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 would like to call this meeting to order. This afternoon the finance committee continues its study of the report of the task force on the future of the Canadian financial services sector.

This afternoon we have as a witness Mr. John Cleghorn from the Royal Bank of Canada. Welcome. I think you know how these meetings operate. You can give us some introductory remarks and thereafter we will get into a question and answer session.

Mr. John Cleghorn (Chairman and Chief Executive Officer, Royal Bank of Canada): Thank you and good afternoon, Mr. Chairman and members of the committee. Thank you for giving me this very timely opportunity to discuss our response to the MacKay task force report.

I look forward to a dialogue with you after my remarks. The input of this committee is vital to the government's deliberations about the future of the financial services industry and indeed our nation.

It's clear to me that since the Porter commission report more than three decades ago, Harold MacKay and his task force have conducted the most thorough review of all the issues facing our industry and its crucial importance for all Canadians. It is a watershed report that presents a powerful, sensible blueprint for Canada to have a creative, innovative, flexible, and competitive new financial services arena for the 21st century.

The report provides clear recognition that change is accelerating. I could not agree more. Change is upon us, whether driven by globalization, customer demands, new competitors, or new technology. The last words of the highlights of the report say it all. They read as follows:

The changes are inexorable and we cannot ignore or pretend they do not exist. For financial institutions, their customers and public policy, reliance on the status quo is no option.

These forces are reflected in the changing needs and preference of our customers. Let me illustrate with a number of examples.

Fifteen years ago 90% of routine banking transactions were conducted in branches. Ten years ago 50% were conducted through branches and 50% through automated banking machines. Today, less than 15% of routine transactions are done through our branch network, with more than 85% being done electronically through ABMs or telephone banking.

Telephone banking was introduced in 1995. In the first year of operation our call centres received 4.8 million calls. Three years later that number will increase to 43 million.

Debit cards didn't exist five years ago. In 1997, debit card transactions represented 34% of total transactions. This represents 22 million transactions a year in our bank.

The mutual fund market grew 750% while personal deposits grew at a rate of only 16%. On a dollar basis between 1991 and 1996, the average annual increase in mutual funds has been approximately triple the average annual increase in personal deposits. Assuming the same rate of relative rates of growth, the amount of Canadians' savings held in mutual funds will surpass that held in personal deposits in all deposit-taking institutions in a few years. This is already the case in the United States.

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These all reflect irreversible trends shaping the financial services industry at the institutional level around the world. Let me give you my vision of where the consolidation and rationalization in North American banking has been going on for some time and will continue. It is being propelled by the need for greater efficiencies, scale, scope, escalating technology requirements, and deregulation.

This trend is leading to huge market capitalizations of U.S. banks, which provides them with considerable clout to grow through acquisitions, an important source of competitiveness. The gap in market capitalization between Royal Bank and the average of the top 15 U.S. banks was under $3 billion in 1993; today it is $23 billion.

Second, globalization will have a lasting impact on Canadian financial institutions in ways not yet imagined. For example, the task force report notes that globalization of wholesale banking has resulted in the disappearance of U.K. investment banks, even though London remains a major international financial centre. While globalization of retail banking is in its infancy, the survival of Canadian retail banks as full service players is not guaranteed if action is not taken soon.

Third, increasingly there will be divergence between the strategies of different Canadian banks as each selects directions based on its own core competencies. Some of this is already apparent in the differences among Canadian banks with respect to their strategies and the business segments and markets they are pursuing. These differences will widen. So what may make sense for one bank may not make sense for another.

Fourth, meeting the changing demands of customers for a mix of service delivery mechanisms poses a real challenge. While most customers have embraced electronic delivery channels such as ABMs, telephone and PC banking, today they still want to have the option of face-to-face branch access. This is presently leading to costly duplication. In five to ten years, with better use of technology and better understanding of customer needs, we will be able to better meet diverse customer preferences more efficiently.

Finally, Canadian banks also need to respond to the increasing expectations of Canadians that financial services firms should provide tangible support for communities and pursue more community-customer partnerships.

These are some of the directions we are headed in. They pose major challenges, and the task force recognizes their importance.

There are important broad themes in the proposals that are in harmony with the challenges we face and that I strongly endorse.

The first is clearly the need to ensure a vital and competitive financial services industry within a sound prudential framework, an industry that is open to competition from existing players and one that encourages the entry of new ones through removal of unnecessary barriers. In this respect, we welcome the proposals to permit foreign bank branching, enhanced cross-border competition, broadening access to the payments system, encouraging new bank start-ups, broadening the ability of credit unions to compete nationally, and other similar competition-enhancing directions. The best way to serve Canadians is to have a vibrant, open, and competitive financial system.

The second set of proposals that are again very appropriate are those aimed at empowering the consumer as our financial system evolves. Some important elements are the proposals aimed at ensuring strong consumer protection safeguards, redress mechanisms, and convenience of access. The interests of our customers must come first and foremost in any undertaking, and we welcome the emphasis the report gives to this area.

Third, the task force recognizes the role of our small and knowledge-based businesses. The strength of this sector is vital for job creation and the achievement of rising standards of living. At Royal Bank we have a solid track record and we want to continue to be the bank of choice for small and medium-sized businesses in Canada. We are proud to be Canada's largest lender to the small business market with more than 380,000 clients and loans approaching $14 billion. Between 1996 and 1997, Royal Bank increased the amount lent to Canadian small businesses by almost $1 billion.

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Fourth, the report provides recommendations to make the industry more sensitive to the needs of the communities they serve. Royal Bank acknowledges that we have to engage in an even more constructive dialogue with the communities we serve and build a new sense of community-customer partnerships. The task force notes that Canadians believe that “banks have greater public responsibilities than other businesses...and also expect banks to play leadership roles in their communities”.

At Royal Bank we are proud of our record of community involvement. For example, we have pilot initiatives in a number of areas, including Parkdale and the Jane-Finch neighbourhood of Metro Toronto and the Côte-des-Neiges area in Montreal, where our staff work closely with neighbourhood community groups in determining ways to best meet the banking needs of local residents. In addition we have an alliance for micro-loans with the Calmeadow Foundation, one of the major micro-lenders in this country. We are among the most active corporate donors in Canada, contributing over $20 million this year to a wide range of worthy causes, including many that are community based.

But we know we can do more and we want to. We agree with the conclusion reached by the task force that accountability of all financial institutions should be increased. Therefore, we endorse the recommendation by the task force that all federally regulated deposit institutions and life insurance companies be required to file a community accountability statement with the Minister of Finance and to table it with this committee for review. We believe that this is in the best interests of the financial services industry. To support this community accountability statement concept, we are ready to help build an open, inclusive and transparent consultation process with various community groups to collaboratively develop a scorecard of accountability with respect to community expectations. We believe it is important that we build the elements of the community accountability statement together.

As the task force notes, there is no commonly accepted way to report on performance. We agree. We would like to help develop measurement procedures by consultations with communities. This is something we are prepared to do in cooperation with communities and other members of the financial services industry. Our colleagues at the Bank of Montreal are also supportive of such an initiative. In this way the scorecard will truly be relevant to the needs of the community. Such a scorecard might address a range of issues, such as those listed on page 170 of the task force report. We anticipate that this process will enhance the effectiveness of parliamentary oversight of this matter as well as our relationship with community groups.

In providing government with a clear path into the next century, the task force cautions that time is of the essence. It says, for example, “We urge that...the debate be focused and the action be timely. To delay is to deny opportunities we think can be realized and to make the challenges facing us harder to manage.” I share this view completely.

The task force notes that Canadian financial institutions must consider their own strategies in response to these challenges. To meet new and potential competitors they must consider how best to position themselves. In this environment the report clearly lays out that there is considerable need for flexibility—flexibility on the part of institutions to be nimble and to adapt as market realities demand and flexibility on the part of policy-makers to allow them to do so. In our case we have determined that a merger with the Bank of Montreal is the most appropriate response for our institution.

There will obviously be some tough choices and difficult decisions to be made, but I believe that if government adopts the recommendations of this watershed report, Canadians will be the clear winners. This will ensure the continuation of a strong Canadian financial services sector providing more competition, leading to wider choice, better pricing and quality and increased consumer protection.

Thank you, Mr. Chairman and members.

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

We will now proceed to a question-and-answer session, and we will begin with Mr. Harris.

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

Mr. Cleghorn, thank you for your presence here today and your presentation.

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I want to ask about something that's of particular interest to me, and that is what has been described as franchise type banking in the future, where we would see banking outlets established in grocery stores, department stores, etc. I think of Safeway in the west. I think some of the major supermarkets in the east have a franchise type banking arrangement. What kind of vision does your bank have for the expanded operation?

Mr. John Cleghorn: First of all, I think it's a viable alternative as well. We've had several pilots unfold in our organization. The Bank of Montreal announced they were entering into an arrangement with Safeway out west. I think that was a couple of weeks ago.

Mr. Dick Harris: In the part of his report where he talked about higher risk, Mr. MacKay brought up higher fee financing for people, entrepreneurs, who had ideas in their business plans but who didn't have cash in their pockets. While I know the government can't demand who banks loan to for obvious reasons, I think there is a segment of Canadians who in fact have some very good ideas for starting their own home-based business or starting small businesses, as the job market diminishes in some respects.

Has the Royal Bank got anything in place now, or are you considering this good idea but no cash type of entrepreneur and how you could address these people's needs?

Mr. John Cleghorn: I think, as the report says, that banks represent approximately 60% of small-business financing. There are a variety of other sources, including different finance companies. Some of them are regulated, some of them are non-regulated.

In our own organization we have a variety of sources of financing. We've got the traditional bank loans at the branch level. We have knowledge-based industry levels, which are a different kind of business compared to the asset-intensive types of businesses. We also have venture capital operations. So we've got knowledge-based industries, venture capital, as well as traditional, and we have partnerships with micro-creditors—with, as I mentioned, probably the largest player in the country, Calmeadow.

We think we can do more. That was certainly behind Mr. Barrett's announcement a couple of weeks ago that together we could do more in this area. Indeed, Wells Fargo announced they were coming to Canada. They were doing it at a higher rate. The availability was there. So you can increase access if in fact you are prepared to look at broader risks. Certainly as a leader in small-business financing we feel we can do more in the higher-risk area, which is not necessarily straight lending. It's somewhere between equity financing and straight loan financing.

Mr. Dick Harris: Thank you. I guess I shouldn't close without one final question on the proposed mergers.

There was a report out about a week ago done by the former secretary of state for banking and a colleague, and they talked about the potential job loss of 20,000 to 40,000 jobs. I still don't know where they got the figures from. Nevertheless, it was quite a frightening report. I also read some material stating that as part of their merger proposal, the banks would be making a mitigation plan for any rationalization of branches—downsizing of their infrastructure. Included in that plan were attrition numbers, buy-outs, and beefing up of staff at the remaining branches. Can you comment on the numbers that were released in that report and just how realistic you feel they are?

