FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Monday, March 30, 1998

• 0911

[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'll call this meeting to order, and welcome everyone here this morning.

Today the order of reference is, pursuant to Standing Order 108(2), a study of the tied selling provisions in the Bank Act.

You all know how this works. We will hear from our witnesses opening remarks of approximately 5 to 10 minutes. Thereafter, we will enter into a question and answer session, beginning with the Reform Party. I'd like to take this opportunity to welcome Mr. Frank Swedlove, director, and Ms. Annette Gibbons, senior analyst, both of the financial sector division, financial sector policy branch of the Department of Finance. Welcome, and you may begin.

Mr. Frank Swedlove (Director, Financial Sector Division, Financial Sector Policy Branch, Department of Finance): Thank you, Mr. Chairman. I am pleased to appear before the committee today.

Let me begin by reviewing the tied selling amendment that was drafted in response to the 1997 review of the financial institutions legislation.

A tied selling amendment was included as part of Bill C-82. It was intended that the amendment would be proclaimed on September 30 of this year.

The key element of a tied selling provision is designed to prohibit coercive forms of tied selling. More specifically, it would prohibit a bank from coercing or imposing undue pressure on a customer to purchase a financial product from the bank or its affiliates as a condition of obtaining a loan.

When Bill C-82 was drafted, it was recognized that there were beneficial forms of tied selling, and that steps should be taken to see that they were not discouraged. Beneficial forms of tied selling provide consumers with meaningful cost savings resulting from product packaging. This type of tied selling takes place in various sectors. It often results in the consumer being offered one product at a reduced cost if another produce or service is acquired.

The tied selling provision therefore identifies certain types of tied selling practices that are permissible for banks. The provision would allow a bank to offer a loan on more favourable terms to a customer who obtains another product from the bank or one of its affiliates. Similarly, the provision would permit a bank to offer a product on more favourable terms to a customer who also obtains a loan from the bank. Finally, the tied selling provision would allow the government to make regulations specifying what types of conduct or transactions shall or shall not be considered undue pressure or coercion.

Given the complexity of the issue, and in particular the difficulty with respect to distinguishing what might constitute coercive practices, the government decided that more discussion of tied selling was needed. As a result, the House finance committee was asked to review tied selling before any action is taken to proclaim the tied selling provision.

During the parliamentary debate on Bill C-82, the government stated its intention to have the financial institutions develop tied selling policies. Last spring, we began the process of asking financial institutions to establish policies that would prohibit abusive tied selling. I am aware that the Canadian Bankers Association recently responded to this request by developing a policy statement on tied selling.

• 0915

I understand that individual banks have now published brochures that reflect the commitments contained in the CBA's tied selling policy and are making them available to customers through their branches. Staff training on the commitments in these brochures is apparently under way.

I understand also that the life insurance industry has completed a tied selling policy, but we have not yet seen that policy.

There has been an effort to monitor bank tied selling complaints received by the government. Since March of last year, the Department of Finance and the Office of the Superintendent of Financial Institutions have received a total of 34 telephone inquiries and written complaints about tied selling.

We look forward to the discussion that take place during these hearings, and welcome any questions that you may have. I have provided a copy of my comments, in both languages, to the clerk.

Thank you, Mr. Chairman.

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

We'll now proceed to the question and answer session. We'll begin with Mr. Schmidt.

Mr. Werner Schmidt (Kelowna, Ref.): Thank you very much, Mr. Chairman. While the speed with which this committee was convened left us sort of wondering what's all happening, I still want to commend you for getting the subject of tied selling before us. I think that's really important.

I wish to refer to a comment that you made, Mr. Swedlove—and by the way, I want to thank you, as well, for appearing before the committee now. I'm referring here to the document you referred to in your remarks, which has to do with the Canadian Bankers Association's point about tied selling. I just wonder if it would be possible for you to explain exactly what it means. The statement seems rather to be a little bit confusing, to say the least.

The pledge, for example, of the bank, is that:

No bank will impose undue pressure on, or coerce, a customer to obtain a product or service from anyone, including the bank and any of its subsidiaries and affiliates, as a condition for obtaining a loan from the bank.

If we go on in that same document, it says:

Banks have an obligation to manage credit risk prudently; all customers benefit when banks discharge this obligation faithfully. Accordingly, for the purpose of managing credit risk, banks may impose certain requirements on borrowers, as a condition of extending credit. For example, a bank may require a borrower to obtain a product or service, such as a transaction or operating account, or refrain from taking on additional debt, as a condition of granting a loan. In addition, a bank may require that a product or service obtained by a borrower from a particular person as a security for a loan meet with the bank's approval. Any requirements imposed for the purpose of managing credit risk will be consistent with the level of the risk being undertaken, and will be for the sole purpose of managing that credit risk.

I was just wondering, Mr. Chairman—exactly what does that statement mean, if it doesn't mean the possibility, of course, of tied selling? It's imposing a condition of obtaining a loan, for example.

Mr. Frank Swedlove: I'm aware, Mr. Chairman, that the Canadian Bankers Association is appearing before you, and I think they're probably in the best position to explain the details of their statement.

We are aware that banks, like other financial institutions, when they provide a product, from time to time will need to have some assurances. If they provide a loan, for example, they will need assurances that indeed that loan is as protected as it could be, and from time to time that would mean checking the security or whatever of the loan. So I think there are some elements of that that may be quite understandable, but the specific details—

Mr. Werner Schmidt: That's not what we're talking about here. That we have adequate security—that's a given. I think that's understood. Very specifically, it says very clearly, in their own words:

for extending credit.

For example, a bank may require a borrower to obtain a product or service, such as a transaction or operating account, or refrain from taking on additional debt...

• 0920

The last words you can see, but to take a particular product, the forcing of taking a particular product...and it does say “impose”. If “impose” doesn't suggest forcing, what does it suggest?

Mr. Frank Swedlove: Mr. Chairman, again, I think probably it's best to direct some of these issues to the Canadian Bankers Association. We have in place a provision that would deal with coercive tied selling. When the provision is enacted, if the banks do not live up to that provision, then action would be taken.

I think they would have to explain to you why they believe their statement is consistent with this proposed legislation.

Mr. Werner Schmidt: It's fine for them to say this, but it seems to me that in the position you hold—director of financial sector division—you have some understanding as well. Clearly you would have had some sort of input in writing the legislation to prevent coercive or undue pressure. Clearly you must have had an understanding of some kind as to what that meant. The Bankers Association uses a different word. It uses the word “impose.” It seems to me that “impose” means there is no other alternative available; it is this one or nothing. And I don't think that's up to the Bankers Association.

Mr. Frank Swedlove: Yes, Mr. Chairman, as I noted in my statement, this was always a difficult area. It was always difficult to determine precisely what is meant by “coercive tied selling” and that's why we included regulation-making authority in the legislation. We're certainly willing to give consideration, as appropriate, to passing appropriate regulations.

Mr. Werner Schmidt: Mr. Chairman, I suppose the main burden of the question is to ask Mr. Swedlove whether, in his understanding, when the clause was written about no undue pressure or coercion, he had some idea as to what that meant, or whether he could have written or should have written a word like “impose” there.

What really is at heart here...because it seems to me there will be a number of people reading this legislation. You are reading it, and customers, bankers, and insurance companies are reading it; everybody who deals with financial institutions reads this. And they all understand, according to the usual dictionary definition, what coercion means, what undue pressure is, what force is and all of these kinds of things; and they also know what the word “impose” means. And clearly, this business of communicating is very essential when it comes to legislation.

I think it's not inappropriate for us to ask you, as a servant of the public administration in Canada, to tell us whether, in your opinion, “impose”, or “undue pressure”, or “force” of that kind, these words, are more or less the same thing, which really exclude the access to alternative things to do?

Mr. Frank Swedlove: I won't provide an opinion as to whether the CBA statement, in its entirety, would or would not be consistent with the provision. I'm sorry, but I'm not in a position to do that.

If an institution were to require as a condition of getting a loan that another product be purchased, then that would clearly be inconsistent with the provision we've provided.

Mr. Werner Schmidt: Thank you very much, Mr. Swedlove. I appreciate that.

Thank you, Mr. Chairman.

The Chairman: Mr. Swedlove?

Mr. Frank Swedlove: I'm sorry, with the exception of providing security, which you said was not an issue.

Mr. Werner Schmidt: Yes.

[Translation]

The Chairman: Mr. de Savoye.

Mr. Pierre de Savoye (Portneuf, BQ): Mr. Swedlove, you have no doubt been working for many years in the area that we are discussing today. You are no doubt familiar with all these issues. I am much more familiar with the banks as a client.

Having said that, I would like to continue in the same vein as my colleague from the Reform Party.

• 0925

Are you comfortable with the banks' policy statement? Can you tell this committee whether you are comfortable or whether you have any concerns? And what would these concerns be?

[English]

Mr. Frank Swedlove: As I've noted, I'm really not in a position at this point in time to make any definitive statements about the CBA text.

One of the purposes of these committee hearings, I think, was to get some sense of to what extent the actions by the associations to try to deal with the tied selling respond to the concerns about tied selling. I know there hasn't been a great deal of experience with the CBA statement, but that indeed was one of the objectives, as I understood it, when the government asked the House finance committee to review the tied selling issue. There was hopefully going to be feedback about how well this kind of statement would work, which would lead to input into us in terms of proclaiming the provision, and also whether any regulations would be appropriate.

[Translation]

Mr. Pierre de Savoye: Mr. Swedlove, you and Ms. Gibbons are our first witnesses this morning. You will get the ball rolling. You are with us until 10 o'clock. Do you have anything to tell us?

[English]

Mr. Frank Swedlove: I'd be glad to answer any questions, but I'm sorry, I really don't feel I'm in a position to proclaim on the CBA statement.

[Translation]

Mr. Pierre de Savoye: What questions should we ask the witnesses. What points do you think we might want to examine? Can you give us any advice that might help us to do our work well, or perhaps you could, Ms. Gibbons?

[English]

Mr. Frank Swedlove: I'm certainly pleased to answer any questions I can answer. We do have a legislative provision before you, and we look forward to hearing people's views on it. But in terms of the CBA statement, if you have specific questions about it, I strongly suggest that it be addressed to the Canadian Bankers Association.

We really haven't had any experience with complaints about it. You will be hearing from the Office of the Superintendent of Financial Institutions Canada, and they are the ones who have received the vast majority of complaints. We in the department have received only about a half dozen written complaints. They tend to relate particularly to the difficulty about individuals seeking loans and being asked to move their mutual funds or RRSPs. That is the nature of the kinds of complaints we've been hearing about. We tend to be receiving them from investment dealers who say their clients are being coerced in this fashion.

In the discussions we've had with the Canadian Bankers Association, they have told us that kind of practice would not be consistent with their statement. I think you may wish to ask them about some of the practices that have been reported in the press.

[Translation]

Mr. Pierre de Savoye: From a purely legal perspective, precisely because you are dealing with registered retirement savings plans, let us assume that a banker or banking institution asks a client to switch over his registered retirement savings plan as collateral for a loan. Am I correct to assume that the RRSP would then automatically be taxable?

Mr. Frank Swedlove: Yes.

Mr. Pierre de Savoye: That's correct. In any case, this could not happen quite so directly; it could only happen indirectly. In the complaints that you have received in this regard, how was it done indirectly?

[English]

Ms. Annette Gibbons (Senior Analyst, Financial Sector Division, Financial Sector Policy Branch, Department of Finance): There's an issue of whether or not suggesting that somebody transfer an RRSP to a bank would constitute coercion. I think that's the sort of issue we're looking to the committee to address.

There are different interpretations of what coercion is. We do have the subsection in the amendment to the Bank Act that talks about allowing for variation in prices for relationship pricing. But I think some of the concerns that have been raised with the department in letters of the minister do not seem to explicitly say that the problem is just a suggestion. They seem to suggest that even recommending that somebody move or asking them if they would like to move their RSPs—we have good rates and we've had good performance on our mutual funds—is coercion. That's really the issue that's at stake.

• 0930

[Translation]

Mr. Pierre de Savoye: If I've understood the issue clearly, the point is to provide a client with a service at a better price. Would the financial institution not be obligated to demonstrate that it is offering a better price?

Ms. Annette Gibbons: I don't know how this could be done in practice. There are some examples of loans for RRSPs that are made below the going consumer rate. We can see that there is a preferential rate.

Mr. Pierre de Savoye: I will give you an example. If you go to a supermarket in Quebec that claims to have an object on sale at $1.99, while the normal price is $2.99, if a client can show that $1.99 is the real price, the government will prosecute the seller for misrepresentation. Financial institutions are not governed by the Consumer Protection Act of Quebec or of any other province, because they are governed by federal legislation. Would it not be advisable to have something similar to prevent abuse of confidence?

Ms. Annette Gibbons: Can you really prove that the real price is $1.99?

Mr. Pierre de Savoye: Before the passage of the Act, it often happened that a seller would claim that the going price of an item was $2.99, even though, in the previous year, it had been selling for $2.25 and he said he was putting it on sale for $2.24. The reduction was not as significant as the seller had announced. The seller was making false representations. Therefore, there were prosecutions, and there still are because, unfortunately, these sorts of things continue to occur. However, the Act is strict and consumers are protected. They can usually believe what they read. Could there be something similar in the case of banks? How would you view this?

[English]

Mr. Frank Swedlove: Using your example, if the price is always at $2.25, then presumably they're willing to sell that product on its own for $2.25. The issue is whether the financial institution offered to sell the product at $2.25 even though the listed price is $2.95. Can you buy it at $2.25 if that's the only product you buy? Or is it a situation where you get the $2.25 price if you take another product?

So it's the linking of one product to another. If you provide a discount, then that would be an appropriate action.

Mr. Pierre de Savoye: My basic question is relatively simple. I'm sitting here and the banker is there. She's looking at me and she's telling me this is something I cannot say no to. This is a once-in-a-lifetime offer. I will believe her. But the day after that, I find out that was not an offer at all; I could have bought the same product at the same price anywhere else. What is my recourse?

Mr. Frank Swedlove: I'm not sure how that relates to the tied selling issue but—

Mr. Pierre de Savoye: Insurance. That's one thing.

• 0935

Ms. Annette Gibbons: Insurance, in what sense?

[Translation]

Mr. Pierre de Savoye: For example, someone who applies for a car loan or for any other type of consumer loan, may be asked to provide collateral. The financial institutions in Quebec can provide such products. The banks can provide other products and claim to offer them at a better price, while, in fact, the bank across the way may be offering the same product at the same price and a third supplier who does not provide that product and is not in the banking business, can provide it at the same or a lower price. What recourse do I have if I am misled?

Ms. Annette Gibbons: You can always shop around and see what the banks or other financial institutions are offering.

Mr. Pierre de Savoye: What recourse do I have if I am misled? Do I have any recourse or are you telling me that there is none, that it is a case of caveat emptor?

Ms. Annette Gibbons: If you really believe that there is a problem or that you have been coerced in some way, you can always appeal to the banking ombudsmen. This system seems to favour the consumer in a very high percentage of cases.

Mr. Pierre de Savoye: I will stop here, Mr. Chairman, because we could continue for a long time. You have been very kind in giving me all this time. Thank you.

[English]

The Chairman: Okay. We'll proceed with Ms. Desjarlais. Welcome.

Ms. Bev Desjarlais (Churchill, NDP): Thank you.

I know you commented in a few instances that we'd have to see whether or not it would be coercion or undue pressure. In your view, what do you see as coercive, undue pressure? You're experienced people, so you must have some ideas in your head as to what you would see as falling into these positions of undue coercion and pressure.

Mr. Frank Swedlove: Clearly, if one were to go into a bank and be told that as a condition of loan you needed to purchase other products.... Again, we've received a few letters from investment dealers saying that their clients have been required to move their mutual funds from their operations to the bank mutual fund companies. I don't know to what extent this has been occurring, but we have received some letters along these lines. In my view, that would be clearly coercion with respect to tied selling.

Ms. Bev Desjarlais: What would be some less obvious cases that would fall under these guidelines? That's the pretty obvious one, and I would hope we wouldn't be sitting here going over this if there were only a few cases. I tend to believe there have probably been a whole lot of cases, and maybe they're not all quite so obvious so there's a real concern out there.

So what are the less obvious cases? For instance, maybe we know 100 people who never got loans in an area, but we also know that they didn't have their RRSPs there or whatever. Is there any way to address those issues, or is that not an issue?

Mr. Frank Swedlove: I think any lawyer will tell you that one cannot provide an absolute definitive line between what is coercive and what is not coercive, and that's one of the reasons we provided for regulation-making authority. But clearly if there is pressure by the bank employee, for example, and if a client gets the sense that they would not get the loan unless they purchased other products.... It may not be as definitive as saying you must move your RRSPs, but it could be couched in such a way that would give a very strong suggestion of that taking place.

The Chairman: Thank you very much.

Ms. Redman.

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

Following along on the line of questioning, is it possible to have a definitive definition of what coercion and undue pressure are, to make it very clear, or are we always going to have this huge grey area?

• 0940

Mr. Frank Swedlove: From what our lawyers have told us, one of the difficulties in putting these kinds of provisions in legislation is that some interpretation is left to the courts to decide.

We thought it would be useful to provide a little bit of guidance in the legislation with respect to what we perceive to be beneficial tied selling. We recognize there may be other opportunities to more clearly define it. We'd like as close a definition as possible, but from what our lawyers tell us, it will never be so clear-cut that there won't be room for interpretation by the courts with respect to the expressions of coercion and undue pressure.

Mrs. Karen Redman: May I have a couple of other questions?

The Chairman: Yes, go ahead.

Mrs. Karen Redman: Would it be possible to put in a requirement—and maybe this isn't something that goes in legislation—to advertise in a very public way? Or maybe we could define groups of people.... It strikes me that if my RRSP is in a bona fide vehicle, whether or not it's with bank X, it should be a sufficient guarantee of whatever loan you're giving me that it's in a vehicle that's been recognized and has the kind of financial stability any institution would require.

Ms. Annette Gibbons: Certainly there's a clear-cut acknowledgement—this shows up in the amendment and will soon show up in provincial statutes as well—that if you require insurance to secure a loan, this can be provided by any reputable lender. The financial institution making the loan can have the right to approve the lender, but the approval should not be unreasonably withheld. It is acknowledged that anyone who is reputable should be allowed to service the insurance needs of the customer.

