing to discuss with provinces whether we can get out of regulating provincial centrals where currently both we and the provincial governments are involved in that area.

If we look at the three levels of the credit union system, at the local level it's regulated by the provinces. At the national central level it's regulated by us. The provincial centrals are a mix at the moment and, while issues would need to be resolved, we've put forward the idea that we could discuss the possibility of our not regulating those provincial centrals. We're looking forward to discussions with the provinces to see if that can be moved forward.

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Those are three tangible areas we're looking at in this area.

[Translation]

Mr. Bélisle: Still on page 9, there is a mention deposit insurance opt-out. It seems that the government refuses to allow deposit institutions that are not taking retail deposits to opt out of CDIC. I suppose that these institutions are still dealing with customers, even though they are not retail customers.

Has any arrangement been made concerning the safety of consumer deposits? Are we going to force these institutions to establish a link with another institution which is a member of CDIC? Overall how is all this going to work?

[English]

Mr. Hamilton: Those are very much the issues we're discussing right now: exactly how this opt-out regime would work. How would we define the restrictions such that it is restricted to institutions that engage almost exclusively in wholesale deposits? How would we establish the process whereby an institution would come into the regime and get out? For example, if an institution is in the regime and wants to get out, what sort of process, what sort of exit fees, might there be? If that institution then wanted to come back into the regime, how would it go about doing that and ensuring there is an appropriate transition regime; ensuring, if we move to a world wherein institutions could opt out, consumers and depositors are protected and not disadvantaged?

Those are the kinds of technical discussions that are being undertaken right now in terms of the opt-out and as we try to sort out how it would actually work in the mechanics. We're engaged in those discussions now.

[Translation]

The Chairman: Thank you, Mr. Bélisle. Mrs. Brushett, you have the floor.

[English]

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

I'd like to come back to consumer protection for a few moments. There are several areas I want to touch on, but the first one is the tied selling. I'm concerned that if we talk about the competition within financial institutions at present, it seems to be your perception that competition within the marketplace will take care of the packaging or the bundling or the coercive treatments of clients, etc. If this is the case, what we've tended to see through the years is that the bigger the institution becomes, there is less apt to be competition, because the little guy disappears. He becomes extinct. We've seen this. It virtually becomes predatory pricing, as we've seen with the gasoline industry, as we've seen with food and grocery retailers and so on. With the bigness, competition actually becomes extinct. I'm wondering how you see representing the consumers, the Canadian individual who comes to buy financial services and is at their mercy and the competition really isn't in play.

Mr. Hamilton: As I mentioned, this issue of concentration in competition has been raised through the course of our consultations, and we did actually devote a fair amount of effort to doing analysis and getting others to do analysis for us to see whether it is in fact a competitive environment out there. Again, I would differentiate between a concentrated industry - one can come up with measures for how concentrated the industry is and what the trends are and how concentrated it's becoming...but I would see the important question being looking at specific markets and asking whether competition in that area is adequate to ensure consumers are going to get the best services at the best prices.

We talked not only to academics. We did our own work and talked to the Competition Bureau. The Competition Bureau obviously looks at these issues to see if in a particular market there is a lack of competition, or inadequate competition. They have various measures they look at, such as what percentage of the market a firm or a set of firms can control and whether that is in fact a competitive market. The work to date and the system we have suggest there is adequate competition in all markets, notwithstanding the fact that yes, there has been some increase in concentration in the industry.

I think it's going to be an important question. Again, I wouldn't want to say that conclusion means the task force shouldn't look at it or it should never be looked at in the future, but in the context of this review we did look at it and we're convinced that at the moment there's no significant evidence of a lack of competition in markets.

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I do expect that in the work of the task force they will look at what kind of a financial sector should be put in place. These issues of competition in ensuring the consumers' best interests are being looked after will be front and centre.

Mrs. Brushett: Just to follow up on that, we talk about low-income families and the ``little person'' having access to financial institutions. As the gap becomes wider between those who are utilizing the corporate sector in banking or the larger service needs and the smaller consumer, there are more and more people in our society who are becoming the smaller consumer as societal changes occur. I think it's a very critical component of your undertakings here to analyse where those people can get services.

I can tell you how embarrassing it is when you stand beside some of your constituents in a small rural bank when they can't cash a cheque and you offer your own assets to help them access some cash for their family for the weekend. That's pretty embarrassing.

The Chairman: Maybe you could give us your phone number.

Some hon. members: Oh, oh!