Mr. John Cleghorn: Well, I think they are exaggerated. It depends on what level you want to look at.

We've said there will be overlap, but any reduction of that overlap will be handled within our normal attrition levels, which are approximately 10%. In other words, we think one year's attrition level would suffice for our intended merger over a period of the next three to five years. But at the same time, those are static numbers. They don't assume that the organization is going to be growing and improving its lines, adding different products, and so on.

If you take a look at us, over the last ten years we've had something like a 130% increase in our high-technology jobs. We had something like a 70% increase in our high-value jobs of marketing and selling and management, and we've had a change in other types of jobs just because the work has changed in the last ten years because of technology.

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Mr. Dick Harris: I have just one final question, Mr. Chairman.

Concerning the selling of insurance through your branches, the insurance industry argues that the industry is well served now through the players in the business, that there is a high degree of competition that exists now, and that customers of P and C insurance are in fact well served. That argument, as I understand it, is quite widely shared.

Given the banks' desire to enter into the insurance business through retail sales through their branches, do you then dispute that the insurance market is well served and in fact is not competitive at the present time? Or are you saying that the entry of the banks into the retail insurance business would in fact have a net benefit to the consumers far and above what they're getting now?

Mr. John Cleghorn: I think I'd rather refer you to the MacKay task force, who've looked at this as one of the elements of study for the last 20 months. It was their recommendation that greater competition in this area, as in other areas of financial services, would benefit the consumer, and they permit a period of time for that to happen provided the proper safeguards are there for consumers, to protect all providers of financial services. They point to Quebec. They point to other countries where deposit-taking institutions do provide insurance to the benefit of consumers.

So I would have to draw your attention to that. That was an independent view of the last 20 months and it's already going on in this country with the largest financial institution, the largest deposit-taking institution in the province of Quebec, Caisses populaires Desjardins group.

Mr. Dick Harris: I'll catch on at the end. Thank you, Mr. Cleghorn.

The Chairman: Mr. Nystrom.

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

I'd like to welcome Mr. Cleghorn to the committee this afternoon and ask him a few questions in two or three different areas, if I could, Mr. Chairman.

One question I was asking Mr. MacKay about this morning—and this is a question that I think makes the Minister of Finance rather nervous too, if we are to believe the reports we hear—is what are the consequences to the Canadian people of a failure of one of these new megabanks, if indeed they do go ahead?

Already we have five banks that have a fair amount of concentration in terms of ownership, compared to other countries in the world, and the Royal Bank, the Bank of Montreal, and the TD and CIBC, if they come together and form two banks, become very large indeed.

What happens if one of these banks fails? What are the consequences to the Canadian financial system, to the ordinary people? I've been around long enough to know that you can expect almost anything nowadays. Look at what's happening in Southeast Asia and Russia, and what's happened historically. What are the consequences? It would be such a big institution that it couldn't fail without, I would think, really dire consequences. Mr. MacKay talked this morning about looking for help from international banks and foreigners and so on.

I wonder if you can comment on that, because that is something people worry about.

Mr. John Cleghorn: Absolutely. And they should worry about any financial services institution going under.

Take a look at the record of Canada, which has had good policy, good regulation, good oversight, good monitoring, and good practices. Since 1923, which was the last failure of a large Canadian bank—the Home Bank—we've had two bank failures. They were two small ones in western Canada in the eighties. We've had others that have been acquired, such as the Mercantile Bank and the Unity Bank, and others that have been acquired after start-up.

In the same period of time in the United States, there were 17,000 bank failures. These were smaller banks, so being small and nimble is not necessarily a guarantee of greatness. And I can assure you that perhaps in the downturn of the eighties, had we been the Royal Bank of Saskatchewan or the Royal Bank of Alberta, we'd be history too. So at least we had a diversified base to carry us through.

To compare our banks and our banking system with Russia and Latin America, I think you really have to go back to the last century in terms of stability of the country, credit rating, and a long period of experience both in terms of the regulators as well as the players. We're talking about first days of the first generation of modern-day banking in Russia.

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As far as Asia and Latin America are concerned, the systems are nowhere nearly as transparent as ours, and ours is closer to that of Europe or the United States. Even in the Japanese system, which is often compared to Canada with their large banks, they don't have the same transparency, they don't have the same regulatory requirements. They did not meet their changing asset values, if you want to call them that. They didn't step into the situation as early as they should have, as Canadian banks and their regulators did in the early nineties and as American banks and regulators did at the same time.

I think you are really talking about quite different systems. But part of the reason for coming together—and this will be viewed by the superintendent of financial services—one of the key elements of the review process, is the safety and soundness of the resulting merged organizations versus two carrying on together. Having worked for an American bank before and seeing regulators on both sides of the border, I know we can be proud of the level of regulation and the best practices adopted in this country.

Mr. Lorne Nystrom: I want to get back to my question of what the consequences would be, though. Of course we hope nothing fails, and they probably will not fail, but there is always that possibility of a failure. The Japanese banks were really trumpeted as being pretty secure a few years ago too. People were saying the Japanese model was a model for the world.

Mr. John Cleghorn: I was just going to say that I don't think you want the Japanese model of regulation or financial services structure for Canada. They are actually going through a process of catching up to where the Canadian system already has arrived.

I would simply point to the total system we have, and this is one of the considerations that the regulators will make: the riskiness of a merger going forward versus keeping the two organizations apart. So concerns will be addressed at that time. You look at various scenarios, but you also have to take a look at the diversity and the make-up of the two businesses. If they have low-risk profiles, if they have high credit ratings and if their culture and management competency are such that they've been tested over several downturns, then the government makes a decision in that regard. We do have procedures to protect Canadians, but I think you also have to take a look at the track record of Canadians.

Mr. Lorne Nystrom: I want to ask you a question about the whole argument of job losses. You've been commenting on the whole question of job losses or job gains if the merger goes ahead, and others have said there will be considerable job loss. Doug Peters, who was the former chief economist at the TD Bank and the former minister of financial institutions until about a year or so ago, has said that if the mergers go ahead there will be about 20,000 to 40,000 job losses. I wonder if you would comment on that. Mr. Peters comes from a position where I think he has a fair amount of credibility, and he was the previous minister before Mr. Peterson.

Mr. John Cleghorn: The comment was made by a similar member in that range. I think those are exaggerated numbers and they don't give any credence to growing a successful organization at home and abroad. Certainly the experience in the States is that after a period of three to five years you are growing jobs. If you look back at our own experience in the last ten years, we've added something like 10,000 employees in our organization. We've had a recession, an upturn, mergers, and we've had a big change in the types of jobs we have in the organization, and we're a larger employer today than we were then.

If you take a look at the whole industry, there are 500,000 Canadians working in financial services. The number working in banks is something like 220,000. If you have a vibrant, competitive financial services industry.... I work for two banks and I ask anybody who joins our organization and is in the management group whether they've worked for another financial services company. Most of them put up their hands, and in many cases we're not the second one they have worked for. That's also the reality amongst our customers today. Many of our customers deal with us, but about 75% of them deal with somebody else as well.

So it's a very broad industry. There's mobility in the workforce. We have on average, as I said, 10% a year regular turnover, where people are moving on either to competitors, to go to another employer or to do something else. So there is lots of room within attrition in our industry to be able to accommodate this.

Mr. Lorne Nystrom: If Mr. Peters' figures are exaggerated, what are your figures in terms of what you think will happen if these mergers go ahead?

Mr. John Cleghorn: We're prepared to live with our numbers.

Mr. Lorne Nystrom: Can you remind us again what those numbers are?

Mr. John Cleghorn: We've said that we will contain them within attrition levels.

Mr. Lorne Nystrom: Within attrition levels.

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Mr. John Cleghorn: Yes. I believe this process assumes—and I understand Mr. MacKay has said that it's difficult to draw conclusions from a press announcement or from a speech made here or there—that if you can put these together in a public impact report, which we fully intend to do, you will be able to weigh all of these and put teeth around them, and we or anybody else who wants to do a major endeavour such as this should live up to the obligations that they say they are going to do.

Mr. Lorne Nystrom: Now, what about the issue of the closure of branches if the merger goes ahead? There's a lot of concern in rural Canada in particular, but also in many of the urban parts of the country, that a lot of branches will close and there will not be the same service as there was before. I'm talking about the closure of branches.

Mr. John Cleghorn: Yes, but you're also going to see different kinds of openings. We talked about that a few moments ago. I think we're just seeing early days. The TD announced they were going to be putting outlets in Sobey's stores. We've had the announcement from the Bank of Montreal of 100 offices to go in Safeway. We have CIBC in Loblaws, announced this year. We're going to see new CIBC outlets in a number of stores there—or President's Choice banking, I should say—and there are pilots that we have. So we'll see a proliferation of different kinds of outlets, whether that happens to be down the road with the post office or some other stores. Those are face-to-face outlets.

But I think also you go back and you say, all right, we have 220,000 Canadians working in banks and a lot of them are in branches, but where are the other 280,000 working? Many of those people are sales people, they're brokers, they're agents, and we're employing a great number today who are going to the farm gate and to communities to see people's homes and also to retirement homes and nursing homes to deal with their customers there as well. Technology enables them to do that. They can take a laptop or they can operate with a cell phone.

So we're evolving. But we have said that no small town or rural area will lose branch service. Certainly where the two of us are the only two banks in town, we've said that the employment levels will stay for five years and we'll stay in that community. After that we'll have to look at it. But again, these are commitments we will have to make when the whole package is put together, and as far as we're concerned, we've made general statements over the last several months since we announced them and we're certainly prepared to live with those, but the details we're happy to put into a public document.

Mr. Lorne Nystrom: The Royal Bank, Mr. Chairman, has announced a merger with the Bank of Montreal. There will be the establishment of a small business bank to substantially increase lending to small business. Now, what would you be able to do with that bank that you can't do now? I'm wondering why you would establish another bank.

Mr. John Cleghorn: I'll draw you to MacKay on that. He feels, and we agree, that one thing size gives you is the ability to take on more diversified levels of risk. In other words, a larger player can do more in venture capital; a larger player can perhaps do more in exchange of ideas. One bank may be a bigger player in ag biotech, another one might be bigger in entertainment financing, another one might be bigger in high technology, and you can combine those talents. The other thing is that if you have a large financial institution bringing the two together, a small business division or bank, you can have a different kind of esprit de corps.

