FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Monday, September 21, 1998

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[English]

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

Before we begin with the hearing on the report of the task force on the future of the Canadian financial services sector, I do want to bring to the attention of the committee that I've received a motion by the Reform Party, which we will be dealing with after Mr. MacKay makes his presentation. Is that correct, Mrs. Ablonczy?

Mrs. Diane Ablonczy (Calgary—Nose Hill, Ref.): Yes, Mr. Chairman. Thank you. We appreciate that there is serious business for the country before this committee.

This morning I would also like to deal with a motion, which we presented in both official languages, that the Standing Committee on Finance strike a subcommittee to investigate the firing of the chief actuary of the Canada Pension Plan, Mr. Bernard Dussault. We are agreeable to discuss and to debate this motion after the witnesses have made their presentation, Mr. Chairman.

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The Chairman: Thank you, Ms. Ablonczy.

Welcome to everyone here this morning.

Today the House of Commons Standing Committee on Finance commences its study of the report of the task force on the future of the Canadian financial services sector, known as the MacKay report. It is a thoughtful and visionary report, which offers a truly profound revision to the way in which our financial sector operates.

The expression that the status quo is not an option has in fact in recent years become very much a slogan. This report, however, makes the expression an intellectual conclusion.

The recommendations of the report are organized around four major themes: enhancing competition and competitiveness; empowering consumers; ensuring that regulation is efficient and does not advantage one group of firms over another; and ensuring that financial institutions are good corporate citizens and perform up to our expectation.

The task force was established because it recognized that significant forces of change were at work: technology, globalization, and the changing demographics. Profound change means that those who are comfortable with the status quo will indeed be challenged. But change is inevitable. The report proposes measures to manage change. We hope that as we conduct these hearings, witnesses will make recommendations that are in the national interest and not just put forward recommendations that are in fact in their own interest.

Before concluding, I must say something about bank mergers. Ever since the announcement of the two proposed mergers, the media has frequently viewed financial events in that light. Just a few days ago media reports were still referring to the report on bank mergers. The work of the task force was never meant to be a study of the two proposed bank mergers, and the report demonstrates clearly that it did not succumb to the temptation to become a report on the bank mergers. The report is about much more than bank mergers. Indeed, it is about much more than banks. It is about a fast-changing sector full of innovative products and firms. It is about a diverse group of companies offering a wide variety of products.

This committee study is not just about banks. It is about creating a world-class financial services sector, one that will be responsive and protect consumers and one that addresses the importance of a dynamic, competitive financial services sector to the success of Canada's economy. We hope the report will encourage and inspire public discussion and debate on the important issues it raises. We are confident that through our nationwide consultation Canadians will participate and share their views and concerns.

I've also requested that all members of Parliament hold local town hall and community outreach meetings to engage Canadians at the community level in a dialogue about the future of the financial services sector. It is the responsibility of members of Parliament to seek public input, and it is the responsibility of Canadians to tell their government how they feel about the recommendations made by the MacKay task force. Canadians will therefore have a chance to be heard, because it is in the interest of all Canadians to help determine this committee's recommendations.

At this point I would like to welcome the chairman, Harold MacKay; Mr. Pierre Ducros, vice-chair; and Fred Gorbet. Welcome, gentlemen. We look forward to your comments.

Mr. Harold MacKay (Chairman, Task Force on the Future of the Canadian Financial Services Sector): Thank you very much, Mr. Chairman.

Good morning. I'm very pleased to be with you this morning, as are my colleagues. I would like to introduce to you those of my colleagues from the task force who are here with me. They are Pierre Ducros, the vice-chair of the task force; Fred Gorbet, who served as our executive director; John Chant, our research director; and other members of our senior research staff, Michael Andrews, Louise Pelly, and Kevin Wright.

It's almost one week since our report was released, and I must say we are gratified at the reception it has received to date. As you know, it's a serious report in which we've tried to cover a lot of very important ground.

In the past week Pierre and I have been speaking about the report across the country. We've had two objectives. The first has been to explain our conclusions and our recommendations. The second has been to urge Canadians to participate in discussion and debate, which starts in a formal sense before this committee this morning.

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What I've told those I've spoken to is that we have to keep moving the dialogue and the process forward. We have to do so recognizing that change is all around us. We need to think about old issues in new ways. We have to recognize the challenges of change, set aside romantic notions of the good old days, and consider the issues from the perspective of the broad national interest. Special interest thinking simply won't do.

Our task force wrestled with the question, “But what is this nebulous concept, the public interest?” We defined it as best we could by setting out a clear vision of a financial services sector that would best serve Canadians. The vision itself is described in our report. The point I want to emphasize about that vision is that it starts and ends with the customer. It's focused on expanding choice, improving service, and protecting rights.

In the course of our study we did consider some very technical issues: ownership questions; holding companies; business powers; foreign entry; regulatory reform. Too often in the past these issues have been considered from the point of view of the industry participants—who wins, who loses, that kind of approach.

We tried our best to consider all of these issues and the other issues on our table from the point of view of Canadians who rely on financial services. The hopes and dreams of Canadians, their abilities to start businesses, to buy homes, and to plan effectively for their retirement depends upon an excellent financial sector. As we developed our recommendations for a competitive, dynamic, and healthy sector for the years ahead, we continuously asked ourselves, “Will this particular change make consumers better off or worse off?” I should also emphasize that the who wins and who loses approach is one we expressly rejected. Rather, our focus was on developing a responsible, realistic, forward-looking set of recommendations that create a win-win opportunity for Canadian consumers, for the financial services sector itself, and for Canada.

As you go through your hearings, I very much hope you will keep this particular perspective in mind and challenge those who come before you to provide their vision of the broader public interest and to show how their proposals will benefit Canadian consumers.

Mr. Chairman, we have a strong financial services system. It's presently a source of national strength, and we should quite rightly be proud of it. We believe it serves most Canadians well, but we do see room for improvement. We'll have to work hard to make sure it stays strong and that it serves Canadians even better.

The forces of change that impact on financial institutions and their customers these days are very strong. The pace of change everywhere in the world is accelerating, and Canada is no exception. Technology and the globalization of markets are changing the way financial institutions have to do their business and the way consumers expect to be served. In this kind of turbulent period, as we've said in the report, status quo thinking is no option.

Change offers consumers new and valuable choices. It's possible now to do basic banking 24 hours a day, seven days a week, not just through computers or the Internet but by telephone, a technology that most of us are now quite used to. The Internet will offer a much broader range of choice. It's possible, for example, to comparison-shop for the most economic bank account, the best mortgage, the cheapest credit card, or the most appropriate insurance policy conveniently and quickly. And it's becoming increasingly easy and secure to actually purchase financial products over the Internet.

Canadians have shown that they are willing to actively embrace new technology and that they want to do so. We have the second-highest number of ATMs per person among the group of ten countries we surveyed. The number of point-of-sale terminals is third highest. And the use of debit cards has increased by an astonishing 91% per year for the last three years. Last year, for example, there were one billion direct payment transactions using debit cards, compared with 1.8 billion cheques written. The crossover point of the two types of transactions mechanisms is obviously not far ahead. Looking ahead, smart cards offer the opportunity for consumers to load cash directly into a card through their home telephone, bypassing institutions and ATMs.

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Electronic commerce is exploding. More than 50% of Canadian households have computers, and more than 25% of Canadians have access to the Internet in their homes. We can imagine Canadians increasingly using the Internet as an electronic shopping mall to find the best financial services products for them and to purchase them directly. The task force is convinced that these changes will come sooner rather than later.

Now there's a downside to change, and particularly to rapid change. We've addressed this in our report. Not all consumers will be comfortable with new ways of doing things. Technology, for example, is making many bank and credit union branches less economic, but most Canadians still want to be able to go to a branch to transact their business. Such tensions create real problems. Transitions can be difficult for individuals, and attention needs to be paid to making transitions easier.

The difficulties may be particularly challenging in rural areas, where technology offers on the one hand more ways to access the world, ways that are comparable to people in the largest metropolitan areas, but on the other hand where branches and face-to-face contact are often important community focal points.

New technology also raises new concerns. In an increasingly electronic environment, consumers need assurance that their sensitive personal information will be well protected and that their privacy will not be invaded. Similarly, as institutions increasingly offer a wider range of products, the potential for abuse of sales practices increases.

So you can see that change brings challenges as well as opportunities. We've styled our report, as you've noticed, Change, Challenge and Opportunity. We cannot avoid change; the real question is how we will manage it. To manage change well, it's important for us to have a very clear idea as a nation of where we want go to. The vision we present in the task force for the sector is one in which there will be an open, competitive system with excellent choice and good service for Canadian businesses and consumers, with a strong and diverse financial services sector and with a marketplace that works fairly and responsibly.

Canadians have every right to expect a wide range of products and the best prices. There's a lot that needs to be done. We have recommendations that will make it easier to start new banks. We propose steps to encourage more competition in Canada from foreign banks, from credit unions, from life insurance companies. In respect of the credit union movement, our recommendations are designed to be sure that our credit unions and caisses populaires become really strong players.

We have to make sure that Canadian policy supports competition and doesn't stifle it. We want to be sure that consumers are a strong and informed part of a more competitive marketplace. We also want to be sure that they're treated fairly. There are new issues to solve: the protection of privacy of information in an age of data banks and data mining; the prevention of coercive tied selling; the need for effective and accessible redress mechanisms for consumers who have been treated unfairly. Our recommendations contain concrete proposals on matters such as these.

Canadians quite legitimately expect banks and insurance companies to be accountable to the communities they serve. Being in the financial services business is a privilege, not a right. With that privilege come responsibilities: business responsibilities and social responsibilities. Our financial system will work best when it has the full confidence of the Canadians it serves. We believe that our recommendations will help.

Our recommendations are also designed to help to build a world-class financial system in Canada, one where we have lots of healthy institutions, where most are Canadian-controlled, where many will focus on particular regions or business niches, and where some will be world-class competitors and successful internationally. We want a world-class system to benefit Canadian users, whether they're looking for credit in rural Canada, exporting to Europe, or opening a business in Latin America. A vibrant, dynamic, Canadian-controlled industry, with major players active and competitive in world markets, provides benefits at home by importing best practices from abroad and by creating domestic activity that includes high-quality employment that can keep our young people in Canada.

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In fact, the very most important contribution the financial sector can make to employment is to be strong, competitive, and innovative. If it is, if it serves its customers well, providing the financing they need, it will be the engine of economic growth and job creation throughout the whole Canadian economy.

We're suggesting in the report that Canadians stand back from their special interests and their own prejudices about banks and other financial institutions. Just take a look on the television set at Russia and Japan, where weak banking systems are destroying economies and the savings of individuals.

We want strong institutions in Canada, not to assist the companies but for the good of the Canadians they serve. A healthy, profitable, competitive financial services sector will help to ensure a strong, healthy, and competitive Canada.

Canadians must be open-minded and take pride in building a world-class financial services system. The task force is confident we can do it. We hope our recommendations will assist.

Mr. Chairman, I thank you for the opportunity to present those remarks. My colleagues and I will be happy to respond to questions.

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

We will now proceed to the question and answer session and we'll begin with Mr. Harris.

Mr. Dick Harris (Prince George—Bulkley Valley, Ref.): Thank you, Mr. Chairman.

Mr. MacKay, I want to thank you for coming and I congratulate you and your task force on what I believe is a very excellent report, comprehensive in every respect. It has now given us the opportunity to begin to examine all the facets of the financial services sector in Canada. We appreciate the work you've done.

I have a couple of questions maybe we could start off with. I know that mergers are only a small part of your report, but I do want to address that right off. I want to get an understanding of what your research has told you concerning the desire of foreign banks to enter into Canada and maybe get an overview of what they see as an opportunity for them in the Canadian marketplace. Also, maybe you could touch on whether there was any interest from those banks in regard to establishing any type of retail branch banking. Maybe you could just give us an overview on that.

Mr. Harold MacKay: In the course of our deliberations we of course did take a look at the present relationship in Canada of the foreign banking community. We noted that the world competitiveness survey, which we quoted in the report, notes that Canada ranks 41st out of 53 in terms of its openness to competition of foreign institutions. Now that's not an analytical conclusion, but a judgment call by those who did the survey. That's not much of a ranking. We think that it's in the interests of the Canadian consumer to be certain that we do have access to as many world-class institutions from around the world as we can.

We have seen some non-Canadian institutions active in the Canadian marketplace for a considerable time. Hongkong Bank of Canada offers retail services. ING is a new entrant, based in Holland, offering virtual banking to retail customers, again using the present vehicles currently available, which simply require that the foreign banking company in question must set up a Canadian subsidiary in order to participate in Canada.

Our recommendations do embrace the idea of making it easier for the foreign banking community to participate in the Canadian market through participating as branches, namely not having to set up a subsidiary—there's confusion here because of this word “branch”, but it doesn't necessarily mean branches on street corners—but using the capital of the foreign bank without the need for a subsidiary to come to Canada. That should ensure—that is a strong wish of the foreign banking community to whom we spoke—more vigorous competition from the foreign banks, of whom there are some 40. That competition is more likely to be in wholesale financial services than in personal financial services. We would see certainly mid-market commercial lending enhanced by this, which means that some small and medium-sized businesses might well see an enhanced role for foreign banks.

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We did not hear from the foreign banking community a strong interest in going head to head with the domestic banks on the street corners with new bricks-and-mortar operations.

So we're convinced there's a much bigger role for the foreign banking community. We're convinced we should regulate it in a fashion that we achieve prudential goals, but we shouldn't overregulate it for the purpose of protecting Canadian institutions. We should look to the Canadian consumer.

Mr. Dick Harris: Thank you.

In your report there's a recommendation to establish a federal ombudsman's office, but I noted in your news conference that the enforcement powers of that office would be primarily the powers of influence—I think that was Mr. Ducros's phrase—and I wondered about that.

I was looking at the U.K. model, where they have a federal ombudsman there who has actual enforcement powers and can impose penalties, name names, and make public offences. I know Mr. Ducros spoke about the fear of a lot of litigation that could result if more than powers of influence were given to the ombudsman. I have to assume that you have examined the role of the U.K. model. I think it is Ireland that has these extras powers.

What was the main reason you didn't recommend a new federal ombudsman have enforcement powers in the areas the U.K. model would have?

Mr. Harold MacKay: Let me speak to it and then Pierre may like to supplement my remark.

We did study very carefully the structure of the ombudsman system, and we looked at whether we should provide that the ombudsman would have the power to make binding rulings, which then could be enforced through court processes. After some considerable debate, we decided that would be unwise. If you do provide binding rulings with court enforcement, it sets up a mechanism such that the financial institution is entitled, as a matter of due process and natural justice, to insist that there are court-like proceedings right in front of the ombudsman. So there would be the need for the cross-examination of witnesses. There would be the potential for adding lawyers to the process as advocates for the parties as opposed to having a user-friendly, cost-effective, across-the-table dispute-resolution mechanism that isn't just a new court. We thought it would be quite inappropriate to move to a new court-like setting unless we absolutely had to.