Mrs. Karen Redman: I notice you said on page 3 that with respect to other financial institutions none have yet acted to implement tied selling policies. I'm assuming they're not looking at bundling of services as well, because I understand cross-selling and tied selling sometimes are hard to differentiate. We're not seeing that trend in other financial institutions, are we?

Ms. Annette Gibbons: No, we definitely are seeing it. The discussions we've had with people at the working level are that some provincial statutes cover their business, and that's particularly true in the insurance business. They have general policies on sales practices that would cover tied selling.

I think it's something you may want to ask the associations about in their appearances before this committee. As Mr. Swedlove noted, the CLHIA has indeed prepared something.

To specifically answer your question about cross-selling, you do see it in different industries in the financial sector to the extent it's permitted.

Mrs. Karen Redman: Thank you.

The Chairman: Thank you, Ms. Redman.

Perhaps I can rephrase some of the questions that were asked earlier. Perhaps you could give me an answer to a very simple question. What is the practical implication of having section 459.1 proclaimed into law? What does it actually do?

Mr. Frank Swedlove: It would ban this kind of activity from taking place. The financial institutions could be subject to the penalty provisions of the Bank Act if they were found to have carried out this coercive-type selling.

The Chairman: What would happen in practical terms? Now this applies only to banks, not to other financial institutions. Why is that?

Mr. Frank Swedlove: That's right. The difficulty relates to the constitutional issue. While we have constitutional authority over banking, with respect to trust companies and insurance companies our involvement is through the act of incorporation. Consequently, our constitutional lawyers felt that it would not be appropriate to include them in the other areas simply because we wouldn't have the constitutional authority to enforce it.

The Chairman: Are you telling me that other financial sectors cannot participate in something like tied selling?

Mr. Frank Swedlove: Indeed. That is why, when this was being discussed, we specifically asked all financial institutions to look at establishing policies to deal with the tied selling issue. As for actually putting a provision in legislation, we felt we could only do so in the Bank Act.

• 0945

The Chairman: In 1996 the committee recommended that the Department of Finance conduct a study of tied selling provisions outside Canada, as well as at the provincial level in Canada. Have you conducted this study, and if so, what are the results?

Ms. Annette Gibbons: I would say no, we have not conducted a formal study, although we are constantly monitoring new developments in provincial statutes and in American ones. As well, we follow what the tied selling provisions are and what changes have been made. Indeed, there have been recent changes in the U.S.

There are also some changes at the provincial level, particularly with respect to mutual fund sales. Some of you may have seen reference to this in a Globe and Mail article this morning. Quebec is also considering changes as part of Bill 188 to deal with tied selling.

We do follow very closely what is happening in other jurisdictions.

The Chairman: The prohibitions against tied selling in the United States are quite strict. Is that true?

Ms. Annette Gibbons: They started out as being very strict, but over the years, and particularly in the last few years, there's been quite a bit of opening up of the U.S. anti-tying rules. It's at the point now where it is pretty much allowed between a bank and its affiliates. They can package products to sell them. The only restriction is that one of the products has to be a traditional bank product, such as a deposit, a loan, and a trust business. They're quite open in allowing relationship pricing, packaging of products.

Mr. Frank Swedlove: The United States basically started with a ban on all tying of products, but provided regulation-making authority to allow certain types of activity. Over time the regulators have increasingly opened up the opportunity for the tying of products.

There is now legislation before Congress to remove the tied selling provision entirely, although there's some uncertainty as to whether it would be passed. It's legislation that's not necessarily supported by the administration.

The Chairman: Why is that? What's the cause? Why are they even promoting this untying?

Mr. Frank Swedlove: There's a recognition that there are some benefits to consumers to allow the tying of products and providing discounts to the consumers.

The Chairman: Are you saying if this tied selling provision were to be enacted, consumers might be actual victims of this piece of legislation?

Mr. Frank Swedlove: The Canadian legislation?

The Chairman: Yes.

Mr. Frank Swedlove: No. We certainly attempted to draft it in such a way that it would not be the case, specifically by permitting the discounting of packaged products. Specific provisions in the section permit that, in our view, to take place.

The Chairman: Going back to the original question, this individual goes in—let's say Mr. Clark, to use a modern-day example—and was able to sort it out. But there are some people who may not be able to. Maybe they lack the knowledge, maybe they're not aware of consumer protection. There are many reasons why people get caught in this situation. All of a sudden we find out this bank is in fact in contravention of tied selling. What happens to this financial institution?

Mr. Frank Swedlove: Would this be after the proclamation of this provision?

The Chairman: That's right.

Mr. Frank Swedlove: The bank would be subject to the penalty provisions of the legislation. There are significant fines and even jail sentences.

One would hope the institutions, in a large way, would be able to respond to any abuses of this. For example, the banks have a whole ombudsman system established, both within their banks and industry-wide, and they would respond quickly to any occurrences of this taking place. If they didn't, the legislation is there and action could be taken.

• 0950

The Chairman: Can you explain to us the role of the OSFI in relationship to tied selling?

Mr. Frank Swedlove: Like all the provisions of the Bank Act, OSFI is responsible for monitoring compliance with the legislation. They'd probably be more in the business of responding to complaints. We do attempt to ensure that consumers are aware that if they do have problems with their financial institutions, including banks, they have the opportunity to raise the issue with OSFI. OSFI does look at individual complaints, keep statistics on them, and attempt to work with the institutions to respond to complaints.

The Chairman: What would happen if an accusation was filed with OSFI?

Mr. Frank Swedlove: At this point in time—and Mr. Thompson will be here and can probably provide you more detail—my understanding is that when they receive a complaint about an institution, they get in touch with the institution, try to get an understanding of what the problem is, and try to deal with the issue, respond to the concerns of the consumer, as long as it's a reasonable concern.

Again, I think the ombudsman system that has been established has at least allowed the customer to try to work with the financial institution to resolve the problem. If that doesn't work, then the Office of the Superintendent of Financial Institutions is at least there to try to help the consumer.

The Chairman: Thank you, Mr. Swedlove.

Mr. Solberg.

Mr. Monte Solberg (Medicine Hat, Ref.): Thank you very much, Mr. Chairman, and my apologies for being late. We were only notified of these hearings on Thursday, and I had some long-standing commitments, which means I'm going to have to leave in a little bit as well.

I want to start by asking whether or not it's already against the law to try to coerce somebody into doing something. Isn't that already against the law?

Ms. Annette Gibbons: I'm sure that, in previous hearings of the committee on this issue, there was some discussion of the Competition Act provisions on tied selling. In the Bank Act per se, the only existing provision deals with the requirement to have insurance to secure a loan.

Mr. Monte Solberg: Well, I think I was looking at the broader picture, though. In law, if you try to force somebody to do something—and I'm a layman, not a lawyer—my hunch is that it would be illegal. Isn't that the case? Unless you're the government, you can't force people to do anything. If you're a private individual, I think you would face penalties in law.

I guess what I'm getting at is whether or not there are provisions already in hundreds of years of common law, where people have reflected upon what constitutes coercion. Aren't there already all kinds of provisions in place that prevent private individuals or corporations from forcing somebody to do something?

Mr. Frank Swedlove: First of all, this is probably an area more of provincial jurisdiction since it would define contract law. Having said that, presumably nobody is forced to actually purchase any product. The person could always just get up and leave. In the sense of being forced to purchase a product, then, I'm not sure that is the case. The issue is whether or not, in order to obtain one product, you are coerced or forced into taking another product.

Also being a layman, I presume that given the fact that some provinces are looking at making specific provisions with respect to tied selling, it would suggest that there isn't appropriate coverage in the existing statutes.

Mr. Monte Solberg: Are we aware of anybody who has ever challenged any of this sort of thing in the courts already?

I think I understand why people might feel that coercion is involved in some cases, because credit is kind of a unique commodity. When I think of all the products that are offered by financial institutions, a loan is probably the one that most people would feel is the most difficult to get, and also the most valuable. Because some people perceive that there is a small pool of institutions that offer loans, I suspect they really have no other options in some cases. They really have to stay with that institution in order to keep a loan or to get a loan.

• 0955

I guess what I'm saying is that if that's the case, and if we can't determine here exactly what coercion is or we seem to have trouble determining what it is, why would we not allow the courts, who have the benefit of a thousand years of common law and have reflected on these things in the past—I'm sure there are volumes of jurisprudence on this—to reflect upon what constitutes coercion?

Mr. Frank Swedlove: In the absence of any provisions such as this, or with some of the provincial steps that are being taken with respect to mutual funds, for example, we're aware that the securities regulators are looking at establishing a rule that would prohibit tied selling of mutual fund products in the absence of providing discounts. It is clear that there is concern that the present law would not stop this activity from taking place, and that specific legislative action is therefore necessary.

Mr. Monte Solberg: A moment ago, you suggested that people aren't actually forced to do these things. I think it's really important that we define our terms here. If people aren't actually forced to do something, then we should make that very clear. If they have the ability to walk away but it would be really very inconvenient or impractical for them to do that, maybe that needs to be the subject of what we're looking at, as opposed to coercion. I think it's accurate to say that in most cases it's possible for anybody to coerce another person. There are probably ways to do that.

Maybe we're not really talking about coercion here. Maybe we're talking about ways in which an institution pressures people. Maybe that's the issue. But if that's the issue, I think the implications are quite different from coercing people to do something. Do you think I'm off base in saying that?

Mr. Frank Swedlove: No. The legislation uses both “coercion” or “undue pressure”. We recognized that maybe “coercion” wasn't sufficient in its own right to define the concern, so we also used the expression “undue pressure”. But I recognize that you do fall into similar difficulties in terms of definition.

Mr. Monte Solberg: So at the end of the day, if there's a dispute over these things, this will ultimately go to the courts in any event.

Mr. Frank Swedlove: Yes. Again, though, we have regulation-making authority, so if there's a decision to proceed with a regulation that would more clearly define things, that might narrow the scope for the courts. But in the absence of that, as I've mentioned before, there is clearly probably some room for interpretation by the courts.

Mr. Monte Solberg: I'll just conclude by saying, Mr. Chairman, that I'm a little bit concerned that at the end of the day, although everybody is concerned about forcing somebody to do something, our inability to really define what that means will mean that any changes that we make will be largely empty. Ultimately, these things will be decided by the courts, just like they would have been decided before.

I'll just leave it at that.

The Chairman: I have one final question in reference to.... The purpose of these hearings is also to provide an educational process for the people of Canada. This issue needs to be addressed in a large forum of Canadian consumers, but also of the financial institutions.

• 1000

It's very unclear. Let's say the bank violates this section. Where would it end up? Are you saying it would go to the ombudsman? That was the last question I asked. Once it's in violation, where does the consumer go?

Mr. Frank Swedlove: The banks have established an ombudsman system and we encourage the banks to advertise as much as possible the existence of this ombudsman system because it hopefully can provide an opportunity to respond to some of the concerns of the consumers. If they are not being properly treated by their banks, we would hope the ombudsman system would address that. But you'll be having the bank ombudsman before you and I'm sure you'll have a number of questions for him.

Our responsibility basically relates to ensuring the act is followed. If there are situations where the act is not being followed and we hear of those situations arising, we would need to take action. If there is a systemic problem, we would want the banks to quickly respond to that. Certainly if it were a continuing problem, the penalty provisions would indeed start to apply.

The Chairman: I just want to take it back to something Mr. Solberg cited, that people may feel there are limited choices when it comes to getting credit or other products. I don't know if I can speak on behalf of Mr. Solberg, but does this really say something about the fact that the whole tied selling provision in the Bank Act is an admission that the banking industry is not competitive, to piggyback on Mr. Solberg's point?

Mr. Frank Swedlove: I think it's a recognition that the selling of financial services is becoming an increasingly complex area whereby banks are providing a wide range of services. The possibility for problems to arise with respect to the tying of products is greater than it has been before.

I'm not saying there is a problem. I'm just saying when you sell a whole series of products and not just offer deposits and provide loans, the possibility for tying a product certainly arises and the possibility of coercion and undue pressure may also arise. Consequently, we think this provision tries to deal with this kind of changing environment where banks now offer a much wider range of products.

The Chairman: As a final comment, this is only applying to banks, and it's a point I have to raise again. You're just saying it's only because of a constitutional reason. Is that it?

If the financial services sector changes in Canada and more and more sectors do the same thing, it seems to me the logical extension is we need to review that because people are engaged in the same business. Why does this particular tied selling provision deal just with banks and everybody else is not included? It's a question I'm going to ask the insurance industry, investment dealers and banks. I want to get to the bottom of it.

Mr. Frank Swedlove: You're right, Mr. Chairman, it is a bit of a difficult situation because we attempt, in all of our financial sector legislation, to have consistency among the various pieces of legislation, so institutions are generally treated in a similar way. So if you look at our Bank Act, the Insurance Companies Act, the Co-operative Credit Associations Act and the Trust Companies Act, their provisions are almost identical in terms of the drafting. So there is that desire to be consistent.

We do have consumer legislation in some of our other legislation, but that consumer legislation tends to deal with providing disclosure and complaints-handling mechanisms rather than defining the relationship between the customer and the financial institution.

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When we start to define or intervene in that relationship, it raises constitutional issues. It was the view of the Department of Justice that while it would be appropriate to proceed with respect to banking, we could not proceed with respect to the other legislation where the federal financial institutions are covered only by an act of incorporation.

The Chairman: The Trust Companies Act and the Loan Companies Act each have a section that speaks to the issue of no pressure, but it's limited just to insurance. Is that correct?

Ms. Annette Gibbons: That's right.

The Chairman: Why is that? Would we change these acts as well?

Ms. Annette Gibbons: That provision mirrors the no-pressure clause in the Bank Act at the moment, but as Mr. Swedlove was explaining, in terms of having a broader prohibition on tied selling, there are constitutional implications.

The Chairman: With trust companies.

Ms. Annette Gibbons: With trust companies and insurance companies.

Mr. Frank Swedlove: Yes.

The Chairman: Thank you very much. I really appreciate that. I think you gave us some insight.

There's no question these hearings will require more than two days. There are many definitions we need to deal with. Above and beyond Mr. Clark, I would like to hear from Canadians and open it up a little more to individuals who feel they were not dealt with properly. There's also the whole issue of why this particular provision applies only to banks. I would like to get to the bottom of that issue as well.

Thank you very much, Ms. Gibbons and Mr. Swedlove. You have been very helpful.

We'll suspend for just two or three minutes and be right back.

• 1007

• 1013

The Chairman: I'd like to call the meeting back to order and welcome the representatives from the Insurance Bureau of Canada, Mr. George Anderson, president and CEO; Mark Yakabuski, director, government relations; and Randy Bundus, associate general counsel. You are not new to finance committee hearings so you know how they operate. I'll give you approximately 10 minutes to make some introductory remarks and then we'll move to the question and answer session.

You may begin, Mr. Anderson.

Mr. George D. Anderson (President and CEO, Insurance Bureau of Canada): Thank you, Mr. Chairman. Perhaps I should begin by apologizing for the tone of my voice, which is never stentorian at the best of times and today it is even less so due to the flu.

I'm pleased to be here on behalf of the Insurance Bureau of Canada to express our views on this elusive and difficult issue of tied selling. With me this morning, as you've indicated, is Mark Yakabuski, who runs our Ottawa office, and Mr. Randy Bundus, who is a lawyer, so those legal questions can go to him. He is very familiar with what happens in provincial jurisdictions.

I should preface my remarks by saying that we have not had the opportunity, given the short timeframe in which the hearings were called, to consult our membership on some of the contextual matters I'm going to address here today, so we would like the opportunity to present a final brief towards the end of the week. But I think the main recommendations we have are certainly supported by our members.

We speak for the property and casualty insurance industry in Canada, an industry that employs 100,000 Canadians in communities right across the country and which last year paid about $13 billion in claims to insurance consumers for loss or damage to cars, homes and businesses and, importantly, to rehabilitate injured accident victims.

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Most recently, our industry, as you know, has played a pretty critical role in helping Quebec, eastern Ontario and parts of the maritimes recover from the great ice storm of 1998. We've already received claims as a result of that storm totalling in excess of $800 million dollars. By the time the final tally is in, we expect that our companies will have paid out well over $1 billion and helped more than 500,000 families and business through some of the most difficult times of their lives.

First Marathon Securities recently described the property and casualty insurance sector as the most competitive of all of Canada's financial services industries. There are nearly 220 companies actively competing to meet the changing insurance needs of Canadians. This level of competition, of course, has enormous benefit for consumers.

Tied selling, on the other hand, is an attempt to restrict this kind of beneficial competition by reducing the choices consumers have in purchasing different financial services. It's obvious that consumers lose out when companies make the purchase of one product conditional on the buying of another, either formally or informally. Tied selling refers to a situation where the purchase of one product is formally or overtly tied to another.

These overt and obvious situations probably don't take place too often. The world is far too subtle for that these days. But there are almost certainly many instances where consumers are in fact exposed to intense pressure—what others have called coercive cross-selling—to buy product B in order to get product A. Both kinds of conditional selling rob consumers of the fundamental right to choose the best financial services for their needs.

Conditional selling, whether it be tied or coercive, should be clearly distinguished, however, from those instances where companies offer two related products at a discount to consumers. It's a wide practice, for example, in our industry to offer our customers both auto and home insurance policies together and to provide them with a significant saving in the process. Customers do remain free, of course, to purchase their home or auto insurance from different insurers if they so choose.

As far as our industry is concerned, over two-thirds of Canadian consumers are already protected against any instance of tied selling. Ontario, British Columbia, Quebec and Saskatchewan all have legislative provisions that prohibit the conditional selling of insurance.

In the case of Saskatchewan, it is currently in the process of updating its Insurance Act. The province's draft amendments propose to strengthen the provisions against tied and coercive selling by focusing on those instances where the provision of credit or other forms of financing are used to restrict consumer choices, and I think that's, if I may suggest, a key issue for this committee to be looking at, this question of the provision of credit and the tying of that to other products.

We're more than willing to work with any of the remaining provinces that don't have this legislation and may wish to consider enacting similar legislation, and we think it makes good sense to continue to allow the provinces to regulate this issue in terms of the property and casualty insurance industry and to avoid another round of what I might term “duelling jurisdictions” on this particular subject.

The main challenge for this committee, it seems to us, is to ensure that there are effective measures at the federal level. For all intents and purposes, this means the banking industry.