Mrs. Brushett: I think this is a critical point, Mr. Chairman. When we look at the divisions in our society, they've become greater, and you have that smaller consumer, and you see it throughout this country...the larger the corporation, whether it's financial institutions or gas outlets... It becomes a major problem. I think it's important that we secure Canadians' access to these services in a very fair and equitable manner without having these great service charges and everything else imposed.

I come now to the cost of credit, the cost of buying banking services. It seems to me - I've lived long enough - that a few years ago you could do your banking without major costs imposed, except for what you really knew at the outset you were paying for, for interest, etc. Over the last decade these costs have skyrocketed. I would like to know if you're looking at this end of the financial industry. Have the costs for the banks, the financial institutions, risen so high that they've had to impose these tremendous costs?

Mr. Hamilton: First, you did mention the access by low-income individuals, and I think Martine spoke earlier about the concerns we have heard in that area and the discussions and the proposal for further consultation we are going to undertake. We are speaking right now to community groups, consumer groups and banking institutions to see what can be done to resolve the issue that has been put in front of us in terms of the ability of low-income individuals to get access to basic services.

I agree that it's an important issue. We put it in the paper to try to see if we couldn't make some headway in this area through our work with the institutions and the groups.

The second aspect you raised is just the cost of services. Yes, we do watch the cost of services. Without answering your question definitively, I guess, it's interesting to note a few things. First, we do look at the cost of services in Canada versus the United States and we're generally quite comfortable with it. The Canadian institutions are offering services at as low a rate as that which is being offered in the United States.

The other thing to note in terms of looking at it over time is that there has been a change in institutional pricing policies to move from more of a spread base charge to explicit fees. As well, I think there has been a differentiation in the types of services that are provided. For example, I think there's a wider range now. One can buy a very basic service and then gradually add more elements and more services and, of course, the price increases accordingly.

It's not an easy and straightforward calculation and comparison to make. One of the things we're trying to do is to find some ways to get better information out to make sure that people can understand the service being provided in relation to the price being charged.

We are trying to look for ways to encourage institutions to do a better job of providing that kind of information, because if you can get good information out, I think people can make choices about whether this service is actually a good deal at this institution versus that deal. If they don't have the information or if they don't understand the information, it's very difficult to make that judgment. That's an area we are trying to improve upon.

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Mrs. Brushett: Just as my final comment, traditionally it's almost been a nuisance for a large institution to cater to or service a small business or a smaller client, an individual who has very basic financial needs. It's almost been a nuisance for them to service those accounts, so they've worked at a higher, broader, more lucrative level, for want of a better word.

I think this is where I'm coming from: there will have to be a trend to service the smaller accounts - although they may not be profitable - and to look at giving a service at the same time.

Thank you, Mr. Chairman.

The Chairman: Thank you, Mrs. Brushett.

I'll go now to Mr. Fewchuk, followed by Mr. Solberg and, lastly, Mrs. Chamberlain.

Mr. Fewchuk (Selkirk - Red River): Good morning, and thank you for your presentation. I just want to follow up on this low-income person and on some of the people who have disabilities.

I don't know if you're aware of what the bank system has been doing just lately, in the last two months. If you belong to a branch and you're out in the country, you can walk in and receive your money. If you go into the city and you do not have the electronic plastic card, there is no teller now. If someone has a cheque in their pocket, on their own personal account, with the same branch maybe five miles away, and they'd like to take out $10 or $20, what are we doing to protect these people who would like to get their money out? Right now, because they don't have their plastic card and the banks are changing the system and there is no teller at the counter, they can't get their own money out.

Ms Doyon: I want to make sure I understood your question well. You're giving an example of somebody who has a bank account in a -

Mr. Fewchuk: Say it's the Royal or Montreal or whatever. Their money is in that bank.

Ms Doyon: - given city and wants to -

Mr. Fewchuk: Withdraw.

Ms Doyon: - withdraw some money from another branch in another city without having any identification...

Mr. Fewchuk: No, without the plastic card. You have your cheque book in your pocket. It has your name and your account on it, but they will not accept it because you do not have the plastic ID card. It's the same branch, but you're ten miles away from your own branch.

Ms Doyon: Oh, the same bank, not the same branch. I'm sorry, I don't think I would be in a position to comment on that part.

Mr. Fewchuk: Are you aware that this is happening now?

Ms Doyon: I think it would be best to ask that, if I can suggest it, of the bankers this afternoon.

Mr. Fewchuk: I just want you to be aware of that.