One of the big issues we have today, and we've had as long as I've been in banking, for over 30 years, is the turnover of account managers. I've seen banks get started, little banks that are no longer with us, on the basis that they were going to be like accountants and lawyers and so on in that they were going to keep their client relationships for a long period of time and not have the same kind of turnover. Well, it's something I think we've always wanted to do. At the bank I was with for nine years before I joined the Royal, the Mercantile bank, which was owned by Citibank, our whole modus operandi was medium-sized small business lending and small commercial annd the idea was to have your account managers on a longer duration. It's very difficult. It's a big challenge, and really, financial players all over the world face this challenge. We're just going to try to do it better.

Mr. Lorne Nystrom: Would this be a new bank and a separate institution, or would it just be a division of the new bank that you create—

Mr. John Cleghorn: Well, that depends. It depends on the rules regarding holding companies. But there are advantages in keeping it within the bank in terms of its leverage capabilities; in other words, it can raise capital in a more efficient way under a bank but still have.... We have divisions in the bank that are separate identities, if you will, today. You can operate that on a division basis. You can employ separately, but you still have the advantages of the scale of the overall institution.

The Chairman: Mr. Brison.

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Mr. Scott Brison (Kings—Hants, PC): Thank you, Mr. Chairman, and thank you, Mr. Cleghorn, for appearing before us today.

Some of the size issues and the economy of scale issues have been related to data processing and the credit card business and that sort of thing, in that in fact you can really reduce your cost of—

Mr. John Cleghorn: Per client.

Mr. Scott Brison: Per client, yes. Is that where you see the greatest cost savings in terms of the economies argument with those data processing areas?

Mr. John Cleghorn: Data processing, technological development—technology underlies virtually every product we have today, including our branches. When people come into a branch, they have a card that identifies them, their screen comes up, and the banker at the counter can see the whole relationship that a client has. So everything we do is driven by technology, and clearly the advantage of scale is to be able to absorb that very heavy cost of development and application over a larger client base. That's also mentioned in the report.

Mr. Scott Brison: Those of us who have confidence in the market system may take a leap of faith and see that in time those costs to the consumer would be reduced because of competitive forces, particularly with increased levels of global competition, changes in the payments system and a lower cost of doing business. But are you willing to make a commitment to reduced costs in those services to reassure Canadians or to provide some level of tangible and more immediate benefit to Canadians—to effectively say, for instance, that we would be able to reduce the cost of these services by this much?

Mr. John Cleghorn: I think our presentation that we ultimately make in the public interest impact would contain that. What we have said, as an example, is that if you have the banking machines, which is a very important part of the delivery channel today, between the two organizations combined...right now there's a fee for, let's say, Bank of Montreal clients to use the Royal Bank and vice versa, and that's something like $30 million. That would be waived.

Two of the areas we are concerned about would be credit cards and mutual funds, but take credit cards. As the task force report points out, credit card fees today are a little bit above what they are in the States, whereas virtually all other banking services are actually cheaper in Canada compared to those in the United States. I think if you look at the charts you'll see that we're probably in the middle of the pack compared to a variety of countries, but certainly compared to the U.S. Canadians enjoy better prices, with the exception of credit cards to a slight extent.

The reason for that is that not only do you have local players in credit cards in the United States but you have these large mono-lines that are competing nationally. Three of them are now here in Canada. Bank One was doing an announcement this morning. They're one of the biggest in the States. They are currently out of Columbus, Ohio, moving to Chicago when they merge with First Chicago. They're opening here and they're talking about growing their workforce in Canada to several hundred. Their headquarters for Canada will be here in Ottawa. You have MBNA who just came in, and you have Capital One. These are all card players who are going to use their North-American-scale, low-cost-per-client operations to try to cherry-pick our clients from us, and it's certainly incumbent upon us to make sure our prices are low enough so that our customers have no reason to go to this new competition.

My point is that if you follow the competition arguments of the MacKay task force, there's going to be plenty of choice in virtually every product line for every Canadian, and then the question is whether that satisfies the needs of the communities in terms of broad choice, and therefore you have choice in terms of price as well as quality. Now, that's not to say we aren't going to look at potential areas such as banking machines, but I just raise that.

Mr. Scott Brison: If you don't know the answer, that's all right, but how many credit card customers would you have?

Mr. John Cleghorn: Close to 5 million. MBNA would have 20 million.

Mr. Scott Brison: And if the economies of scale.... Okay, that's an obvious advantage, then, that they would have currently.

Mr. John Cleghorn: They have call centres that cover great parts of the United States, and our call centres would cover Canada. I guess ultimately it's going to be a tussle between Canadian financial institutions with call centres in Canada operating north-south, just like U.S. financial institutions with call centres in Bangor, Maine, Atlanta, Georgia, Tennessee, and so on, coming north.

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Mr. Scott Brison: There has been some discussion of the new service delivery vehicles for the banks. The President's Choice Financial franchise operation with the CIBC and Loblaws is one example. There's obviously going to be a wider range of service delivery vehicles over the next several years. One example now is the fact that you can withdraw money in a grocery store at a checkout counter. Every grocery store checkout counter in some ways performs the function of a bank.

In the future, do you see, for instance, a Loblaws or Sobeys, instead of working with one of the banks, actually effectively setting up their own bank? Do you see that in the future?

Mr. John Cleghorn: This is contemplated by MacKay. As long as safety and soundness is followed, and they can meet the test, we see a variety of players getting in. There may be agency arrangements such as we see here. You can go to the States today, for example, and go to a banking machine that could be a banking machine that's operated by the particular store. They then link into the payment system.

There was a very good comment in the paper today about the U.S. clearing and payment system. They would like to catch up to what Canada has. Canadians get same-day clearing coast to coast. And new players should certainly be able to complete the ring; otherwise you back into a system that the U.S. has, which can take many days to clear cheques. So the consumer benefit's not there. Also, you see the evidence of cheque fraud because the delays are so long.

Mr. Scott Brison: So particularly with the softening of the 10% rule, ultimately you could see a huge increase in the number of players in terms of banking services. Do you see that happening? Effectively, what you are saying is it would be possible for a Sobeys, Loblaws, Sears, or Wal-Mart to—

Mr. John Cleghorn: Well, one of the comments was that somebody operating money market mutual funds could also be able to offer a chequing account, so you will have a brokerage operation.... Merrill Lynch, whose clients have been able to have an account for years in the States, are now back in Canada in a form far larger than when they left back in the late eighties. Indeed, the Ottawa Citizen today said that the Merrill Lynch chap was going to go after all the employees of the high-tech companies here in Ottawa. Well that's good; it's more competition. It's going to keep us sharper.

My point is take a look at each product line and take a look at who is going to be there. And whether it's brokerage, whether it's mutual funds, or whether it's deposits, you're going to see different types of players around each offering. Many of those today are now offered by mobile sales forces and agents not operating through branches at all. If they are selling, say, a product for one group that is not a bank but has insurance and mutual funds, you can have the agent selling insurance, and while they have the person there they can sell them a mortgage or personal loan through one of their companies. This is now being done out there in the marketplace.

Mr. Scott Brison: Taking the global competition argument in a current context, what is the presence of the MBNAs and the Wells Fargos? Have you seen a significant increase in their presence?

Mr. John Cleghorn: Oh yes. They are taking business away from Canadians who previously had it, which means it's going to be a lot more competitive. You see their advertising; it comes in the mail all the time. One night when I went to see a football game between the Alouettes and Calgary, the first commercial kiosk I saw when I walked into Molson Stadium was an MBNA outlet right there to attract people to sign up their credit card. It doesn't matter whether it's Montreal, it's also the case in Regina, where they have the CFL card. I think everybody who went from a recent game in Regina back to their car in the parking lot found every single window had an MBNA sticker. So I would suggest that they are making their presence felt.

Mr. Scott Brison: You were saying earlier you are willing to make a commitment on jobs. Is there a time period during which you are willing to make that commitment?

Mr. John Cleghorn: Yes.

Mr. Scott Brison: What's the timeframe?

Mr. John Cleghorn: Let's get down to the point where we put the whole package together for the public interest process.

• 1615

Mr. Scott Brison: Will there be a commitment for services to rural communities from a branch?

Mr. John Cleghorn: Exactly.

Mr. Scott Brison: I think in many ways that argument in 15 years will be less relevant, but there's a significant segment of the population, including people like my mother, who wouldn't touch a bank card, who when they deposit money want it stamped there.

Mr. John Cleghorn: The Royal Bank has 460 rural branches today. What you hear about are complaints on the margin, the odd one that gets shifted. We certainly have to do a better job of working with the communities. There are processes laid down in the MacKay report in terms of working with the community.

We have said that no small town or rural community.... Any commitments we've made in speeches to date, which are assumed to be in the public domain—certainly they were made at annual meetings across this country and in front of other inquiries here—any commitments made to date obviously will be part of the package, but something more specific obviously.

Mr. Scott Brison: In this process, do you have some concerns over the politicization of the issue in terms of the degree to which a public policy issue is becoming increasingly politicized? And are you concerned that arguably Canadians may be denied the benefits of sound public policy due to that politicization?

Mr. John Cleghorn: Given that we are a grassroots type of service provider, the MacKay task force even draws reference to the fact that financial institutions and banks are a different animal when it comes to their role in society and their role in communities. So it obviously involves more of a politicized process, something I guess our industry is just going to have to learn to live with. But I wouldn't say that's unique to Canada; you certainly see that in the United States as well.

Mr. Scott Brison: Thank you very much.

Mr. John Cleghorn: Thank you.

The Chairman: Mr. Gallaway.

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

Mr. Cleghorn, I'm going to raise for the third time here this afternoon the question of the job losses or the suggestion of job losses. We heard this morning from Mr. MacKay, who told us that we were going to hear from a hodgepodge of interest groups. I was listening last evening to a national radio show on which one of your employees, Mr. McCallum, was one of the guests. I believe he was billed as the chief economist for the Royal Bank of Canada.

Mr. John Cleghorn: Yes, that's correct.

Mr. Roger Gallaway: In response to a caller who asked a question about job losses, he dismissed it, saying “This is coming from the Bank of Nova Scotia—what do you expect to hear from them?” That's fair on a radio show, but at the same time we heard reference to Mr. Peters having suggested this, and there's a British Columbia task force that also came up with some numbers on job losses in that province.

You've made reference today to some sort of a package that's going to be presented to the Canadian people, which is interesting. You're here today and you're saying they're wrong, yet they're saying they're right. We're here to sit and try to give relative weight to evidence that is presented here. I want to ask you, do you have any studies? And if you have any studies that would substantiate what you're saying, that there will not be job losses, would you please undertake to table them with this committee?

Mr. John Cleghorn: Thank you for the question.

What we're saying is that there will be some overlap and there will be redundancies, but the actual number of people going out, losing their job totally.... I think we're going to be able to do exactly as government has been able to do, and that is do it through attrition and also retraining our people.