The importance of protecting consumers against tied and coercive cross-selling in the banking sector is, I think, very clear. I've already mentioned how Saskatchewan is rewriting its financial institutions legislation to focus on those situations where a financial institution uses the granting of credit to pressure consumers to buy other services. There is a recognition here that transactions where credit decisions are involved are potentially ideal opportunities to engage in tied or coercive cross-selling.

Members of this committee know that Canada has by far the most concentrated banking sector of all the G-7 countries. We have only a handful of banks nationwide and in many cases only one or two in any given local community. We need to keep in mind that it is much easier to make consumers buy a second product when there is no competition on the other side of the street.

Moreover, the threat of tied and coercive cross-selling is substantially greater today, I would suggest, than it was years ago, as a result of the financial institution amendments made in 1992.

• 1020

We have taken the position that the federal government made the right choice in 1992 to allow the cross-ownership of different financial businesses, but Parliament also recognized when it made these provisions that this could not be done without putting in place certain fundamental consumer protections.

As far as insurance was concerned, new competition from bank-owned insurance companies was balanced by a recognition that banks should not be allowed to use the personal information they have on customers to cross-market insurance, and they should not be permitted to retail insurance over the counter in their branches.

I suggest to you that these provisions are working, and working well, and they ought to be maintained as we roll forward in this new financial services environment. But they also need to be supplemented by tied and coercive cross-selling regulations.

These regulations are even more urgently needed now to address the fact that since the 1992 changes, the major chartered banks have, as you know, expanded their reach to a host of other financial industries and are likely to expand further in the years ahead. With this expansion comes an enormously increased potential to tie the purchase of any one of these services to the bank's principal lever, the granting of credit. I return to that again as a main theme of our remarks today.

It is true that the federal Competition Act contains provisions against tied selling. In our view, these are too narrowly defined, however, to deal with the millions of consumer financial transactions that take place in Canada on any given day. I think you're going to have witnesses come forward to tell you what's going on there in the marketplace on a day-to-day basis.

The act does not address the countless opportunities where coercive cross-selling, as opposed to formal tied selling, may become a reality. Moreover, the act was not specifically designed to protect small depositors and other consumers in purchasing daily financial services.

We believe the committee has the opportunity to remedy that by ensuring there are adequate provisions in the Bank Act to protect consumers.

A new section, proposed section 459.1, was drafted as part of Bill C-82 last spring but not proclaimed. Our view at that time was that proposed section 459.1 had been worded far too broadly. Our view has not changed. Certain subsections had the effect of limiting the government's ability, in our view, to draft regulations that would clearly define the types of conduct that constitute tied or coercive cross-selling.

Mr. Bundus can elaborate on that, if you wish.

That is why we urge the committee to delete these subsections completely. I think I'm referring here specifically to proposed subsections (2) and (3).

We would encourage that the regulations drafted as part of proposed section 459.1 focus on those situations where the granting of credit is used by banks to compel or coerce consumers to buy other financial services. This whole area, we suggest, needs further study to ensure that provisions are in place to capture the increased potential for tied selling as a result of the enhanced powers granted in 1992.

As well, we need to look at how this potential may increase even further in the future if the major chartered banks are indeed allowed to merge with one another and create enormous engines and platforms for selling a whole range of financial products in the marketplace.

In summary, Mr. Chairman, we are here today to urge the committee to provide consumers with the protection they need against tied and coercive cross-selling. This kind of protection already exists for most consumers of property and casualty insurance at the provincial level, and we are prepared to work with any of the remaining provinces in this regard. However, the key issue, in our view, is to ensure that the power to grant credit, enjoyed by Canada's banks, is not used in undesirable ways.

You can make an important start by changing the Bank Act by bringing into force proposed section 459.1, as long as those proposed subsections are deleted, as they restrict the government's ability to draft effective definitions of tied and coercive cross-selling.

If I may suggest, this issue needs to be looked at closely and continuously as we roll forward and consider some of the other issues this committee will have in front of it in the months ahead.

Thank you very much, Mr. Chairman.

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

Mr. Solberg.

• 1025

Mr. Monte Solberg: Thank you very much, Mr. Chairman.

This is a very complicated issue. I take Mr. Anderson's point about the issuing of credit. I think it could be argued that in an environment where options are limited, credit is really a unique product, commodity, or however you wish to describe it, but it's something only the banks.... That's not quite accurate either.

Let's assume for a moment we accept the premise that there is a limited number of places people can go to get credit. Let's assume we have an environment where there are lots of options for people to get credit and the quid quo pro for the merging of banks is that there is unfettered competition, foreign banks are allowed to come in, but also, domestically, insurance companies are allowed to give people loans and are allowed access to the payment system and all that other stuff. In a situation like that, where everybody's on a level playing field, how would you feel about the practice of tied selling, keeping in mind that in other sectors of the economy, outside of financial services, tied selling is probably pretty much the status quo?

Mr. George Anderson: While I would suggest no Canadian should ever to be forced to—

Mr. Monte Solberg: Right, forced.

Mr. George Anderson: —buy one product in order to get another product, on a more general point, theoretically, if we had a completely level playing field in the country where institutions competed on a fair basis, you could make the case that others ought to grant credit and so on. But the reality is that we have a very concentrated banking sector in this country. It dominates everything it gets into. Everybody knows that. It's a natural disposition to want to acquire more and more market share.

I think we have to be concerned, as we now consider what we've wrought in terms of banking legislation, whether or not we are exposing customers to an ever narrower range of choice, where tied selling would not occur. I accept the bankers at face value when they say they don't tie sell.

There are other ways to indicate it would be preferable for our business relationship if we had more than one business commodity. The opportunity to do that is very great when you create this enormous engine for production the banks now have. I think, frankly—and I think you know—Canadians are worried about this.

Mr. Monte Solberg: You mentioned you package auto insurance with life insurance—

Mr. George Anderson: Auto and home.

Mr. Monte Solberg: —auto and home; you don't do life insurance. In a situation where somebody says to you “I only want auto but I want it at the price we'd get it for if you packaged it with home”, what would you say?

Mr. George Anderson: Each company would make its own decision. Some might do it, but I think generally they don't. They say we're offering you a discount to buy both products because it's cheaper for us from a marketing point of view. We're also not attempting to lever off one product line into a whole bunch of others. We don't say we also want your RRSP and this and that, so it's a slightly different situation.

Mr. Monte Solberg: I understand what you're saying, but in a sense it seems to be the same thing because you say you're not forcing people to accept a product at a particular price. They always have the option to go somewhere else if they only want to buy one product but find that the price isn't attractive or you won't change your price. But isn't that really the same situation with the banks? Maybe they really want the auto insurance but they can't afford it at that price.

Mr. George Anderson: I would suggest not. I think there's a real difference between offering a discount for a bundled product and what we call tied or coercive selling, where people really don't want to give you a product but feel compelled to do so in order to get what they really want.

Perhaps Mr. Yakabuski could elaborate a bit on that.

Mr. Mark Yakabuski (Director, Government Relations, Insurance Bureau of Canada): I think there's a big difference between some of the instances you talk about and the packaging that goes on in our industry with respect to auto and home insurance, for example.

First of all, auto insurance rates are regulated by all the provinces. Our companies have to file those rates with the provincial regulators and those rates have to be approved. The fact that we might grant someone a discount because they choose to take both their home and auto insurance with some of our companies is a reflection of the fact it costs our companies less to both maintain that policy and maintain that customer and to find that customer in the first place. There are some savings.

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The thing that has to be kept in mind is that we have over 200 companies competing in the auto and home—

Mr. Monte Solberg: That's a good point.

Mr. Mark Yakabuski: —insurance field, so consumers have a great measure of choice there if they choose not to take that package. The package reflects the fact that, because we have the level of competition in auto and home insurance that we do, those savings are passed on to the consumer in the form of a discount as opposed to being kept in the pocket of the insurance company.

Mr. Monte Solberg: Just one final point—

Mr. George Anderson: I have something to add.

Mr. Monte Solberg: Okay.

Mr. George Anderson: Customers are dealing with brokers who are dealing with more than one company. They're not dealing with a product manufactured by a single company, with only its product being sold. If a consumer doesn't like the offer that the broker brings to the table, there are other offers right there from other competing companies. You don't get that in the banks. They don't offer the other competitors' products.

Mr. Monte Solberg: Fair enough.

I have just one final point. The banks would argue that there's a cost savings to them too if they can package the products. I think you'd have to agree that that's true for the banks as well, and that's how they can justify saying that if you bring your RRSP business to them, they'll grant you this loan because they can now afford to. It makes sense for them to do it if they can afford to.

I take your point about competition. I think that goes back to what the chairman was saying before. Because of the perception of the lack of competition, maybe banks are put into a different category. The granting of credit is a different situation.

I think that's fair enough, but I think we also have to ask ourselves if that will always be the case, and if we are preparing a policy that will suit us now for only a year or two. Or will things dramatically change in the event that we allow a merger of banks in this country, open up competition holus-bolus, and allow access to the payment system so that everybody has access?

Those are my concluding remarks, but I must also say that because these hearings were called on very short notice, as you know, Mr. Chairman, I had scheduled another commitment and I'm going to have to leave.

The Chairman: Thank you for your contribution.

If I can come back to you, Mr. Yakabuski, the issue of competition seems to be a major issue for you.

Mr. Mark Yakabuski: It sure is. There's just a big difference between a financial industry that has five nationwide banks and an industry such as ours, in which we have 220 companies competing across the country. It's just very difficult to make the comparison between things happening in our industry versus those happening with the banks. The question is whether or not tied selling or coercive cross-selling is being used to fundamentally diminish the choices that consumers have to buy the financial products they need as opposed to the financial products that a company might want them to buy. Competition plays a very big role in ensuring that consumers indeed maintain those choices.

The Chairman: Am I to understand that the products that may be included in a tied selling proposal are only sold by banks?

Mr. Mark Yakabuski: No. As Mr. Anderson already said, we have tied selling provisions—basically, they're conditional selling provisions—in place in a number of provinces in Canada, covering over two-thirds of Canadian consumers already. Most of those have the effect that you can't say you can only buy product A if you buy product B. We believe that's a restraint on consumer choice, and regulations ought to address that. We already have regulations touching our industry at the provincial level. We don't have regulations to that effect at the federal level. Banking is a federal responsibility.

The Chairman: So the products are sold by other financial institutions as well, and may in fact be included in a tied selling proposal by a bank.

Mr. Mark Yakabuski: Some companies out there are no doubt selling products that banks sell as well.

I guess the other point was that there's no doubt that, as the 1992 financial institution amendments worked their way into the system more and more, banks were given extensive new powers in 1992. Some other financial institutions were given greater powers as well. As all of this mixes up over the years ahead, we are going to be seeing many more opportunities for cross-selling than existed in the past. We have to take that into account and make sure our regulations are such that, while we've expanded the powers for cross-selling, consumer choice is not diminished.

[Translation]

The Chairman: Mr. de Savoye, do you have a question?

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Mr. Pierre de Savoye: Yes, Mr. Chairman.

At the risk of having my bank loans cancelled, I must say that I like this brief very much. Bankers are good people who are trying to earn a living. What you say is very sensible. One of your points is that someone who has been subject to a tied sale, with or without coercion, has little recourse under federal legislation.

But the crux of your brief is when you say that proposed clause 459.1, except for subclauses 2) and 3), in your words,

[English]

[it] might in fact encourage the bundling of certain bank products and other financial services in a way which was not beneficial to consumers.

[Translation]

Can you explain why you made this statement?

[English]

Mr. George Anderson: Mr. Chairman, perhaps I'll ask Mr. Bundus to elaborate on that.

Mr. Randy Bundus (Associate General Counsel, Insurance Bureau of Canada): Thank you, Mr. Chairman.

Subsections (2) and (3), the two subsections that we're concerned with, are put in apparently to clarify, to give greater certainty. They allow that a bank can offer to make a loan on more favourable terms than it otherwise would make the loan if certain other products are bought either from the bank or from another person. We believe this provision limits the power of the government to make regulations under paragraph (5)(a) of this section.

If there's a concern with banks doing what I just described, and if that causes concern to customers, we believe the government should have the authority to make regulations at a later point in time. We believe that with subsections (2) and (3) in place in the legislation, that regulation-making power is limited. If a problem arises by virtue of conduct set out in subsections (2) and (3), conduct that harms consumers, we'd have to change the legislation. We couldn't do a quick fix by regulation to address that problem.

Mr. George Anderson: Generally, I think our view is that this section is an important section. It expands the regulation of tied selling, and it ought to come in with this one exception whereby we think the government is in effect hamstringing itself. While it's a complicated technical argument, we're prepared to submit a separate brief on that to explain our view in more detail.

[Translation]

Mr. Pierre de Savoye: This is, indeed, the crux of your presentation. You are saying that the wording of these subsections might bring about the linkage of a certain number of bank products. Could you give us an example to illustrate what might happen?

Mr. Mark Yakabuski: These subclauses have been drafted in a rather peculiar fashion. We wonder why the Department of Finance has chosen to specify what constitutes tied sales or coercive practices, while in both these cases, government should have reserved the power to issue regulations in this regard. We simply believe that these two subclauses were not clearly analyzed by this committee or in the public hearings.

If we want to adopt regulations dealing with the whole issue of tied sales and coercive practices, drafting should be clear and open.

Mr. Pierre de Savoye: Can you give us a specific example of a negative effect?

Mr. Mark Yakabuski: For example, let's read subclause (2):

(2) For greater certainty, a bank may offer to make a loan to a person or more favourable terms or conditions than the bank would otherwise offer to a borrower, where the more favourable terms and conditions are offered on the condition that the person obtain another product or service from any particular person.

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According to the interpretation of legal specialists, this means a bank could ask someone to buy a product from one of its branches. Is this a good thing? Should the consumer not retain the choice of buying the product from any financial institution rather than a branch of the bank?

In reading clauses (2) and (3), I have the impression that the bank could ask a client specifically to buy a product from one of its branches. I do not think that this is good.

Mr. Pierre de Savoye: In your brief, you are not merely saying that the bank could do so. You are saying that the bank would be encouraged to do so because subclauses (2) and (3) indicate that this is allowed. If it is allowed, this opens the door, and you are saying that they will all jump through that door. Is that what you are saying?

Mr. Mark Yakabuski: We are merely saying that this opens a door. In view of the nature of our banks in Canada, I believe that they will take advantage of this.

Mr. Pierre de Savoye: Did you want to add something else, Mr. Anderson?

Mr. George Anderson: No.

Mr. Pierre de Savoye: Thank you, Mr. Chairman.

[English]

The Chairman: Thank you very much, Mr. de Savoye.

Mr. Casey.

Mr. Bill Casey (Cumberland—Colchester, PC): Thank you very much. I'm certainly pleased to be here this morning. I'm not usually on this committee, but I have a special interest in that I made my living in the brokerage business until coming to Parliament. I worked for one of the companies that haven't been taken over by the banks.

Mr. George Anderson: Maybe we can guess which one it was.

Mr. Bill Casey: They also like the colour blue.

I find that tied selling is pervasive in my business. It's not the exception, it is almost the rule, and it comes kind of retroactively. After you've established your mortgage, after you've established your line of credit and your Visa card, then the subtle statements come.

It's not coercion. I hear awful words like “threats” and “coercion”, but that's not how it happens. It's just through little statements like asking when your mortgage comes up or how your line of credit is doing with your business. It's things like that, and it scares people.

I hope the committee understands that the relationship between a customer and a bank manager is not normal. If you go to an insurance company—

Some hon. members: Oh, oh!

Mr. Bill Casey: It is not normal. It is not a level playing field.

If you go to an insurance agent and he does something that you don't feel really comfortable with, you can go to another one. It's the same with your car dealer or your clothing store. But if you go to the bank and the manager holds your mortgage, your credit card, and everything you own, and it's going to cost thousands of dollars to change, if he or she expresses a little hint that you should do something, you do it.

Your presentation is very calm, cool and collected. I believe it should be stronger. It probably is, in reality. I'm sure you're even more concerned about this than you're saying. It's a big issue, and I do encourage the committee to go ahead with their legislation and to make it tied selling.

The bank presidents say they have a policy against tied selling, and I'm sure they mean it and believe it. But they also have a policy that says that if the bank manager loses that account, he's in trouble. That's where the second policy overrides the first policy. I've seen that, and I'll relay later on an actual instance of how that's happened.

Anyway, I just wondered what you see as the worst anticipated effect if the legislation is not put into place with tied selling.

Mr. George Anderson: I think the worst anticipated effect is that you're giving undue power to Canadian financial institutions, specifically banks, to use the charter rights that they acquired to offer credit, to dominate every other financial sector business in the country.

At the end of the day, you will eliminate competition. Under the guise of having created more of it in the short term, I think you'll see the banks take substantial segments of everybody else's business, as they have started to do—and your business is one example. Trust company business is another. Look at where they were in mortgages twenty years ago and where they are today. This is just a natural tendency.

I think we're now at the point where we're looking at the globalization of financial services. We're looking at the potential of merging these huge institutions. We have to be careful about where the consumer sits in all of this. There's potential danger there, and I think all members of the committee well know that their constituents are concerned about it.

Mr. Bill Casey: If I was in the insurance business—as I am in my business—I'd be concerned that if someone had a mortgage on a house, the subtle pressure would be there to get exactly the right insurance that they require. In that way, tied selling doesn't necessarily happen at the initial sale. It happens once the customer is committed and has spent thousands of dollars on placing a mortgage and on legal fees and registration.

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Mr. George Anderson: There's a real difference between somebody coming in as a supplicant asking for credit and being presented with these alternatives and just receiving a letter that says, “Why don't you come down to the branch? We have a lot of good products, and if you're interested in them we'd like to sell you on them.” That's one way of approaching the question of marketing. The other approach happens when you have the person there when he's applying for a loan to keep his small business going—you'll hear about this later today, I'm sure—and he is asked for his RRSP. What would you do?

Mr. Bill Casey: I've already heard it from my customers.

Mr. George Anderson: I know what I'd do.

Mr. Bill Casey: I've had customers who are independent, confident business people march off to the bank wanting to change their RRSPs and their investment objectives in order to do something the banks don't offer, and they come back and say that the bank manager asked where they were going to get their line of credit next time, so, they say, they can't move their RRSPs. I've been really surprised at the impact this has on people, but it's very real, and I just can't emphasize it enough, this intimidation and coercion. Those are strong words. And it doesn't take that to make someone nervous or apprehensive about changing.