Ms Doyon: No, I'm not aware of it. Typically, banks will issue access cards to go with deposits.

Mr. Fewchuk: My point is that you're always talking about protecting the customer or other people. I just want to know if the department is aware of this. Maybe you're thinking that the electronic stuff is the great stuff today, but it might be backfiring for some of these people. What are we going to do down the road to protect them in order that they can get their money out?

Secondly, the banks talk about small business. What is the department doing to ensure that the small business guy with one employee can get a loan for $10,000, which the bank doesn't want to give today?

Mr. Hamilton: In the area of small business, what we've seen obviously has been an issue that's been debated over recent time. I guess, as I look over the last few years, we in the department have seen some positive signals coming out in terms of what banks are doing for small businesses. Certainly, they've adopted a code of conduct in terms of their dealings with small businesses. They've come up with dispute resolution mechanisms, if I can put it that way, and each bank has put in place an ombudsman to deal with these issues. In fact, the industry has put in an ombudsman.

As well, an interesting development here is just the level of statistics that are coming out in terms of what banks are doing in the area of small business lending. Through working with the industry committee, I think there has been a real improvement over the last little while in the data that's available. It's really a bit premature to pronounce judgment on that data, although some of the initial indications we're seeing are positive. It's comforting to know that both now and in the future there will be better data upon which to make assessments. In the past, in the absence of good data on what's actually going on, it's been quite difficult to know precisely how good or bad the situation is.

So I think the moves that the banks have made over the last year or so seem positive, and we're watching that area carefully to see what developments take place, how concerns are still being expressed to us, and how real they are. From our perspective, almost as important is getting a good sense of the data and what is actually happening out there so we can make a more qualified or more educated judgment as to the nature of the problem.

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That's what we see happening on the small business lending side that we see quite positively.

Mr. Solberg (Medicine Hat): I've heard a few times the accusation that very often banks will apply the Small Business Loans Act to all the businesses for whom they would have provided financing anyway but that are the riskiest businesses in their portfolio. In doing that, they simply ensure that they face fewer defaults and make more money for their shareholders.

Considering that we're talking about a lot of money here, I wonder how the finance department measures whether or not that money is actually going to people who otherwise wouldn't have got financing from the bank.

Mr. Swedlove: I'll profess a little bit of ignorance in terms of the SBLA, because that's a program that's administered by Industry Canada. So we at the Department of Finance don't have a lot of detail about it.

I'm aware that last year, I believe, the SBLA was changed in terms of the conditions that would apply. Some of the concerns that you raise were out there previous to the changes, and the objective of the changes was to try to rectify that; in other words, to ensure that indeed the lending under the SBLA would reflect those who might not have got funding through the normal course of events. I think the results are far more positive now than they were a year ago, but you'd have to get that detail -

Mr. Solberg: I guess it is almost impossible, really, to know whether or not those various businesses would have got funding without the Small Business Loans Act. Therefore we've got a lot of money sitting out there and we just don't know if it's doing the job.

Mr. Swedlove: I think what the changes did last year was take away a lot of the incentives that the banks had to put it under an SBLA. That effectively took a lot of that away from the banks, so it was no longer as attractive for the banks to put on business that they felt was a reasonable risk for them to take on their own books in any event - and also because of extra fees that were going to be applied to the SBLA.

Mr. Solberg: I want to switch gears here. On the process, we've talked about changes to regulations respecting financial institutions coming every five years. It has been suggested by a member across the way that that was plenty fast, but many people have also raised concerns about consumers. If things are happening that are affecting consumers and this is not addressed before five years is up, obviously that's not very good.

Wouldn't it make more sense, for both consumers and financial institutions, to have these things addressed on an ongoing basis, instead of using a five-year sunset clause as the minimum amount of time in which changes can be made?

Mr. Hamilton: To respond to that, I think the five-year review process that we used this time has worked quite well, and I think that, in looking forward to when this new legislation would be sunsetted, we were comfortable with saying it would be no later than five years. So once this legislation is passed, the next review would come no later than in five years. So it's a maximum, not a minimum.

Mr. Solberg: But in reality it has been. That's the way it has worked out.

Mr. Hamilton: That's the second point I want to make. If we look back at the experience between 1992 and now, in fact we did come in and make changes in response to concerns. We introduced Bill C-15, which did change the legislation. So, in setting out that sunset, it doesn't preclude the possibility of coming in between to respond to whatever important issue might be there.