As I say, we have, between our two organizations, the need to hire, as we did last year, about 7,000 people, most of those in Canada. That was a growing economy, and also we were just literally running out of places and with the turnover we needed to replace people. What we're saying is that's one year's attrition level. The normal attrition year is about 10%. We have a full-time equivalent of about 84,000 employees between us. So people are moving within this industry.

I'll give you an example. Part of our job loss that occurred was selling our payroll division. All the banks were doing payroll before, so you had between 2,000 and 2,500 Canadians working for the Canadian banks offering payroll services. In a period of two years, every bank sold out their payroll divisions to two American companies, ADP and Ceridian. That means that all of the Canadians who were working for the banks now work for ADP and Ceridian. Let's say most of those jobs are still here, at least the backroom jobs and the sales jobs. The headquarters jobs, the key marketing jobs, the strategy jobs, are all down in the States now. So the high-value jobs are down there.

• 1620

My point is you get a shift that's taking place. Some of it may be overlap. Some of it may occur through divestitures. This is what's happening. We've had banks selling their custody divisions. We employ 1,000 people in custody, and we're the last only-Canadian bank. Others have sold theirs out or gone into partnership with others. So you've got this change taking place within our industry.

What we're saying is that the amount of reduction of people working for us during the integration period might represent approximately one year's attrition rate, but that would happen over a period of time. It wouldn't happen in one year; it would happen over a three- to five-year period.

It also means that you could take the savings you're generating and apply them into technology or other things to also bring your costs down, bring your prices down. So there are benefits to the community as well as direct employment.

Without mergers the banks still face the issue of forward cost control. So the kinds of job shifts we've seen over the last ten years you're going to get in spades going forward—with or without mergers.

Mr. Roger Gallaway: I'm aware that you have a business transition group comprised of people both from the Royal Bank and from the Bank of Montreal. You've now suggested that it would be 8,400 jobs in the first year or in a certain period of time.

Mr. John Cleghorn: Over time. We're not saying in the first year, because you can't. I'll give you a reason why. Year 2000 means we can't merge systems until the summer of the year 2000.

Mr. Roger Gallaway: Let me just finish the question then. It doesn't matter, over some period of time there are going to be these 8,500 jobs. Is that in fact substantiated by the studies of your business transition group, or is this an opinion of someone? You've obviously done base studies; you've obviously been working on this.

Mr. John Cleghorn: Sure. And not only that, those are static positions. We're saying that the two organizations that are healthy, that are able to grow and acquire and add to their product lines and so on, do business in other countries as well as in Canada and build head office jobs here. That goes with a healthy and growing organization.

You take an organization like ours, that's a static point. So what we're saying is that over a period of five years job losses would also be offset by job growth. That's why we think that these statements are exaggerating the case to begin with and they show no growth and no opportunities for growth by the individual players.

Mr. Roger Gallaway: My question was do you have a study, and would you table it with this committee? Do you have one, and would you table it?

Mr. John Cleghorn: Remember, we're not allowed to get into absolute detail. We're prevented by the Competition Bureau from sitting down and doing one precisely for our bank. We would have to get some kind of dispensation from the Competition Bureau to go into the kind of detail contemplated by the MacKay task force.

Mr. Roger Gallaway: My question has to do with what I would call competition. In a study done, I believe by the OECD, on American banks it talked about concentration in local marketplaces, however they might be defined, in metropolitan areas. In that study it said when there were concentrations among three banks having 68% of assets in a market area, the spread to small business—I'm not talking about large business—was the greatest. In other words, if you were in a market area in the United States where three banks controlling 68% of the assets of that area were in business, the spread to small and medium-size business was the greatest. They have what they call the local monopoly thesis, that in fact there's a local monopoly.

Yet if your bank were to merge with the Bank of Montreal and the CIBC were to proceed with the Toronto Dominion Bank, one would have to wonder what that rate of asset concentration would be throughout the country, because it's known that the top six have 91% of the asset base at this point in Canada.

So let me ask you.... You make the comparison to the U.S. If it works in the U.S., and there's a merger of your bank and the Bank of Montreal, one would assume that this new bank, whatever it is, in many regions of this country is going to come into that threshold area. What would prevent that theory from working in Canada, that theory of paying more money for small business?

• 1625

Mr. John Cleghorn: On small business, the task force looked at this, and the banks represent 50% to 60% of the source of small-business financing. We're not 90%; we're 50% to 60%.

There are a lot of other unregulated players, including government players such as the Business Development Bank, the Alberta treasury branches, General Electric, GE Capital and many others. I think that's been well presented as to who they are by the Mackay task force. But you have national competitors and you have national pricing in this country. Whether it's a mortgage or whether it's a personal loan or whether it's a small-business loan, you've got national players, whereas down in the States you've got localized clearing systems and localized ways of doing business. They don't necessarily have a nationwide system.

When you start to get into some of the larger nationwide players, such as the big mono-lines, you get closer to this nationwide pricing I'm talking about. But clearly we look at our business base across the country and we look at all the competitors who are there, and the banks are only part of it.

One of the issues that you've got, we've got, and MacKay certainly saw, was the lack of good data to be able to assemble all the information from all the players. But here again, if you take all financial services today in this country and come back to the employment level of 500,000, 220,000 work in the banks. The banks also represent about a little over 40% of all financial assets in this country. So you've essentially got roughly the same breakdown in terms of assets provided by banks to Canadians and the number of bank employees working with Canadians. But you've got 280,000 others working with other financial service entities that are not in the top six.

So I'm saying that the competition.... You may not be able to see it at a branch, but believe me, if it's in Prince George, I know GE Capital is there, because they're a serious competitor of ours.

Mr. Roger Gallaway: You've raised the spectre of foreign competition, which is very interesting. You've also talked about the concept that there are other countries where there are large banks, such as in the U.S. and Europe, and in Holland, which has eight million people.

Mr. John Cleghorn: It's about fifteen million, I think.

Mr. Roger Gallaway: I was told eight million.

Mr. John Cleghorn: It's more like Switzerland.

Mr. Roger Gallaway: Half the size. Let's assume it's fifteen million.

Mr. John Cleghorn: Yes.

Mr. Roger Gallaway: They have a bank that is much bigger than yours.

Mr. John Cleghorn: Two.

Mr. Roger Gallaway: Yes. ABN AMRO is much larger than the Royal Bank, and I assume it will be larger than a merged Royal Bank—

Mr. John Cleghorn: That's correct, and the same thing with ING.

Mr. Roger Gallaway: Yet 57% of their assets are located outside of the country. In other words, in a small country they went outside and did business. They didn't rely on domination of the local market or of the country; they relied on getting out and competing in the marketplace. What's to prevent the Royal Bank of Canada then from getting out and competing? Why do you have to merge?

Mr. John Cleghorn: Nothing at all. Thirty percent of our business is done outside of this country.

Mr. Roger Gallaway: What percentage of your assets are outside the country?

Mr. John Cleghorn: About the same. Sometimes you have fee base and sometimes you have assets that back it up, but I think it's really better to look at the revenue source. It's approximately 30%, and that can vary, depending on the Canadian dollar.

We have very active retail operations in the Caribbean. We would like to do more in the United States, but because of consolidation there it's been uneconomic to do so.

The Bank of Montreal, by the way, is the fourth-largest bank in Canada, not the third. The Bank of Nova Scotia is bigger than the Bank of Montreal today. The Bank of Montreal has the Harris Bank, and they feel they would like to have a partner such as us to be able to build on Harris. We see that as something we'd like to do as well.

What we want to do with the Bank of Montreal is not an end game. We would rather be a North American player in retail financial services, including asset management, like mutual funds and brokerage as well as traditional banking. Now that's something we want to do, whereas others may want to be larger players in investment banking or high-yield debt instruments and so on. So each one of us has a slightly different strategy.

We are the leader in providing foreign exchange to Canadians. We are the largest in trade finance, even though we don't have the largest network internationally. One of our competitors, who is probably the largest international network, is ranked fifth in foreign exchange dealings with Canadian companies.

Mr. Roger Gallaway: Thank you.

The Chairman: Mr. Pillitteri.

• 1630

Mr. Gary Pillitteri (Niagara Falls, Lib.): Mr. Cleghorn, some questions have been asked here today about the relaxing of the 10% ownership rule in Canada. This question was asked earlier. Some chairmen of banks have said they would like to do away it. What is your position on the 10% rule here in Canada, and on a merger, if a merger were to be had?

Mr. John Cleghorn: I think the MacKay report is a very flexible one. It's an interesting conclusion.

Our submission to the task force said that, short of mergers, maybe the 10% rule should be kept until such time as we have institutions large enough to fend for themselves, and then maybe there could be some process of either a rule or ministerial discretion that would at least allow flexibility, which is generally the way it is in other countries. I think the task force responded to that.

I think they have responded with a flexible answer. The government would be able to view it as being in the national interest, whatever ownership structure or ownership partner came along down the road.

For example, in the Dutch system nobody can own more than 5% without the finance minister and the head of the central bank concurring, which allows for ministerial discretion. I think the way suggested by MacKay gives us the flexibility the country would need to ensure that any ownership of major financial institutions would be seen to be in the public interest.

Mr. Gary Pillitteri: I'd like to follow up on that. Your answer to an earlier question, Mr. Cleghorn, was that, even with the merger, it would still not be as large; it would still not be within the top 15 of the world banks. If they have the 5% rule in other countries, as you just said, why should we say, as Canadians, relax that rule or say it could possibly be relaxed? What benefit would this be to Canadians? What control would we have over that rule as being a more Canadian institution?

Mr. John Cleghorn: As I read the report, for smaller banks you would have something more flexible. For the larger institutions, for anybody wanting to acquire, I think the limitation was 20%, in any event. It still didn't rule out the possibility of one of our institutions being acquired by foreign owners, but I think demonstration of its being clearly in the national interest had to be there. That was certainly contained in the report.

Mr. Gary Pillitteri: I have just one last question.

In two papers written by the C.D. Howe Institute, Frank Mathewson and Neil Quigley expressed disappointment with the public pronouncements of bank presidents wanting to merge. We know that some of them have been to some other committee meetings. One chairman said they wanted to merge because the status quo was not an option. Mathewson and Quigley cite three possibilities; one is that the banks do not really know why they want to merge, or if they know, they're not telling. What is really behind the merger, and why are you not telling? Do you think you've made your case in telling the Canadian people about the merger?

Mr. John Cleghorn: There's nothing wrong with repeating a story or putting it in a broader context. As I say, we certainly look forward to that in our public impact statement. If the government invites us to do it, we're pleased to do it. I think the rules recommended by MacKay are fairly broad, so we're looking for some direction in that.