The Canadian banking ombudsman, who has been in place for a couple of years, has handled hundreds of complaints and has made many recommendations. We were informed and understand that absolutely every recommendation has been implemented. The mechanism that is in place in the Canadian banking ombudsman's system, the voluntary system, is that if that doesn't take place, if a recommendation does not follow, the institution is to be publicly named and that will be published in the annual report.

We believe that such a thing, such a name-and-shame system, the sunlight and bad publicity that comes with a reputation of an institution that would flout the ombudsman, will clearly deter financial institutions from not acquiescing to recommendations from the ombudsman. So we decided it would be unwise to move into this legalistic system. I'm a lawyer, but I wasn't promoting business for the legal profession here. We don't want a legalistic system. We want a user-friendly system.

We've also said if for some reason our confidence that institutions will not flout the recommendations is not justified in practice, then obviously this recommendation would have to be revisited. Practices do differ around the world. There was a debate inside the task force, but that's where we landed.

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Mr. Dick Harris: Thank you, Mr. MacKay.

I believe Mr. Epp has a question.

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

I too would like to commend you on a voluminous report. It's a good one. It takes a little time to digest it all.

I have a very general question for you. You indicate that you'd like to have more competition. You say the financial services sector in Canada provides good service, but there's room for improvement. I wonder whether you could be as specific as possible in naming the areas where you think improvement is necessary.

Mr. Harold MacKay: Certainly. We tried to divide our analysis of how well served Canadians are into three categories of users of financial services: large business, small business, and individual consumers. We concluded that the large business community was well served, and they were well served because they had the ability to look to international capital markets. The globalization process has made those alternatives clear substitutes for what may or may not be available at home. The Canadian institutions are vigorous competitors in the area, but there are many other competitors, which keeps the service and keeps the prices at what they should be for large Canadian business. So we concluded that they were well served by the present financial services structure.

For the small-business community, we found a mixed bag. We found, for instance, a continuing concern in Canada about the quality of the relationship between financial institutions on the ground and the small business customers they serve, concerns about the turnover of account managers that prevented a relationship from building, which for many small businesses is viewed as very important to the long-term success of the small business and banking relationship. We made some recommendations that the financial institutions should try even harder to prevent such a turnover. So we identified that as a target of opportunity.

We also identified that in Canada there appears to be some reluctance to provide financing to higher-risk borrowers using higher-priced lending, recognizing the risk with more innovative financing practices, whereas in the United States there appears to be a much broader range of risk accepted, with appropriate reward offered through the pricing mechanism of the loan. We thought that would benefit the relationship between small businesses and financial institutions if there was some greater flexibility in designing financing packages.

So for small businesses, some of whom were bruised quite badly by credit reductions in the early part of this decade, we found that service was fair to middling, but there was certainly room for improvement. We found it quite interesting that although our evidence shows that the average spread, the price of financing, is higher in the United States, notwithstanding that, the small business community in the United States appears more content with their banking and credit union system than our national system, which in certain ways appears on its surface more attractive. That goes back to the local relationship I described. I think it's a very critical issue.

Then, as to the individual consumer, we did find that the present system serves such consumers really quite well. We have a national system. Cheques clear with same-day clearing in Canada. In some other countries it's two or five days, as we've identified in the report. We have the benefits of the strength of large institutions and the confidence Canadians have in those institutions.

On the other hand—and, by the way, before I go to the other hand, we also have demonstrated in the report that for the most part the lending spreads in Canada compare very favourably with other countries in the world. The service fees fit in the middle of a basket of service fees that our researchers conducted in a group of countries in Europe and the United States. They are not the best and not the worse, and some were squarely in the middle. However, we did identify that in some products, such as credit cards, the spreads in Canada are a couple of percentage points higher than they are in the United States, and we've identified that as a target of opportunity.

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To come back to our general thesis, it's that if we provide the most competitive, on-the-ground marketplace we can, we will get world-class service and prices. There are some things to be done there, because there are artificial fetters on the credit union movement, the life insurance companies can't be as involved with providing chequing services as they would like to be, and so forth. So there are some problems. They should not be magnified. We don't have a system that's broken, but there are targets of opportunism.

Mr. Ken Epp: Can I have one more quick—

The Chairman: Thank you, Mr. Epp. We'll have to move on to Mr. Loubier.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): I must first of all heartily congratulate Mr. MacKay, Mr. Ducros, Mr. Gobet and their whole team. I was expecting a good report, but I did not know that we would receive such an in-depth, serious document with such well-documented appendices. I did not know that we would receive such a substantial and intelligent product. I congratulate you most sincerely for this excellent report.

You have approached concerns which we share, the future of the industry being one of those. One very positive aspect which I must emphasize is that you look to the future, not to the past, and you do not dwell on the current situation. In 7, 8 or 15 years the banking and financial services sector will no longer be the same. It will be completely different. Who would have thought 15 years ago that it would be possible to do all of the transactions we can now carry out on the Internet, through Interac, etc.?

You have also shown that you share our social concerns when you refer to community banks and make analogies with what is happening in the United States in regard to the Reinvestment Act and I commend you for that. You have expressed certain concerns about consumers and employment. there is also the matter of increased monitoring of the financial sector. We also support your recommendation in that regard.

Some of your recommendations are more problematical and controversial. We will have the opportunity of discussing those during the debate and approaching the matter of insurance being sold by banks, among other things. We don't understand why you introduced this matter of financial deregulation into the debate at this time, when the analysis could have been saved for later, nor why you are raising the issue of reducing bank taxes at this time. You will understand that we are not too keen about that measure and that we feel that a 10-year tax holiday for the new financial institutions might be a bit long. In short, some things are controversial and we can get back to them. But overall, it seems to us that the concerns you have put on the table are the right ones.

I do have one thing to reproach you with and I'm not going to hold back. It has to do with the fact that in the 124 recommendations you make and in your analysis of the future of the financial sector you have not given the priority to the tools we need in various parts of the sector to improve international competitiveness. That's a bit of a shame, because the committee does. In fact, we intend to make this part of the debate. Had you, in discussing domestic competition and international competitiveness, given priority to the broad changes that must be made, we would have been a little more satisfied.

Allow me to explain what I mean. You talk about increasing domestic competition to better serve consumers in terms of prices and quality throughout Quebec and in Canada, even in poorer regions, through your concept of community banks, and you refer to international competitiveness and the future of jobs. If our financial services are not in place and at the ready in 10 or 15 years as markets open up, we will have to forget about typically Canadian or Quebec-inspired services and employment.

It would have been good for you to mention in your report-and we did in fact analyze things in that way-that there are certain parallel measures that must be taken so that everyone will be on a level playing field with a new domestic competition framework, as well as with regard to international competitiveness. For instance, and this is what my question to you in about, on the matter of bank mergers, you must absolutely raise the matter of the other instruments that the banks and other financial institutions that do not wish to merge may have to use.

You referred to financial holding federations and multisectoral consortiums that could be a counterweight to bank mergers domestically in order to better serve consumers and preserve jobs, and you alluded to the fact that we must have new players to face globalization and the international opening up of markets.

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So, why not have said that for the financial sector to be equitable and efficient, if banks must merge, the legislative framework should be modified first to allow those institutions that do not want to merge to get off on an equal footing at the same time, like in a Formula 1 race, so that things are fair for everyone and so that we can all face these big changes together without favouring the banks that want to merge, or for that matter, the others who have decided not to merge? I'd like to hear your perspective on that.

[English]

Mr. Harold MacKay: In terms of the ordering of things, which is the question that I think you have on the table, our view is that many of our recommendations are interactive; they can and should go forward together. Where there is a need for something to come before something else, we tried to identify it in the report.

On the specific matter you mention, it is our view that we should not feel it necessary to delay considering specific mergers on their merits with very careful consideration of the competitive impacts, the safety and soundness impacts, the public interest impacts, while at the same time moving forward with the opening of the market.

If you were a proponent, a sponsor, of a bank merger, you might well conclude that you will have an easier time of satisfying these various hurdles later on. That may be, but because things are moving so quickly, as you and I have just agreed, I think, we have said it would not be prudent to set back the opportunity to review particular mergers that are put on the table—not just the two that are there at the moment, but other larger mergers—on the grounds that we must do other things first. We should look very hard at them, we should make sure they pass the scrutiny, which we've described as a very tough scrutiny, but we shouldn't necessarily delay the response.

Pierre, do you want to supplement that?

[Translation]

Mr. Pierre Ducros (Vice-Chairman, Task Force on the Future of the Canadian Financial Services Sector): With your permission, Mr. Loubier, I first of all want to thank you for your comments, which we greatly appreciate. I would like to discuss three points following your introduction, points that will touch on several elements. You mentioned other matters aside from mergers.

The first point would be taxation. I fear that we were not very well understood. We say two things in the document. We would like to see the tax on capital reduced, and if governments cannot afford to reduce taxation overall, we suggest that this tax on capital be transferred to profit. We were not proposing a policy to have taxes reduced in Canada. It would not be up to us, but up to you to make such a decision. We recommended changes to taxation because it is unfair. We recommend that the tax on capital be transformed into a tax on profits, if we want a solid financial system. If capital is taxed, it will have a tendency to decrease, which may create problems that will have repercussions on the sound footing of the financial system and financial institutions themselves.

The second point I would like to discuss is employment. One of the key points of our work is that we are considering not only direct employment, but also indirect employment. A financial system that functions very well will create employment in small and medium businesses, the sector which currently generates the greatest number of jobs in Canada. Consequently, we must find mechanisms to provide better support to small and medium businesses.

The previous question was about SMEs and client satisfaction and I would like to get back to that. I think we must absolutely support a subgroup of those SMEs, i.e. the knowledge-based industry. That is the new economy. That industry does not necessarily have a lot of material assets to offer as collateral; people's brains and know-how are the assets involved, as well as their intellectual property. Mechanisms have to be found to support that sector. Financial institutions have gotten into that area and are already doing excellent work, but more could be done.

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The third point involves insurance in the banking sector. I might point out at the outset that in Quebec, the Caisse Desjardins Movement is getting into insurance in a big way. Caisses populaires will be able to sell insurance and we want to have a milieu in Quebec where fairness will prevail in this sales area.

We were concerned with the consumer from the outset. By allowing insurance sales through banks and caisses populaires we are increasing the choices being offered to consumers. In fact, this is appearing at the international level.

Mr. Yvan Loubier: With your permission, Mr. Ducros, I'd like to ask you a more specific question on the last part of your statement.

You referred to Quebec and to the sale of insurance by the Mouvement Desjardins. This is being done in very restrictive and particular conditions with some very strict requirements being placed on the industry. As to what you proposed, there is still no framework. You proposed it without any particular conditions. So, there is a small difference. In fact, industry representatives said that to you rather clearly the day after your report was released.

I'd like to get back to the priority conditions I was mentioning earlier. In discussing your 124 recommendations, I would have preferred that no one focus solely on mergers, as they are a part of a whole. However, if we must talk about mergers, we must talk about the other players, those who don't want to merge, and that is very important. It is like a Formula 1 race; you can't have one, or four, drivers taking off before the others. Everyone should be at the starting gate at the same time and we expect everyone to work very hard to make it to the finishing gate more or less at the same time.

But what you are presenting here, by not stressing the priority of certain aspects of your report, seems unfair. If mergers are allowed on the one hand and you talk about accelerating discussions around that so that the fate of the major Canadian banks can be decided quickly, you must absolutely by the same token put in place a legislative framework that would allow banks such as the Banque Nationale and the Banque Laurentienne, the insurance companies, the mutual fund management companies and other financial services sector players to create alliances to allow them to come together as large players, such as holding federations, which would be a counterweight to the concentration in the banking sector domestically on the one hand and would on the other hand allow us to have six, seven or eight major players nationally, that could be in a very strong competitive position to face other businesses on international markets.

If we don't allow everyone to get off on the same footing into this new era of financial services I feel we will be creating an unfair situation. You might have been a little less critical. You put the emphasis on mergers and the acceleration of those but you did not put much emphasis on holdings and the creation of large groups for those financial institutions that don't want to merge.

I might go even further. If the government decided not to go with your suggestion of creating holdings and a legislative framework to allow for strong alliances between the institutions that don't want to merge and decided to accept those mergers, that would be unfair to the others and might also be to Quebec's disadvantage, straight off the mark, because it is in Quebec that people want to create strong alliances; for instance, that of the Mouvement Desjardins with Dutch banks and of the Laurentian Bank with insurance companies, mutual funds, etc. If the government were to accept mergers without first changing the laws, this would be unfair to everyone, I feel. Moreover, this would quite obviously be to Quebec's detriment.

[English]

The Chairman: Thank you, Mr. Loubier.

Mr. MacKay.

Mr. Harold MacKay: I think the wisdom of having a set of rules that would permit alliances between smaller institutions was accepted by the task force, and we have a number of recommendations that are designed to facilitate such alliances, including the holding company recommendation, recommendations in respect to accounting principles, and the like. We agree completely with the importance of that, and we have urged at the front end of our report that such recommendations be proceeded with very promptly.

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Once again, I think we agree with your premise. It will be for Parliament to decide how to get that playing field as level as it can be. I always say I'm from Saskatchewan, and I know a level playing field when I see it. But it's for parliamentarians to decide how to move that ball forward. I think we have the remedies on the table.

I want to say a brief word on your comments on the insurance issue. There we have, as you will have noted, specified that the changes to insurance ought not to be made until appropriate privacy regimes and appropriate tied-selling regimes—tough ones, as we recommended—are in place. Those were issues that were at the root of the objections presented to us. We agree that should be addressed, and we've made that very clear. We've also suggested there should be an appropriate transition period in that respect, in which the larger institutions would be delayed from entering that market to avoid transition problems.

[Translation]

Mr. Pierre Ducros: You are quite right. That is why we must be very careful to not give priority to mergers without creating a competition framework at the same time. If the government were to decide in favour of mergers and did not provide a competitive framework to allow other financial institutions to come up with their own strategies, there would be a serious imbalance. If that is the point you wanted to bring out, we agree. So we must be mindful of priorities here. We have to move on all fronts in order not to push debate along on just one issue and create an unbalanced situation for other financial institutions.

[English]

The Chairman: We'll have to move to the Liberals now. Mr. Gallaway.

Mr. Roger Gallaway (Sarnia—Lambton, Lib.): Thank you.

From this side of the table, I would like to welcome you all here this morning.