This man wanted to move his own money, change his investment objectives and do something the banks didn't offer. But he came back afraid to do it because of comments made by the bank. I'm sure they didn't threaten him. I'm sure they didn't say, “You do that and we'll deny you your line of credit.” The intimidation was there subliminally, but it's still very real, and I just hope the members of the committee understand that this man...if he went to his car dealer and said he wanted to change cars, there would be no hesitation to go from one car dealership to another if a comment were made.

But in the bank situation you just can't do that. You can't just shift banks like you can car dealers or grocery stores or clothing stores. It is a different relationship and it's not a level playing field. One of the members said earlier that we need a level playing field—

A voice: We don't have it.

Mr. Bill Casey: —and that when the customer sits across from the bank manager it is not a level playing field. If there's just one little message I can get through, that might be it.

The Chairman: Mr. Casey, are you going back to the same point about competition in the banking industry?

Mr. Bill Casey: I am too, yes. I believe that there should be far more competition in the banking industry, just like there is in the car business, the clothing business and the grocery store business.

I definitely believe it is because these people who come to a financial adviser wanting to change their investment objectives and do something that the banks don't offer...and it's entirely legitimate because it's their money and it's their savings. But the bank, because it has the other products tied up, can make people fearful of making a decision to change their investment objectives.

I know a senior citizen lady who was brought to tears over the pressure that was put on her, and I'm sure the bank manager probably didn't even think he was putting on the pressure. But she came back to me in tears about the fact that she could not move her RRSP without going to the bank's brokerage arm. They were putting the pressure on her to go to the brokerage arm of the bank—not to just another banker to keep the money in the bank—which is supposed to be at arm's length, just like the insurance company.

I feel a little bit strange saying who it was. It was the Bank of Nova Scotia. She had the money in the Bank of Nova Scotia and she wanted to buy Bank of Nova Scotia shares. The Bank of Nova Scotia can't sell Bank of Nova Scotia shares. I've known this lady for 25 years, and she called me and asked me if I would do it for her. I said all right, that I would be really glad to do it for it. But when she went to take her money out, they put the pressure on her to leave it there.

The Chairman: Mr. Casey, thank you very much. If you have names of people who would like to appear in front of the committee to tell their stories, kindly forward them to the clerk.

Mr. Bill Casey: All right.

The Chairman: I'm going to move to Ms. Redman, then Mr. Pillitteri, and then I will go back to Mr. Schmidt for a final question.

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

I think it was a very thoughtful presentation and I appreciated it. It seems to me, though, that we still have the dilemma of what the definition is. What is the specific wording in the provincial legislation that defines the difference between bundling and tied selling?

Mr. George Anderson: Perhaps Mr. Bundus could clarify that.

Mr. Randy Bundus: Sure. I'd like to take the British Columbia Financial Institutions Act as an example, Mr. Chairman. In section 94 of that act they don't attempt to define tied selling; they actually explain the situation and don't label it with any particular term. They say that a financial institution regulated by that province or a person acting with the approval of that financial institution is not to require as a condition of a transaction that the person who received a product or service under the transaction must transact additional business with the company.

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That's a very broad definition, Mr. Chairman. In fact, it could be broader than the tied selling definition in the Competition Act, I suggest.

Mr. George Anderson: It really, I think, concerns the circumstances under which the situation arises, if I could suggest that. It's going to be very difficult to define, in language precise enough for the lawyers, what coercive cross-selling is, but the circumstance is well known to everybody in this room.

I think what we have to start focusing on is not legal definitions of tied selling but the circumstances in which the granting of credit is used as a lever to require other products being brought to the institution. I think if you approach it that way, you'll have a more satisfactory result than if you try to parse out what coercion and tied selling is. I think you have to perhaps look at the circumstance under which the business relationship is occurring; it is not an equal power relationship.

Mrs. Karen Redman: Further to that, you reference, I think, one case that's being investigated that would come under tied selling, and yet all of the provinces don't specifically have legislation to deal with this. Is it the fact of competition that would explain why this isn't more pervasive, even in provinces that don't have legislation entrenching it?

Mr. George Anderson: Say most of the product is placed through a broker. That broker is representing more than one company, so if you don't like the offer, you can get other companies competing for the business through that same person. I won't mention any particular bank, but you can't say to the branch manager of a bank that you don't like that manager's offer so you want the offer of the bank across the street. They don't do that.

The Chairman: Mr. Pillitteri, I think you can start.

Mr. Gary Pillitteri (Niagara Falls, Lib.): Thank you, Mr. Chairman.

Your presentation here, Mr. Anderson, was quite a good one. May I ask one simple question? I might ask a couple, more possibly, but I wonder what the difference is in this scenario. Say you offer a package. What if you offer auto insurance and house insurance, versus a bank that offers two products? Are you putting this in just because of numbers, because there are 200 companies, or because there are only 6 companies? Is this the only difference?

I would also ask you this while you're at it, if you want to answer this. What stops you from getting into the lending business under your charter and doing services that are provided by banks and credit unions in the jurisdiction? I don't think, if I'm correct, that it has stopped you in the industry. Or is that you want that part of an industry to remain as it is? You only want that part of a service provided to people. Do you want to protect that end without getting into another end?

Mr. George Anderson: We operate a specialized business; we don't pretend to grant credit. There is sufficient credit available in the country to take care of the credit needs of Canadians if it's properly organized. You don't need property and casualty insurance companies in that business, nor from a risk point of view would it be right for us to be in it, given the kinds of liabilities we undertake for catastrophic losses.

Mr. Yakabuski has quite a good analysis of this question of tying products together, and the difference between a discounted price and a tied price, and I would ask him to elaborate on that.

Mr. Mark Yakabuski: If we can just go back to the description of this situation that's presented in the B.C. Financial Institutions Act, for example, the whole question is, are you making the purchase of product A conditional on also buying product B?

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Let's say you go in to see your insurance broker or your insurance agent and you tell them you need to renew; you've just bought a new car. You also want to look at your home insurance package again. He says, for example, “Okay. If you want, I can give you a package that will give you a 10% to 15% discount”.

You then decide whether you like their home insurance package, whether you like their auto insurance package. If you like both of them, you might go for the discount, but at no time is your purchase of auto insurance conditional on your purchasing home insurance as well.

There has never been a case where that has been made conditional on your buying home insurance. In other words, you can buy those two products separately, and you can buy those two products from two different suppliers, if you want. You retain that right entirely.

So I think that is very different from a situation where, in effect, you're called into an office and are told, “I'm going to give you this loan provided you do all these other things”.

Mr. George Anderson: Never quite worded that way.

Mr. Mark Yakabuski: Yes, never quite worded that way, but the insinuation is that this is conditional: you're not going to get this loan unless you do something else. That is the insinuation.

So when we talk about packaging services here, I think there's this fundamental difference with respect to whether or not it's conditional. I defy anyone, anyone who wants to come before this committee, to show us where their purchase of auto insurance has been conditional on their purchase of home insurance. It doesn't take place.

The Chairman: In terms of discounts, will you offer me 10% off my home insurance if I don't buy the car insurance with you?

Mr. Mark Yakabuski: There might be other reasons that you might qualify for a 10% discount. Some people, for example, happen to be in a lower-risk category. Some people are able to get themselves as part of a group, for example. They might negotiate a slight reduction on their home insurance.

So there are other ways of getting discounts on your home insurance, for example.

The Chairman: Mr. Pillitteri.

Mr. Gary Pillitteri: I have a little bit of a follow-up. Maybe it's not pertaining to this, but I think I'll try to tie it in.

Right now there's a task force going on with regard to the banks. I've sat in on that a few times. Here at the finance committee you've said a lot of things. One, you're saying that in these merges there's less competition, and you're saying there should be more competition in the Bank Act. By creating more competition and letting others in the field, you have a tendency to have better prices because of competition.

If we were to open the field more to the competition in terms of other banks coming in the country, I don't know if I would be comfortable with that, because having more come into the country doesn't necessarily mean it's better competition. It also could mean that it's almost like it is in insurance today, that you have 200 different ones offering different packages—a bonus for this, or this is comparable to this package. You offer so many packages. I just wonder if it comes with “buyers beware”, as it does in parts of the United States or other countries.

My interest here, in sitting at this table, is mostly for the consumer. I couldn't give a darn about insurance, banking, or whatever companies. I only represent the consumers here. Wanting to represent the consumer, it doesn't necessarily mean that having more competition or more people in the game from outside creates a more level playing field, because I think it becomes even more buyer beware in terms of what they're offering.

I say this truly because I'm a businessman, and in my long life I have approached both sides, insurance and banking. I find it more in buyers beware rather than saying that the banks have been....

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Sometimes there's a misunderstanding...not that I'm defending the banks, but there's a misunderstanding. I sit in, sometimes more than I should, on client-bank...just to see if I can help along. Sometimes there's a misunderstanding.

As I said, I just don't want this to be understood as being more in the game and being more competitive. I find it more buyer beware. I wonder if you have any response to that, because actually you're not.... I mean, if we want to offer the same package and the best package, we'll all be going to that one company rather than trying to find a company that we're comfortable dealing with.

The Chairman: Thank you, Mr. Pillitteri.

Mr. Anderson:

Mr. George Anderson: I think you're right. It's not necessarily true that simply opening the doors for more competition leads to great consumer benefit. Competition unrestrained can be harmful, as we all know, and that's why we have consumer protection laws. So the panacea of competition achieves certain limited objectives, but the consumer has to be protected even in highly competitive environments against unprincipled practice.

The problem in Canada that we're facing is whether we'd ever get significant foreign competition in this market. If you look at where the big five banks hold sway, it's going to be very difficult for foreign competitors to contemplate coming into what is a relatively small capital market, in which consumers are already captives of these institutions, and try to wean them away in any significant numbers.

You're talking about banks here that have millions and millions of customers locked into very complex interrelationships. For somebody from outside the country to think they will spend their capital to go into a relatively small market worldwide to compete, I think, is an open question of whether it would happen even if the legislative provisions were there to permit it.

I see no evidence that foreign competitors are breaking down the doors to do business at the retail level here, so I think you make a good point.

The Chairman: Thank you, Mr. Pillitteri.

Mr. Schmidt, do you have a question?

Mr. Werner Schmidt: Thank you, Mr Chairman. And thank you for appearing this morning.

I have really two parts to the same question. I think this could easily become a bank bashing kind of discussion, Mr. Chairman. I don't think that's what we're into here at all. I think what we want to do is create a level playing field here so we can operate successfully. Is the issue that all other companies are covered by a tied selling provision of some kind, outlawing it, and yet the Bank Act is silent about tied selling and that there is no such thing as a bank being punished for the fact that it does engage in this practice? Is that the issue?

Mr. Mark Yakabuski: That's part of it.

Mr. Werner Schmidt: I ask this because section 459.1 introduces into the bank legislation now the prohibition of tied selling in all categories.

Mr. Mark Yakabuski: Yes.

Mr. Werner Schmidt: Before, there was a section 45, I think, that prohibited the bank from getting into tied selling with regard to insurance, but it was limited to one product.

Mr. Mark Yakabuski: That is correct.

Mr. Werner Schmidt: Now this is expanded to all products. This was not proclaimed because the bank people said they'd regulate themselves, so we wouldn't need this prohibition. The Competition Act covers all other kinds of companies, and tied selling is defined rather clearly there.

Now, I want to really clarify whether that is your concern, that the banks be subject to the same prohibition of tied selling as other companies are.

Mr. George Anderson: Yes. We think section 459.1 generally advances the cause of offering that kind of protection and we are generally in support of it. Our lawyers feel there are a couple of conditional provisions in section 459.1 that, if left unchanged, have the effect of gutting the intent of the legislation.

Mr. Werner Schmidt: I understand that very clearly. I was going to come to that. My second question, Mr. Chairman, has to do with subsections (2) and (3). I want to clarify what the real issue is. If the issue really is this business of prohibiting tied selling, the definitions are there. We can argue about coercion, we can argue about force, but we can't argue very much about tied selling. We know what that means.

Mr. George Anderson: Right.

Mr. Werner Schmidt: Now, if that is done, then subsections (2) and (3) virtually redefine subsection (1) so that it doesn't mean anything any more.

Mr. George Anderson: That is correct.

Mr. Werner Schmidt: So your suggestion to the committee then would be, please implement section 459.1, but let subsections (2) and (3) drop.

Mr. George Anderson: That's correct.

Mr. Werner Schmidt: Thank you, Mr. Chairman.

The Chairman: On behalf of the committee, I'd like to thank you very much. It was an excellent presentation. However, I would like to receive the explanatory notes of your objections to subsections (2) and (3) in more detail.

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Mr. George Anderson: Certainly. We'll do that within the week, Mr. Chairman.

The Chairman: Thank you very much. We'll suspend for approximately two to three minutes and be right back.

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The Chairman: Mr. Caldwell, as you know, you have approximately ten to fifteen minutes to make your presentation. Thereafter, we'll engage in a question and answer session. You may begin.

Mr. Thomas Caldwell (President and CEO, Caldwell Securities Ltd.): Thank you.

First of all I want to apologize, Mr. Chairman. I brought 30 copies but I was unable to get 10 translated into French. We had only a day and a half to prepare and we had trouble enough with English, frankly.

I want to walk through the presentation I have given you. I'll just paraphrase it. I'll be within my 15 minutes, but give me a few moments of grace if I go beyond that. I'm just going to read through it and pick out what I believe to be salient or important points as I go through.

First, I'd like to make a couple of points clear. I have no personal banking problems. My banking relationships are very good; at least they were until today. Second, the corporations I head are prospering and they too have very satisfactory dealings with their bankers. Third, I have no objection to the proposed merger of the Royal Bank and the Bank of Montreal, which of course begs the question of why I'm here.

I'm here because of a client who was in tears in my office about inappropriate bank behaviour. I encounter tied selling by the banks virtually on a daily basis; however, this incident was the spark that made me say, enough, somebody has to do something about this. So I sought my partner's agreement to spend some time to confront what I believe is a vital issue.

What has surprised me in this exercise is the overwhelmingly supportive response from individuals and companies across Canada, including bank employees. I understand that the banks have sought to be the last to speak in this matter, and that's an excellent debating tactic. However, I must emphasize that this discussion is not about winning a debate or discrediting people who have the courage to come forward, but about resolving a genuine and serious concern regarding financial freedom for the people of Canada.

I want to use as an overview a note I wrote to the Honourable Paul Martin. I won't go through it in full detail but I'll again paraphrase as we work through this.

First, let's talk about cross-selling. This, as you know, is the practice whereby banks offer products other than deposits or loans, such as mutual funds, insurance, RSPs, auto leases, etc., to their customers. In Canada, the in-house products offered by the banks now cover the total spectrum of financial services. Most of us experience cross-selling merely when a teller offers a GIC or RSP when we're making deposits. The reality, however, is nowhere near as benign and has in fact become abusive to Canadians on a wide scale.

To understand what's going on across the country, there's one additional factor to consider. Bank staff are actively encouraged to market all bank products under the guise of cross-selling. The encouragement can be general, as being seen as a team player, or specific, in terms of compensation or even promotion possibilities. As a result, cross-selling often generates into tied selling. And I've given some examples.

Customers seeking loans are now actively coerced into moving RSPs to banks, even though these retirement assets should not and cannot be pledged against loans. I'll touch on this later. Entrepreneurs regularly face credit constraints if they do not agree to use a bank's other fee-generating profits. Bank-controlled mutual funds are continually thrust at consumers, who are often pressured into investing in products that may not stand on their own performance merits or, in some cases, may not even be appropriate.

This includes encouraging loans for the purchase of proprietary mutual funds. I'm in the investment business and personally I don't believe people should borrow money to buy mutual funds, period. I'm not talking about the last-minute RSP, but this is a policy that's big time out there now and will come to haunt the banks.

Independent financial firms lose clients daily as a result of banks demanding to take control of individuals' total financial well-being. There's not an independent broker or financial adviser—the gentleman on my right mentioned this—who does not continually experience the results of coercive selling efforts by the banks. Clients come in, apologize for forced moves, but feel they don't have a choice.

A recent case in our company involved a client who had significant financial assets at a bank, yet was encouraged to take out a small loan for personal needs. I believe it was because the bank employee wanted to sell more bank products. Several hundred thousand dollars in assets and a $10,000 loan—it does not make sense. This was clearly inappropriate.

A trustee of our mutual funds had to justify holding one of our mutual funds and having an RSP with our company in order to secure financing for his business. Fortunately he was powerful enough to be able to withstand that. An out-of-town client was asked to remove a $200,000 RSP from our organization in order to secure a $15,000 loan, despite having additional assets other than those financial ones I've mentioned.

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Harassing telephone calls and delays are the norm when a client seeks to escape to a more professional and caring environment.

Cross-selling by the banks has in practice become tied selling, and as such is coercive and abusive to their customers as well as to independent financial product providers. Banks are not simply vendors of products when it comes to fee-generating offerings. They have enormous power in people's lives and are not the same as other merchandisers or salespeople when offering a connected product. Their suggestions carry significant weight and are not at all like a shoe salesman also offering you some socks.

Over-concentration of power within our banks already exists as a result of inaction by government and regulators. Even greater concentration will result from continuing to ignore the existence of tied selling...and I go on, in this letter, to say that if you doubt the nature of the abuse, ask independent advisers across the land.

Most bank customers are far too afraid to complain in public about the pressure being placed on them to use bank products, for fear of credit retribution. They certainly would not seek out a bank's ombudsman or attempt to find some obscure federal authority; thus, the extremely flawed basis for the bank's defence in this matter is “no complaints, no problems”. And it's unfortunate that governments and regulators have bought into that logic.

Recent discussions regarding bank competition have been remarkably superficial. The important subject is not competition among the banks. It isn't whether or not you're going to have two or three banks in Tuktoyaktuk or Inuvik; it's the result of the overall bank juggernaut for other financial service providers and the resulting lack of choices for all Canadians. The dramatically tilted playing field is bad enough, but the power and scope of the bank activities in the lives of all Canadians means that even casual recommendations to use fee-generating products have force and are in fact tied selling.

The federal government created this situation and it's incumbent upon it to level the playing field in order to ensure that the abuses are stopped and that Canadians have an opportunity for real control over their financial well-being through having choices in a truly competitive environment.