Mr. Solberg: But the important issues haven't been addressed. Even though, as you have said, everyone agrees that they are big issues, they simply have not been addressed and have been put off and put off.

Mr. Hamilton: If we're talking about process, I'm saying that the review process itself does not preclude that.

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Mr. Swedlove: I would just make a comment on the sunset provisions. If you look at the Canadian experience relative to other countries, you find that, for example, in the United States, there are a lot of areas where reform has not taken place, such as the Glass-Steagall Act on interstate banking, and a lot of other areas where it's been a very slow process. I think one of the elements the Americans point to in terms of the advantages of our legislation is that there is a requirement, a maximum, whether it be five years in these circumstances or ten years previously with the Bank Act, that allowed for reform to take place.

Even with respect to our domestic legislation, previous to 1992 the Bank Act had a sunset provision and was changed on a regular basis. The Insurance Companies Act and the Trust Companies Act did not have sunset provisions. If you talk to the industry participants in the insurance and trust areas, I think they are very much of the view that before 1992 they were operating with a very difficult act that was seriously out of date. It hadn't been changed in a fundamental way since the turn of the century. So I think they appreciated the fact that the sunset provision was now going to be applied to their industries.

Mr. Solberg: But in this case the big issues are not going to be respected within the five-year period, and they're going to be put off beyond that. I guess the point I'm making is twofold, that if you have the sunset clause, perhaps it should be a lot shorter, or at least the change should be ongoing, and second, that if you do have a sunset clause, it should be respected.

Mr. Swedlove: It should be remembered, I think, that 1992 was a very big, fundamental change. When you talk about fundamental changes, I think the view was that this was as large a change with respect to the financial sector as we've had in Canadian history. When the changes were made in 1992, it was the view that we needed a review five years hence rather than ten years hence because of concerns about the significance of the changes that took place. At a minimum, we would need technical changes, the cleaning up of the legislation within that five-year period. So that's why the five-year period was chosen.

I don't know whether when Parliament passed the legislation in 1992 the view was so much that by 1997 we needed to have another fundamental review of the legislation. My recollection from the time was that the view was that we needed to ensure that what we had put in place in 1992 was working well.

The Chairman: Thank you, Mr. Solberg.

Mrs. Chamberlain.

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

First of all, I would just like to ask for a clarification from Mr. Solberg. I think Mr. Grubel also made reference to it. In terms of the reference that we're not respecting the sunset clause, is the inference, then, that it would be your desire for banks to be able to enter the market of leasing and insurance? Is that where you're going?

Mr. Solberg: Mr. Chairman, members across the way have raised the issue of protection for consumers. Clearly, if the regulations today don't provide protection for consumers, that should be dealt with now, not in 18 months. I hope Mrs. Chamberlain isn't suggesting that we should leave consumers dangling, allowing big financial institutions to take advantage of them.

Mrs. Chamberlain: I did not suggest that, one iota, to my colleague. I was asking for a clarification on your point. Do you endorse -

Mr. Solberg: My point is twofold. One, financial institutions competing in the world have to have regulations that allow them to compete, which of course helps create jobs in many instances, I would point out. Second, consumers have to be protected if there are abuses going on.

Mrs. Chamberlain: I couldn't agree more -

Mr. Solberg: Thank you.

Mrs. Chamberlain: - but I'm just asking for a yes or no.

Mr. Grubel: May I try to answer? The point is, we cannot prejudge what will be the outcome of a task force investigation. It is a very difficult question. I do not want to prejudge the case of whether or not banks should be allowed to compete in the insurance industry. I simply do not know. But we do hear from our constituents, just as you do, that some people are asking why we should not have more competition in order to protect the consumer, as it has done ever since we have had free markets. Others are asking what the consequences will be for the poor insurance people. I don't want to prejudge this, but it's sitting there, festering.

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What we need in order to resolve these issues is a task force that looks at the entire package. What we're seeing is stonewalling by this government, which is saying we will have this task force report after the next election, when the mandate was that this should be done five years after, and that is 1997.

Mrs. Chamberlain: Mr. Chairman, with due respect, and I really do mean this most respectfully, the only stonewalling I see is that I can't get a yes or no. But that's fine. I will continue with the panel.

The question I want to go a bit further on is consumer protection. You actually raised how difficult it sometimes is for low-income people to access services from the banks.

I've had a group come to me in my constituency... First of all I would say to you... This may be further than you can go, than your powers or your investigating go, but I want to draw this to your attention because I don't know if you have heard this along the line. Since you brought up the low-income earners...