Mr. MacKay, one of the points you stressed, which I think is the conclusion or the pivotal point of your report vis-à-vis mergers, is the issue of whether it is in the public interest. One other comment you made this morning, which took me back a bit, was that in assessing this—and we're all assessing this in the country, it's not just in this room or in your deliberations, it's on the street—Canadians should back away from their prejudices regarding banks. I want to tell you, that's a tough thing to make people do.

The other point you made, just to start questions here, is that Canadians could today go and shop—I'm talking now about personal banking—among banks because there is competition. That surprises me, at the level of personal banking. How closely did you investigate the whole notion of personal banking? What I'm hearing is that if I were to go down to Sparks Street and visit the big five down there today, and I wanted to open a chequing or savings account or get a credit card, there indeed is no competition. They may call them different names, but what I pay in the end is all the same.

Mr. Harold MacKay: Well, first of all, through the work that we did and the work our consultants did, we took quite an extensive look at personal banking. I think an economist would say that the fact that prices wind up being very close to each other is either an example of collusion or a very competitive marketplace, in that it drives people, if they want any business, to get to the lowest price. So I don't think you can come to a judgment simply by the facts you have on the table.

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We did look at the basic accounts that are offered to Canadians, because we were trying to figure out whether low-income Canadians did have access, if the agreement that has been entered into between the government and the banks were honoured, to low-cost accounts.

I don't want to get too technical here, but if you refer to page 23 of what is our background paper number 4, we have compared the basic accounts that are available from Canadian banks for a basic package of services, withdrawals and the like, with an account that is statutorily mandated in the state of New York for the benefit of low-income people. What we've found is that most Canadian banks are offering a more competitive account than that statutorily mandated account in the state of New York, at quite different prices, not always the same price but all quite good prices.

I think our conclusion was that on balance there is evidence of a competitive marketplace. In particular products there's evidence of growing competition in the marketplace. You mentioned credit cards. Of course that's a personal financial service in which the three large companies who have just entered the market from the United States and who are international powerhouses and dominate the United States market— This will be major competition for the Canadian suppliers of credit cards, the banks and other suppliers; let there be no mistake about that.

Mr. Roger Gallaway: I'm assuming you're aware of and have studied the Wallis report from Australia. Because you come after, I'll say that you did what they linked, or formed some conclusions the same, and that is that competition is tied to consumer protection, that the two are in some way absolutely linked. We hear banks talk about providing more services to Canadians and we also hear banks talk about providing choice, although I'm not certain that those two are in any way linked. Firstly, in your report I believe that the Competition Bureau of the Department of Industry is opposed to an absolute prohibition on tied selling. Am I correct in that assumption?

Mr. Harold MacKay: The Competition Bureau provided an addendum in their submission to us on the tied selling issue. They came at tied selling through the eyeglasses of tied selling as a competition issue, and not a consumer protection and consumer abuse and coercion issue. They concluded that the protections that exist in the Competition Act, and as our study notes also exists in the general law, provide adequate protection in a competition sense to ensure that there is no violation in the marketplace of squeezing out of other firms, for instance, using tied selling as the means.

However, it's another question, in our view, whether consumers are being abused on a case-by-case basis through tied sales. We have expressed the premise, as I believe this committee has, that there should be some strong safeguards against coercive practices.

To answer your specific question, the Competition Bureau took the view that from a competition point of view there was no need for further laws in relation to tied selling. They expressly noted that they realized there were other considerations that could be put on the table.

Mr. Roger Gallaway: You mentioned also in your opening comments that a number of your recommendations are interactive. I'm thinking in particular of what the banks call bundling of services, where they will provide you with personal banking services: they want your mortgage business, they want your insurance business, they want your brokerage business if you have any. There are a number of services that at the moment are somewhat independent of the parent corporation but nonetheless in terms of ownership are tied.

When we get into this business of bundling of services, where you go to your bank and you perhaps apply for a car loan and they also want to sell you the insurance and they gather a lot of data on you concerning your personal financial situation, it seems to me that at some point bundling becomes tied selling. I'm not certain where that line is.

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If they're coming at me from all directions in my bank about a number of services and it's a reaction to the fact that I have applied for some banking service, how can federal regulators realistically police that type of action?

Mr. Harold MacKay: Well, let's even drop the word “federal” because I think Canadian consumers, whether they're dealing with banks or credit unions offering a wide range of products, caisses populaires offering a wide range of products, insurance companies offering an increasingly wide range of products, are presented with institutions who have many products on the table.

We've identified this as a looming issue. We don't think the right way is to define a marketplace in which consumers are not offered a choice that would include a bundle choice. When you go to McDonald's there is not a preclusion of the hamburger and the fries and the coke being offered as a package. We have, however, suggested that this is a serious issue and deserves very serious legislative safeguards. For instance, on the tied selling front, where we would expand the definition that is currently in the Bank Act, we've also suggested that there should be a clear obligation, in a format that has been worked out and approved by regulators, to inform consumers that they are not required to buy the bundled product as a condition of obtaining the critical product that may be what they're in the institution for.

It's a matter of defining how that message is passed clearly so you have informed consumers. Our recommendations would go well beyond anything that's in the law in that regard. Again, some other jurisdictions have already taken that step.

In a world in which some institutions are offering only one product and doing it very well and other institutions are offering a supermarket of products, it's really extremely important that there be clear signals to the consumer so the consumer is able to respond.

We've also said one other thing: that if a consumer is abused, the consumer should be able to pursue consumer-driven remedies, and not have to persuade the Department of Justice to charge the institution with an offence. We have suggested there should be civil remedies so an aggrieved complaining consumer can step up to the plate before the ombudsman or before a court and pursue remedies, including punitive damages.

So it's a problem, but don't solve the problem by defining a marketplace that doesn't allow as much choice benefit as the consumer could have. Go at the problem the right way is what we would urge on you.

The Chairman: Thank you, Mr. Gallaway. Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you, Mr. Chairman.

Mr. MacKay, the chairman started off the meeting by reminding us all, in particular Canadians, that your report was dealing not with bank mergers but with the entire financial services sector. I think it's important that we keep that.

You have often used the phrase “status quo is not an option”. I think it's important for you to indicate to the committee and to Canadians that your reference to the status quo not being an option is not your opinion on just bank mergers, but it is with regard to the sector.

Mr. Harold MacKay: I'm happy to do that. The comment “status quo is not an option” is not an endorsement of any particular strategy. It does mean that we think that if you're a consumer these days of financial services or if you're a financial institution, you'd better not think you can necessarily carry on doing things the way you've been doing them and be successful ten years out.

We think there are many strategies to pursue. As we've said in the report, mergers are one legitimate commercial strategy that can be pursued. But when we say “status quo is not an option”, that is not an endorsement of mergers.

Mr. Paul Szabo: Okay. My final question question has to do with I guess generally the report as a whole. When you deal with the financial services sector, the banks, trust companies, insurance companies, credit unions and caisses populaires, on top of that, the report also deals with others who are not presently in that group. Certainly the automobile industry is very interested in what's going on here, insurance brokers, the independents, foreign banks and other near banks.

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Your recommendations cover a broad range of matters. They can have potentially significant impacts on each and every one of those sectors, some favourable, some not. And there's a tremendous amount of interdependency: that if there is a shift or a move or a product authorization in one sector, it may increase competition with someone else, or it may eliminate the opportunity; it may constitute cherry-picking in a sense, if there were certain circumstances where leverage or loss leaders could create certain situations. It gets very complex, and there's a lot of interdependency between the players within the financial services sector.

Since it is possible that some of these recommendations could have material and adverse consequences to the public interest in one sector, the public interest may as a whole on a net basis be better served, but it's complicated to deal with that or to figure that out on a case-by-case basis. If we're going to move away from the status quo and we're going to in fact balance the public interest, would it be your opinion that such a move from the status quo has to be on a gradual and evolutionary basis, rather than some quick decision that may trigger some cataclysmic event that could lead to significant adverse impacts, not only on the public, but on the sectors you're talking about?

Mr. Harold MacKay: Well, in the environment of rapid change that is going on— Let me back up one step. I'm always a believer in approaching things deliberately. Some people have said I'm too cautious a person. So I would of course approach whatever is to be done here—and I'm sure the task force would—with great care. But that's not to say we can tarry, because the marketplace is changing very rapidly, and the forces of change we've described are significant. Canada can't be isolated from these forces. There are a lot of things going on. There's no reason for Canadian consumers in the near term to be second-class consumers compared to the citizens of Europe or the United States or other jurisdictions.

So we looked at it through a filter of the consumer interest, the public interest. We recognized the transition questions. We have in some of our recommendations actually spelled out the need for time constraints. And I've already mentioned that both in our insurance and our leasing recommendations, we do make that recommendation.

I think my answer to you is yes, there is the need to proceed with care, but it's not a time when we can deliberate ad nauseam about where we're going to go, where our goal is. We have to get on with getting there. You know, serious people can debate then the speed, the transition issues that are associated. The debate on how the public interest factors intersect is an important debate and needs to be had.

So I agree with your premise, but would simply encourage the Canadian community, the committee, the government not to assume that sitting on our hands for a very long time is a good idea on most everything we have presented.

Mr. Paul Szabo: Thank you.

I think I understand your comments with regard to the process that's going on right now, but in the event that many of the recommendations you've postulated in this extensive report are accepted, the approach to their implementation may in fact mean that we have to deal with the acts, the laws, the regulatory jurisdiction first, and maybe with regard to defining sectors so that they have an opportunity to play. It raises the issue about first off the mark and all those other issues that many people have talked to you about.

The gradualist or evolutionary approach was not so much with regard to the process we're going through in terms of consulting with vested interests, including the public, but with regard to the implementation and where mergers may fit in this. I read in the paper this morning, for instance, that the banks are suggesting that if this takes too long, the deals may wither on the vine. So the gradualist question I'm asking about, the evolutionary question, is whether there is a contradiction or a friction between the needs of the banks to have timely resolution of some of these issues and the preferred approach to implementation of some of the changes.

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Mr. Harold MacKay: Our view, to put it directly into the merger context, is that these two proposed mergers can and should be carefully assessed with the three criteria of the public interest, the competition interest, and the safety and soundness interest.

As I mentioned earlier today, if I were a merger sponsor I would realize that if the changes we had recommended were already in place, it would probably make the job easier. But there's no reason why the analysis can't go on today in respect of these mergers.

I don't think we have thought of ourselves, in presenting our recommendations, as revolutionary. We think this is evolutionary but very necessary evolution that we have presented.

The Chairman: Thank you, Mr. Szabo.

Mr. MacKay, if I may, where there have been major changes in the financial services sector, and I'm referring to the example in London, England, the term often used is the little bang and the big bang. What's the MacKay report—is it a little bang or a big bang?

Mr. Harold MacKay: I think the community will have to figure that out. We have basically said qualified people should be able to do this business and do it well for the benefit of Canadians. Now if that's a big bang, I guess that's what we have.

The Chairman: Ms. Redman.

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

I too would like to commend you on the report, and I absolutely agree that all the issues are interrelated.

You spoke about protecting consumers, competition, safety and security. Not just the bank mergers, but all of the changes that are happening in the financial sector seem to me to be blurring the lines we've known historically. One of the issues I'm not quite satisfied with, which I'd like to put before you, is the fact that there's the technology revolution and the blurring of lines nationally and internationally and the fact that there are now international forces impacting our financial sector. Do the appropriate lenses exist to examine this, and do we have the requisite benchmarks to look at it not only in light of the issues you've talked about within our national boundaries but also internationally and externally and whether or not this direction is one we want to go in?

Mr. Harold MacKay: First let me talk about the premise, and then let me deal expressly with the question.

You are right that not only in Canada but also abroad the convergence of financial institutions, the coming together into large conglomerates of financial institutions that cut across the so-called traditional lines, is a fact of life. To take an example, which is an interesting one, the Netherlands has three very large financial institutions, all of which are conglomerates and which really do all aspects of business. One of them is led by an insurance company. That's the ING group, but which in Canada is offering insurance and banking services and I think has also discussed offering security services. The banking group, ABN AMRO, is an international conglomerate offering all services on a global basis, led by a bank. And Rabobank, the third institution, is the world's largest cooperative bank. The credit union movement in Holland recently purchased the largest cooperative insurance company in the Netherlands.

So the phenomenon we're describing is an international phenomenon. Within Canada the phenomenon is well developed, and over the last decade or two we have seen it emerging. So I start by saying that appears to be the way of the world, and some consumers appear to welcome that and want to buy their products on this basis.

Can we regulate successfully? It will require international collaboration, because these institutions are international institutions. We were fascinated to learn of the very extensive work that has gone on in the last ten years in trying to get a stronger international regulatory environment, and we've dedicated a chapter in our background paper number five to a discussion of what those developments have been.

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Now, they are not yet to the point of saying we've done all we need to do. But one of those developments, which is very topical, is that within the last three years a joint forum of international regulators dealing with the regulation of international conglomerates has been established and has now published some suggested rules for the regulation of such conglomerates by regulators around the world, including the Canadian regulators.

At the moment, the financial institutions are responding to that, and we are trying to move to a system that works well. This will certainly present challenges for regulators. Technology both complicates the issue and presents new possibilities for the regulators.

We have noted in our report the need to be sure the Canadian regulator, who is a vigorous player in these international bodies, is well staffed, well funded, and able to play its full role. We've recommended, for instance, that OSFI have a board of directors to help in strategic planning, because just as we've said the status quo is no option for consumers and institutions, it certainly is no option for regulators either.

So I take the premise of your question and I think our report recognizes that. We don't think that's a reason for us to put the brakes on and put a halt on the types of recommendations we have. But we'd better not starve the regulators.

The Chairman: We'll now move to Mr. Nystrom.

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): Thank you, Mr. Chair.

As the only Saskatchewan member here, I want to welcome Mr. MacKay.

Mr. Harold MacKay: I used to live there.

Mr. Lorne Nystrom: You used to live there, and I think Mr. Epp used to live there at one time.

Mr. Harold MacKay: I'm a constituent of yours as well, Mr. Nystrom.

Voices: Oh, oh.

Mr. Lorne Nystrom: Yes, so I've got to be very careful; he's one of my bosses. But you can tell he's a progressive evolutionary, to use his words—or at least evolutionary; I put in the word “progressive”.

A voice: We may have a new party.

Mr. Lorne Nystrom: I want to say that his report reflects a good balance in terms of being a very progressive, careful western prairie citizen.

I wanted to ask you questions in three different areas if I may, Mr. MacKay.

You referred, in your opening remarks, to what's happening in Russia and Japan and the failure of the banks in Japan. We've seen what's happened there in the last few days. I wonder if you could enlighten us as to what the consequences would likely be if these mega-mergers went ahead and we had a failure of a mega-bank.