Let's go to the next section and what I refer to as “the denial defence”. Canadian banks claim the practice of tied selling does not exist. In the back of this section we have some numbered quotes; you can turn to “Denial Quotes”, number 1. There are a couple of them that I just picked out of the newspaper, and if you have the stomach for it, you can review them if you wish to. This defence flies in the face of massive circumstantial evidence across Canada to the contrary. It's unfortunate that many of those charged with protecting consumers have bought into the denial defence strategy.

Tied selling is most effectively used on people when they are vulnerable, especially while seeking loans. It is little wonder, considering their predicament of requiring funds and the power of the banks in their lives, that these people are reluctant to complain directly to the bank, let alone in the public forum.

The complaint process as it exists is obscure and cumbersome. It's only within the last few weeks that I've personally learned of the existence and the identity of the federal ombudsman. In fact, I just met him a moment ago, and he seems to be a nice fellow—

Some hon. members: Oh, oh.

Mr. Thomas Caldwell: —but he's apparently unknown even in some of the banks.

You can turn to quote number 2 at the back of this section. This is a sort of half-humorous one, but I blotted it out to protect the bank employee. As you can see, it's a fax to our office from an employee of the Toronto-Dominion Bank. He sent us a Gazette article. He says, “Banks abusive? Tsk, tsk. No one here admits to being the ombudsman. Maybe it's my attitude!”

Then again, I don't presume that's great evidence, but it just shows that they don't know who he is, let alone the people outside the banks.

To access the bank ombudsman's office, you first have to work your way through several levels of the bank before any complaint can be considered. That can take several months. The federal ombudsman's recent claim that he hadn't received any reports seems to be a little bit misleading, because I understand—again, I take this as an understanding—that Mr. Doug Clark, who I gather is going to appear later, had already handed him one in person at a social event. Maybe the ombudsman should have said “through proper channels”.

Because the ombudsman has stated this, I'm of the opinion that possibly there is a bias against those he's charged to protect—and possibly not. I'm not going to accuse him of that, but there seems to be...he's in our denial quotes.

To substantiate the existence of tied selling on a wide scale, I invite committee members to call their independent—that is, non bank-owned—investment advisers or financial planners in their home jurisdictions. When you go back, call them. I recognize that they may be considered biased witnesses, but there's no national conspiracy to claim something exists when it doesn't. Most of us have jobs and responsibilities that occupy our time and attention. No one, including myself, wishes to gratuitously fight with the banks. Talk to your friends. Ask them about their banking experiences. An honest effort to seek the truth in this regard will clearly substantiate what is being said to you.

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The problem is, whenever any individual comes forward, they're either quickly placated—if they wish to spend a great deal of effort at it, like Mr. Clark—or discounted or dismissed. No number of incidents will ever be enough if the individuals and organizations involved refuse to deal with the issues honestly and with integrity.

I was thinking about this when I came up here. When I was a kid and I didn't eat my dinner, my parents would say, “You know, there are people starving in China”. My pathetic defence was always, “Name one”. You know, it was there!

Some hon. members: Oh, oh!

Mr. Thomas Caldwell: I've enclosed some examples. Two recent cases came to my attention in a two-day period. And this is just me. I'm not presenting these as big cases. They just give you an idea of how these concerns are handled.

Let's go to item three in the back. The first item pertained to what was a tied selling incident.

By the way, I have copies of these letters, my letters, which I've had the clients sign. I keep them in my office to substantiate what I've said. Very often there's a propensity for some banks to go back to the people, and the stories tend to change. Like a car accident, there are five stories a week later.

Here's my complaint. You can read it at your leisure.

Then there's the response I got. I've blotted out the names, by the way. We're talking of the same person. You can take a look at key words: “apparent misunderstandings”, and “It appears that there was some confusion”. I mentioned that the person involved said she was talking about bank policies: they “adhered” to bank policies. Then, of course, “you may direct them to CIBC”. They don't want to deal with it through me, of course, because they'd rather abuse the person directly.

Let's go to the next one, item three. This had to do with a widow who wanted to move her assets out of the bank. This was delayed for a tremendous period of time. It's usually about 20 days. This was at 30 days that I wrote the letter, and then things did start to happen. She had to leave her answering machine on because she was getting harassed by the banker.

This was a case, by the way, where she had assets and a loan—quite inappropriate. That issue, as you know, is never mentioned in the response letter, that it was possibly inappropriate. But again, key words: Mr. Wilson made a “courtesy call”, singular. I mean, that's...well, okay, put in what you want.

They use the phrase “extremely normal”. That looks like it doth protest too much. Then, “alleged comments”, “they were perceived”, and the client “never indicated there were any concerns”. An elderly widow moves her money out of the bank and she has never told the bank there was a problem? Come on, guys!

At any rate, you can see from the responses what happens.

Neither of these two concerns would be considered complaints by the federal ombudsman because they did not exhaust, and the clients were not prepared to be exhausted by, the banks' complaint procedures. Ironically, in the tied selling incident noted, the customer went to another financial institution and he was forced to buy their mutual fund in order to get an RRSP. He just finally gave up and figured that was the system.

At a recent seminar I gave at another investment firm, I asked approximately 20 investment advisers how many had lost clients as a direct result of tied selling. Virtually everyone put his or her hand up. A few weeks later, that company was sold, and investors were again deprived of one more independent firm.

I believe that's item four at the back.

Other incidents have been reported directly to the newspapers. Let's go now to item five under newspaper excerpts. There are two items in here.

Linda Leatherdale in the Toronto Sun says:

...Canada's big banks claim they're opposed to tied selling....To the banks, I say, `bunk.'

Why am I so cynical? Because since I wrote about a small payroll entrepreneur, a securities boss

—that's me, by the way—

and an accountant who all had horror stories claiming banks were involved in predatory practice, my phone has been ringing off the hook....

This isn't coming from me. That's in the paper. Bang. The Sun would never lie.

Some hon. members: Oh, oh!

Mr. Thomas Caldwell: Maybe I'm undoing my own case here.

Item B is of interest, though, again from the Toronto Sun:

...One call came from a former, 22-year Bank of Montreal manager of customer services, who said her branch began instructing staff about tied selling two or three years ago.

`They called it cross selling or trying to bring additional business into the bank, but it went like this: “I'll give you this if you do this.” And to me, that's tied selling', said Terry, who asked that her last name not be used. `I was absolutely upset about this.'...

I received similar calls like that, by the way.

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Other organizations have noted their experience in this matter. These are these letters that I've noted, from six onward. I'll just touch on a couple of them.

Here's one from Watt Carmichael:

The increase in tied and coercive selling practices by the banks and their financial affiliates is at an all-time high.

Murtaugh and Smith are insurance agents:

Though I am a believer in free enterprise, the bank community represents a special circumstance where clear regulations are appropriate to do with any form of product crossover.

Here's another one. Item six here is from Normand Delisle:

It appears that most people are just too scared of the banks to complain about them. No client should be put in the position of not being able to choose what is best for them.

Acumen is on the next page:

We regard the tied-selling issue as important for the financial services industry, and fully support....

Dlouhy Investments: Dominik Dlouhy is an ex-governor of the Montreal Stock Exchange and an ex-chairman of the board:

I was very opposed to the Government's support for dismantling of the Four Pillars.... As a participant in this industry for many years...oligopolistic situation developing in Canada, and, ultimately, the resulting reduction of freedom of choice for Canadians. With the growing domination of the banks, we may also be creating a “parallel government” in our country.

That's good quote. That'll come to haunt us.

The next one is from Odlum Brown, which is out in Vancouver:

The problem in having clients, or former clients, write about this is universal fear of reprisal. The banks control so much of our lives it's unbelievable.

Great Pacific is in Vancouver:

We, as a firm, have reported this to SelfRegulatory Offices with specific examples but that is where it ends—the banks couldn't care less—they are a law unto themselves.

Here's another one from a company, but I'll leave that. It's Briar Foster of Foster & Associates. Altus is much the same with the distinction between the cross-selling and tied-selling sides.

There's an interesting one here, though. I'll give you a couple of interesting ones, and then we'll go back. Again, I've taken these as they are, okay? So if you want to substantiate, you can go back to these dealers involved.

This is one from Regal Capital. It has a very interesting paragraph. It's on the next page and it concerns Scotiabank:

Scotia Mortgage Corporation (SMC) has agreed to waive the penalty in the amount of $1245.00 on your mortgage...upon you transferring a minimum of twenty thousand dollars ($20,000.00) or other deposit dollars to the branch.

Well, I don't know what that is. Couldn't you call that tied selling? It looks fairly coercive to me.

Let's keep on going here. Maybe it's a misprint.

Brink, Hudson & Lefever is out in Vancouver:

The examples given in that letter are very typical....

Credifinance is the same thing.

Here's an interesting one. It's the next one. This letter is from Robert Candido. This is the first time I've ever seen this, by the way. This letter is written on blank letterhead. It came to us from a financial planner who got the permission of the individual involved. This letter was prepared by the the CIBC and was given to the customer on blank letterhead. It's the first incident I've seen of directly attaching an RRSP.

Now, there's nothing said anywhere, but that client had to sign it or he wouldn't get any loans.

Anyway, we've done enough of those. There are quite a few there that you can pore through. I think there are about 20 in total.

The last one, by the way, which is item 7, came from one of our employees. I was leaving the office. I said where I was going and what I was doing, and he said he had that. I asked him where he had been for the last two weeks. So he gave me something in crayon and I had him quickly type this. Typical.

I know this is Canada Trust. It's not a bank, but it's the same issue, the same matter:

I have dealt at my local Canada Trust branch for ten years where I have maintained a positive balance and through whom I enrolled in a MasterCard on which I have never missed a payment.

Lately, my paycheques have been larger and I began having difficulties receiving any funds from certified cheques drawn on another Canadian bank.

The branch manager indicated to me that in order for me to receive any cash from a certified cheque that she must personally approve it.

I was then informed by another Canada Trust employee at this branch that if my mortgage, RRSP and other financial dealings were transferred to Canada Trust that the problem would go away.

Okay, just take it for what it's worth. I will see about his larger paycheques when I get back after this.

More letters can come if you wish.

Firms such as First Marathon Securities Limited, Midland Walwyn, and Gordon Capital have all made submissions to this committee. It should be noted for the record that these submissions are not, as has been claimed by the banks, a matter of fearing legitimate competition. I have never known any investment professional ever to be concerned about competing on a level playing field with bankers in any endeavour.

Let's go to policy versus practice. We've talked about the denial defence. There's enough in there. You can review as you wish.

The Canadian Bankers Association has a policy on tied selling, and it makes this pledge:

No bank will impose undue pressure on, or coerce a customer to obtain a product or service from anyone, including the bank and any of its subsidiaries and affiliates as a condition for obtaining a loan from the bank.

I highlighted “undue”. That's my highlighting, by the way.

The problem is not with policies, it's with practices. For example, as a result of recent newspaper articles, concerns have been voiced by some bank employees that their training programs involved using pressure to secure additional business when issuing loans. You can go back to the Sun article I mentioned.

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The key word here, or tip-off, is the word “undue”. In law—I've checked with our legal counsel; I'm not a lawyer, mercifully—it is normally accepted that before force or pressure is considered undue, the action has to verge upon the criminal. For example, the use of violence would be considered undue pressure. The mere fact that the qualifier “undue” was used shows the real intent is to leave significant latitude to bankers when directing customers to use related products. In reality, ladies and gentlemen, that pledge is virtually meaningless.

Let's go to influence. It is well recognized that the Canadian chartered banks wield immense power in both the marketplace and political regulatory rounds. It's also the case in the media, where bankers are big advertisers.

I got a kick out of this. I don't know whether anybody saw in the weekend paper where it referred to the Royal Bank as “Canada's most respected corporation”. I wonder how many voted on this. Did anybody here vote on this? I'm sure advertising has nothing to do with that, but there's an article that was done a year ago that the banks also were quite concerned about. It was delayed until these hearings were over because of the degree of pressure—that's the Globe and Mail article that came out a little later.

My point is, there's a terrific amount of clout that the banks exhibit and exert. This power has apparently fuelled a degree of arrogance when it comes to regulations or laws that displease them. This is particularly evident in the Canadian Bankers Association letter to the Honourable Ernie Eves, wherein it objects to the possible adoption by the Ontario Securities Commission of tied selling constraints proposed in the Canadian Securities Association national instrument 81-105—mutual fund sales practices. This letter and the related newspaper article on the issue in question are attached.

I'll just read the issue in question:

7.4 Tied selling - No person or company shall require another person or company

(a) to invest in securities of a particular mutual fund or mutual fund family, either as a condition or on terms that appear to a reasonable person to be a condition, of supplying or continuing to supply, products or services; or

(b) to purchase or use any products or services either as a condition or on terms that appear to a reasonable person to be a condition of selling securities of a particular mutual fund or mutual fund family.

That's a pretty bland regulation, believe it or not. I can't understand objecting to that from a banker's point of view, but fortunately I don't think in that matter. The banks' power to influence events in this manner is something many Canadians fear, and with good cause. The use of political power to influence regulators has not been limited to the provincial realm.

Aside from the arrogance in this instance, there's the matter of logic. Why does the Canadian Bankers Association object to formalized tied selling rules—not policies, guidelines or something they can “police internally”? Why does it object to this when it claims tied selling does not even exist? If tied selling is not occurring to any significant extent, why be concerned about rules that would simply be academic? Only the most biased observer would fail to see the self-serving nature of that objection.

Let's take a look at the broader issue. Banks are granted powers under the Bank Act to create loans and facilitate transactions—create credit, loans, cheques etc. They provide these loans based upon their deposits and liquid reserves in accordance with the nation's monetary policy and as directed by the Bank of Canada. The rights, privileges and obligations accruing to the banks place them in a fiduciary role with respect to the Bank of Canada, the Government of Canada and the people of Canada.

For the banks to use powers granted to them under the Bank Act, as part of our nation's monetary policy, to elicit business for their fee-generating affiliates is clearly unacceptable. This is the case with both cross-selling and tied selling.

Cross-selling occurs when a bank makes more favourable loan terms to someone purchasing a related bank product, for example, lower interest rates in buying their mutual fund. This practice has recently come into wide use and should be examined as well, since it is in effect using powers granted for the national good by the banks for their own benefit.

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The primary matter of tied selling also represents similar.... I don't think we should leave the issue of cross-selling, but tied selling also represents a similar breach of fiduciary responsibility as well as an abusive use of their power and size.

The dramatically tilted playing field, I have noted in my covering letter, has already witnessed the effect of the demise of an independent trust company industry, the investment and independent investment brokerage industry and now appears to be focusing on the insurance industry.

It is interesting to note how influence and power affect business practice. Most organizations, when faced with widespread media and customer concern, would attempt to address that concern and possibly even be grateful for being made aware of it. As Mr. Pillitteri said, he's been in business. I'm in business. If there is a problem, something wrong has happened, it gets reported to me and I'm going to deal with it. I want to clean it up, because I want to run a good business and I want to be competitive. That's not the case here.

It appears the response of the banking industry is to fight and disparage perceived threats. In fact, I got a kick out of this. I was threatened before I came here—well, I don't know if it was a threat—through one of the papers. One of the PR managers at the Royal Bank said I was going to be discredited on coming to this committee, and for a second I was quite frightened. I thought it meant he was going to take my credit cards. But that's the attitude. That's typically their attitude. Such is the arrogance that comes from unchecked power, and no amount of advertising, including this $20 million campaign, is going to cover the underlying attitude in the eyes of consumers.

All of these issues relate to one common simple question. Ladies and gentlemen, how powerful do you want the banks to be in the lives of Canadians? That's the question. Period.

Again, it's not enough to come here and just complain. I should try to come with a solution or two. Here are some recommendations, some possibilities that I would pray you consider.

1. I think there should be a strict ban on tied selling, and I would also probably include cross-selling. But a strict ban on tied selling should be put in place whenever credit is involved—that is, whenever loans are being made. Reasonable collateral would naturally be required, but the constraint of requiring it to be a bank product should not.

2. Meaningful penalties should exist for violations of this ban.

3. A clear and direct complaint process should be put in place outside of individual banks and the banking system. The complaint process and the means to use it should be openly and regularly advertised. It should also be staffed by individuals who are willing to listen and to help as well as to provide a quick response to concerns.

It is only through these three steps that our omnipresent and, if left unchecked, omnipotent banking system will be held in check in order to provide responsive financial services to all Canadians.

Now, the banks need not worry. I am confident they will survive and, indeed, continue to prosper despite the protection and openness offered by these measures.

Ladies and gentlemen, thank you for your time.

The Chairman: Thank you.

Mr. Thomas Caldwell: I am sorry, I went over my time.

The Chairman: Oh no, that's okay.

Mr. Schmidt.

Mr. Werner Schmidt: Thank you, Mr. Chairman, and welcome, Mr. Caldwell.

Mr. Thomas Caldwell: Thank you.

Mr. Werner Schmidt: It's good to see you here. Your rather forceful and dramatic presentation had some humour in it. It's always a relief when we deal with matters of this sort.

As I understand your recommendations, it's really at the heart of the whole presentation here; all the arguments leading up to the recommendations have to do with a clear and unequivocal ban or prohibition of tied selling to the banks. Should this prohibition exist not only to banks but to all companies and business endeavours?

Mr. Thomas Caldwell: As you see, I qualify it by saying whenever credit is involved. As soon as you're making a loan, when a creditor is involved, you now have power in that person's life and your suggestions have weight, they have meaning, and very often people don't have choices.

For example, suppose I want to call an insurance company—I beg to feel badly for the insurance people right now. But suppose I want to call the Canadian Imperial Bank of Commerce. I pick up the telephone and say “I understand you've got a good policy on your car loans”. They respond with “Yes, we do, and by the way, we have a really good policy on our house loans”. I don't have a problem with that; it is a package. But the second I go to a bank and I have to borrow money, this is not, as I think somebody mentioned, a level playing field. This is eyeball to eyeball. I need that money. That's why I'm at the bank. I don't hang around there if I don't have to.

So that's my point. Where credit is involved should be the criteria.

Mr. Werner Schmidt: So that is really the only condition you have placed on this.

Mr. Thomas Caldwell: Yes.

Mr. Werner Schmidt: Could I ask you how you would define coercive selling or undue pressure or imposition of a requirement? These are the three words that are bandied about in this connection. How would you define those words?