Clearly, we're looking to build a competitive, Canadian-based, Canadian-headquartered, financial services company that can serve its customers better here, can grow on both sides of the border, and can be a Canadian flag carrier for our companies doing international trade and so on. In other words, it's something that will benefit Canadians doing business here with us or outside of Canada.

We'll certainly put that in a broader context as it applies to the various communities we're involved in as well, where the individuals may not be interested in whether we're providing international services but in what we are doing for them in their communities.

The Chairman: Thank you, Mr. Pillitteri. Ms. Bennett.

• 1635

Ms. Carolyn Bennett (St. Paul's, Lib.): Mr. Pratt had to leave, but he asked me to ask a question a number of his constituents are quite concerned about. Obviously, everybody is concerned about closing branches, but he is asking about the branches that actually are in the communities, who are reporting that they do business with the banks, but the banks don't do business with them. So in terms of local procurement and local purchases and the kinds of things that happen within the community, is there anything you can see that would be...?

The MacKay report talks about community accountability statements. I just wondered if you could address both things. How do you see a community accountability statement working, and what would you put in it, or what would you think it would be? And would it address this concern of Mr. Pratt's?

Mr. John Cleghorn: Well, I think page 170 draws some of the examples, so I would just leave it at that.

Ms. Carolyn Bennett: But that didn't actually talk about this local business concern.

Mr. John Cleghorn: No, but you're talking about as a supplier to us, so it depends on what we're using in that community. Certainly we're employing people in that community, but we also have to run efficient organizations and we have to weigh the benefits of suppliers who can give us consistent price and quality for all of our operations across the country, versus regional players. That's something every business faces; we're not alone.

Financial institutions that are more centralized just deal with people who are there near their head office, and their agents, brokers, or commissioned sales forces that are across the country don't have to meet the same community tests that we do. Maybe they should.

What we're saying is we will address each of these issues, and to the extent that those can be put on the table and dealt with, we'll look at them. But that's where you get into the trade-off between somebody's community versus another community, whether a supplier from one can't service the person in the other. We have this problem in Canada today with interprovincial trade.

Ms. Carolyn Bennett: One of the things that often come into my office is that one of the impacts on community is that the person from the local bank just joins the Rotary Club or just joins the Optimist Club, and then they're moved, or that the small-businessman just has a relationship with his new bank manager and it seems to be the time they move on. I think that seems to have a deleterious effect.

Mr. John Cleghorn: It is the bane of our existence. It's been something that's been here for a long time. In my own case, living in our thirteenth house, it's the nature of the beast. And it happens in other countries as well.

To differentiate ourselves, we are simply going to have to try to do something better for small business for sure, and this is why maybe something with a separate identity, that we can look to career pathing and compensation.... Employees want to get ahead, and they think that moves are going to get them there as well, so it's a pressure or challenge that comes from both sides.

All financial service institutions have to address this, and we do. If we're going to differentiate ourselves, we're going to have to do a better job. That's one of the areas the new small-business bank would certainly work hard to try to correct.

Ms. Carolyn Bennett: At the moment, if a small-business person has a line of credit with the Bank of Montreal and a line of credit with you, would they be assured they would still have those two lines of credit after the merger?

Mr. John Cleghorn: Well first of all, in small business, which is the epitome of diversified risk, it's just not a capital problem at all. I would suggest that in the case of the Bank of Montreal, which has a very strong credit culture—risk management balance, risk management process—you could almost make a blanket statement that it's just not an issue. I would say the two banks are relatively similar in that regard. Both of us want to grow our small-business practice and both feel very strongly about wanting to be the bank of choice in this country for small business. And you don't do that by running your customers off.

Ms. Carolyn Bennett: No. So the customer would be assured they would have at least the same as if you added those two lines of credit together?

Mr. John Cleghorn: Exactly.

Ms. Carolyn Bennett: Okay. Thank you.

The Chairman: Ms. Redman.

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

Mr. Cleghorn, is there anything in the MacKay task force report you didn't like? For example, were you pleased with the tied selling recommendation?

Mr. John Cleghorn: Well, it's incorporated in the Bank Act now. The Canadian Bankers Association has a code and we do as well.

• 1640

I like the idea of all the players in financial services being subjected to the same rules. I think we've been held out as the only practitioner of tied selling, when I've certainly heard examples of some of our non-bank competitors doing things that.... It's interesting to hear the debate on what's a tied sale or what is something that's being made attractive to the consumer. The MacKay report refers to McDonald's and if you buy an individual product or a combo meal, for example; they even draw reference to that.

What we're really talking about, I assume, is coercive tied selling. That's bad news. Certainly if there are clear rules for all players, all competitors having to meet them, we applaud that. So there's nothing wrong with the wording here at all.

Mrs. Karen Redman: So the fact that your industry objected to the enactment of section 459.1 of the Bank Act was specifically because it was aimed at banks alone?

Mr. John Cleghorn: Exactly. And yet, as we know, if you take it product by product, we're not the only players in virtually every category in this country. If you take residential mortgages, I think we're about 60%. If you take personal loans, we're about 60%. If you take small-business lending, as you heard from Mr. MacKay, we're 50% to 60% of the business.

If the rules can be applied to all the other players, that would be great for industry. It would be good for the country.

Mrs. Karen Redman: What do you think about the MacKay assertion that the financial sector ombudsman isn't as effective as it could be?

Mr. John Cleghorn: I think the ombudsman set-up, which is still relatively new, is working. But again, the embracing of the ombudsman role for all financial service institutions is something that should be as recommended in MacKay. I think that's a great idea.

Mrs. Karen Redman: If I could have just one final question, it's one I've been wrestling with for a while, and we've actually spoken about it separately from these hearings. It's about timing: the fact that the banks got together and announced that this was something they were going to look at, and now we hear in the MacKay task force that they don't want events to overtake the vision we need to create for the whole financial sector. This morning this committee dealt with how timely is timely.

I guess I'm just trying to make all of those different agendas gibe. I wonder why you felt the need to announce mergers when you knew the MacKay task force was going to deal with it.

Mr. John Cleghorn: Certainly the report that's come out is all-exclusive but does not comment on the specific mergers. It was a hypothetical idea. It was a strategy among others that could be followed.

Our two organizations felt, for what we feel we want to be in the future and to be able to serve our customers better, that a merger was part of our strategy. Obviously we agreed. We put that forth subject to approval by the government and our shareholders. We knew of the MacKay task force, which really had been formed under a different name in December 1996. They met their deadline. They really have gone way beyond what we had contemplated when the task force was first launched back in 1996, when the level of debate had reduced itself to whether banks should be in car leasing or insurance, rather than looking at the full future of financial services.

That's been done, and now the debate is started here and will be taken across the country. I think there's a terrific educational process involved here.

Meanwhile, the Competition Bureau is also looking at two proposals, which I think will help with the debate. The Competition Bureau could not have been invoked without a specific case to look at. Now you can put the theory to the test, if you will, because here are some live examples.

There are only one or two combinations that we had, and we decided we had better talk to our by far and away best option first, because there were all kinds of rumours out there.

I can tell you, having read the MacKay task force report, I think the big pressure would have been now what do you do? If mergers are one of your key options, who are you going to talk to? The discussion had not been absent going on the last several years. The rumour mill was pretty active.

We're simply saying we've got something here that can be considered in the full light of day. We're quite prepared to submit to a full public review process and the public interest. We've said we accept that. We've put no time limit on this, and we have not hijacked any process.

Mrs. Karen Redman: Just one final comment, if I may.

• 1645

One of the things Mr. MacKay said to us this morning, and I agree with him, is that the financial sector needs to be looked at comprehensively. You obviously agreed with that when we talked about the two issues of the ombudsman and the tied selling. Would you agree that mergers need to be done as well, as an interrelated part of the broader spectrum of the financial sector?

Mr. John Cleghorn: Yes. The report starts with the fact that they are speaking on behalf of the consumer and how can the consumer position be improved in this country. So discussion about competition, discussion about consumer protection, discussion about improved community framework and so on—it's all there; we agree with all of that. We're simply saying we'll put our merger to the test of any of those. And I think Mr. MacKay in the report has said that the debate should be focused and the action timely. We'd agree with that.

Mrs. Karen Redman: Thank you.

The Chairman: I have a number of questions in reference to a report on the three Cs of Canadian banking: conduct, competition, and concentration. I believe it's Mr. McCallum's study, chief economist with the Royal Bank. On page 10 of this study, he holds up the Dutch model as one that Canada might profitably choose to emulate. That means allowing mergers, accepting higher concentration in local markets, and that gains a more competitive financial sector as a result. Yet according to the MacKay report, Canada already has a higher concentration ratio than the Netherlands when measured by the five-firm concentration ratio. We also have more efficient banks. What has the Dutch sector really achieved that we have yet to achieve here in this country?

Mr. John Cleghorn: First of all, you've got institutions there that are quite different. ING, a name Canadians have heard about in the last couple of years, are not only a bank, but they are also a huge insurance group. They do insurance business here. I think Mr. MacKay mentioned that. They do significant insurance in Canada, as well as their start-up virtual bank. Then there is ABN AMRO, which is not only big in Holland but around the world.

The Dutch decided about ten years ago that they wanted to have strong players at home in addition to banks that could hold themselves up internationally. This is a country half our size. They also have a very strong cooperative group. The Rabobank is a cooperative bank. That is something we would certainly support, a strengthening of the cooperative or credit union movement in the country so that it can be more efficient and bring the best practices for those who want to form a national group. I think the example cited here was something like a Rabobank.

Now, why did the Dutch do what they did ten years ago? They saw consolidation occurring in Europe. They saw much bigger countries that they have to compete with consolidating, and indeed major financial institutions there wanting to look at their own financial players.

It took some time for those mergers to work. I think CBC had a report as a matter of fact on Venture one night when they showed the impact on service charges when those two mergers took place. There was a slight increase in the early nineties and then they've been basically flat ever since. Both those banks have become very aggressive acquirers since then outside of their own countries. That's because of their larger scale, larger capital base. So those acquisitions and expansion opportunities have been taken not only in continental Europe, but the U.K., when ING acquired Barings when they failed. And of course we see start-up initiatives like ING coming to Canada.

The Chairman: So tell me, what have been the net benefits for the Dutch economy in reference to the mergers that I cited earlier?

Mr. John Cleghorn: Well, I think they've got two major players headquartered there who have high-value jobs. They are regarded as world leaders. Both banks are in the top 10 or 15 in the world in terms of market capability.

If you take a look at the recent listings of the top 50 multinationals in the world, the Dutch have three or four, and two of them are banks. The Swiss have two as well in there. Canada doesn't have any. I think our largest multinational is BCE; it ranked 136th.