We already have, as you know, the most concentrated banking system in the world in terms of assets. If these mergers go ahead with the Royal Bank and the Bank of Montreal, and the TD and the CIBC, we'll have an even more concentrated banking sector. When I was travelling around this summer, a lot of people in our riding and across the country told me they were worried about the consequences of the mega-bank collapsing, what it does to the financial services sector, what it does to our economy, and what it does to our country.

I wonder, since you've done so much research and have so many recommendations, whether or not you can enlighten us as to what the consequences might be.

Mr. Harold MacKay: I think when you see a banking system get into trouble you begin to see people grapple with whether they have the tools to deal with the trouble.

There is, in financial circles, a doctrine loosely described as the too-big-to-fail doctrine, which, translated into something I can understand, appears to mean that the government will step in and solve the problem.

Now, I think the first thing we need to recognize is that we do already have five large financial institutions that are of a size—on the banking side, and a couple on the insurance side—that one might argue is already in the zone of discussion as to whether they would present a serious problem for the Canadian community. And you will have that same debate and argument as institutions grow.

On the other hand, you are trying to build strong institutions, and you therefore have the paradox that the price— If you can move forward with a merger without damaging competition and without other public interest factors being impacted, the paradox is that you may be building a stronger institution, but with the question mark that if in the future it then becomes a weaker institution, can you afford the price?

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What we've done in the report is recognize that we should have a flexible set of rules so that the regulators, who must initially decide that there will be no negative impact on soundness before any merger goes forward, would have as many flexible tools as possible in the event of a catastrophic failure. We recommended, therefore, in one of our recommendations that in an extraordinary case such as the one you've described, in structuring the white knight, it ought not only to be other Canadian financial institutions who would be asked to pick up the pieces, but it should be possible for the government to look more broadly to international players who might have an interest in coming to the Canadian marketplace as part of that activity.

You are quite right that as you narrow the range of other private sector institutions to whom you would look in the case of a failure, you make a problem seem larger and larger. We have tried to address that by making a flexible capacity to look really worldwide, as happened when Barings failed. It was a U.K. bank that solved the problem. Under present Canadian law, it's not clear that could be done. So we've tried to create a flexible regime, recognizing that it is an international marketplace, so that the Government of Canada would not be expected to carry the can in a way that would be unacceptable to Canadians.

Mr. Lorne Nystrom: Maybe you can elaborate just a bit more as to what some of those other financial institutions might be internationally that could help carry the can if we get into this catastrophic situation.

I've been around life and politics long enough to know that you can always expect the unexpected. You don't know what's going to happen for sure. Of course we would not want this to happen, but you could have a mega bank that does fail. We've had some problems in banking in the past with some of our large banks in this country, and if we cannot solve the problem ourselves, I think it gets a little bit scary for the ordinary person, including myself. What international institutions could we look at? What other recommendations could you make in terms of what changes we need?

Mr. Harold MacKay: For instance, we've suggested that widely held banks from outside Canada in such an instance could acquire the institution. In effect, business could carry on without having to look to another Canadian institution as the sole source of rescue. This would not be done out of generosity of the other institution, but it would also be a business opportunity for that institution, as it was in the case of the Barings failure. Again, we would like to see flexibility in the system.

Mr. Lorne Nystrom: On my second question, if I read the recommendations correctly, it seems to me you're advocating giving more power to the Minister of Finance, certainly not curtailing his power. This concerns me in general in terms of democracy in our society. John Ralston Saul, for example, spoke in our home city on Thursday night on the question of democracy and how that seems to be slipping away from the people as represented in parliaments and legislatures in general.

I notice in Japan that one of the solutions they have there is the take-away power from the Minister of Finance or from the executive. I'm not pointing at this particular Minister of Finance or any person. I'm talking about the trend in our society in the last few years, as more and more power rides with the executive, of taking the decision-making process away from the will of the people as expressed through the parliaments.

I wanted to ask you why you are moving in that direction. I think as parliamentarians travel around the country we feel a frustration that people say their votes are wasted. They ask if their vote really counts. Are MPs, as Mr. Trudeau once said, nobodies when they step away from Parliament Hill? We've evolved even further away from that in the last 10 or 15 years.

It seems to me that the other direction should be the one we're going in, where less power resides with the executive, with the Minister of Finance or other ministers, and more power resides with the Parliament. The Parliament becomes more and more meaningful, and committees become more and more meaningful as we reflect the will of the people. Along with that, of course, we need serious electoral change.

I wonder if you can tell us why you haven't moved in that direction and instead are moving in the direction of more and more power with the Minister of Finance and the executive.

Mr. Harold MacKay: First of all, our present set of financial services legislation already vests in the Minister of Finance power to approve amalgamations, mergers, and other significant transactions. So we are not, measured against what's presently in place, really moving very far. I'll come back to what we are proposing in a moment.

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Measured against international approaches, the Canadian approach of vesting in the government, in a minister, the power to give such approvals is the common approach. Indeed, the discretion that is available to governments and ministers elsewhere is broader than it is in Canada. For instance, we presently have constraints on ownership, such as the 10% rule, whereas in most countries ownership is a matter in the discretion of the government of the day.

Could it be left to Parliament? I think it is very difficult to imagine that a Parliament could in a timely way give responses to the issues that are currently with the executive. It doesn't easily work for legislation to be required, for instance, each time one must make a move.

We've identified the fact that in this world ahead we need flexible and responsive systems. The ones we've proposed are also very transparent in a public fashion. For instance, you take our merger review process. We have tried to ensure it's not a behind-closed-doors exercise but an exercise where the merger sponsors put their propositions squarely on the table. The public then has an open and transparent way to discuss that with the target clearly in front of them and to which the minister would then give his approval, which, by the way, is the approval that he now is to give. Ours is not a new approval. We have not injected into the system many new approvals. In most cases we recommended that there be published guidelines as to how those discretionary powers would be used. That's not always done in other countries.

Finally, some of the additional discretion we have suggested is clearly discretion that is intended to provide the capacity to ensure a more competitive marketplace that doesn't presently exist. Let me mention and refer you to our suggestion that the minister should have the power to deal with bylaws, rules and operating practices of the Canadian payment system and take steps vis-à-vis that if anti-competitive practices were engaged in that system. So we'd like to see that sort of discretion.

We know the minister is accountable to Parliament, but I think we haven't understood a way in this fast-changing world to introduce anything more formal and, if you like, slower than the processes that are presently on the table.

Mr. Lorne Nystrom: I'm wondering why you wouldn't make a recommendation, for example, that the minister not have the power to give a green light or a red light to big bank mergers instead. Why doesn't Parliament do that? Why shouldn't Mr. McWhinney have a vote on whether that goes ahead or stops? That wouldn't really slow down the process. A minister is accountable to Parliament, but let's make that decision a direct decision of Parliament. I don't think that would slow down the process. We're debating this ad nauseam already, and it's going to go on for a long time. Why shouldn't we have built in a couple of days of debate where Parliament itself makes the decision? It would be in many ways even helpful to the minister if that were the case, and it would certainly make a minister more responsive to the will of the people as expressed through the Parliament of Canada.

Mr. Harold MacKay: Our task force really didn't discuss that option. Maybe you'll be able to persuade the minister.

Mr. Lorne Nystrom: I've already talked to him about it.

This will be my last question unless I have a couple more after this.

The Chairman: This is the last one.

Mr. Lorne Nystrom: One thing I wanted to highlight here, which has not yet been done, is a recommendation I'm quite interested in. I'm not surprised, coming from Mr. MacKay, that it has been made. That is the strengthening of the credit union movement and the possibility of them getting together to form a national bank. I think the credit unions outside of Quebec have assets of around $35 billion and

[Translation]

in the case of the caisses populaires in the province of Quebec, it may be 45 or 50 billion dollars.

[English]

I would like you to elaborate a bit more on why you made these recommendations and what the vision is if Parliament and the government were to accede to your recommendations in this area. I think it's a very important step, because today credit unions are regulated by individual provinces. Many of them are very small entities in terms of the new technologies and so on making it very difficult to compete with a bank and offer the same services as a bank. And any facilitating through cooperative federalism of the movement where it could be one bank might be something we should take a very serious look at very quickly.

Mr. Harold MacKay: Just before I go to the credit union point specifically, I want to talk about the general need for what you just framed cooperative federalism. As we've looked at our report, we realize that in a number of the recommendations we've made there's going to have to be a collaborative effort between the federal government and the provincial government. But a sound financial services system is just too important for us to have confined our remarks to what would be good inside the somewhat blurry federal sphere. So we've come with best practices, with suggestions of really what would be good for Canadians, and we would really encourage governments to sort out their turf and get on to the solutions.

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What we have said on the credit union side and on the caisses populaires side fits very much that pattern. They are currently principally the subject of provincial regulation, but there is federal regulation designed to link them to the Canadian payments system, and it has its own sets of restrictions. Currently they're sitting with sets of restrictions from their jurisdiction of incorporation, which often is a set of restrictions fettering their ability by reason of the provincial borders. Then we have another set of restrictions out of the past that has been designed to fetter them in some way or another in terms of their business activities, and we've articulated three or four of those.

We believe there need to be as many strong second-tier institutions as competitive forces in this marketplace as possible for the benefit of Canadians and personal financial services. What better way than the credit union movement, which has, through the caisses, 5 million members in Quebec and 4.5 million members in the rest of Canada? There is a real opportunity here. There also is, in some parts of the country, a real issue for the credit union movement, if it's not able to move forward, as to whether it can succeed even as it has succeeded in the past.

So it's a movement at the cusp, and we believe it's very important to address these issues. We've attacked it on two fronts and we hope that both levels of government will facilitate what we've suggested.

On the one side, we've said it would be helpful to have cooperative banks, the power to form cooperative banks. It was something that was pressed on us by Caisse centrale Desjardins du Québec and by the Credit Union Central of Canada as a good idea. We think it is a good idea and we've recommended it. It would be new. But we also recognize there are some in the credit union movement who aren't enamoured with the cooperative bank idea, and in that respect it's necessary to get the credit union centrals in each of the provinces to have a broader range of powers and in at at least three respects to liberate them from the restrictions of the federal legislation.

So we are urging the federal government to move on both fronts. We think this can be a source of really vibrant competition, even more vibrant than in the past. The success of the caisse movement in Quebec is proof of what a well-organized cooperative sector can do.

The Chairman: Thank you, Mr. Nystrom.

Mr. Lorne Nystrom: Thank you very much.

The Chairman: Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): Thank you, Mr. Chair.

I too commend you for your work and for the report. You've taken a holistic and rational approach to a complex set of issues, and you've resisted the temptation to respond in a knee-jerk way to any particular issue. You've dealt with the issues in a very rational way.

The recommendations on the changes to the payment system, the consumer protection measures, including those against tied selling, the ombudsman with greater accountability, softening of the 10% rule, and even the micro credit vehicles, which you've explored—you've dealt with the issues, in my opinion, in a really remarkable way.

That being the case, I'm very concerned about what's going to happen to your report now that it's in Ottawa, and perhaps you might be in some way concerned as well. I said last week at this committee that politics sometimes is the enemy of good public policy. We have seen partisan caucus committees operate under the guise of public policy, what could be considered a partisan witch hunt that didn't really accomplish a whole lot in terms of public policy but did serve to increase the degree to which this issue is being politicized.

With your recommendations, there's a real risk that there's going to be cherry-picking based on the political palatability of any particular recommendation. For instance, there may be a yes to changes in the payment system, a yes to consumer protection measures, to softening of the 10% rule, etc. But perhaps on the bank merger issue, instead of what you call a flashing yellow light, there may be a red light for a period.

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Is there a risk that if we implement part of your recommendations or some of your recommendations and don't implement others, the positive effects from a public policy perspective could be sacrificed? I'll mention one example of what I see might be a risk, what could happen.

A few years ago, when five of the Canadian banks bought brokerage firms, many people were concerned that the sky was going to fall at that time, and it would be the end of the brokerage industry as we know it. There was one holdout of the major firms, and that was Midland Walwyn. Midland Walwyn of course was recently purchased by Merrill Lynch, a U.S. company.

A few weeks ago I had a meeting on Tuesday with their chief economist and senior vice-president to discuss some economic issues. On Thursday he was destined to present to our caucus some ideas and share some ideas about where the economy is going. On Tuesday he had a job with Midland Walwyn, and on Thursday he was out of work by the time he reached our caucus.

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Someone was on a witch hunt, I guess.

Mr. Scott Brison: I'm warning all of us. I think we all have to pull back and make this issue less partisan. We've seen Merger Martin become Populous Paul for this. He takes off his finance minister's hat and puts on his leadership candidate's hat. We have to be very careful about this.

In any case, is there a real risk to good public policy if we cherry-pick your recommendations?

Mr. Harold MacKay: First of all, I don't think we have ever thought of these recommendations in a way in which we wanted to say to the public, to Parliament, to the minister that all 124 have to be taken or the world will end.

Having said that, there is a good deal of interactivity in these recommendations. Some of it is expressed in the report. The other interactivity really goes back to what I said in the opening statement. This debate is a noisy debate. There are many special interest constituencies. They will press their points of view, as is only fair and right. But at the end of the day it's desperately important, as public policy is devised, for those who devise it to devise it against a goal and not against a hodgepodge of pressure groups along the way and whoever has twisted the arm the hardest.

Against that backdrop, there may be the risk you've described, and it will be for Parliament, the government, to resist the risk. But on the positive front, we have detected a great willingness, when Canadians discuss this issue across the table, one-on-one, in smaller groups with us, to be more open, to stand back and try to look more broadly. We hope that's what happens, but we've done our job, and now it really is over to you.

Mr. Scott Brison: Thank you.

Just following on Mr. Nystrom's comments relative to the tremendous amount of power that lies with the finance minister's office relative to this issue, you have set out some criteria and some recommended criteria, and that's very positive. Mr. Nystrom was speaking about having a parliamentary committee, but is it possible as well that there should be a more neutral and objective decision process, perhaps that is extremely transparent, similar to what's going to happen with the Competition Bureau but beyond that a little more holistic in nature, where effectively the minister or any parliamentarian who goes against the ultimate recommendation of this group that say was studying one particular merger or another would really have to answer some hard questions as to why this was a bad thing? Isn't there potential for an arm's-length agency that would be able to pursue—

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Mr. Harold MacKay: I think the ideas we've presented can be grafted onto still other ideas, whether they be formal public hearing processes or perhaps something you've suggested. There's nothing inconsistent with that.

What we've said is that with larger mergers, whether they're banks or insurance companies, there should be a very disciplined process, because we have a concentrated marketplace. We've talked already about the banking system. It's interesting to note that the five largest life insurance companies have a bigger share of the life insurance market than the five largest banks have of the deposit market in Canada. Concentration isn't just an issue of banks; it's an issue of the sector.

So we've suggested that there needs to be a careful, focused review, and it should be transparent. We've proposed some ideas. I agree with you that it's capable of being implemented through other mechanisms, such as the one you've described or other mechanisms. There's nothing sacred about starting and stopping where we have suggested, although what we have suggested goes well beyond what's in place at the moment.