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Mr. Thomas Caldwell: As I said earlier, in law “undue” leaves a tremendous amount of latitude. “Undue pressure” means I'm threatening to do something quite serious to get you to do this. But “pressure” comes from a mere suggestion, when you are dependent. It is within that relationship.

This was mentioned, by the way, in Washington, although I don't think it's practised very much there, that differences in power represent inordinate influence just in themselves. This was referred to in a White House situation. Again, it's a policy that may or may not be followed, but my point is there is a difference in power, even the suggestion of doing it.

Once I've got my loan and we're signed up, no problem. The deck is cleared. I walk out and I walk right back in again, “By the way, we have a great package on so and so”. That's fine. But when the two are connected, it's different. So I would broaden that issue of coercive to include relationships. I think that's really where I come at it. Otherwise we'll go round in circles for days trying to find a definition.

Mr. Werner Schmidt: I think that's exactly one of the difficulties we have, the “undue pressure” or “coercion”, those interesting terms attached to it.

Mr. Thomas Caldwell: Could I interrupt for a moment, Mr. Schmidt? When I worked for another firm, if the president said to me, “Tom, I think you should do that” or “I think it would be a good idea if you did that”, I'd do it. I think any of us would. That is coercion. Coercion rests in the difference in power. It's not an eyeball-to-eyeball relationship. I'm sorry, I didn't mean to interrupt you.

Mr. Werner Schmidt: That's fine. This business of coercion, then, is it implied?

Mr. Thomas Caldwell: Yes.

Mr. Werner Schmidt: It is an intimidation factor based on a power position or, if you like, a dominant position in the industry.

Mr. Thomas Caldwell: In your life.

Mr. Werner Schmidt: As you would put it, in the life of the individual who's involved here. So when we're talking about an industry that occupies a dominant position in our economy and has an oligarchic hold on that particular section where there aren't many competitors, the power is increased disproportionately to the number of branches that are out there, so that the individual actually...there's an acceleration of power that is really indirect. In fact, it works in the opposite direction to the number of those institutions that are there, so the fewer those institutions the greater the power.

Mr. Thomas Caldwell: Or the less the competition the greater the power.

Mr. Werner Schmidt: Yes, by deduction. If that's the case, then, would this, wherever credit is involved, apply not only to the banks but to, say, credit unions or private institutions like Newport or mortgage banking institutions? Would you apply the same kind of recommendation to them?

Mr. Thomas Caldwell: I would, yes. I'm talking about individuals.

Mind you, there's an article here, one of the ones from Peter Bailey of Gordon Securities, that also works at the corporate level. For my purposes, I think wherever credit is being granted—I don't care if it's coming from a trust company or a credit union—that is no longer an eyeball-to-eyeball relationship and your suggestion has weight. I don't care what the institution is. We just happen to be dealing with the banks now, but I mean any credit provider. Once you have that loan, that's fine. After we've signed up, we can have another discussion.

Mr. Werner Schmidt: Thank you for broadening that out. I think that's very helpful.

Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Schmidt.

[Translation]

Mr. Pierre de Savoye: Good morning, Mr. Caldwell.

[English]

Mr. Thomas Caldwell: By the way, let me apologize. We had to bring 10 in French and 20 in English. I had trouble enough with English in the day and a half given me, so I apologize for not having a translated version.

Mr. Pierre de Savoye: I accept your apologies. I must admit that you had a very interesting and stimulating presentation.

Mr. Thomas Caldwell: Thank you.

[Translation]

Mr. Pierre de Savoye: Mr. Caldwell, I have difficulty believing that so many of your clients are paranoid. I have less difficulty believing that what you have told us merely represents the tip of the iceberg. But what really struck me, Mr. Caldwell, is that in a number of examples, you seem to indicate that the bank's clients were offered a product that did not suit their needs, and even that they were obliged to take a product that did not suit their needs.

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At the fifth point, on page 3, you said:

[English]

A recent case in our company involved a client who had significant financial assets at a bank and yet was encouraged to take out a small loan for personal needs, simply in order that the bank employee could sell more bank product.

[Translation]

A little further, in a letter that you wrote to Mr. Clegghorn, you mentioned that Mr. Wilson, a banking advisor, had told a certain lady:

[English]

“If you put your money with Caldwell Securities, you will never get it out”.

[Translation]

Is this not clearly a conflict of interest? Do such examples not show that the banks are in a conflict of interest and that they are advancing their own interests before those of the client? What do you think of this, Mr. Caldwell?

Mr. Thomas Caldwell: Yes.

Mr. Pierre de Savoye: Thank you, Mr. Caldwell.

[English]

Mr. Thomas Caldwell: Absolutely.

First, our clients are not paranoid and not overly frightened, nor am I. That's why I'm here. I believe, though, when one is in a position where you know what's happening and you have the courage to speak up, then you have to do that. I believe that's an obligation for each one of us. That's why you people are here.

The banks may not be offering a product that's inappropriate. I don't want to say that they're forcing something down the throat that's wrong, that this client shouldn't have it, that this is evil incarnate. It is not. There is a pressure. In fact, I feel a sympathy for bank employees in this case. They are miscast in a role now of being in sales, when many of them prefer to be in a service capacity. They have to sell product, and their bonuses, their promotion, whatever, is...and I referred to this.

The incident I mentioned in here—and that's the same lady, by the way, in the two instances—and I say in order to sell more bank product.... That's my hypothesis. I can't think of any other reason why someone with several hundred thousand dollars in a bank would want to, of their own volition, exercise a personal line of credit for $10,000 or so to take care of a home repair. Wouldn't you just cancel some of your GICs or redeem some of your mutual funds?

This lady was a widow. She's only been widowed about a year and a half and she's looking to answers from people, and I felt that Mr. Wilson in this incident.... I don't know the man, but in what she reported to me, he was trying to get her to stay within the bank as well, and using threatening and I believe unethical...saying, you won't get your money out of Caldwell. She had trouble enough getting her money out of the Royal Bank. So it was very clearly self-interest, and I think it was very clearly a conflict of interest.

[Translation]

Mr. Pierre de Savoye: When we discuss the subject at hand, namely, tied sales, we are not necessarily talking about conflicts of interest, but clearly, the notion of conflict of interest exists. Should we not be concerned about this when we discuss tied sales or other sales, above and beyond the idea of a loan? In other words, would you recommend that we also deal with the issue of conflict of interest?

[English]

Mr. Thomas Caldwell: Tied selling is by definition conflict of interest. Cross-selling represents a degree of conflict of interest. That is, a person is coming to you for a certain product, and that person is placed in a vulnerable position. Then you say, we can address this need.

Again, I'm not talking legitimate, reasonable collateral for a loan. I'm talking of beyond that. It's another thing to take that and say, we'll do this if you do that, either overtly or covertly by suggestion. That in itself represents a conflict in my mind.

[Translation]

Mr. Pierre de Savoye: Do you think that if we eliminate the idea of a loan, as you have stated in your recommendation, the issue of conflict of interest will be resolved?

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[English]

Mr. Thomas Caldwell: I don't know. I would suggest that a great portion of it will be dealt with. There will always be areas of conflict of interest. You close the barn door and they get out the window. You can't get it all done at any one time. But I think it will deal with the major abuse of areas of conflict of interest as they affect the consumers. Mr. Pillitteri said he's interested in the consumer. It will certainly deal with that.

[Translation]

Mr. Pierre de Savoye: Thank you Mr. Chairman. Thank you, Mr. Caldwell.

[English]

The Chairman: Mr. Casey.

Mr. Bill Casey: Thank you.

You're like your very own double-barrelled shotgun.

Mr. Thomas Caldwell: Am I?

Mr. Bill Casey: Yes, you are very effective and you've done a lot of work on this presentation.

But I'm stuck on page 1, where it says specifically “I am here because of a client who was in tears in my office”. I'm in the business as well and I just mentioned a few minutes ago that I had the same experience. There was a senior lady in tears in my office because of inappropriate bank behaviour. It's interesting that you're from Toronto, King Street, and this lady is in a place called Tatamagouche, Nova Scotia.

I hope the message gets out that even though the banks say there is no undue pressure, if actions bring people to tears there's undue pressure. Whether the banks realize it or acknowledge it or not, their behaviour sometimes is certainly undue pressure. If nothing else, I hope we've come to that point now, where we agree there is a problem here and there is undue pressure.

Mr. Thomas Caldwell: I would like to interject for one moment. I didn't know whether to put that in or not, because it sounds kind of melodramatic, but I was so put off by it that I would have gone down and seen the manager involved and dealt with him on other than a committee basis. I was that annoyed at it. This was a widow, and I remember asking myself, what would her husband do if he was here?

Mr. Bill Casey: My case was the same. It was a lady whose husband had just died and it was the first time she ever was involved with her finances and her investments. I did take it to the vice-president of the bank involved; I don't know if they've taken it seriously or not, but it wasn't very long ago that happened and I believe it is the definition of pressure. If their actions bring somebody to tears, there's pressure. Probably coercion is in the eye of the beholder, as I just wrote down here, but it is a very serious problem. I don't think the bank presidents and management realize what happens at the retail level. As you say, they put the pressure on the staff of the banks; they, in turn, pass it on to the customers.

I'll give you a good example. You talked a minute ago about a delay in a transfer of a customer's RRSP. I had the same thing—

Mr. Thomas Caldwell: That's standard.

Mr. Bill Casey: Yes. My customer was not one to sit and let it happen, and he stormed over to the bank after 30 days. The bank manager wasn't in, but the assistant manager was there and he didn't like the bank manager. My customer asked where his RRSP was and the assistant manager said the manager can't send it in yet because he's exceeded his maximum allowable limit of transfers out for the month and so you'll have to wait until next month for your money. That's what you're up against.

It's amazing. I'm sitting here listening to you and it's just like listening to my customers.

Another thing you mentioned is clout. I feel strongly that consumers in the business don't have a level playing field as far as clout goes. I don't know how many of you have been lobbied by banks and managers in the association, but since my election on June 2, 1997, I've probably had eight managers approach me to give me their thoughts on the industry and tied selling and everything else. That's an incredible ability to be able to do that, to access MPs.

Also, the $20 million fund, which you mentioned too, was another. The banks have a tremendous clout to get their message out, and consumers don't.

The chairman suggested that I bring the names of the people I referred to in my previous comments. But they wouldn't dare because the same fear they had about losing their lines of credits and their mortgages and their Visa cards is the same reason they wouldn't come to this committee to make a presentation. But, anyway, they're there and they're real.

I'm supposed to ask you a question, but you've pretty much answered all my questions, although I'm fascinated by your—

The Chairman: You can just make comments if you don't have a question.

Mr. Thomas Caldwell: I'd like to make a point. In one of the letters I did, and this is from an investment dealer, Dominick & Dominick in the last paragraph:

My hesitation in writing this letter due to the potential repercussions is a personal reminder of just how pervasive and dominant their economic power has truly become.

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That's in item 6 in subsection 3, in Dominick & Dominick's letter, and you can see that with people coming forward. A lot of people are reluctant to come forward to say anything. And these are dealers in the securities business. I mean, all of us have to access bank lines at sometime or another.

Mr. Bill Casey: That again defines that different relationship. It is not a level playing field. If it was the car business that we were here to talk about, people wouldn't hesitate to come in to talk about it. If it was the clothing business, people wouldn't hesitate to come in to talk about it. But there is that subliminal pressure, that perceived pressure, that perceived threat about the industry.

Again, I'm not a bank basher. Banks have kept me in business all my life, and they've lent me money when they probably shouldn't have. However, there is a problem here when it relates to consumers. Mr. Pillitteri said he's concerned about his consumers. If an industry brings its consumers to tears, there's a problem. Let's find a way to avoid bringing consumers to tears.

The Chairman: That's the purpose of these hearings, Mr. Casey. Thank you very much.

We'll move to Mr. Pillitteri.

Mr. Gary Pillitteri: Thank you very much, Mr. Chairman.

I'm not saying there is bank bashing here this morning, but I wouldn't be able to live without the banks either. I have not reached the point in my life to know what securities are. Maybe I've never had a need for them, or I haven't had enough money to put into them. What are securities, sir? Just keep it simple.

Mr. Thomas Caldwell: Stocks and bonds.

Mr. Gary Pillitteri: Stocks and bonds. How does one acquire them?

Mr. Thomas Caldwell: Through an investment broker or an investment advisor.

Mr. Gary Pillitteri: A simple question, sir: how is one charged for buying these stocks or bonds, or for trading them?

Mr. Thomas Caldwell: Mutual funds are also included, by the way.

They pay a brokerage commission on them. On stocks, you will pay a brokerage commission that varies, but those are negotiated.

Mr. Gary Pillitteri: Are there different fees on them?

Mr. Thomas Caldwell: There are all kinds of fee schedules out there.

Mr. Gary Pillitteri: No, I mean that when one provides a service, is there a different size to the charges?

Mr. Thomas Caldwell: Most of the transactional part of the securities business—the buying of the mutual funds, the stocks, the bonds—has a commission of some variety attached to it. In the management part of the business, it's a fee for managing money, managing securities, but the transactional part is commission-driven by some degree, yes.

Mr. Gary Pillitteri: In other words, “Your money is your business” stems from individuals with an excess of money wanting it to provide for the future, doesn't it?

Mr. Thomas Caldwell: Yes.

Mr. Gary Pillitteri: In other words, I'm a businessman and I only have so much money in my pocket.

Mr. Thomas Caldwell: It's not enough.

Mr. Gary Pillitteri: That's exactly why I put it that way. I could have reversed it, I could have used my wallet.

But since it's not enough—as I say, I'm not really in business for investing in the future—there's only so much money that I have in my pocket. Your business wants access to this money here without anyone interfering. You're getting to a point where, with a security, you actually have no competition because I've made up my mind that I'm going to be investing in something for the future.

Mr. Thomas Caldwell: I don't understand your question.

Mr. Gary Pillitteri: I'm going to tie it up.

Mr. Thomas Caldwell: I'm beginning to lose track.

Mr. Gary Pillitteri: Let's put it this way. Quite clearly, you're no different from a bank's business because you want to handle money.

Mr. Thomas Caldwell: No, it's totally different. That's like saying you and I are the same person because we both have grey hair. Come on. It doesn't work.

Mr. Gary Pillitteri: No, that's not what—

Mr. Thomas Caldwell: Let me answer your question.

Mr. Gary Pillitteri: I don't want to be argumentative, but what I'm saying is that, in a sense, you are in a business of, yes, selling a security, yes, selling a product, yet you have no competition in your business other than the people who are in that same business.

Mr. Thomas Caldwell: No, that's not true.

Mr. Gary Pillitteri: You're not in competition with the bank, are you?

Mr. Thomas Caldwell: Of course I am.

Mr. Gary Pillitteri: In which way, sir?

Mr. Thomas Caldwell: Banks have a bank-controlled brokerage affiliate, so their brokerage businesses are interfacing with us.

Mr. Gary Pillitteri: But they're also lending money.

Mr. Thomas Caldwell: Yes, they're also lending money.

Mr. Gary Pillitteri: But you're not lending money.

Mr. Thomas Caldwell: No, we're not lending money, but we have competition from every bank through either their discount firms, their full service affiliates, our other related firms. We have a massive amount of competition that squeezes commissions down, giving better value to consumers when they're buying and selling stocks. We have to manage money for clients, money they take off the table, money they don't need in their daily lives; our job is to steward those funds and help them grow. It's a highly competitive business. If you don't think the mutual fund business is competitive—

• 1200

Mr. Gary Pillitteri: But you're not risking any money, are you?

Mr. Thomas Caldwell: Pardon?

Mr. Gary Pillitteri: You're not risking any money. You're not lending any money. You're not risking it.

Mr. Thomas Caldwell: Let me put it this way—

Mr. Gary Pillitteri: Today you could tell me this security, if I buy it—

Mr. Thomas Caldwell: No, we—

Mr. Gary Pillitteri: —or that I should buy, but if I lose that stock or that bond loses, then there's nothing that I could do to it, maybe with a piece of advice.

Mr. Thomas Caldwell: I can get back to as simplistic a basis as you want to...and that is extremely simplistic, because it doesn't work that way. What happens is that we work in an advisory role with people; we're helping to manage their money for them. Doctors aren't at risk if they tell you to take an aspirin and it kills you. They're not at risk for it, they represent good value for that. And in our business we provide advice, we have infrastructure, we have a tremendous investment in computer services and in skills and in people. If our clients walk away because we're not doing our job properly, we're out of business. That's a risk to us. There's also the risk of what it is you want to do. The main thing you have as a firm is your reputation and your integrity, and that's a massive risk.

Mr. Gary Pillitteri: There's no risk of capital.

Mr. Thomas Caldwell: Of course there is! How do you get that? If I—

Mr. Gary Pillitteri: There's no risk of capital that you are lending out to the consumer—

Mr. Thomas Caldwell: Come on and see my office in the—

Mr. Gary Pillitteri: —because this is exactly what you're getting at, sir. You're getting to the point and saying you don't want to see any tied selling as long as you're lending out money, but those individuals... The banks are in two things: they're lending money, so there's a risk factor in that—

Mr. Thomas Caldwell: And they should have collateral. I think that's right, and that's why I use the words “reasonable collateral”. And that's for a banking committee to decide; no one wants to deprive them of collateral. That's not what I'm saying.

Mr. Gary Pillitteri: But you see, sir, you said that there's a conflict of interest, and I say that in the case of the presentation you made, there's not a conflict of interest, of self-motivated interest.

Mr. Thomas Caldwell: No, it's going beyond that.

Mr. Gary Pillitteri: That's what I'm getting at.

Mr. Thomas Caldwell: If you don't want to listen, I'm not going to try to convince you. But let me tell you something—

Mr. Gary Pillitteri: Well, I just wanted to bring that point across—

Mr. Thomas Caldwell: No—

Mr. Gary Pillitteri: —because you are in the same business—

Mr. Thomas Caldwell: Reasonable—

Mr. Gary Pillitteri: If they are in a business of lending money, they are more at risk than you are, sir—

Mr. Thomas Caldwell: If they're lending money, then they should have collateral.

Mr. Gary Pillitteri: —and that's the point I want to bring out.

Mr. Thomas Caldwell: That's why I say that reasonable collateral would naturally be required. No one is saying they don't have collateral; they should have collateral, that's the right thing. But what we're saying is that it shouldn't have to be a bank product.