This group came to me. They were quite concerned that banks were lending, and that was fine, but what was happening with this particular group of people when they were borrowing, particularly if it was for a house or a larger item, was they would look at the ability to pay, and it perhaps was right, numbers-wise... Perhaps they looked at it and they said okay, these people could afford to have a loan of $70,000. Where it went wrong was sometimes these people fell into circumstances such that they couldn't meet those loan payments. That was a concern of a certain consumer group I was dealing with, that perhaps sometimes the counselling services were a little weak in the line of remembering that there needs to be quite a good cushion, perhaps particularly in that group.

Since you brought up access to dollars, have you heard anything along that line? Are you aware of that, and does that go further than your powers - the counselling part of the banking process?

Mr. Hamilton: Again I'll turn to Martine, who has been very heavily involved in this area. I certainly have not heard that concern.

Ms Doyon: No, I have not heard that concern either. It has really been focused on the ability to open a deposit-taking institution account.

It's hard for me to react, because this is the first time this problem has been brought to my attention. As we go forward with further discussions with community groups and consumer groups I would certainly be interested in hearing whether this particular problem has been brought to their attention, whether they have any idea how widespread it is, and whether they have any suggestions for solutions.

As I mentioned earlier when I talked about the various aspects of the access problem, what we found through discussions with the financial institutions and consumer and community groups was that in many instances people do not quite understand how banking services work, what kinds of products would work well for them and what kinds of products would just not work well. While it was really focused on the accounts, it may well be that there are some similar problems on the lending side. I'm certainly willing to take that on in our further consultation with consumer and community groups.

The Chairman: Thank you, Mrs. Chamberlain.

Mr. Grubel.

Mr. Grubel: I would like to recommend to Ms Chamberlain the existence of an ombudsman office, created by the banks, to which such difficult cases can be referred, in case she does not know it exists. The banks have made special arrangements for hardship cases of this sort and other problems that might arise in the course of banking where consumers do not understand it. Constituents who have come to me with problems of this sort have been very well served.

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Mrs. Chamberlain: Thank you. I am very aware of the ombudsman and I appreciate your guidance. Perhaps I will also be addressing this point with the banks.

The Chairman: Thanks to both of you.

Do you know of any other jurisdictions in the world with the same type of overlapping regulatory regimes for their financial institutions as we have here in Canada? Are we exceptional?

Mr. Hamilton: I'm trying to think of examples. Australia is one. We've been dealing with Australia and it has the federal state system, but I think they tend to not have quite as much overlap and a lot of the regulation goes on at the national level.

Perhaps, Frank, you are aware of other examples.

Mr. Swedlove: Probably the United States has the most overlap, if I can use this expression. Maybe it's not proper to say ``overlap''. It might be best to call it split jurisdiction. In the United States, the insurance sector is regulated at the state level. There are state securities commissions, although much of the regulation is at the federal level with the securities and exchange commission. Banks in the United States are regulated both at the federal and at the state levels.

So compared to Canada the American system probably is the most divided in terms of a split jurisdiction for the financial sector.

The Chairman: Thank you.

I think what we've heard here, fellow members of Parliament, is an excellent overview of some of the issues being brought forward for our immediate attention.

But all of us know there is an overlay of much broader and in some ways more important and difficult issues dealing with the actual powers of banks. These issues have to be taken up in the not too distant future. We are on the threshold of investigating these very important issues. We have found there are really two competing factors working.

One is we need a very sound system of financial institutions in our country. The system needs to be sound to protect depositors, policy holders and perhaps investors. Yet it must be able to compete in the global economy, in an economy changing so rapidly because of technology and globalization.

Then, on the other hand, because we as a state have given certain powers to these institutions, we expect of them very high-quality service at reasonable or affordable prices for our consumers.

I think we've seen a number of cases today where often these two competing principles may come into conflict. I suspect there are no really easy answers. Otherwise, they would have been in place long ago. I am very impressed with the difficulty of some of the decisions we are going to have to make and with the depth of knowledge we're going to have to acquire over a very short period to be able to exercise good judgment in these circumstances. On behalf of all members, I want to thank the four of you who have given us a good start in this awesome undertaking we have now embarked upon.

Thank you very much. We look forward to meeting this afternoon at 3:30, where we will have the Canadian Bankers Association, the Canadian Life and Health Insurance Association, then the Insurance Bureau of Canada. We adjourn until then.

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