• 1650

So in terms of world order and world competitive strength, the Dutch and the Swiss are clearly seen to be significant players. Canadians probably have to do not only what we're contemplating with the Bank of Montreal, but go on a significant growth pattern in North America, meaning the United States, over the next ten years to be in the same league. Indeed, if Bank of Montreal and ourselves combined today, we would be ranked 23rd in market capitalization.

The Chairman: Thank you.

Mr. Szabo, then Mr. Discepola.

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

Mr. Cleghorn, this morning, in questioning Mr. MacKay on the task force report, the issue of definition of status quo and what it was referring to came up, as you know. It reminds me, I guess, of the situation President Clinton finds himself in now, trying to explain his definition of a sexual relationship. Status quo, according to Harold MacKay, was in reference to the financial services industry, and not necessarily to bank mergers. Yet it's being used often to suggest that.

I note in your presentation a list of wide-ranging changes within the banking industry over recent years, which itself demonstrates that banks have not, as an industry, been standing still, that it is a dynamic industry, and that it's necessary to continue to change.

I suppose, in a sense, that “status quo is not an option” is generally a strategy the banking industry has followed all along in any event. In the context of the MacKay report, “status quo is not an option” was not necessarily in reference to bank mergers, but rather to the financial services industry.

I want to raise that, because you probably have heard many times the public suggest, “I don't like banks, but boy I really like my bank branch”. You know, the people are nice, etc. But in your statement you referred to face-to-face banking as leading to costly duplication because of the electronic banking alternative that's there.

Status quo for some may include to some extent face-to-face banking because it's part of the integrity factor, the respect factor, etc. Banks need to earn respect every day. I'm wondering how many electronic voice-mails, ATMs, or telephone services are going to earn respect for the banks.

Mr. John Cleghorn: Good question.

From scratch three years ago, 15% are now using telephone banking in a personal sense because they find it is convenient for them. The big usage is taking place Sunday afternoons and evenings, when no branch was ever open. So it's fitting their own patterns.

I have said in some smaller communities in the Maritimes, when we announced our call centre in Moncton three years ago, that this was maybe a service that would be adopted more by urban customers, as opposed to the smaller communities. I was strongly debated with, in the sense that for people who work in institutions, hospitals and so on, where they work different hours—at night rather than nine to five, people who work in mills and so on, on swing shifts—financial services electronically are far more compatible with their needs. Their idea of what is customer satisfaction is different from somebody who will go to a traditional branch.

Our point is that we have to be there for everybody and at the same time be able to do it in a business-like manner. We have to be there as our clients shift, and we've also got to be there and handle it delicately where it is shifting and people are faced with change.

Having said that, we're in 460 communities today. They are very good businesses for us. Somebody from Ontario was asking recently about our rural branch commitment. Well, I think we opened two branches in the last three years in rural Ontario. We trimmed two as well, but it was basically on balance for the last three years.

• 1655

What we're saying about status quo is the competition is different, the demands of our customers are different, and people's ideas of quality of service are different. Ten or twelve years ago you didn't think of a bank when you were dealing with mutual funds, but it's a very important part of our product offering today. Indeed, if you take a look at insurance, the whole debate is about insurance sales and so on, but if you take a typical insurance company or take the industry, 50% of the revenue is based on asset management, which has nothing to do necessarily with the selling of insurance; it may be related, which is exactly the same thing as we're in.

I think the report talks to this convergence, if you will, of products and different channels so that it is indeed becoming blurred. Some people still prefer the traditional type of product with the traditional outlet; other people want to get their financial services from a variety of players. The bank might be only one element of it.

Mr. Paul Szabo: I have one last question area.

On September 15, in response to comments by Peter Godsoe, the chairman of the Bank of Nova Scotia, Matthew Barrett, chairman of the Bank of Montreal, was quoted in the Globe and Mail as saying that the mergers would likely require our banks to divest or pare down because of excessive market share and certain things, which would you lead.... And I think he said it would mean a golden opportunity for other banks to gain market share by undercutting merged banks on prices and service. He concluded that Mr. Godsoe should therefore either.... Since he has an obligation to his shareholders, he has an obligation to his shareholders to support mergers or else remain quiet.

Now, it struck me as a little troublesome. I understand that in your job as chairman and CEO of the Royal Bank of Canada you have an important responsibility to your shareholders, but under the favoured status granted to chartered banks, you also have an obligation to the public. The question is how we are going to balance shareholder interest, consumer interest and, to carry it even further, the public-at-large interest. The reason I raise it is that, as you well know, Harold MacKay is talking about the financial services sector, not just banks.

Mr. John Cleghorn: Exactly.

Mr. Paul Szabo: He's talking about insurance companies, trust companies, credit unions, caisses populaires, the whole gamut, including potential impacts on the automobile leasing industry, on independent insurance brokers—and I could go on. You're well aware—we spoke about it briefly earlier—that we're talking about some major impacts.

The point I addressed with Mr. MacKay this morning had to do with the velocity of all this and whether we were talking about evolution or revolution. If it's potentially going to have impacts on virtually every aspect of the financial services sector and beyond, and given the fact that the banks have indicated that if this thing drags on too long or has too many strings or conditions attached it may wither on the vine, in your view, do we have time to do this job properly in terms of adjusting the regulatory jurisdictional framework, etc., to properly assess the impact on the public—not just the shareholders and the consumers but the public at large—and still achieve the kinds of things that you believe bank mergers would achieve?

Mr. John Cleghorn: In response to your comment—and there's some very interesting language in the report on this in terms of the responsibility of leaders of institutions such as ours, whether they're banks or insurance companies or what have you—you can't just sort of head down one road and look after the interests of one of your constituents. Clearly an organization like ours, which is such a grassroots organization, has to think in terms of its customers, so that's where this report starts from. Frankly, we wouldn't be where we are if we were only looking after one constituency. So it's interests of customers, communities—our shareholders obviously, because those who haven't in the long haul haven't survived—but our employees as well. So we really have to balance all of our constituencies when we take a look at the advantages or disadvantages of going forward.

• 1700

I've read with great care the suggestions that the task force puts there in terms of ideas for public impact, community impact reports. We said we're prepared to meet those and help to develop, both at the community level and with the government, acceptable score cards. I'm also encouraged to see, both in the report and in the number of press conferences and indeed with your committee this morning—and I'm sure that was based on input not only from private sector sources but government sources to the MacKay task force—that they felt these things could all be done in a reasonable period of time and that some of the studies could be done simultaneously. Until we're told otherwise, we remain optimistic.

The Chairman: Mr. Cleghorn, many of the subjects and areas that would be in a public assessment study you have probably dealt with already.

Mr. John Cleghorn: Exactly. It's a question not just of having them in an annual meeting statement or in a press release, but rather of putting them in a format, really a score card, so they can be compared with others. It's really the kind of blueprint we're looking at that all players are going to have to submit to.

The Chairman: On the question of mergers, it seems to me that while the MacKay task force refers to the entire financial services sector, when we engage in a discussion about mergers our total focus is just on banks. Therefore the impact is magnified quite a bit, because by just looking at banks you are saying basically that everything else really does not matter to the issue. I would of course disagree with that, because the economic system and financial services sector are very interdependent and to view the mergers just through the prism of banks limits the debate quite a bit, I would think.

Mr. John Cleghorn: Clearly the recommendation says this should be looked at—all the players by product, by area that they are serving. You are going to see some areas where there are a number of players, and you are going to see other potential areas where it appears to be more concentrated until you look at the mobile sales forces and telephone access and so on. When I say “watershed”, I mean that, as I told our senior executive the other day, this report is must reading for everybody if you want to get a full picture of the entire financial services industry at this point in time, and in terms also of the evolution and a set of sensible ideas on where we should go with it.

The Chairman: Mr. Discepola.

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Thank you, Chair.

Mr. Cleghorn, in your March 5 chairman's address to the shareholders, you made a few statements. I want to pick up on some of them and ask you if you still believe in them today.

One was that you wanted to protect Canadian jobs and grow the combined workforce.

Mr. John Cleghorn: Yes.

Mr. Nick Discepola: The second was:

Together, we want to continue to provide Canadians with full-service banking, whether they live in big cities or rural Canada.

Mr. John Cleghorn: Yes.

Mr. Nick Discepola: You have answered yes to both questions. I'm wondering, then, how in answer to Mr. Brison's question on job losses.... Unless I don't understand the concept very well, a job loss is a job loss whether through attrition that position is not refilled or whether it's an outright firing. Am I wrong on that?

Mr. John Cleghorn: Again, if you compare it to what government did, they said that lay-offs would be minimal. In other words, people actually were losing their jobs but people moved on to somewhere else.

Mr. Nick Discepola: Through attrition you replenish those jobs normally.

Mr. John Cleghorn: Yes.

Mr. Nick Discepola: Okay. In this case you're not going to replenish those—

Mr. John Cleghorn: What we're saying is that over time, with efficiencies, we should be able to get about a 10% efficiency, but given the nature of an industry that employs 500,000, we think there are lots of opportunities for them, as they do today, to go to our competition or go to some other employer. They do that today.

Mr. Nick Discepola: So you're hoping someone else will pick them up.

Mr. John Cleghorn: I'm just saying that we also employ people from other financial services. Our jobs are changing as we're talking. Whether you have mergers or no mergers, this is a very fluent and dynamic workforce.

Mr. Nick Discepola: That I would agree with.

On the issue of full-service banking, how do you propose to do that to rural communities?

• 1705

Mr. John Cleghorn: What we've said is that in addition to the traditional type of branch, we're looking at the franchise where you may have banking and third-party outlets. Our competition, for example, have an arrangement going right now on a pilot basis with the post office. There are a lot of outlets in this country that could offer other services and get a return for the square footage that's there. With technology, you don't need to have the same type of branch as you were used to seeing before, because actually in many of those branches not all the people were able to meet a customer's needs. A lot of them were administrators. A lot of those jobs have now been centralized and the bulk of jobs in branches are sales and services, and you can do that through smaller outlets as well.

Mr. Nick Discepola: You invoke the use of technology, and Mr. MacKay did it this morning also. I'd like to read you some statistics, and I want you to be aware of them because I still have municipalities in my riding that don't even have 911 service, let alone touch-tone service.

Mr. John Cleghorn: And those would have to be served in a different way.

Mr. Nick Discepola: But you're also downloading the burden. Someone has to acquire a computer at $1,500 or $1,600, they have to get a modem, and they have to get an Internet provider at $20 or $30 a month in order to be able to use some of your services.

Mr. John Cleghorn: No, we're not suggesting that people have to do that. Only about 2% of our customers do, and that's going to take awhile to evolve. Telephone usage is a lot higher. As a matter of fact, our smaller community versus large urban community usage of telephone and debit card would actually be slightly higher, even with the problems that I am aware of in some of the smaller communities on the telephone—

Mr. Nick Discepola: But if you do the numbers, sir, you will see that the access to those kinds of technology that you require is strongly along socio-economic lines, and there's an urban-rural split also. If you take a look at the numbers, less than 20% or 22% of people earning $25,000 to $30,000 have computers, compared to 61% of those earning over $70,000. If you take the urban-rural split, for example, more people in the urban centres have access to computers.