Mr. Scott Brison: I have one last question, and again it has to do with the risk of Canadian financial institutions to a foreign takeover, particularly with some softening of the 10% rule. I guess one question would be ultimately, in the long term, do you see a justification for the 10% rule?

Secondly, given the current values of Canadian banks in terms of their price or P-E ratios and also the Canadian dollar, wouldn't our Canadian financial institutions represent a significant bargain to global players seeking value for their investment or return?

Mr. Harold MacKay: The last question probably suggests a degree of sophistication on my part in terms of assessing how the market assesses value that I have. I think I should stick to the first question.

We have suggested that there should be a continuing widely held rule in Canada. We currently call it the 10% rule. We've described it as a widely held rule that would achieve the same objectives as the current 10% rule.

What are those objectives? Those objectives are to ensure that the largest financial institutions, whose collapse might have some systemic implications, such as those mentioned by Mr. Nystrom, should be widely held, should not be controlled by a single individual or a company, so as to create the best possible environment for safe and sound institutions and not have the temptation or risk of contaminating the large financial institution that presents the systemic risk by considerations of the owner's other businesses. That rationale to achieve a safe and sound system remains valid. It's a linchpin of the current system. In the submissions made to us by institutions, by individuals, and by regulators, there was an acceptance of the wisdom, the need for some rule of that kind.

The second reason is that although the rule does not keep Canadian institutions Canadian-owned, it does mean they are Canadian-based, or as we call it, Canadian-controlled in a governance and management sense. That puts head offices and jobs, economic activity, innovation in Canada and not somewhere else.

Those are both powerful reasons for maintaining a widely held rule. We think those are reasons that will be valid over time and will continue to be important goals of the Canadian financial services sector legislation. So we've embraced both reasons. However, we've said that we can—you've called it soften—provide a framework in which we can achieve both goals but at the same time open the world for some other strategic options for financial institutions by forming alliances, by looking more widely to the outside world and to other companies inside Canada to the betterment of the Canadian financial community.

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So we're determined, if our recommendations are accepted, to keep the benefits of the 10% rule—we think they're valid—but to create a more flexible environment in which other goals can also be achieved.

The Chairman: Thank you, Mr. Brison.

Mr. MacKay, I have a number of questions I would like to ask, and they concern the issue of establishing an entrepreneurial financial services sector. I'd like to know which recommendations are the most important ones that this committee should be focusing on to establish a more entrepreneurially based system. I ask this question with the full knowledge that we as legislators certainly can't legislate vibrancy, but we certainly can create the environment for that type of market to evolve.

Secondly, I would also like to ask whether you see major financial institution consolidation as a major component of that strategy.

Mr. Harold MacKay: I'll perhaps start with the first one.

We were struck by some clear examples of remarkably positive entrepreneurship, where in a short time some quite large institutions—I don't want to name institutions—have been created in Canada and have been very successful. On the other hand, if you take the banking sector, we saw that in ten years there had been three new banks created inside this country. In the United States there were 207 last year. Even as that sector consolidated in the United States, and over the last ten years, there have been some 1,300 or 1,400.

Now, when you say create a new bank, that does not mean create a new institution that has hundreds of branches on street corners from coast to coast. They may be new financial institutions that only deal with one product—a credit card product, as an illustration. They may be new financial institutions that operate solely using new technologies. They may be regional institutions. They may have international aspirations.

To come back to your thesis, Mr. Chairman, in a marketplace that spawns new institutions there is vibrancy, a dynamic element to it that doesn't appear to exist in the Canadian financial services marketplace. We'd like to think there are major opportunities for Canadians. We share a common language, a common legal system with the country to the south. We ought to be able to not just be importers of financial services good ideas from that country, but exporters.

So how do we spawn that kind of system? Number one, we've suggested that the present rule that I've just described as wise for large institutions is actually an inhibitor to new institutions being formed. If you or I wanted to form a new bank to pursue a high-tech solution, we're faced with the reality that we have to, in a relatively short time, a medium term at any rate, sell off 90% of that bank. So in a way you have an ownership system that for the sponsoring of new enterprise is an unnecessarily stifling environment.

So we've recommended that one should be able to have closely held financial institutions up to the size of one billion dollars' worth of shareholders' equity, which to give it some perspective— What's the best perspective I can put on one billion dollars' worth of shareholders' equity?

A voice: It's $20 billion worth of assets.

Mr. Harold MacKay: It's $20 billion worth of assets. I don't know whether there's a comparator I can put to you at the moment, but it would be a large bank, a large successful niche or regional bank.

A voice: National Trust.

Mr. Harold MacKay: I'm told that National Trust might have been that size.

So being able to spawn a vigorous financial institution with a proper ownership rule is step one; if I had to say, the most important recommendation we have. If there's entrepreneurship out there to try to deal into it, it relates to the ownership rule change. But we've got a cluster of other suggestions that are important.

Number one, we've suggested that OSFI's mandate should more clearly balance its safety and soundness goals with competition facilitation. That is happening with the new statutory mandate in Australia and in the United Kingdom. We think it's important that we have a regulator who has his eye on both balls and not just one. We've recommended that the minimum $10 million of capital for new institutions should, depending on the business plan and depending on the real needs of the business, be able to be waived by the regulator on a case-by-case basis.

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The capital tax recommendation for new start-ups, which was referred to earlier, is particularly important. Whatever one may think of the capital tax for large institutions, for small start-ups it is a very damaging tax. We've done some calculations that suggest that if you started up a new institution and carried on business in 10 provinces, your $10 million worth of capital might, in the first year, attract $220,000 worth of capital tax, and in the first year or two of any new business you may well have start-up problems and losses. It's natural and normal as you enter a market. The very root of a financial institution is its capital. That's what determines whether there will be strength and capacity to grow. If you have a tax system that immediately attacks the capital and moves it into the public coffers, you have a disincentive to those new institutions that is serious. Tax the profits, don't tax the capital, is what we're saying, and we think that's an important recommendation.

We're also recommending that regulations should be addressed to the real needs of the enterprise. If it's a single-purpose institution doing a fairly narrow range of business, there should be one kind of regulation. If it's a multi-purpose, multi-branch, large national institution, it's another kind of regulation. We should try to make sure we've tailored regulation carefully to the different kinds of institutions that are out there.

We think if you made those changes, and if you also opened up the marketplace to all the other kinds of players to do more things, to be innovative, we will get a more vibrant marketplace in Canada, and we really do desperately need it.

The Chairman: Mr. MacKay, you didn't answer my second question.

Mr. Harold MacKay: What was it?

The Chairman: Do you see a major financial institution consolidation as a major component of your strategy?

Mr. Harold MacKay: I don't think we have linked the entrepreneurship part and the consolidation part inextricably together, but I do want to explain one thing, because I think it does address why international competitiveness matters. At times people suggest or may think that international competitiveness is a buzzword for doing business outside Canada and it doesn't matter to Canadians. We think if you have internationally competitive institutions, which are also strong national players, those institutions will deliver, right here at home, excellent value and excellent service. If they're internationally competitive, it stands to reason that they will be world class in terms of what they're delivering to their most important consumers at home.

Therefore, as we look at consolidation as a way to international competitiveness, if it's compatible with the other goals, it obviously helps to build a marketplace that has world-class competitive characteristics here, not just in the other countries where that business is carried on. If that is a linkage between consolidation and entrepreneurship— I guess one could draw that linkage. It's certainly a linkage between what can help to build the kind of system that's good for Canadians.

The Chairman: To have an entrepreneurial system you need entrepreneurs.

Mr. Harold MacKay: That's a good start.

The Chairman: Let me throw out a scenario for you and see if we're off the mark or not. I'm not talking now about the mergers that have been proposed. I'm talking about this as a concept.

If you have consolidation of the financial services sector, be it banking, insurance, what have you, part and parcel of any consolidation, the unfortunate part—it's not only about green lights, it's also about pink slips—is that people are going to be laid off. Will they provide a pool of people with the knowledge of the financial services sector that will in fact speak to the issue of developing an entrepreneurial system, which you talked about throughout your report?

Mr. Harold MacKay: It's an interesting question. In the course of our work we actually looked at some public offering documents in the United States of people who had in fact been, for a short time, the victims of the consolidation in the sense that their positions became redundant in the consolidated entity, and some of these people have been the very successful sponsors of new banks and financial institutions.

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So yes, indeed, that can be a source of the entrepreneurship, which doesn't in and of itself make the process any easier for those folks. But that has been the experience in the United States. Many of these new institutions are spawned by experts who find that they would like to take advantage of their knowledge and the fact that they've been sort of freed up from the old rut to go out and pursue opportunities. That requires, by the way, a vibrant capital market where new equity can be raised.

Our report also addresses something provinces have to consider, and that is how to make sure it isn't just big public offerings that can be done but smaller public offerings. The ones I'm talking about were public offerings in the range of $5 million to $10 million in the United States to start some very interesting new, smaller financial institutions.

It has been pointed out to me by Mr. Gorbet that the same process really did take place here in the investment dealer business, as I think one of your colleagues mentioned earlier.

The Chairman: I have one final question with reference to the recommendations of your report seen as a package and which recommendations in fact should and must be a package. Then I have one final question with reference to regulations.

In your report on page 20 you state that you prefer a minimalist approach to regulation. You prefer to rely upon effective competition and disclosure, and you warn against regulatory straitjackets.

Then, in reading your report, I see that you recommend, amongst other things, that the Minister of Finance be able to issue directives to the Canadian Payments Association, that institutions wishing to merge be subject to a public interest review process—that's a very fair process—that financial consumers organizations be established, that transparency and disclosure requirements of institutions be enhanced, that privacy safeguards be legislated, that a federal ombudsman office be established with costs borne by the industry, that community accountability statements be issued annually, that deposit-taking institutions give four month's notice before closing a branch, etc.

My question is a fundamental one. Are all of these requirements consistent with a minimalist approach to regulation?

Mr. Harold MacKay: It's a bit of a pleasure on the one hand to be accused in some of the media of being an advocate of deregulation and on the other hand having a question posed that in effect asks if you are really an advocate of some sort of overregulation.

The Chairman: Is that what it says to you?

Mr. Harold MacKay: I think we're an advocate of the right kind of regulation and a regulation that's right for the times. You'll see through our recommendations the tearing down of regulatory barriers where we say the interests of Canadian consumers would be benefited. That includes, for instance, the lighter regulation of new start-ups in niche businesses, which I've already described. It includes the elimination of overlap between CDIC and OSFI. It includes the elimination of overlap between federal and provincial governments. On a host of fronts there are recommendations here that say get rid of what is really unnecessary regulation, not only unnecessary but harmful regulation, to the marketplace.

But consistent with the thesis of minimalist regulation, you have to ask what is minimalist regulation for a fair working marketplace for the time ahead, not the time behind. The matters you've mentioned all, in our view, can be passed through that filter and pass the test.

The Chairman: The reason I asked that question is of course about regulatory burden, but it's also to clearly illustrate that when we analyse your report you can't be just viewing one section at a time. There is an interconnectedness, and if you don't address it we may not draw the benefits that are potentially there.

Mr. Harold MacKay: That's a fair comment, Mr. Chairman. On this issue of whether it is a package and how much of it is a package, we've said, as we presented it, that these are integrated—I've used the word interactive—regulations. There's a cohesiveness to it.

We hope people can look at it through those same kinds of eyeglasses. That isn't to say we think each and every one of the 124 recommendations will see the light of day exactly as presented. As one columnist suggested, it was the obligation of parliamentarians to actually do that, and believe me, even in Regina I'm not that naive.

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The Chairman: Thank you, Mr. MacKay.

Mr. Harris.

Mr. Dick Harris: Thank you, Mr. Chairman.

Mr. MacKay, I want to stay on the subject of competition. In most industries in Canada where we don't have regulations entrants are free to move around and take advantage of business opportunities pretty much at will. But within the so-called four pillars of our country—banking, trust, insurance and securities, for example—being a heavily regulated industry, I believe that certain conditions must be right or must be in place to warrant entry of new entrants into the different segments.

I want to talk specifically about your recommendation that banks be permitted to enter into the insurance and auto leasing businesses. In accepting that recommendation one would automatically come to believe that perhaps those industries were in fact underserved by the current players and lacked a presence of good competition. That generally doesn't seem to be the opinion in Canada in the insurance business or in the auto leasing business, so I'm just wondering what conditions your task force saw present that would encourage you to make that recommendation.

Mr. Harold MacKay: There was a common set of filters through which we passed the thought process. Underlying it all was the question of how can we ensure that Canadians are in fact as well served as they can be in the most competitive marketplace possible. That led us to the conclusion that it was wise to have as many providers of products as we could.

Now, of the two areas you've mentioned, it's interesting to look at them perhaps separately. In the leasing area the Canadian statistics show that the finance companies run by the manufacturers have between 70% and 80% of the business. In the United States they have between 40% and 50% of the business. As we've noted in the report, some of the companies have mentioned in their annual reports that the marketplace in the United States has been very competitive, and when you look at the statistics on that marketplace, it's evident why it would be more competitive because American credit unions and American banks fill up about a third of the market in the United States. In Canada the dealers have between 10% and 15% of the market in dealer fleets. In the United States that's more like 7%.

Now at the end of the day Canada appears, as far as we could see, to be the only country where this is any sort of an issue. And when you stand back and look at trying to provide the best competition possible for the consumer, the best choice, the best prices, we don't really understand why it ought to be a different array of choices in Estevan, Saskatchewan, or Minot, North Dakota, just across the border when, as far as we can see from analysing the evidence, the United States marketplace is more competitive and doesn't have the consolidation of leasing within the framework of what is a fairly small number of large automobile manufacturers who, as I say, in Canada have between 70% and 80% of the leases.

Those who have talked to us about leasing have mentioned concerns relating to tied selling and privacy issues, and we have said that proper safeguards should be in place before the marketplace is opened up.

Mr. Dick Harris: Were you able to identify some of those proper safeguards that should be put in place?

Mr. Harold MacKay: Yes, the report describes in some detail the privacy regime we would propose. It suggests there should be basic minimum standards outlined. It notes what those standards are and how they should be administered.

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On the tied-selling front, there's also a more careful and disciplined regime for tied-selling controls to be in place than in the present section. I think it's also important to note we would imagine that the present section of the Bank Act regarding larger vehicles, which banks can currently lease, which prevents banks from referring customers to particular dealers, would stay in place also for automobiles and light vehicles so as to better assure there would not be directed deals. That's the purpose of the present section. It should stay in place.