For example, and not to pick on one, let's say the Bank of Commerce...if I'm having a loan from the Bank of Commerce and it wants some of my securities as collateral, it shouldn't have to be a Bank of Commerce mutual fund. It might be a Bank of Nova Scotia mutual fund. That's what I'm saying here. So I don't understand your point. No one is demeaning the importance of a loan being secured. We don't want to see a banking system with bad loans, but that's not what we're talking about in these discussions, make no mistake about that.

Mr. Gary Pillitteri: Just to follow up on that, as I said earlier, I sit in a lot of banks, client and bankers.... By the way, my own daughter was a banker; she manages a business today. Let me also say that they say “We're not in the business of securing money. We're in the business of lending money. Yes, we have security, but we don't want to be landlords.” They're in the business of lending money, so they have a risk.

Mr. Thomas Caldwell: No one's disagreeing with that.

Mr. Gary Pillitteri: In your case, sir, you have no risk involved. I just want to make that clear.

Mr. Thomas Caldwell: I'm selling, though. I—

Mr. Gary Pillitteri: So it's a vested interest.

Mr. Thomas Caldwell: No, it's not. I'm not here because of myself. I'm not here because of my loans. I'm not here because I'm demanding that the banks have less collateral. I'm an investment adviser who is coming here on behalf of clients, because of an industry.

You may call it a vested interest, but you can call it what you want. That's irrelevant. The point is that I'm not talking collateral. I said reasonable collateral would be provided, but the constraint of requiring it to be a bank product should not. And they should not have to do it. That is not unreasonable, and only an apologist...it would be off the scale to say that's a conflict of interest.

The Chairman: Ms. Redman.

Mrs. Karen Redman: Thank you very much, Mr. Chairman.

I have two questions, actually. You held up a Globe and Mail article and referenced it. Would it be possible to get a copy of that? I'm not familiar with the contents of that article.

Mr. Thomas Caldwell: It came out a day or so after the hearings last year, I believe. It was written by Karen Howlett. I think it's from October 1, 1996—I can't read the writing—and is called, “Senate to hear banking stories minus happy endings”.

Mrs. Karen Redman: Would it be possible for us to get that?

Mr. Thomas Caldwell: Yes, if you want. It's the only copy I have, actually—I just grabbed it when I left the office—but if someone can photostat it...I'd like to take that one back with me.

• 1205

Mrs. Karen Redman: The other issue—and I have to tell you, I think the pervasive concern collectively around this table is that of the consumer; I'm sure that's what prompted you to come as well—is that, for me, the nub of this whole argument is really defining what tied selling is. In your first recommendation you make it a very inclusive term.

It seems to me, because of the proviso that it's whenever credit is involved, you're also including bundling or cross-selling. Am I to understand correctly that's what your recommendations really pertain to?

Mr. Thomas Caldwell: The latter part is a bit of a weaker topic, but I think it should also be looked at, because I believe it does represent a conflict under the Bank Act. I assume that's what Mr. Pillitteri was referring to, under the Bank Act.

That having been said—

Mrs. Karen Redman: But this is my question, so don't assume anything—

Mr. Thomas Caldwell: —I wouldn't think we should look at that as well, but certainly, under tied selling, absolutely.

Mrs. Karen Redman: I raise that issue because, to me, that's the real grey area, yet we've heard other presenters talk about bundling and cross-selling as perhaps being of benefit to the consumer. So to come down on the side of fairness and yet protect, in the most effective way possible, the rights and choice of a consumer, which I think is really a part of this issue, is to me the hard part. You've kind of dismissed that by taking tied selling and defining all of it under that category.

Mr. Thomas Caldwell: Tied selling is where there is coercion and power in place. I think the topic is so difficult to deal with.

These are my suggestions, okay? My main purpose here is to bring the issue forward, because frankly, people in the world don't believe you guys even accept the fact that tied selling exists. That's the main reason I'm here. You can't deal with a problem when you're in denial. You have to recognize the problem exists.

I believe—or hope—I've done that to some degree. I've tried to make some suggestions.

I was listening to a few of the people speak prior to my presenting. Everybody was talking about coercion and power and force and when it's undue. I think that's an ongoing debate. You have to say that coercion exists when there's a difference in power. Your boss suggesting something to you, or somebody 9 foot 8 saying, “I think you shouldn't do that”—that's coercion.

So there is a difference in power in that relationship when you're going through the credit aspects of it. If the credit thing is done and properly secured with proper collateral that is reasonable, then we've done a deal.

Now, you can then say, “By the way; now that we've done that loan for your house, and it's finished and signed, we have a terrific deal on house and car insurance”. That's different. The credit part is done. Then you can discuss it.

Mrs. Karen Redman: Please appreciate, Mr. Caldwell, I'm asking these questions to understand the points you're bringing forward. I'm not trying to do this in a confrontational manner.

To me, you're making it simpler than it really is. I can buy the logic you're using to make that argument right now, but when I go back to some of the points Mr. Casey made, which is that down the road, if I want to renegotiate my interest rate or I'm looking at taking on a small business loan, it's a very complex—

Mr. Thomas Caldwell: That's a whole other issue. I'm trying to get the thing started. This has been going on for a year or so, and people have been abused for a year or so. Sooner or later somebody has to do something as opposed to just stalling things.

I'm trying to say maybe here's a possibility, but this is one aspect of it. The secondary credit renewals is of course another problem. I think once you get the first part done the others will fall into place and it'll be a little bit easier to address once you have something in place.

Mrs. Karen Redman: Thank you.

The Chairman: Mr. Pillitteri, do you have any further questions?

Mr. Caldwell, thank you very much.

Mr. Thomas Caldwell: Thank you very much for your time.

The Chairman: Just so that you can take note of this, the reason we're meeting here, having these hearings, is precisely because of the fact that we think this is an issue that needs to be looked at in a serious way.

Mr. Thomas Caldwell: Thank you. I'm comforted by that.

The Chairman: We'll suspend for five minutes.

• 1209

• 1215

The Chairman: I call this meeting to order and welcome the representatives from the Insurance Brokers Association of Canada: Mr. Rod Jones, chairman; Mr. Mike Toole, president-elect; and Mabel Sanson, executive director.

I guess you were listening to the other discussions, so you know exactly how this committee operates. You'll have approximately ten to fifteen minutes for presentation, and thereafter we will engage in a question and answer session. Thanks. Welcome again.

Mr. Rod Jones (Chairman, Insurance Brokers Association of Canada): Thank you, Mr. Chairman. Just before I begin, I'd like to point out that unfortunately our presentation won't be quite as colourful as the previous presentation, but we do have some interesting thoughts we'd like to share with you.

We are here representing some 23,000 insurance brokers across Canada with 55,000 employees. We have presented to the committee in the past and are certainly thankful for the opportunity to do so again today.

With me, as you've mentioned, is Michael Toole, who is an insurance broker from New Brunswick. I am an insurance broker from Nova Scotia, and Mabel Sanson, our executive director, is an insurance broker from Toronto.

Mr. Chairman, ladies and gentlemen, we are pleased to be with you this morning and we welcome the opportunity to restate our position regarding tied selling. Our position is rather straightforward. We recommend that the federal government should move ahead and proclaim the tied selling provisions of the Bank Act.

As it is currently written, however, the tied selling measure may in fact undermine its intended purpose. Specifically, our concern rests with the wording of the interpretive subsections (2) and (3). While subsection 459.1(1) of the Bank Act states explicitly that no bank shall impose undue pressure on, or coerce a person to obtain products and services, subsections (2) and (3) undermine subsection (1) by allowing banks to do just that. In our opinion, subsections (2) and (3) give the banks considerably more latitude and will permit certain activities to take place that will not be beneficial to consumers and small business.

To remove any risk of misinterpretation, we suggest that subsection 459.1(1) be allowed to stand on its own merits. Subsections (2) and (3) should therefore be deleted. This way the message is clear. Tied selling is illegal.

Do tied selling and coercive practices really take place? We have no doubt. Not only do they exist, but the use of these dubious practices is widespread and consumers and small business have been, at times unknowingly, subjected to them for decades. It is a systemic problem.

Tied selling exists in several forms on a spectrum ranging between explicit coercion and voluntary choice. Explicit tied selling is obvious. If you borrow from us, you have to insure the loan with our insurance company. But there are more subtle and common forms of tied selling. For example, banks can implicitly tie insurance to loan granting. A word from the manager is sometimes all it takes to make a customer feel compelled to buy the bank insurance to get a loan approved. The perception of coercion may be more insidious than the reality, and frankly, it is impossible to regulate.

As most of you know, there is always a power disadvantage when consumers and small businesses are looking for credit. Bank control over decisions of whether to extend or withhold credit provides them with the capacity to exercise an unusual amount of influence over the choices made by the consumers and small businesses. As a result, they often feel vulnerable. In most cases, they do not wish to undermine their relationships with their deposit-taking institutions.

Recently, Canada's privacy commissioner had this to say about the relationship between consumers and their banks and its effects:

There is an enormous power imbalance here. We know that. If people go to a bank for a mortgage and are desperate to get the house built before the rates go up next week, they will sign anything to get that mortgage, including, if necessary, a waiver for subsequent third party use of that information. The public must have that power imbalance redressed and more transparency and openness introduced into the process.

It is now difficult to protect consumers from the anti-competitive effects of coercive and tied sales. The rules are simply inadequate.

Some may argue there is a fine line between cross-selling and tied selling. From our perspective, there is no fine line between cross-selling and tied selling. Cross-selling is common in many businesses and it is an accepted business practice. Tied selling, however, is illegal and immoral.

IBAC is not advocating regulation for the sake of regulation, but we are of the opinion that a direct legislative intervention will benefit consumers and small business.

• 1220

Moreover, the need for a solid consumer protection policy framework will increase as banks take advantage of the powers granted to them in 1992 and as they begin to offer a host of other products and services.

The proposed merger between the Bank of Montreal and the Royal Bank of Canada raises a number of important issues relating to the possible abuse of private information and the use of coercive and tied selling practices.

In support of this observation, the task force on the future of the Canadian financial services sector has recognized that in the financial services sector the potential for discriminatory pricing and coercive tied selling may merit greater concern than is generally the case with mergers in other sectors of the economy. This consumer and small business concern is real and its importance should not be overlooked.

To reinforce this point, we would like to share with you a few examples from our file.

Last month, a Manitoba-based consumer with a solid credit rating was told by his Bank of Montreal loans officer that his RRSP loan would be granted only if he agreed to buy products from the bank.

A family from Saskatchewan, also with an excellent credit rating, reports that their credit union forced them to buy disability insurance in order to benefit from a lower interest car loan.

A Hong Kong bank representative in British Columbia has required that a customer provide the “full policy wording” of an unrelated insurance contract because of “new bank requirements from head office”. What do you think the bank plans to do with this information?

A year ago a consumer was told that she must purchase life insurance from her Saskatchewan-based deposit-taking institution as a security for an RRSP loan.

In eastern Ontario, a life insurance agent with a paid-up mortgage and a $125,000 RRSP portfolio was refused a $15,000 line of credit. Instead, he was offered a $25,000 higher interest loan on the condition that he would transfer some of his portfolio to the bank.

Even our own president was pressured to buy the bank's life insurance coverage to enhance the chances of his business loan being accepted.

In early 1997 we filed a number of documents with this committee that illustrated the use of coercive and tied selling practices in British Columbia. We invite members of this committee to review them again.

So why are there few complaints? Mr. Tom Caldwell of Caldwell Securities Ltd. said it best when he noted in his open letter to the Minister of Finance that Canadians are generally afraid to complain. We often get a similar reaction. Many Canadians have told us in writing that they have been pressured by their banks. Regrettably, they are often concerned about the impact this will have on their ability to obtain credit at a later date.

Furthermore, as small to medium-sized business entrepreneurs, we know first-hand the effect this has had on our industry. Increasingly, our brokers are reporting that banks are using their dominant position in the marketplace to hinder brokers' ability to effectively operate.

For example, one broker reported recently that his bank had demanded he bring all of his business to their institution. Furthermore, the bank limited his access to credit because banks would soon be given the right to sell insurance in their bank branches. Another broker recently reported that his bank also had denied access to credit for the same reasons.

This is moving away from the issue of tied selling, but it illustrates how banks will use their dominant position. Some may argue that we—and consumers—should go to another source of credit, but it's not that easy. Our choices are limited, and in most small urban and rural areas, there is even less choice.

Finally, there are four reasons why we believe government intervention is required.

First, it will send a strong signal to Canada's deposit-taking institutions that tied selling and coercive practices will not be tolerated.

Second, it will send a positive message to Canadians that in a time of rapid change in the financial services sector—peppered with references to competitiveness and globalization—consumer protection remains a policy priority. Without a solid legislative and regulatory framework, consumers and small businesses are less likely to come forth with their complaints.

Third, it will enhance consumer sovereignty and will help to restore some of the power imbalance.

Fourth, it will help to ensure that consumer and small business concerns are more fully integrated in the overall policy framework governing Canada's financial services sector.

Consumers and small businesses need more than just competitive markets and choice. Financial decisions must be made in an environment unencumbered by illegal and unethical practices. This is the key reason why we recommend that the federal government put into place a modified version of the tied selling provisions noted in the Bank Act.

• 1225

Thank you, Mr. Chairman.

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

We will now proceed to questions and answers. Mr. Solberg.

Mr. Monte Solberg: Thank you very much for your presentation.

In listening to your presentation, I think you make a number of good points, but I keep coming back to definitions. While it may be clear to you what constitutes the difference between tied selling and packaging of services, or cross-selling, where I'm unclear is, for instance, on one of the examples you gave.

You mentioned that your own president was pressured to take insurance, I think it was, in exchange for getting a business loan. But that's where it become pretty difficult. What constitutes pressure?

To use another of your examples, the insurance agent who had the paid-up mortgage and $125,000 in RRSPs, presumably, when he was told that he had to sign up for a $25,000 higher interest line of credit, probably said take a hike and went to the institution next door.

I think there are people who are in situations where they have no options, and I think that is coercion, but it's hard for me to separate, even with the examples you've given, whether or not some of those examples are really coercion. Would you respond to that?

Mr. Rod Jones: I guess this is a good opportunity for us to lead into another issue that was discussed earlier today, that is, the illustration of how a tightening of tied selling regulations can perhaps benefit the consumer. We have done some research outside the jurisdiction of Canada and have been able to actually get some factual information on legislation that is in effect within the United States, different states of the United States, as well as overseas.

Our executive director just came back from a conference in Brussels where she dialogued on this specific issue and certainly has some information that we would be willing to share, if you people were interested in receiving it.

Perhaps I could quote, for example, from legislation that is in place in Rhode Island with respect to tied selling. This is what it says:

Overt and implied tied selling are strictly disallowed. Banks must clearly disclose in writing that purchase of their insurance is not a condition for credit. Insurance solicitation may not be done by someone responsible for loans, credits, or taking deposits. If a loan requires insurance, an outside insurance policy may not be rejected because it's outside, or may not have additional requirements put on it. Loans and insurance must be separate documents. Place of insurance and banking must be physically separate.

So they have defined specifically the types of conditions that they see necessary to control that coercive practice, and I think it's a perfect illustration of the type of legislation that could perhaps work.

Mr. Monte Solberg: If I understand what you just said, you would like to see any legislation be a lot more specific and say that these specifically are the practices we would want to see outlawed, or not allowed, in any way, shape or form, as opposed to what I think is a pretty vague clause in the proposed legislation.

Mr. Rod Jones: We feel satisfied that section 459.1, as written, would prohibit the tied selling activity and eliminate the possibility—obviously with some means of retribution—without any need for further terms.

Mr. Monte Solberg: Okay. All right.

Thanks, Mr. Chairman. I'm going to have to leave again, unfortunately.

• 1230

[Translation]

Mr. Pierre de Savoye: Thank you for your presentation which repeats some of the things that we have already heard, but which casts them in a different light.

There's a paragraph that struck me and I would ask to have some further clarification on this. You said:

Some people might emphasize that there is little difference between cross-selling and tied selling. In our opinion, these two things are quite different. Cross-selling is a common commercial practice and is accepted in many businesses. Tied selling, on the other hand, is illegal and immoral.

In light of your experience, could you explain to me the difference between these two practices and then tell me why you are saying that tied selling is illegal and immoral?

[English]

Mr. Mike Toole (President-Elect, Insurance Brokers Association of Canada): If we look strictly at retail, just to simplify things and probably oversimplify things, in the matter of cross-selling we had the example of buying shoes and the offer of socks to go with it, or women, when they go into a dress shop, usually getting other articles to go with it, such as jewellery, scarves and hats. That would be, in a simplified manner, a way of cross-selling. If you have a number of products to sell, you cross-sell those products.

The point was made earlier on coercive selling and tied selling. Again, it's a perception problem and it's hard to regulate. It's very difficult to regulate perception. When you have one person sitting across from a bank manager, say, negotiating a loan, that bank manager is in a power of strength. Again, it's the perception; how do you regulate that perception? I think that's the reason we have to have strong regulations and enforceable laws, because you cannot regulate perception.

Mr. Pierre de Savoye: But you're mentioning clearly here that tied selling is illegal and immoral. Do I actually understand that you consider it to be immoral and you wish it to be illegal, or can you pinpoint the fact that it is illegal right now? It isn't illegal, is it?

Mr. Rod Jones: As it stands right now, I guess it's not illegal. With the proposed legislation it would be illegal. Until that's enacted, as it presently stands, I guess it's not.

Mr. Pierre de Savoye: Could you amplify on the immorality, your point of view on this?

Ms. Mabel Sanson (Executive Director, Insurance Brokers Association of Canada): On the question of immorality, I think it comes back to the perception of power and who has control of the situation. Many times the consumer is put in a desperate situation, needs the loan for business expansion, and there are other criteria they must meet that have nothing to do with the granting of the loan. Again, it's the perception that becomes almost immoral, and whether they have the right to go to another lending institution.... They may have that right, but it may not be available to them in the town or city where they live. They may have other reasons that preclude them from making that choice. So it becomes almost an immoral issue at that point.

[Translation]

Mr. Pierre de Savoye: Thank you, Ms. Sanson.

Thank you, Mr. Chairman.

The Chairman: Thank you.

[English]

Mr. Casey.

Mr. Bill Casey: That was good service, thank you.