I'll just flag that for you because—

Mr. John Cleghorn: Oh, I agree with you. PC banking is going to take a while. For those who like it and are conversant with the practices it's very user-friendly, but 98% of others would prefer the telephone or a banking machine or a branch. We don't want to get ahead of our customers in that regard. We have said that where we are currently located, no small town or rural area will lose service as a result of our merger, and we'll live to that.

Mr. Nick Discepola: Okay. There also seems to be a certain amount of complacency amongst consumers in the sense that when you place a deposit you feel your deposit is secure, risk free, and from the point of view of institutions relying on that complacency...to the point sometimes of exploiting it by taking increased risk when they normally wouldn't. Mr. MacKay referred to this as moral hazard, and he also referred to it as the doctrine of “too big to fail”. We've seen that no one is too big to fail. We've seen that in Asia.

Mr. John Cleghorn: Right.

Mr. Nick Discepola: My question to you would be this. In the event of merged institutions, bigger institutions, wouldn't there be added pressure and a heightening of the problem with the concept of “too big to fail”? The general trend would be that either the regulators or the government would bail you out anyway. The bottom line is that the taxpayers are going to be footing the bill. So is it not better to have five smaller institutions from the concept of risk and, God forbid, one of them failing, versus having two or three large institutions and then again, God forbid, one of them failing?

Mr. John Cleghorn: Again, I think to some extent you have to draw a little bit from the past to realize the status quo is not an option. But at least you can see how our regulatory environment has evolved and how our banks have evolved over the years. Because we are national Canadian players, we have diversified risk. Because we've been able to meet competition, we've been able to run reasonably good businesses and take a balance in terms of our risk portfolios.

Yes, most of the Canadian banks have been involved internationally and have gone through some of those cycles. That's because they've been international organizations since the last century, and they've built up contacts and networks in areas where Canadians trade. So we've been part of that flow. But even through all of that we stayed strong and we were able to maintain our dividend pay-outs.

• 1710

As I say, the only two Canadian bank failures since 1923 were two small banks. MacKay does speak to that, that the risks are probably more in the smaller end than they are in the larger end, because in the larger end you've got the diversification of risk—it's the country as well.

Hopefully Canada is well run fiscally and won't get into the problems our Asian friends did who had.... I wouldn't exactly call those transparent countries. I wouldn't say their accounting treatment would be the same. Those of you here who are CAs would know that. The banking regulations were nowhere near what we have. Indeed, when Finance Minister Martin can give a prescription for how emerging market countries could adopt better practices for their banking systems, that's based on experience here in Canada, and they listen because we have that strong track record.

What we're simply saying is that banks are not the only players in financial services. Indeed, we're 40% if you take all the banks combined. It's changing. The different products being offered by banks are also being offered by competitors, some of whom are Canadian-based, some of whom are not Canadian-based, some of whom are regulated in the manner you know our banks are. Some of them are not regulated. For example, the fastest-growing area of financial services is mutual funds. They don't have deposit insurance, for example.

So I would think in the status quo there are big issues, as addressed here in the MacKay task force, way beyond whether banks are going to be here or not down the road. The key thing is to make sure they can balance all their constituencies and be soundly managed in the future, and not have to take on risky revenue sources just to cover their business. They would be better to merge than to just simply take on risk for the sake of it, because in many cases some smaller institutions that have tried the riskier track get wiped out as soon as there's a downturn.

Mr. Nick Discepola: Could I have one final question?

The Chairman: Go ahead.

Mr. Nick Discepola: In that same speech you state that decisions about the financial service industry should be made by Canadians for the benefit of Canadians.

Mr. John Cleghorn: Exactly.

Mr. Nick Discepola: Could you tell the maybe few thousand people who are going to be watching this program how Canadians will benefit by merged banks?

Mr. John Cleghorn: I think the method adopted by the task force lays out a good process, but essentially what it means is you'll have lots of competition to meet your financial needs in whatever product you want from your financial services. They will be done at a price or quality as good as anybody can get in North America, and you'll have a safe and sound system because of the process of regulation that's being adopted and being recommended here.

I think the process for change recommended here is a transparent one, so there'll be broad debate, as started today in the findings of this task force. I think Canada, in the latter part of this century and in the early part of the next century, can count on financial services as something for which we can hold our heads up as a strategic area of interest, where we can still be counted on as leaders in the world, not just importers of financial services, but leaders, as providers from home-based headquartered companies here.

Mr. Nick Discepola: That's our challenge.

Mr. John Cleghorn: That's our challenge. That's right.

The Chairman: I have a follow-up question.

When you lay out that vision of the country it seems that more or less everything is fine. You're going to have more competition. You're going to have generation of jobs. You're going to have a strong financial services sector.

The question I have to ask myself is what is going on in the public domain? Why is it that I run into many people who are not yet sold on the idea of consolidation and mergers and this new vision for the future? What has been the major challenge for you, as chairman of the bank, to get your message out? There is a lot of public education that has to occur, and that all takes time.

Mr. John Cleghorn: I think we need public education, confirmation by third parties who've had a good, full, unemotional view of the total sector, not only in Canada, but what's going on outside of this country. And I think we've got a dispassionate view here. There's something in it for literally every consumer and for every provider of financial services.

• 1715

I think after the public process your committee and the Senate banking committee will be following, we'll have the process followed by the Competition Bureau. We're expecting to hear a report back from these various sources sometime at the end of this year, and then we'll see what happens.

I think the process will be helped if people can see they can obtain their financial services from a Canadian company they're familiar with, or that there's lots of competition if they're not sure, and it's good competition, it's solid competition, it's competition that's going to be here tomorrow as well as today, and that there is a process for protecting the consumer, and that we'll be held accountable for any commitments made by people such as ourselves to justify why we want to follow a certain strategy. Again, those are processes recommended in the MacKay task force, which we can certainly live with.

The Chairman: Thank you.

Ms. Cohen, followed by Mr. Harris.

Ms. Shaughnessy Cohen (Windsor—St. Clair, Lib.): Thank you, Mr. Chairman.

Mr. Cleghorn, I'm not a regular here; this is not my beat. I was watching you on the parliamentary channel and I thought I'd come over and ask some questions if I were granted permission from the chair, and I have been.

This is not an earth-shattering question, but last summer I was privileged to visit the Arctic and also to visit the northernmost community in Canada, which is a little place called Grise Fjord, population of about 240 people, at about the 77th parallel. I also spent a lot of time, and I do every year, on Pelee Island, which is the southernmost community in Canada, where I have a small farm. Neither of those communities is served by a bank.

Now, Pelee actually has a credit union, the Windsor community credit union, or Motorco, a credit union that comes in and does a little circuit once a week and serves those people. The population there is about 250 permanent residents. Those of us who go in the summer sort of go there to have the inconvenience; I don't think we care particularly, but people who live on the island and who work on the island do.

We heard from the people of Grise Fjord and the people of Resolute and Cape Dorset and other far-northern communities about the terrible sense of isolation they have, particularly since they have satellite dishes, they can watch TV, and they know what we have down here and what things are available to us.

I guess this follows along on what Mr. Discepola was asking you. Doesn't someone have an obligation now, given that these conveniences are available to all of us down here, to find a way to make those conveniences available to our isolated communities? And if it costs something, so what? Shouldn't somebody do that? If you agree, particularly in the area of banking, who do you think should do that?

Mr. John Cleghorn: We have some remote-community banking, not in the ones you mentioned, but we're in others. I believe our competitors, the Bank of Montreal, have a couple north of the Arctic Circle. They've also talked about a partnership with the post office in some of those areas where again, small communities.... I think that's what we have to look at, really—where we can form partnerships.

You mentioned satellite, and the ability to communicate now is easier, whether you use telephone.... In some of these communities we actually have bankers who fly in and fly out and handle the needs of small business and individuals. They're available at the other end of the phone. So it isn't just asking these people to come south and do business, but we have people who travel north. I'm not talking about just our organization, but indeed our industry does as well.

Ms. Shaughnessy Cohen: You have a bank in Iqaluit, the Royal Bank, but for these other communities I have to say it would not be very economical to serve them, because they're so isolated. It's my view, and I suspect it's the view of many parliamentarians, that there is an obligation somewhere for us, either us or you or somebody, to provide services.

• 1720

We talk about communication. In these communities, in order for them to use the Internet, they have to call long distance to Iqaluit and pay that long distance charge in order to get onto a server. So for them to transfer money from one account to another on PC banking or telephone banking would probably cost them more than having that service is worth.

It just seems to me, and it's something for you to consider perhaps, that remote communities need to be somehow better served. There may be some partnership available or possible between government and banks or other commercial entities that could do that. It's certainly not happening now.

Thank you.

The Chairman: Mr. Harris.

Mr. Dick Harris: Thank you, Mr. Chairman. I have one last question.

Mr. Cleghorn, you have outlined for us today the benefits that we, as Canadian consumers of financial services, could expect from a merger in the banking industry. Should, at the end of the day, the Minister of Finance withhold his approval of the mergers, what kinds of significant challenges would that present to your bank, for example? Could you also tie that to some lost opportunities of consumers of financial services? What would be the result, if no merger was ever allowed to happen? What challenges would your bank have? What would Canadian consumers perhaps miss out on, if in fact they would?

Mr. John Cleghorn: Let's assume that we're talking about this report and we have not been able to satisfy the question of public interest—in other words, if it got turned down, unless there was some other reason, like competition or safety and soundness. Let's say that for a variety of reasons we had not been able to make our case and had been turned down forever and a day. I guess we'd have to follow second- or third-best strategies. We'll have to look at that at the time.

We're not sure when this process is going to come to a conclusion. Until it does, this is the option we're putting forth. It's not the option that everybody is going to follow. In the meantime, since we've announced, we've seen Bank One announce that they're coming for credit cards. Merrill Lynch has acquired Midland. Again, they're in a larger position now than when they exited back in the late eighties.

We would expect to see competition intensify. We'll have to review what we can do to keep our costs in line so that we can continue to serve our clients and keep our costs low. The words status quo not being an option is clearly not our option, so we're going to have to continue to evolve. Basically we're going to have to concentrate on those businesses in which we think we have a reasonable chance of survival, not only among Canadian and existing competitors, but those that are coming. Given that it could take you three to five years to turn your ship around to be competitive, it takes time. We have to determine, as we did in payroll, whether we can make it on our own or not.