On the insurance front, we looked around the world and found that in most countries deposit-taking institutions sell insurance as one of the competitive forces. In the province of Quebec that's also the case. The caisse movement has had the power in certain areas and, under recent legislative changes through Bill 188, has an expanded power, which in effect means that now the credit union movement, the caisse movement, within Quebec has a power that is denied to the National Bank or the Laurentian Bank across the street.

As far as we've been able to see, the protections that have been put in place in Quebec are logical ones for us to stretch forward here as insurance is sold by credit unions, as it's sold by banks, and those are protections that would guard the privacy of information, particularly medical information, and that would make it really a separate silo inside the institution in terms of the care of that information, in terms of the employees who deliver it. We are not suggesting that people who deliver credit products would be able to deliver insurance products. We're saying exactly the contrary. These would have to be new people in the credit unions and the banks. We believe that the regimes we've suggested will ensure that Canadian customers are as able as customers elsewhere to access these two financial services.

We've recognized the need for a transition period. We've suggested that large financial institutions, the over $5 billion financial institutions, not get into this business until 2002 even if the privacy and tied-selling regimes are in place. So we recognize the need for transition. But we're trying to look out there for a little longer period and basically to say that when the world unfolds, the Canadian consumer should have the same choices as others.

This isn't at all to say we think that Canadians will flock to their banks to buy insurance or to lease cars. The experience in other countries has not been that. The statistical penetration levels do not show that. But it presents one more competitive choice. For a small prairie town, for instance, it may mean that the local credit union, if the credit union movement were to adopt the same regime—and it would appear many provinces are looking at the federal scene to see how it goes—would be presented with an additional product, and it may be very important for its viability to be able to offer personal financial services in the small community. So it's a matter of choice. It's a matter of options.

Do we think we're going to drive people towards the banks, the credit unions and the caisses? Not at all.

The Chairman: This will be your final question.

Mr. Dick Harris: Yes. You talk about the provision of financial services from outside of Canada under item 119 on page 223. You say:

The Bank Act should be amended to make it clear that all providers of financial services that undertake mass solicitations or target marketing— without establishing a physical presence in Canada are required to comply—

It doesn't define what financial services you're referring to. I want to use the example of, say, if you flipped your computer on one morning and the first screen came up and said “Welcome to Microsoft banking services. How can we help you?” As you can imagine, with the concentration Microsoft has in the software market, they would have an incredible advantage over other competitors if you basically had no option but to look at their offer to provide you with the banking services. What kind of regulation do you think would have to be put in place to prevent that type of—

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Mr. Harold MacKay: Well, you're asking a really difficult question. I'm tempted to respond with one little anecdote first.

It may be apocryphal, but a senior representative of a software company is reputed to have said that banks are roadkill on the information highway. I don't know whether that's right or wrong, but what it suggests is that software manufacturers, people in the technology business, may very well see themselves as providers of financial services as their technology is the gateway to those financial services. And there will be the issue of whether dealing with such an institution means we are dealing with deposits, if that's what's being offered, or are they a bank, or have they crossed the line, and once they're dealing internationally the problem just becomes that much more complicated.

Now, this kind of competition is obviously a significant issue for the banking community. We have not tried to solve all those problems. What we have tried to say is that if there's mass marketing and target marketing on the loan side— If you read through our recommendations, you'll see we have carefully distinguished between those people who take the money of Canadians, either for insurance policies or by way of deposit—and for those people we say we should keep our regulations in place, and we should try, as far as we can, to enforce those regulations to ensure people don't take money from Canadians without full regulatory regime applying. That may have all kinds of enforcement difficulties, with people based in the Caribbean or outside Canada trying to deal by Internet, but don't loosen up that regime.

But we've said that on the other hand there's a whole lot of financial services products that aren't of that nature, where credit, for instance, is being provided to Canadians. There we think there should be a clear regime so that can be successfully done by people who would mass market, target market, or use the Internet or other devices from outside Canada.

When Wells Fargo came to Canada to try to provide small business loans, the existing Canadian law did not really permit them to understand whether they could or couldn't carry on their business from abroad without the full regulatory net applying. There was great uncertainty about how it worked.

So we're saying that in a world of international commerce, for those who would extend credit to Canadians or provide any financial service that is not a deposit or a policy where we're counting on the money being paid back, we should be open to it as long as such providers are prepared to open themselves to Canadian standards of consumer protection, the disclosure and the like, and if there's a dispute they'll agree it can be resolved in a Canadian court.

Now, that's a first step to dealing with international electronic commerce, but it's a tentative first step. There are meetings that are to take place here in Canada, I think beginning in October, that deal with electronic commerce on an international basis.

Most countries seem to be taking a wait and see attitude as to how to regulate. There are serious issues here that can be resolved only by international cooperation, because somebody has to be the regulator, there have to be market conduct rules, there will have to be solvency and other rules if you are having deposits taken. I confess we haven't solved all those problems in our report, Mr. Harris.

The Chairman: Thank you, Mr. MacKay, Mr. Harris.

[Translation]

Mr. Desrochers.

Mr. Odina Desrochers (Lotbinière, BQ): I too was surprised by the content of your report, Mr. MacKay, Mr. Ducros. Could you tell me how much time you spent holding hearings, drafting the report and finalizing it?

Mr. Pierre Ducros: The task force was set up in December 1996 and really began its work in January 1997. It tabled its report in September 1998, so a period of approximately 20 months was involved. During that time we first of all presented a working document to all of those who were willing to reply. We received a little over 250 reactions to that working document. The task force travelled throughout Canada, from Victoria to Saint-John's, Newfoundland. We met with over 100 people. A preliminary report on non-chartered bank mergers was published on July 11, 1997 and, finally, there was this report released in September 1998.

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Mr. Odina Desrochers: Thank you. Do you think it is normal to take only 16 days to ask people who are interested in this matter their opinion, especially as concerns the whole survival of financial services in rural areas in our country, in Quebec and in the riding of the Lotbinière I represent? If you needed 20 months to do your work, how can that issue be settled in 16 days?

[English]

Mr. Harold MacKay: I don't know where the 16 days comes from.

[Translation]

Mr. Pierre Ducros: I don't understand what you mean when you refer to a 16-day period. I don't understand at all.

Mr. Odina Desrochers: I'm referring to Finance Committee, travel.

[English]

Mr. Harold MacKay: I'm sure our framework will help you work in that timeframe.

[Translation]

Mr. Pierre Ducros: It is not up to us to say how long the Finance Committee should take for its travels throughout Canada. That is a political matter and it is up to you to make that decision. For our part, we worked for 20 months to try to determine guidelines in line with our perspective on developments in the coming years, up to the next millennium. And that is where we set the limit. As for the way in which the Finance Committee or the Senate Banking Committee will approach its work on the issue, that is your problem and not ours.

Mr. Odina Desrochers: I'm not talking about—

[English]

The Chairman: You'll just tell us about how to build the future of the financial services sector. That's what you'll limit yourself to.

[Translation]

Mr. Yvan Loubier: Seriously, you worked for over 20 months to prepare a report which is on whole a very serious one. The praise I addressed to you earlier was not gratuitous—I don't give out praise very easily. You did some very serious work during 20 months. As you said, Mr. MacKay and Mr. Ducros, this matter will be of concern to Quebec and Canada over the next 15 to 20 years because it will entail radical transformations in the activities of the financial services sector and the banking sector in particular. Is it normal to only take 16 days to analyze all of these recommendations following 20 months' work on a matter that will engage our efforts for the next 20 years? That is the real question we must ask. It's no joking matter.

[English]

Mr. Harold MacKay: I think we do have to leave it to you and your colleagues to sort out an appropriate period of time to look at these issues. I don't think we can really assist you.

The Chairman: Thank you, Mr. MacKay.

Mr. Desrochers.

[Translation]

Mr. Odina Desrochers: I can tell you I have some reservations insofar as the 16 days are concerned. I can say that because I am in politics.

Now, in light of the 124 recommendations, of the regulations and expert analyses in Quebec as well as in Canada, how are you going to respect the Constitution in the areas of overlap between Quebec and Ottawa?

Mr. Pierre Ducros: You will note that in the report and each of the information documents we repeatedly ask that provincial jurisdictions be respected, be it the Quebec jurisdiction or other provinces. We are asking that jurisdictions be respected. There is no doubt about that. However, we also propose that you take great pains to harmonize those jurisdictions so that the financial sector can proceed and so that all Canadian consumers may benefit from this report.

On the one hand, our intent is in no way to attack provincial jurisdictions, but on the other, the harmonization of those jurisdictions must proceed.

Mr. Yvan Loubier: I now have two very technical questions to ask.

You talked about a 10-year tax holiday for some of the new institutions that would be penetrating the market. First, how can you justify that 10-year period? Secondly, how can we justify applying that measure to financial institutions alone when there are other businesses that are just as deserving in the software sector or other sectors who could benefit from a tax holiday, perhaps a shorter one, because I don't agree with such a long period? Thirdly, would a new bank that would penetrate the market as the result of a merger, for instance one of the mergers announced in January and April, be, according to your definition, a new financial institution that could benefit from a tax holiday?

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I will ask my second question now. Was it deliberate that you never mentioned the securities sector in your extensive report?

[English]

Mr. Harold MacKay: Let me tackle the first question first.

Our suggestion for a ten-year tax holiday relates to the capital tax; it does not relate to profits taxes. I think that's the first important point to make. We are making no suggestion at all that there should be a tax holiday on corporate income taxes. We make the proposal because capital is at the heart of a new financial institution, and its erosion in the early years can create a death spiral for a new institution. If we're going to spark new institutions, we think we shouldn't do that. But if it's immediately profitable, we say let it pays its profit taxes.

In answer to your question about large institutions taking advantage of the rule, we have never imagined that could be the case. We don't view that as a new institution, and would hope, if the suggestion is taken, that's quite clear in the enabling legislation.

I'm not sure I understand your question on the real estate.

[Translation]

Mr. Yvan Loubier: I asked whether you deliberately omitted discussing securities. This is an important part of the financial sector.

[English]

Mr. Harold MacKay: Oh, I see.

[Translation]

Mr. Yvan Loubier: Why are there no specific recommendations in that regard?

Mr. Pierre Ducros: We took on the sectors that needed to be examined in our opinion. The securities sector concerns bigger businesses or consumers who have greater means to make choices, in our opinion. Our report focussed on the consumer as such and we did not feel the need to refer to that topic directly.

Mr. Yvan Loubier: That would mean that a Canadian securities commission is not relevant to preparing the financial sector for the challenges that await us in the year 2000.

Mr. Pierre Ducros: A national commission?

Mr. Yvan Loubier: A Canadian commission, yes.

Mr. Pierre Ducros: We did not examine that. That did not seem to be what needed to be presented at this time.

Mr. Yvan Loubier: Very well, thank you.

[English]

The Chairman: Thank you.

Mr. Discepola.

Mr. Nick Discepola: Thank you, Chair.

Mr. MacKay, I believe that in Canada we have one of the soundest financial systems in the world, and I believe you share that opinion. It's sort of exemplified by various factors. One is that we're always avant garde in use of technologies. You've quoted in your presentation the high use of ATMs and computers.

I guess one of the best factors that demonstrates the soundness of any industry is the profit that corporations in that industry make, and we know that our corporations are very sound in that respect. So I have a hard time when I hear people say the status quo is not acceptable. It seems to me that if things are going so well, there are some who will subscribe to the doctrine of too big to fail. I think I should have heard you say the bigger they are, the harder they fall.

I, as an entrepreneur, always subscribe to the doctrine of “if it ain't broke, don't fix it”. So if we're compelled to fix it, I would like to know from you what timeframe do we, as legislators, have to fix it and fix it properly? Is it one year, two years, three years? What is it?

Mr. Harold MacKay: First of all, the crystal ball for us does not work any more precisely than it does for you in answering that question.

Mr. Nick Discepola: But is there an urgency?

Mr. Harold MacKay: We sense an urgency, not because it's broken, but because once Humpty Dumpty falls from the wall you can't put Humpty Dumpty back together again.

Mr. Nick Discepola: Put him in jail.

Mr. Harold MacKay: Unless you put him in jail. So we say fix it while you still can and get on with it with a certain sense of measured urgency, I guess is the way one might—

Mr. Nick Discepola: Can you guide us with a timeframe?

• 1225

Mr. Harold MacKay: Well, we've said we think that technological developments, for instance, will be sooner rather than later. I don't think I can guide you to say it's in eighteen months or six months or three years, but you'll notice all the things I've put on the table are short timeframes.

The changes that are going on are really incredible in terms of the speed. The consolidation in the insurance industry, to take an example, is a worldwide phenomenon, the change in distribution patterns. Let me give you another illustration: the apparent success of call centres for some products in insurance has risen from a 12% penetration in three years to a 20% penetration. That's a fast move. That's a radical shift.

So new channels are presented almost every year for most of these products. New players are in the market. Big things are going on. All we have said is let's recognize the rapidity of change. Let's not wait until we have to repair something that indeed is broken, but let's recognize that status quo is no option in the sense that we have to pursue constructive strategies, whether we're running a financial institution— If the credit union movement does things the same old way for the next ten years, they're not likely to be much of a movement after those ten years. And I think most people in the credit union movement would agree. It's the same if you're running a bank, if you're running your household, or if you're running OSFI.

We're not saying it's broken. I agree with your premise: we have a strong system. We're saying let's keep it that way, not for the sake of these institutions but for the people who are served by them.

Mr. Nick Discepola: But there are those who feel that we have to act and we must act quickly. I have one great fear in this. I mean, I want to do the right thing.

Mr. Harold MacKay: Yes.

Mr. Nick Discepola: As you said in your press conference, this is an irreversible process.

Mr. Harold MacKay: It is.

Mr. Nick Discepola: Once we go ahead, no matter what conditions we impose on these mergers or whatever we want to achieve out of it, we're going to be faced with the situation that we will not be able to undo that.

Mr. Harold MacKay: Yes.

Mr. Nick Discepola: I noticed with a certain amount of humour when I watched the press conference that you said that maybe we should consider jail sentences if they don't respect those conditions. I'd like you to elaborate on what measures we could envisage on imposing conditions that you've elaborated out of your recommendations. Realistically, do we just go ahead and trust the industries that they will react and respect their undertakings, or are you seriously considering that we should legislate some form of penalty, jail term or otherwise?

Mr. Harold MacKay: First of all, we were serious. I think I said in the press conference as well, this is serious business. On the merger side, these are irreversible decisions. But the fact that it's serious business and the fact that you may not be able to change what you've done is no reason to put your head in the sand and say “I won't look hard at it. I won't determine by the clearest process I can have how this will impact the public interest, whether it will be good or bad, and I will see what the sponsors are prepared to put on the table for the good of the country.” As I said earlier, they know better than anyone the implications pro and con.