I'm not clear on the status of the banks' efforts to become involved in the insurance business. What is the status of that right now? I know they're manoeuvring and attempting to buy major insurance companies, but what is the status of it?

Mr. Rod Jones: As it currently exists, banks are not able to retail property and casualty insurance products directly through their branches, a process they would very much like to have. Obviously, it would give them an opportunity to use tied selling or coercive practices with our particular product.

There are banks that presently own insurance companies and, through distribution services that they elect, are free to compete with us. Frankly, we don't have a problem with that. We've never challenged any additional competition. In fact, we've gone on record as saying that if the banks would like us to market their products for them, we'd be more than happy to do so.

We see that if the opportunity is given for them to retail those products directly in the branch, the consumer will certainly be the loser, ultimately.

The other problem we see here is that—and it was alluded to earlier by another witness—the bank is only going to develop one product, and that may not necessarily be the product best suited for the consumer. The consumer is not going to have any way of knowing or being able to check that out. If he's in a position of being forced to buy that product, it may be the product best suited to serve the bank's needs, but it may not be the best product for the consumer.

• 1235

Mr. Bill Casey: You said their goal is to market their products in the bank branches. Do you think they're making progress on that?

Mr. Rod Jones: We'd like to think not.

Mr. Bill Casey: You would not be in favour of that, obviously, and I agree with you it shouldn't be.

Do you think it would enhance their opportunities for tied selling if they sold insurance in the branches?

Mr. Rod Jones: Yes, we believe that very strongly, just by evidence of what we've already been able to discover from the practices that currently exist.

Our product is very closely associated with credit-giving and loan-granting services of the bank, because obviously car insurance and house insurance are directly related to the purchase of major assets. We see there would be an obvious opportunity there.

Mr. Bill Casey: Did you say there were 23,000 brokers in Canada?

Mr. Rod Jones: That's right.

Mr. Bill Casey: That's all, Mr. Chairman.

The Chairman: Thank you, Mr. Casey. Thank you, Mr. Jones.

Mr. Pillitteri.

Mr. Gary Pillitteri: Thank you very much, Mr. Chairman.

Comments made this morning remind me about being a farmer and cherry-picking. But I'll clarify that in a moment.

Mr. Jones, you made a remark that there's legislation in Rhode Island prohibiting tied selling. I just want you to bear with me for a moment and answer this question for me. I recall as a youngster of 30 years old that I took out a loan from the Farm Credit Corporation, our own corporation here in Canada, and was required to take out life insurance on the loan. Maybe we've been emancipated and it no longer pressures people to buy that. Would you say that was tied selling? Would you say that was coercive?

Mr. Rod Jones: I guess that depends on whether the institution that was granting the loan—

Mr. Gary Pillitteri: I had no other option.

Mr. Rod Jones: —made it a condition of accepting the loan. Weren't you given an opportunity to go outside to buy it?

Mr. Gary Pillitteri: No.

Mr. Rod Jones: Then it was tied selling.

Mr. Gary Pillitteri: This was our own government, the Farm Credit Corporation—the junior Farm Credit Corporation. It was a long time ago.

I have also many types of insurance. I have a business and I've changed insurance brokers many times over the years—for different reasons, to be quite clear. There's an immense amount of difference between one company and other companies. I'm actually buying the same amount of insurance but I'm buying consumer protection and property protection—many versions of the business I'm in. Sometimes there's as much as a 100% difference in the prices. I've had someone quote me double the premium for the same amount of coverage. I don't know the details of the fine print, but I'm asking for the same thing.

I had my car insurance with another company and it said, “Mr. Pillitteri, do you know we offer fleet insurance?” Fleet insurance is for more than one vehicle. I had 10 or 12 vehicles. Would that be considered also tied selling if they offered me this package?

Mr. Rod Jones: In my opinion, that is not tied selling. Perhaps I can be allowed to explain why.

It's a service provided by insurance companies that can sometimes be beneficial. Our responsibility is to tell you whether it is beneficial in your case or not. But it's not a requirement for you to do that because you have a multiple group of vehicles to insure.

• 1240

Mr. Gary Pillitteri: I quite agree with you, I know that it's not. But is it any different if I walk into a bank—and I have loans; I'll probably still have loans when I die and I'll never be out of debt—and they were to say to me, “Here we offer RRSPs” or “We offer something turned into mutual funds”? Is that any different from what I just stated here?

Mr. Rod Jones: If they are tying that directly to your acceptance or the condition of accepting a loan or a line of credit, then I would say it is a coercive act.

Mr. Gary Pillitteri: I just stated, sir, that I'll probably die being in debt. So therefore what it means is I've dealt with them for years and I am in debt. So if they say to me they're offering RRSPs, that doesn't necessarily mean it's some type.... They just mentioned to me they had another product that they have for sale. I don't find that coercive.

On the other hand, if we were to specify that an individual was going to a bank for the first time for a loan and then you tied something to it, then yes. But if that individual already has loans with that bank, it's no different if he has a mortgage. He already has that debt.

So the package he is offering is nothing new. Would you say that is tied selling, coercive?

Mr. Rod Jones: It becomes a matter of opinion. My opinion would be that in fact it could be construed as a coercive practice if there is some direct affiliation with the fact that you are indebted to the bank now or are looking to be further indebted to the bank. If it's simply a matter of a product being offered and you have the freedom of choice...but the evidence we have and the evidence we've been hearing is that these aren't freedom of choice decisions. These are decisions that are being forced upon people.

Mr. Gary Pillitteri: I don't want to be argumentative, but the point is if one was going in there for the first time for a loan, yes, I could see it. But if a loan does exist, if a line of credit does exist and then you offer another package, I don't find that coercive or tied. That's all I want to clarify.

Mr. Rod Jones: Yes, okay.

Mr. Gary Pillitteri: So that's one element. Then, for the insurance brokers, it's no different. If one has to shop for the best package that he can get for himself...because what you have are independent brokers you don't necessarily all offer the same thing.

Mr. Rod Jones: That's right.

Mr. Gary Pillitteri: Thank you.

The Chairman: Ms. Torsney.

Ms. Paddy Torsney (Burlington, Lib.): Thanks.

I wanted to clarify this. You don't have a problem with banks selling a life insurance policy of $10,000 to cover the $10,000 line of credit?

Mr. Rod Jones: It's really not in our realm. We are specifically dealing with property and casualty insurance, and the question should probably be asked of the life insurance industry. But in general principle, yes, we could certainly accept the fact that there has to be some sort of a commitment to guarantee a loan.

Ms. Paddy Torsney: So with life insurance on a mortgage, to cover the value to the bank of that mortgage, do you have a problem with it or not?

Mr. Rod Jones: The problem we see presently existing is that the customer is not necessarily being given the opportunity to be able to find out whether he has a chance to find a competitive product. The mortgage is being presented to them and at the same time the insurance is being provided or recommended to them and the implication to the consumer we see is that they must tie them together.

Ms. Paddy Torsney: Don't they usually make the withdrawal from their bank account at the same time?

Mr. Rod Jones: Exactly. But when the loan application or the mortgage application is being completed, that is the time when the life insurance is being.... In fact, we've seen cases and we have evidence of cases where in fact people weren't even given any explanation that it was actually included as part of the mortgage process. It was just another line to sign on the form. No information was provided.

• 1245

Ms. Paddy Torsney: But don't you think....? I guess I'm concerned here, because certainly I've heard about people having life insurance policies to cover their mortgage and then forgetting to pay for them. Then the person dies and there isn't the insurance they thought there was to cover that mortgage. Well, they obviously don't think that, whoever their partners are.

Certainly from a bank's or trust company's perspective, ensuring that the life insurance is there for that $160,000 of mortgage is in their interests. Is there another way to make sure the payments are being made other than tying it directly to the product?

Ms. Mabel Sanson: It's very similar to home insurance. When you have a mortgage on your home, the bank requires insurance. Insurance brokers must supply the bank with evidence of insurance on an annual basis. So we could do the same for life insurance.

One of our concerns—and again, it should be addressed to the life industry—is who is the beneficiary of that life policy, and have the insured received counsel before they bought it? Those would be our concerns.

Ms. Paddy Torsney: In terms of bundling of services—I mean, that's where we're getting into all of these definitions—you probably offer discounts on house insurance if people have their car insurance with you, because it costs less money to administer an active file for that person. Is that correct?

Mr. Rod Jones: Absolutely.

Ms. Paddy Torsney: Do you get a deal from your suppliers of those insurance products?

Mr. Rod Jones: A deal in terms of remuneration?

Ms. Paddy Torsney: Yes, or in terms of discount.

Mr. Rod Jones: No.

Ms. Paddy Torsney: Does the discount come directly from you or does it come from...?

Mr. Rod Jones: It comes directly from the supplier, from the insurance company.

Ms. Paddy Torsney: Do they then encourage you to sell the second product? They don't offer you any financial incentive to sell the second product.

Mr. Rod Jones: No, not at all. As insurance brokers, we represent more than one insurance company. We do that for the consumer's best interest.

If, in making a recommendation to you, we see it's in your best interest to take advantage of a bundling pricing program, and you choose not to do that, we still have the option of being able to market your insurance needs in various insurance companies. The product may not be designed to do the job that needs to be done for you. That's a perfect example of that.

Ms. Paddy Torsney: So if I have.... Give me the name of an insurance company. I'm trying to think of who's left.

Mr. Rod Jones: Today?

Ms. Paddy Torsney: Seriously.

Mr. Rod Jones: Royal?

Ms. Paddy Torsney: That's who I was going to say, and then I wasn't sure any more.

Let's say you've sold me my car insurance, and it's with Royal. Then you ask me about my house insurance, and tell me that Royal's offering 10%. Is that going to be the discount I get or are you going to offer something as well for the paper savings you have?

Mr. Rod Jones: No. In fact, most provincial jurisdictions have laws in effect that prohibit us from being able to rebate premiums. So we aren't in a position to be able to negotiate differently from the premiums that are already printed and filed with regulators in each province.

Ms. Paddy Torsney: So Royal will give you a discount to give me a discount on my house insurance.

Mr. Rod Jones: Yes.

Ms. Paddy Torsney: But if I say to you, okay, I want the same kind of insurance on my car and my house that you've just offered but I want another company to deliver the house insurance, and you tell me you can't do it for the same price...or do you negotiate?

Mr. Rod Jones: It may possibly come that this is the case. In fact, it may come to pass that we are able to find a company that could do it at a lesser price. So the bundling may not necessarily dictate the lowest possible price for you.

Ms. Paddy Torsney: It's certainly a lot less work.

Mr. Rod Jones: But there may be an opportunity. The companies can only charge the appropriate premium that they see for the risk, directly related to their own experience. They have to recognize the premium's inverse is the pay-outs in claims. So they regulate their own costs for their product.

We, because we represent multiple companies, are in a position to be able to tell you that Royal Insurance, say, can give you bundling at this price, but by buying one product with Royal and one product with company B, you'll actually be able to enjoy a lower premium.

Ms. Paddy Torsney: Okay.

The Chairman: Mrs. Redman.

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

I really appreciate your presentation, because I think it hits on some subtleties in layering that haven't been articulated in quite as well a way. The perception of coercion may be more insidious than the reality, I would agree with you. I think that's part of what we are dealing with.

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You also mentioned that it's a systemic problem, so I guess the question I would like to put to you is this. In your opinion, if we followed the suggestion for subsection 459.1(1) and did something with subsections (2) and (3), is that enough to significantly deal with the perception and the insidious nature of, as well as the systemic issues around, tied selling?

Mr. Rod Jones: Boy, that's a tough one.

I guess it's what we see as the best option that's being offered. Recognizing that we've been able to go through and see some of the regulations, some of the legislation in effect in other jurisdictions around the world, we see that there are certainly tighter restrictions on financial institutions in other jurisdictions, specifically on banks. We're just not sure how far we should be pushing to have changes made to what is already in the process now. Subsection (1) would adequately do as much as we think it possibly could do at this point.

Mrs. Karen Redman: If I could, I have just one other question.

I notice that you have a really thick portfolio of case studies, and you made the assertion that it's a systemic problem. When you went through them, were you able to build up any kind of profile as to the kinds of people involved, or their circumstances? I think you mentioned rural Canadians as people who may be more subject to these kinds of conditions because there isn't as much choice. Did you have an eye to any of that when you were going through and compiling that?

Mr. Rod Jones: We haven't done that. If you thought it was beneficial, we could probably sit down to do some of that, to break it out and provide you with some information, but it would be a bit of a chore for us, frankly.

Mrs. Karen Redman: Thank you.

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

I have a question. How widespread do you think this tied selling is?

Mr. Rod Jones: We think it's even wider than this. Frankly, we've had a fair bit of difficulty in gathering testimony to present, because of people's fear of what may follow from actually allowing their names to stand with cases. I guess I can't really tell you how far we feel it is spread, but we feel it's widespread enough that something needs to be done about it. We see that it's only getting worse and worse.

The problem we see is that the top executives and the public relations people within the banking industry are saying one thing while the people at the grassroots, branch level are in fact doing something totally different. When evidence of cases of impropriety is presented to the top levels, they then come back and publicly say they were isolated cases, that they're sorry and won't let it happen again.

It just seems that it's continuing to build and build and build. I think somebody said earlier today that local bank employees are having extra pressure put on them to perform at levels different from those they had previously been expected to perform at, so this may be part of what we're actually seeing happen.

The Chairman: How long have you been studying this issue?

Mr. Rod Jones: Gosh, personally I can say that we have been involved for about the last six or seven years, and our evidence certainly goes back ten years. It's been for quite some time.

The Chairman: So that file you have there is based on eight years of research across the country.

Mr. Rod Jones: No, we may have some in there that goes back eight years, but we purge it from time to time. And actually, that's not very big in relation to what we feel really exists out there. We've been frustrated by the fact that we haven't been able to gain as much testimony as we'd like to have.

The Chairman: And you're saying you think that's basically out of people's fear that they're dealing with...?

Mr. Rod Jones: Absolutely.

The Chairman: And you think the change, the amendment being proposed, would in fact—let me quote you here—“enhance consumer sovereignty and it will help to restore some of the power imbalance”.

Mr. Rod Jones: Yes, we feel identifying that it is not a proper procedure to follow is at least a starting point. Tied selling is not an allowable act, and we would like to hope that the banking industry would be honourable enough to want to follow the legislation that was enacted.

The Chairman: I'm just wondering about something. The financial services sector is changing rapidly, as you know, and many of the products that banks sell are also sold by other financial service sectors. Do you agree with that?

Mr. Rod Jones: Yes.

The Chairman: Yet today, we're just talking about banks. Should this be broadened to include everybody, all other sectors? If you're in the same business as banks, yet you want this special provision for the banks, and other financial services are selling similar products or the same products, why wouldn't it be throughout the financial services sector? And I know this is a challenge.

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Mr. Rod Jones: Sure. We've always maintained that a level playing field is the only way to go. So the biggest concern we have is with that fear of the perception of actually coercive practices taking place.

If it's directly related to credit taking—and I think that was talked about earlier today by some other witnesses—I think we would have to agree that's probably the best means of being able to try to draw some control to it.

We don't see the products that we offer in our office as having the capability of being tied sold and we don't see how any undue pressure can be put on people to force them to buy our products. People are free to come in and discuss, at will, any product that we have to sell and they're free and at will to be able to leave and do something else.

The Chairman: Let me ask you a question. And correct me if I'm wrong, because I'm not in the insurance business. You basically make your living from commissions. Is that right?

Mr. Rod Jones: Yes.

The Chairman: And you have many products and represent many firms. You might represent X, Y and Z, right?

Mr. Rod Jones: Right.

The Chairman: But you know that if you sell x amount of policies for, let's say, company Y, if you reach a certain level, you get paid more. Don't you?

Mr. Rod Jones: Yes. There are incentives.

The Chairman: There are incentives, are there?

Mr. Rod Jones: Sure.

The Chairman: That's interesting. So when I come to see you and you're selling insurance to me, you're going to tell me that A to Z is available, right?

Mr. Rod Jones: No. Let me make it clear that our responsibility is to our customer, not to our insurance companies. Our customer is the person we are representing. Our customer is not the company.

The Chairman: No question about that—

Mr. Rod Jones: So once we identify the product that is best suited to your needs, that is the product we are in fact going to offer and hopefully sell to you.

The Chairman: So the incentives these major companies give you are there for what reason?

Mr. Rod Jones: The incentives are based only on the quality of the business that you present to them; it's not based on volumes of business that you might place with them. It's not meant to be an enticement for you to place all of your business with those particular companies. That's not the idea. Our business is based on the quality, because it's a claims-driven business. They know and anticipate the losses they will incur from the premiums they derive. The expectation is for us to be able to build a mix of business for them, which will generate claims experience so they can make modest profits.

The Chairman: So you're saying that it doesn't even enter your mind.

Mr. Rod Jones: Really, no, and I'm quite serious about that.

The Chairman: And I'm quite serious about the question as well.

Mr. Rod Jones: Absolutely.

The Chairman: I can tell you that the reason we're holding these hearings is precisely to make sure that we establish sort of a level playing field, that people like Mr. Clark are taken care of properly, although he seems to do a great job taking care of himself, quite frankly. I followed his case.

I asked that question because as a broker you're of course interested in customer satisfaction. That's the only way you're going to survive in the business. But you're saying that you're not at all interested in the fact that if you sell $1 million worth of policies for company Y you're going to get a bonus as a result. That doesn't enter your mind at all?

Mr. Rod Jones: My responsibility is ultimately to the customer. When I sit across the desk from a customer and evaluate his or her needs, my responsibility is to find the product that's best designed to meet those needs. And that's the other interesting point: a policy is not a policy is not a policy. To buy tenant's insurance policies from five different companies may mean five totally different things, so it's our responsibility to identify...and each person's needs, interestingly enough, are very different from one another. It's really not a cookie-cutter type of product that can be designed to meet the needs of a large group of people.

The Chairman: On behalf of the committee, I'd like to express really our warmest and sincerest gratitude for your presentation. You brought up some excellent points, which we will review, and we'll make sure that we use these points to help out Canadian consumers and to also really develop a level playing field, which I think is also a constant theme in these hearings. Yes, people are concerned in this particular instance about banks, but there is also a concern that they want to deal with right across the board, with all of financial services sector.

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This concludes the morning-quasi-afternoon session of the finance committee. We'll be back at approximately 3.30 p.m.