There is custody today, which is somewhat arcane, but we do employ 1,000 people in that division. That's providing a safekeeping for financial services. You may have noticed the other day that the teachers just awarded theirs to State Street Bank out of Boston. The other big pension fund group in Canada is the Caisse de dépôt, and they use State Street as well.

While we've got a reasonable market share in custody, for everything of decent size that comes along, a foreign player is bidding against us. That's a fact of life. We're going to continue to see that in virtually every line of business as we go forward into the next century.

So we will do what we need to do to survive and be there for Canadians, but it might be in a different format from what people have been used to.

Mr. Dick Harris: Thank you.

The Chairman: Mr. Desrochers.

[Translation]

Mr. Odina Desrochers (Lotbinière, BQ): Good afternoon, Mr. Cleghorn. This is the second time in two weeks that we've had the pleasure of meeting. As I recall, you met with Bloc Québécois members on September 9 last.

Mr. John Cleghorn: That's right.

Mr. Odina Desrochers: At the time, the MacKay report hadn't yet been released. When we questioned Mr. MacKay this morning, he told us that before authorizing bank mergers, the federal government should review all of the regulations so that the situation is fair to the Desjardins financial institutions which, it would appear, are opposed to bank mergers.

• 1725

What are your thoughts on Mr. MacKay's position? Are you in agreement with him?

[English]

Mr. John Cleghorn: I think he has a possible answer for smaller institutions that want to go down a different route. If they believe down the road that they have to form partnerships or alliances with larger financial institutions, I think that route has been contemplated.

I don't know precisely the strategy of the National Bank in that regard. I know that given that a large part of their business is in Quebec, they have certainly felt the pressures of competition from the Caisses populaires Desjardins group, which has been able to sell insurance as well as do traditional banking products such as small-business lending, mortgage lending, personal loans, deposits, mutual funds, and so on. To some extent, this answers their concerns in order to be able to have the level playing field in their prime market of Quebec.

I think that from their perspective, they should address the MacKay task force.

[Translation]

Mr. Odina Desrochers: Mr. Cleghorn, do you agree that the federal government should review the regulations given that as things now stand, if the bank mergers were to take place, it wouldn't be fair to other institutions? Mr. MacKay seemed to share the Bloc Québécois's view on this point.

[English]

Mr. John Cleghorn: A process has been set out for all to follow. There are two on the table now. Based on their report, they would have to be subjected to public interest review, impact studies, and so on. There's quite a long process ahead.

When you say jump the queue, this is a rather long process to say that anybody has jumped in front. We've been eight months since we announced. The MacKay task force has now submitted after twenty months. We have hearings taking place this fall.

I think that's a question better put to the National Bank and their perspective. This is a report that I think addresses the needs of smaller institutions as well as larger ones. They recognize that mergers are only one strategy to be followed by some, that there might be niche strategies followed by others. The aspect of a merger being suitable for one institution and not another is accepted in the MacKay report.

The Chairman: Thank you, Mr. Desrochers. Mr. Brison.

Mr. Scott Brison: Thank you, Mr. Chairman.

Further to Mr. Harris' question, assuming that parliamentarians reviewing the MacKay report recommendations say yes, for instance, to improved consumer advocacy and the ombudsman process and the improvements therein, yes to the changes in the payment system and to things like the dilution of the 10% rule, and yes to an increased access for global players through the Canadian market, effectively cherry-picking the most politically palatable recommendations, but then say no to the mergers, what position would that put your bank in, in terms of the jobs of your employees in that sense? We have the luxury here, when we talk about status quo, of effectively not knowing. It's very difficult to compare where we will be based on which alternative. I tend to agree with you that the status quo is not an alternative in the global environment. What is the risk that you see for your employees in terms of maintaining what you have now in terms of jobs?

Mr. John Cleghorn: As I mentioned before, if the status quo were here and we weren't talking about a merger, we still have to be a low-cost producer in order to keep our clients, because competition is coming. It was coming before the MacKay task force report came in, and we expect even more to come. We have to gear ourselves up now for players that are going to be here five years from now, because it takes us that long to redesign our systems and indeed to set different strategies around product lines that may lead to either acquisitions or divestitures.

• 1730

So it's moving. It's moving as we sit and wait for decisions, whether they happen to be mergers or additional powers such as insurance or car leasing or whatever.

I think the important thing is that the rules here are intended to help the consumer, to protect the consumer. It's saying that the consumer will ultimately benefit if there's lots of competition, and here are some rules to protect the consumer, given that there will be a lot of new players. Part of that is also education: how do you deal with somebody you've never heard of before, for example. Obviously it's incumbent upon the company that's doing that. But not too many years ago Canadians had never heard of Sprint either, or AT&T or MCI to the same extent they are today, and many Canadians have signed up for that service. So we expect the same thing to happen, because in many ways we are a value-added service to the telecommunications system, because everything we do rides on that channel.

When you mentioned cherry-picking, I think that's to some extent hypothetical. There's a report that's been submitted. The ball has been passed to your committee and to the government, based on what you see and what you hear across the country. We have to just wait and see what you come up with and then pick our course accordingly.

Mr. Scott Brison: One last question. The Bank of Nova Scotia position on this has been very different, obviously, from the other chartered banks. Their position seems to have changed over the past year or so on this. To what would you attribute this change of position for the Bank of Nova Scotia? Is it patriotism and altruism, or opportunism?

Mr. John Cleghorn: They made a submission in writing to the MacKay task force last fall, which to some extent seems different from what they're saying today. They have a strategy, which they discuss among their management and their board, and it suits their view of the world, which happens to be different from what we see. For example, on some of the investments they've made internationally, we wouldn't choose to do that. We would prefer to make another kind of international investment or something in technology here or something relative to wealth management.

We think mutual funds, for example, are a very important product that our clients are migrating to. Indeed, we see that through the whole sector. Bank of Nova Scotia has said they're not afraid of foreign competition today, and yet they rank 15th in mutual funds, with two Americans ahead of them. As a matter of fact, Fidelity's and Templeton's operations and sales in Canada to Canadians already exceed five of the chartered banks and Canada Trust.

So I would suggest that the future has already arrived; it's well entrenched. It's serious competition in the products that have been developing in the last ten years or so and that are clearly going to be extremely important going into the next century. That's the way we view it. They happen to have a different view. That's fair.

Mr. Scott Brison: Thank you.

The Chairman: Mr. Pillitteri.

Mr. Gary Pillitteri: Thank you again, Mr. Chairman.

Mr. Cleghorn, in the MacKay report—and I've just read a little bit of it—there are a lot of specialized groups in the marketplace here in Canada. I think maybe you should have a look at financial institutions here in Canada.

What I want to ask you, and I don't know if it's in the report or not, is there's one group in the United States, a mortgage company, where one company is larger than the whole six Canadian nationals country-wide, and which holds mortgages larger than all six banks put together. I just wonder.... You and I have had discussions, and let's just say if it's not good enough for Canadians the merger should not take place. I think those were your words to me personally. Will it be more concentration into cherry-picking from the groups, or will it be offering the Canadian taxpayer more service if the merger were to occur?

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Mr. John Cleghorn: I think in the long haul what we're saying about the mergers is that you'll have a viable Canadian choice and it will also be a flag carrier for financial services as one of the Canadian leaders. But when we take a look at concentration and power, we have to remember that Canada has an economy and a population base the same size as California's. So if anybody who is successful in financial services in the United States and is looking for a terrific new market to penetrate is not here, we would expect, knowing our business, that they're going to come. And if the rules permit them to come, they will be here sooner rather than later.

In reference to my colleague at the Bank of Nova Scotia, he says he's not afraid of foreign financial competition at home. That's good. That means he's going to build an even better Canadian bank to be able to keep his customers.

I mentioned a couple of players who are already larger than five Canadian banks and Canada Trust and mutual funds. We have Merrill Lynch, which is significantly larger now in Canada than the Bank of Nova Scotia is on the brokerage side. But that's fine, they're here today and its incumbent upon us to make sure we don't lose our clients to the likes of these names. As big a brand recognition name as they are, we're going to have a big job to prove that we can be there for our clients just like these large international companies will be.

But that's the nature of business. That's what is happening in telecommunications and that's what is happening in our business. The point is that we could see this coming several years ago and we felt we had to adjust ourselves to be able to do what we needed to do in order to keep our clients. So we have low-cost, high-quality service and we were going to have a viable headquarter-based company that still carried the Canadian flag.

I still believe in the future. Given what this task force recommends, we're going to have some Canadian flag carriers in the world scene, because this is something Canadians do well. I've worked for a Canadian bank and I've worked for an American bank, and I can tell you that Canadians do a terrific job at home and around the world. We don't do a very good job of explaining ourselves, and this report will give us a far better framework to put a score card out there to match us against other competitors here in Canada.

Mr. Gary Pillitteri: Mr. Cleghorn, what I understand from you in some of your answers is that I think we should have it continuous rather than having to analyse the banks and financial institutions and forget about it for the next five or ten years, as it has been in the past. I think what we should have is more of a continuous—

Mr. John Cleghorn: Flexible.

Mr. Gary Pillitteri: —flexible look into the lending institutions, for now and for the future.

Mr. John Cleghorn: Yes, if I had to put one word on this report, I'd say it talks to flexibility. If you're going to allow competition and if you're going to have consumer protection to allow all this competition, then a flexible process is the only way to do it.

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

The Chairman: Thank you very much.

Ms. Carolyn Bennett: I was just wondering what the point was. Do you think we can wait another five years for an analysis of financial institutions, or are things moving so quickly that there needs to be a continuous process? I think that is what—

Mr. John Cleghorn: Well, Mr. MacKay didn't recommend we have another five years and I certainly wouldn't recommend it.

Ms. Carolyn Bennett: Okay.

The Chairman: Thank you. You've raised a very interesting point.

Also, if I may, there is no question in my mind that as committee members and also as members of Parliament, we are witnessing a paradigm shift in the financial services sector. That is happening before our eyes. Some may predict a shift because maybe they're dealing with the business sector every day. They see things coming, perhaps even more quickly than the public does.

One thing we can rest assured of is the fact that we have moved from coins to bills to credit cards to debit cards to smart cards, and I think anybody who observes that transformation sees that it's pointing in one direction. So the virtual bank may be a reality before we know it. But what's happening today is that brick and mortar arguments are very much part of the debate as well as the new electronic commerce. It is these push and pull factors that will make this debate a very exciting one in the weeks to come.

On behalf of the committee, Mr. Cleghorn, I'd like to thank you very much for an excellent presentation. I also appreciate the fact that you didn't simply come here to push the merger issue. You gave us your view of the entire task force report, and for that I'm grateful.

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Mr. John Cleghorn: Thank you, Mr. Chairman.

The Chairman: Thank you.

The meeting is adjourned.