Then there needs to be this very open, deliberate process. And deliberate doesn't mean stretched over years and years. I think our own process in the task force illustrated this. Our process, identified by Mr. Ducros, was to present a discussion paper, invite submissions by a date, and then the debate went on. It was quite interesting, as we posted these on the Internet, to watch the public debate take place really quite vigorously and quickly on the Internet as organizations an individuals responded to what they had picked up. And those were not just big institutions; they were also social institutions acting for the constituency they represent, the small businesses and other institutions.

We urge on all of these matters that we have the courage to recognize that we'll have to make some changes, that we have the discipline to do it carefully, and then we get on with it.

Mr. Nick Discepola: My last comment touches your statement of your vision where you hope that there is a competitive, open system, with much choice and service levels for Canadians, and a strong sector obviously. But when it comes to competition, I believe strongly that the best way is to let the market forces prevail, and ultimately you do get the level of services you want and the competition level you want.

• 1230

But when we're talking about competition and allowing institutions of offer all kinds of horizontal services— many years ago we were told that if you wanted to survive in any industry you had to go to vertical services. Right now, if I look at the types of choices the consumer has, they may be limited choices, I'll admit, but at least I have five or six institutions that I can choose from for some financial services. I have hundreds of dealerships I can choose for others. I have hundreds of insurances brokers. These are all small business people. I'm not factoring in here the amount of branch closings we see, the number of small businesses, family businesses, that may go belly up.

If it was all for strength in competition, then I think consumers would still have choices, but I don't see that happening. All I see is essentially these large institutions getting larger, offering more services, and the almighty bottom line is what they're after. I've yet to see one institution say the consumer is going to benefit.

So how can we achieve competition and allow five or six institutions to become one or two?

Mr. Harold MacKay: Our report has a whole series of suggestions for having a feisty, competitive marketplace. We've suggested, for instance, that the members of Interac should look hard at using their system to accept deposits as well as withdrawals. That can create strong new competitive forces in the marketplace. We've suggested that the insurance companies and the money market mutual funds provide transaction services through accounts. We've provided a long list of ways in which our present marketplace artificially denies competition.

I think we agree with your premise. The very best thing is to let a market work openly, get as much competition as one can from as many sources, and that will provide for consumers the best choice, the best prices, the best products. We have systematically suggested knocking down those barriers.

We have also, however, on the merger front, suggested that the public interest has to trump the individual interests of the companies and that one must pass serious competition and other public interest tests. We don't see that there's an inconsistency between having some further mergers, whether it be of life insurance companies—I've already mentioned they also have a consolidated and consolidating sector. We don't see an inconsistency between allowing some mergers and opening the marketplace. It is a product by product analysis. There may or may not be good competition in some products and poor competition in others. It really is important not just to look at some agglomerated number, whether it be in insurance or banking, and say somebody has 70% of banking assets or 70% of insurance assets. That's not a measurement of competition.

The measurement of competition is to say let's look at small business loans and see what share particular institutions have. The small business market is an interesting one. It shows that the banking sector provides between 50% and 60%, depending on which small business product you're talking about, of financing to small business. That's still a large number, but it is only 50% or 60%. It shows some significant changes in recent years, but it's a particular product, a very important product, that I'm sure the Competition Bureau is spending a lot of time on.

Mr. Nick Discepola: But you're saying competition may exist even though you allow that power to be concentrated in the hands of one or two institutions, and I don't agree with that.

Mr. Harold MacKay: No, I'm not saying—

Mr. Nick Discepola: You're saying consumers will still have choices.

Mr. Harold MacKay: I'm saying you have to examine each product line. You have to make sure competition exists in all major product lines.

Mr. Nick Discepola: Even though those same product lines will be offered by one or two institutions.

Mr. Harold MacKay: Obviously a merger that was going to go forward so that only two institutions had the product line will run into the Competition Bureau in a significant way and something will have to happen in tailoring that transaction. I can't imagine that the Competition Bureau is going to allow a product, say small business loans, to be delivered by two institutions.

The Chairman: Thank you, Mr. Discepola.

Mr. Pillitteri.

• 1235

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

I must say, Mr. MacKay, that I have not read the report. As a matter of fact, I must compliment you even though I have not read it. Some of my colleagues must have read it and have asked you questions per se.

In hearing your presentation this morning, you said the status quo thinking is no longer an option. I've also heard other groups say the status quo of doing business is no longer an option—not that it was said this morning.

Let me say that, specifically closer to the merger, we have six national banks here in Canada. I want to put this on the record. Some Canadians might be watching, or some day someone might want to read some of these transcripts, and think they'll be second-class citizens. I want to make it quite clear that if we take a look south of the border, there are over 5,000 banks, and they're going on to the point of merging. Of course it will take quite a long time before they would have such concentrated power in the marketplace as we have here in Canada with the six national banks.

I also want to tell the Canadian people, they have more regulations in the United States than we do here in Canada. Regional banks can only take a certain percentage of the marketplace. They cannot control the marketplace.

In saying that these things are happening, we've taken a look at the presentation that's been made saying that bigger is better. Of course when we ask questions about technology—and technology is far more advanced here in Canada than it is south of the border—and take a look at the service banks give Canadians today— for instance, in clearance, they can clear any transaction overnight here in Canada. I understand in the United States this is sometimes not possible for five days. Also, the guarantee of deposits here in Canada is far more dependable than that south of the border.

Having travelled across parts of the United States and Europe— You are saying we don't want our citizens to be second-class citizens. By gosh, when I walk into banks anywhere in Europe, I don't get half the service I get in Canada. If I go south of the border and I want to buy a roll of quarters and I'm not a member of their bank, they won't even sell me a roll of quarters.

Is it more that we're talking about convenience rather than being competitive? Is it convenience we want to give to the public? They want more convenience. Instead of going to a mom and pop shop, one after the other, they want to go into one supermarket and do all their shopping there. We should not really confuse the two.

I'm a businessman, and to think that I'm going to be receiving better service from one group, concentrating power in the hands of two— I'm not that naive, Mr. MacKay. I don't know if any Canadians are that naive, but certainly I'm not. Perhaps you would like to give me some explanation of it. I think it was more convenience that we're trying to offer the people of Canada rather than competition.

Mr. Harold MacKay: Hopefully my colleagues and I are also not naive in this regard.

First of all, I think it has to be made very clear, and I want to make it very clear, that our recommendations are not designed to be pro-bank or pro-merger. They're designed to have an open system in which we can have vigorous competitors from any side.

Let me note for you that there are the four large life insurance companies that are deneutralizing. Many of them have indicated a willingness and an interest in significantly expanding their range of financial services to be better and stronger competitors in the marketplace. The credit union movement has game plans to be stronger providers. The international providers coming to Canada are significant forces in some products, such as credit cards. There is major change going on in financial services.

• 1240

We are saying that for the average Canadian who has to deal with a financial services institution it's important there be as many opportunities as possible. There should be as many organizations to deal with as possible, not just for convenience but in order that there be excellent choice and the best possible prices.

The ability to comparison shop on the Internet is an interesting feature. If you have one of these larger institutions offering a product but you're able to determine from your home that it's a non-competitive product, you'll have to make a value judgment as a consumer as to whether or not the convenience somehow of dealing with the large institution at the higher price offsets the price that's available through, say, an Internet purchase. But that's the world that's out there somewhere. I think we're looking at genuine competition and consumer well-being issues and not just convenience.

I do agree with you that those who would be supermarkets are also selling convenience and service, because that's part of the competitive marketplace, too. But I don't see it as the only issue.

The Chairman: Thank you, Mr. MacKay.

Ms. Bennett.

Ms. Carolyn Bennett (St. Paul's, Lib.): Mr. Chairman, Mr. MacKay, as a family physician I come to this issue realizing that some of the greatest stress my patients ever dealt with was from dealing with financial institutions. I feel that on the issue of medical information you have expressed a very specific concern about the mingling of medical information with information related to credit decisions, as you said in your previous answer.

I think that consumers want to know a little bit more about what really happens and if they should really expect that in that rural branch there would be a new person there dealing with insurance. If they get turned down for a loan after they have meticulously filled out a form that reveals they have HIV or have just had a heart attack, what is their personal protection that information was not shared within that branch?

Mr. Harold MacKay: Let me back up one step to say that concerns of this nature have been part of the debate wherever this issue has come up. In Illinois a model code has been developed on this subject of information sharing, and very similar provisions are now in effect in Quebec under Bill 188. They're very similar actually to the American protections, and those are very similar to our recommendations. I think here we're building on what has been done there.

There are really two legs to this stool. The one is the demand for rigorous separation of interest. There are practical difficulties, I don't disagree with that, but we need to have as well enforcement mechanisms that are tough and strong and are credible at the branch level. That's why we are not satisfied with voluntary codes. We think that doesn't give the customer the confidence level you've just spoken about that a significant legislated regime can and should.

We've also noted that the privacy regime we would have in place would include periodic audits by OSFI, which is the federal regulator of consumer-related issues on this front, or whatever other regulator might be in place. But we see there being sufficient teeth in the system to make it real, that the separation will work. As far as we've been able to understand from other jurisdictions, it now does work, and there is a confidence level using, say, the model code in the United States that does overcome those problems. But we thought it was a really significant problem, and you'll see we've drawn the lines pretty hard.

Ms. Carolyn Bennett: Regarding Bill 188, did you hear from the consumers in Quebec any concerns about the way the caisses populaires are working?

Maybe I should go straight to my third question, which is do you think you've heard enough from consumers?

• 1245

Mr. Harold MacKay: I think we mentioned in the report that in presenting to us, consumer groups were inhibited in part by lack of financing and the typical problems.

We think Canada would be better off with a significant consumer voice in financial services. How we get there is the question. We've debated that in the report and set out a few ideas.

We did hear a lot from consumers. Whether we heard enough from consumers I'm not quite sure, but I'm really quite proud that across the country this report is being viewed as a consumer-oriented report. So whether we heard enough or all the right things I'm not quite sure, but that's where we started.

We started with it on the competition front as a consumer issue, not as an institutional issue, and then we said consumers are important for two reasons. Informed consumers will themselves be a competitive discipline in the marketplace, so we have recommendations about better clarity in documents, transparency of documents, better disclosure, and more timely disclosure from insurance companies and others. But not only will there be empowered consumers from the point of view of information, but consumers who will be treated fairly and will have the confidence that the legal system stands behind them, so there are private rights of action and other disciplines in the system.

My colleagues and I are all delighted that these are the sets of eyeglasses that Canadians are seeing our report through. That's what it was supposed to be.

The Chairman: Thank you. I'll go very quickly to two questions.

Mr. Shepherd, followed by Mr. Pratt.

Mr. Alex Shepherd (Durham, Lib.): Thank you very much.

We've talked here today about change, and another word we can use that is usually coupled with change is volatility. I'm going to ask my question through the filter of small- and medium-sized businesses, but I think it applies to a lot of other sectors.

Lending in Canada to small business, in spite of everything we may say, is short term, because basically there's a 30-day call on most people's loans. So we're talking about competitive products in the marketplace. The fact is they don't really exist for small business.

We live in a period of time when financial institutions and other corporate structures are almost entirely focused on short-term profitability, how much money did you make last quarter, how much money did you make this month. We talked about technological innovation, but it is also occurring within the firm. So in other words, banks and other financial institutions have the ability to sectoralize their markets; in other words, they can look for high-margin sectors and then compete among themselves.

Couple that together with capital flows between sectors within the economy, and between countries and geographical areas outside of our country because of the advent of globalization. You add that together with another factor called economic dominance, as you shrink the number of people who are presenting these products, and suddenly the real question becomes whether there is certainty of the access to capital. Looking at the foundations of small business, they require a certain degree of certainty. We finance inventory, we finance accounts receivable; we can't live with the possibility that someone is going to take that money away from us tomorrow.

So is this whole volatility aspect actually an impediment to business formation, and shouldn't there be some other considerations, like what are you doing about term lending and so forth, before we go any further with this?

Mr. Harold MacKay: I think the word “volatility” is a pretty good word. A word we've used in the report frequently is “turbulence”—we think these are turbulent times.

Now, there are of course reasons that will be presented by suppliers for why they're structuring loans in particular ways, whether there are capital adequacy issues as to how various loans may be counted for risk-weighting purposes in meeting capital adequacy standards. That actually is an issue in the structuring of loans and the introduction of more call provisions than there used to be.

But standing back from it and approaching it more generally, I think having more suppliers in the market for products, diversity of suppliers, obviously helps address the question you've just mentioned, because institutions will have different thought patterns as to the sectors that are good and the sectors that are bad.

• 1250

I think all that we have been able to do is say let's recognize the importance of a competitive marketplace. Let's try to have as many entrants as possible, and that goes for small business as well as all the other products. There actually has been a fair change in the small business market, which we've noted in the report, over the years, as there has been more migration, for instance, to the asset leasing and lending companies, some of whom have risen from something like 9% to 15% in very recent years in terms of their market share. The credit union movement, which in some provinces is a strong small business lender, in other provinces doesn't have the capacity. That's another reason why they need these strengthened national powers.

Finally, on small business matters generally and trying to deal with the question of the certainty of capital, we were struck by the inadequacy of information available in our system. Notwithstanding the many years worth of debate and study, there don't seem to be good data. It's startling, but that was the conclusion of our researcher.

We were then interested to find that in both the United States and a very recent study by the federal reserve, inadequacy of data was pointed out as being the main problem with small business financing policy, and similarly, that's been identified in the United Kingdom.

So we've come with a very extensive set of recommendations for much more rigorous data collection for small business so that small businesses, their organizations, the financial institutions, and parliamentarians and provincial governments will actually know and understand this market as we try to develop public policy. At the moment, to get the certainty of capital access you're talking about, not enough is known about the views on the demand or the supply side. The Canadian Bankers Association puts out some data, nobody else who supplies the market puts out any data, and the rest of the market supplies about half the market. So there's a lot to be done on the data side, and I think if we can get the data, we can start to address these capital access issues you're talking about. But we should go out and get that data.

Mr. Alex Shepherd: Before we allow mergers?

Mr. Harold MacKay: No. At the end of the day you can go out and assess the marketplace for small business financing tomorrow. We have said that one of the most problematic areas in the merger analysis will be small business account services. With a small business, it isn't just a matter of getting a loan; you also have to have transaction accounts that relate to the running of your small business. We think that package service will be a complicated area of analysis for the Competition Bureau. At the end of the day, it's a product that has to pass muster or I'm sure there'll be no merger.

The Chairman: Thank you, Mr. MacKay. Thank you, Mr. Shepherd.

You have a brief question, Mr. Pratt.

Mr. David Pratt (Nepean—Carleton, Lib.): Thank you, Mr. Chair.

Mr. MacKay, it's been said before this committee today, and I'll say it again, that the quality of public consultation obviously can have a direct impact on the quality of the public policy decisions that are made, and also that the quality of the consultation process is obviously dependent upon the willingness of some of the key actors to engage actively in the process.

I don't know whether my experience is representative, but I held a town hall meeting in my riding on the bank mergers last week. I had two proponents, two for and two against. Two of the banks were invited. One bank and a small business group opposed to it also attended. Mysteriously, at the last minute, one of the banks bowed out and decided not to participate. I heard that was something that that particular financial institution had done in the past. I didn't give it much thought, but then I heard some comments on CBC Radio recently about a dialogue that they had intended to hold. One of the banks mentioned reported that they didn't do talk shows. In fact, they asked the talk show host point blank what was in it for them.

I'm just wondering if my experience in terms of what I've heard and seen myself is representative of the willingness of some of the financial institutions to engage in public discussion. It would appear that some of the banks are involving themselves actively. The banks I had out to my riding meeting, for instance, were defending their positions quite passionately, and I thought it was very constructive.

Is what I saw representative, or what's your take on it?

• 1255

Mr. Harold MacKay: I can only respond through the eyeglasses of our own process. The individual institutions and their associations, banks and other industries, were fully engaged in our process and were responsive to our request for information and to meet. So I didn't experience what you've just described.

However, I think I would say one other thing. On the merger front, I just want to emphasize that it's our view, given the realities of life, that the proponents of mergers have to really be clear articulators of their vision, what they're going to do for Canadians, why it will help, and, if it's going to hurt, how they are going to solve those problems. We think there is an onus on sponsors of mergers to be forthright. These are good, large Canadian corporate citizens. They're going to be here for a long time and they've got a vested interest in seeing this process work well. We think it has to work in a much more disciplined way, as I said in the news conference, than with a press release here and a speech there and try to stitch it together to figure out the whole. That's why we've recommended what we've recommended.

Mr. David Pratt: Thank you.

The Chairman: Thank you, Mr. Pratt.

Mr. MacKay, Mr. Ducros, Mr. Gorbet, on behalf of the committee, I certainly would like to express to you our sincerest gratitude for your presentation. I think you've clearly illustrated the importance of the four themes of your report and also the forces of change that are having an impact on our system.

I want to go back to a comment you made about a crystal ball. The future certainly is hard to predict, but I am convinced that while we can't predict the future, we certainly can help shape it, and in many ways that is what your report really speaks to. So on behalf of the committee, once again, thank you.

Mr. Harold MacKay: Thank you very much.

The Chairman: I'm going to suspend for a minute or two and we'll be back.

• 1257

• 1306

The Chairman: I'd like to call the meeting back to order. We're going to be dealing with the Reform motion, as stated earlier in the committee meeting, that the Standing Committee on Finance strike a subcommittee to investigate the firing of the chief actuary of the Canada Pension Plan, Bernard Dussault.

I think Mrs. Ablonczy has already spoken on the issue. Are there any further comments?

Mrs. Diane Ablonczy: I haven't actually spoken on the issue. I simply introduced the motion.

The Chairman: Okay, you've introduced the motion. Would you like to speak on it?

Mrs. Diane Ablonczy: Yes, Mr. Chairman, I would appreciate that.

Mr. Chairman, as members of the committee well know, it has come to light that the chief actuary of the Canada Pension Plan was fired on August 25, and this came to light at the end of last week. As members of the committee also know, the chief actuary is the top number cruncher for the Canada Pension Plan, which every working Canadian depends on. The fact that this firing took place just a few weeks before his major three-year review is due to be released, including 100-year projections on the performance of the plan, raises a number of questions not only in the minds of the official opposition, which is always full of questions, but in the minds of the public.

I think, Mr. Chairman, as responsible parliamentarians, it's very important that the public be reassured that the information they will be getting from this and subsequent reports will be information they can have confidence in. The way this can be established is to definitively conclude, through a comprehensive investigation, that the firing of Mr. Dussault was not motivated by any reasons to change or tamper with the numbers Canadians are getting from the Canada Pension Plan.

As you know, Mr. Chairman, as parliamentarians we are stewards of the Canada Pension Plan, and we want to make sure that the confidence of the numbers is not compromised in any way. I think this very untimely firing certainly has raised that question. So I'm proposing to this committee that a subcommittee be struck to investigate the firing of Mr. Dussault and that there is no legal reason why we may not deal with this subject matter. The matter is not before the courts. Mr. Dussault has simply filed a grievance through the union process.

So, Mr. Chairman, I think in order to reassure Canadians on this very critical matter, it is incumbent upon us to do an investigation of the background and the reasons for this rather unusual firing at an unusual time and see whether we might be able to reassure the public that there was nothing untoward about it and nothing that might undermine the confidence in the projections and numbers that we will be getting on the Canada Pension Plan.

For that reason, I would urge members of this committee to support the motion.

The Chairman: Thank you, Mrs. Ablonczy.

Mr. Valeri.

• 1310

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

I'd like to state very clearly that there really is no objection to the creation of any subcommittee. I think it's important, though, to note that we have an individual now who has filed a grievance, as far as I know, with whatever body is representing him or where he can be heard. I think to strike a subcommittee at this point may in fact compromise some of the principals who want to appear before this tribunal or hearing that will be set up in order to hear the case.

On the one hand, while I have no objection to the striking of a subcommittee, I guess I would have a bit of a problem with making it perhaps more difficult for those principals who may want to come before this subcommittee at this point in time. They may be reluctant to do so if they feel that appearing before this subcommittee may in some way jeopardize whatever other avenues they're attempting to follow, and whether that ends up in the courts or not is a decision that will be made by Mr. Dussault.

I'd like to propose a friendly amendment to what we have in front of us. It would read, after the words “Bernard Dussault”, “after completion of any legal proceedings into this issue, or at the first available date after the principals have exhausted whatever options they have”. My concern is, and again I just want to reiterate, that I don't want to put a principal who wants to testify at these hearings in a difficult position because of some other hearings that may be going on. What we may end up doing in striking a subcommittee today is inviting people to say they really can't come before our subcommittee until they pursue whatever other avenues they have, because this subcommittee testimony may jeopardize or prejudice whatever it is they want to accomplish on the other end.

So I just put that out, and I have the amendment out there.

The Chairman: You're moving the amendment?

Mr. Tony Valeri: I'm moving the amendment.

Mr. Dick Harris: Mr. Chairman, could I speak to the amendment?

The Chairman: Yes, go ahead.

Mr. Dick Harris: Mr. Chairman, I appreciate Mr. Valeri's thoughts. However, I think this particular issue is in fact far bigger than simply the fact that someone has a grievance put forward. In fact, what this is all about is the integrity of the office of the chief actuary, an office that was filled by a person with impeccable credentials. When the integrity of the office of the chief actuary is put into so much question because no information as to the reasoning, the rationale, behind the firing has been put forward, then it raises questions of the integrity of not only the office but also of the government and indeed of the Canada Pension Plan itself.

So it's no small matter. Therefore, I don't believe—and I'm sure this is shared by members of the opposition and members of the Liberal Party—that there is a justifiable reason to delay this, considering the magnitude of this particular incident and the far-reaching effect.

The Chairman: Mr. Loubier.

[Translation]

Mr. Yvan Loubier: Mr. Chairman, I support the motion of the Reform Party. Bernard Dussault had criticized the pension plan and its management and publicly stated that there were serious problems with that Canadian Pension Plan. Dismissing Mr. Dussault seems like a vengeful act on the part of a government that is not happy with the message and is attacking the messenger. As Mr. Harris said earlier, this is really an attack on integrity and a gesture that goes beyond simply firing someone. There is the integrity of the office to consider, but there is also the fact that Mr. Dussault's dismissal looks very much like it is politically motivated. I think that it would be a good thing to shed light on the whole matter.

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And so, I support the motion.

[English]

The Chairman: Okay. Mr. McWhinney.

Mr. Ted McWhinney (Vancouver Quadra, Lib.): Mr. Chairman, I have problems with the motion and the amendment. I think I could suggest to the committee that although we have a competence and an interest in the substance of what's involved, this committee does not really have an especial competence in investigating a breach of contract law. We have neither the resources an American committee has nor the legal talent available to do it.

In my view what we can do properly within our general mandate is to examine the policies within the Canada Pension Plan and to hear evidence from people, including Mr. Dussault. If there is reason for concern on the large policy issues, why don't we discuss that? But I think it would be improper and also technically a rather sloppy job for us to try to do what a court of law or somebody else should do.

The Chairman: Okay. Thank you, Mr. McWhinney.

Are there any further comments? Mr. Nystrom.

Mr. Lorne Nystrom: I have just two comments on supporting the motion before us today. I understand that Mr. Dussault is not going before a court of law and that there's a regular union grievance procedure for this. That's my understanding of this. So I don't think there'd be any jeopardizing of his position or anybody else's position by having a parliamentary committee look at it.

Secondly, in terms of the real motivating principle, I believe that we have to take away power from the executive of this country, Mr. Chair, that the executive has too much power to make senior appointments and there's no parliamentary responsibility, no parliamentary vetting of these appointments. If we're going to represent the will of the Canadian people, then parliamentary committees should have more power and more authority, and I think this motion goes in that direction.

Here is a very important person, the chief actuary of the Canada Pension Plan, which affects most every Canadian citizen, being fired without a public explanation—

Mr. Paul Szabo: Allegedly.

Mr. Lorne Nystrom: —allegedly being fired without any public explanation, and it seems to me that we could strike a small subcommittee—

The Chairman: I know we're just back from summer break, but I just want to be very clear about this. We're talking about the amendment Mr. Valeri has stated, and I'd really like the debate to be focused on that particular aspect, in other words, after completion of legal proceedings into this issue or at the first available date after the principals have exhausted their legal options. That's what I would like people—

Mr. Dick Harris: Mr. Chairman, can we just get clarification? I understand it's a delaying motion. Is that what Mr. Valeri basically is trying to—

Mr. Tony Valeri: I guess it's all in the eye of the beholder. You feel it's a delaying amendment because you want to have your motion passed as it's presently written. The reason for my putting this forward—and I prefaced my comment by saying there is no objection to the establishment of a subcommittee on this issue—is that whether it's a union, tribunal or court that will be hearing this particular grievance, I think it's fair that we allow those individuals who want to pursue that to do so, and after a decision is made in that respect and you want to have a subcommittee on this issue, then it's up to the committee.

So I don't see it as a delaying tactic as much as one that's being fair to both Mr. Dussault, who is pursuing another avenue, and this committee. I agree that the issue is a very important one, and this committee may want to look at it. But those are my reasons for putting it forward.

We're not saying do not strike the subcommittee. All I'm saying is let's do so when those principals are able to come before this committee and speak freely and not in any way feel that whatever they say to this committee prior to some other proceedings that may be going on would jeopardize those proceedings.

Mrs. Diane Ablonczy: Mr. Chairman, I am a little puzzled by the amendment. There are no legal proceedings. The amendment refers to legal proceedings that are non-existent, and so it appears to me that it's not a pertinent reason to amend the original motion.

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The other thing I would say is that we all know realistically that sometimes these personal grievance procedures take a lengthy period of time to resolve. In the meantime, the Canadian people have a very legitimate concern as to the confidence they can place in this process when an independent actuary, giving independent information to us as stakeholders in the pension plan, is summarily fired out the door a very brief time before his major report is due. I think as protectors of the public interest, this grievance procedure by one person has to take somewhat of a back seat to our duty to protect the public interest. But even if that is not the case, I would certainly say that the interests are not different in this case.

Mr. Dussault has some legitimate concerns about his firing. They tie into the public duty that we have. So I would think that it would be of assistance to Mr. Dussault, rather than any unfairness, for us to pursue this route at this time and in an extremely timely manner, showing how concerned we are and how determined we are to protect the public interest to the greatest degree possible.

Mr. Tony Valeri: I'm not going to pretend to speak for Mr. Dussault. All I'm saying is he did not indicate that he wants to go forward and sort of air this thing at a parliamentary committee—

Mrs. Diane Ablonczy: We're not doing this for Mr. Dussault.

Mr. Tony Valeri: You just spoke on his behalf. You felt that a public hearing would in fact assist him. You're either talking about his situation or you're not. What I'm saying is if we're going to talk about his situation, we should at least allow him to go forward and deal with his issue the way he would like to deal with it, and subsequent to that—we can pass the motion today—come before a parliamentary committee.

Mr. Dick Harris: Mr. Chairman, I think what we're talking about is that we want to determine whether the office of the chief actuary of the Canada Pension Plan of Canada has been compromised by the firing. That's what we're talking about. We want to discover if the Canada Pension Plan and the numbers that make up the Canada Pension Plan have in fact been compromised by this firing. And I think it's very important to note that timing in fact is of the essence, because that report in fact is due out at the end of November. Therefore, if a question were to hang over the November report like a cloud of dark suspicion, then that would do neither this government nor the people of Canada and the participants in the pension plan any good at all.

I think it's incumbent upon us to ensure that the integrity of the report is protected, the report that's coming down in November. That's why, Mr. Chairman, we've said that time is of the essence, and delaying this inquiry would certainly not be in the best interests of anybody—the government, the people of Canada who are in the pension plan, and indeed the pension plan itself and the office of the chief actuary.

It makes no sense whatsoever to delay this.

The Chairman: Mr. Valeri.

Mr. Tony Valeri: Mr. Chairman, I'm just repeating myself. I think we're all repeating ourselves. I would just call the question, unless there's someone else—

The Chairman: I'll go to Mr. Szabo. He has a comment.

Mr. Paul Szabo: Mr. Chairman, the arguments that I've heard about in support of this are clearly relating the firing to the report that is to come out. However, Mr. Dussault—and it's on the public record—has stated very clearly that this issue did not have anything to do with that report and what his recommendations or content were. So based on that, I believe Mr. Dussault—that the issue is not with regard to his report. Therefore the arguments that have been put forward here don't seem to sustain the need for having a subcommittee.

The Chairman: Thank you, Mr. Szabo.

We're dealing with the amendment first. All those in favour of the amendment?

Mr. Dick Harris: Could we have a recorded vote, Mr. Chairman.

The Chairman: Yes. All those in favour? We're dealing just with the amendment now; then we'll go back to the motion.

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(Amendment agreed to: yeas 8; nays 7)

(Motion as amended agreed to: yeas 14; nays 0)

The Chairman: Yes, Mr. Epp.

Mr. Ken Epp: Just for clarification, when will this subcommittee be struck?

An hon. member: Never.

Mr. Ken Epp: What specifically is going to have to happen before this committee strikes that subcommittee?

The Chairman: We can discuss that in steering committee.

Mr. Ken Epp: I wish it could be done. I think we have some very unclear, ill-defined criteria for delaying this.

Mr. Dick Harris: Good. Well said.

The Chairman: Your comment is noted.

We will adjourn and be back at 3:30 p.m. to hear from Mr. Cleghorn. The meeting is adjourned.