FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Friday, September 25, 1998

• 0904

[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call this meeting to order and welcome representatives from the Insurance Bureau of Canada: Mr. George Anderson, president and CEO; and Mr. Mark Yakabuski, vice-president, government relations.

• 0905

You're both experts at appearing in front of committees, so I'm not going to give you directions. We'll be listening very carefully to what you have to say and then we will enter into a question-and-answer session.

Mr. Anderson, welcome.

Mr. George D. Anderson (President and Chief Executive Officer, Insurance Bureau of Canada): Thank you very much, Mr. Chairman. It's a pleasure to be in front of the committee again to talk about the MacKay task force recommendations.

What we want to focus on this morning is the vision of the MacKay report and its broad themes as they apply to our industry, the property and casualty insurance industry. We would also like the opportunity—because, as you know, this is a large, complex report—to submit other ideas as we work through them. We'll be preparing a paper that gives you some of our views on some of the other issues that I don't touch on this morning.

I think most of you know our industry is the property and casualty insurance industry. We are the insurers of homes, automobiles, and businesses. It's quite important, as the debate moves forward, that we keep the distinction between that and life insurance clearly in front of us, because they are, as the task force itself says, quite different businesses.

We employ approximately 100,000 Canadians directly and indirectly, working in all communities and all parts of the country. I'd like to start by saying that if the past, particularly the most recent past, has taught us anything at all, it's that we live in a volatile environment in which the outcomes of any financial services vision are uncertain at the best of times. That is why to us, the role of government and parliamentarians is so important in the current debate.

As we prepare Canada's financial services sector for the next century, we do envision a policy framework that surely does respond to global financial forces and that takes into account advances being made in information technology, but these forces need not intimidate us or push us to premature action. Future international financial developments are, after all, only dimly perceived at the best of times.

Canada also needs a policy framework that recognizes the fundamental role of government in ensuring domestic stability and security of our financial institutions and in overseeing their responsiveness to Canadian consumers. We need a policy that recognizes that the financial services sector has always been a regulated market and that government has a responsibility to foster additional consumer benefit by ensuring a balanced competitive environment, job creation, and consumer protection. All those matters are important.

These kinds of policy choices are by their very nature political. There is no magic formula, no group of academics sitting in a seminar room somewhere at a university, no abstract mathematical principle that can be used to define what the right answer is in these particular circumstances.

When I last appeared before the committee, Mr. Chairman, you asked me to provide a vision for the future of financial services. As the property and casualty industry moves towards the next century, we would like to see a financial services sector that has the following characteristics.

It is first of all stable, secure, and reliable for Canadians. Secondly, it is a sector that is consumer-oriented, responding quickly to changing consumer needs. The third principle is that we would like to see a diverse financial sector made up of many successfully competing companies, with new firms entering the business and offering real choice to consumers. And finally, we see a role for government in ensuring that these key outcomes are met and in providing consumer protection, job growth, and competitive balance.

This vision for the future of the financial services sector as a whole is one that has been developing in the property and casualty insurance industry since the reforms of 1992. It goes without saying that lots of things need improvement in our industry, and we work diligently on those, but we have made good progress towards this vision in the last six years.

Our industry is stable, secure, and reliable. Because we're organized on a global basis, we are literally able to weather some incredibly unpredictable events, such as last January's ice storm, hail storms in Calgary, and tornadoes in Edmonton—and to do that without in any way impeding the stability of our industry. In fact regulatory capital in our industry is the highest it has ever been. Moreover, we've worked successfully with this committee and members of Parliament to help prepare the country for the eventuality of a major earthquake.

• 0910

I suppose you can never be consumer-oriented enough, but we have made great strides in this direction in the last few years. Our policyholder compensation program has recently been enhanced. We have the first privacy code formally approved by a recognized body as conforming to the model privacy code of the Canadian Standards Association. We have launched a national consumer forum, and following that, a three-year program designed to enhance consumer awareness of our products and help consumers design products that make sense to them.

We are an industry driven by fair pricing, because of its competitive nature. The property and casualty industry is remarkably diverse. Over 230 companies are actively competing in our industry. And the interesting thing about it is that many small entrepreneurial firms are competing against large and mid-sized insurers.

Consumers can choose from over 70 Canadian companies, but they also have access to the products and services offered by the world's major international insurance groups, all of which operate in the Canadian market. And isn't that the vision we want for our banking industry? These companies were responsible, through reinsurance, for covering about two-thirds of the cost of January's ice storm. It's no wonder then that First Marathon Securities has recently described our industry as the most competitive financial services industry in Canada.

That kind of diversity exists because the barriers to entering the property and casualty insurance industry are among the lowest in the financial services sector. Contrast the record of our industry with the fact that we have not seen a new major bank established in Canada in almost 20 years. In fact the task force report points out in one of its background papers that the World Economic Forum, in its 1997 Global Competitiveness Survey, ranked Canada a lowly 41st out of 53 countries in the area of foreign bank competition, and a low 39th with respect to the ease of entry into our banking industry.

Balancing all of the characteristics I have mentioned for a future vision are good public policy and good political judgment. When the current regime was established in 1992, after several years of debate, banks were allowed to enter the business for the first time. At the same time, Parliament established a set of fair competition rules, which have since worked remarkably well. Banks do not have the power to retail insurance in their branches and cannot use customer files to sell insurance, and yet under these rules, most of the major banks have set up insurance subsidiaries and are offering insurance products to Canadians.

When Parliament debated this question again only recently as part of the 1997 review of financial institutions legislation, it confirmed these rules. In both 1992 and 1997, every party in the House of Commons supported the decision regarding bank powers in insurance.

I have to say it's our view that nothing brought forward by the task force since the last review changes the fundamental dynamic of this debate at all, partly because it simply advances old views held in 1992. The conclusion of the task force in proposing to give banks expanded powers is simply not conclusively supported by its own background analysis.

Let me show you how sometimes, if you think globally, you can misfire locally. The task force argues that banks should be allowed to retail insurance in their branches on the grounds that banks all over the world are selling insurance. They describe this as part of the convergence effect in financial services, where everybody is selling everybody else's product.

Yet at the same time they acknowledge in their report that property and casualty insurers are different from all other financial institutions. In their own analysis, the key function of property and casualty insurers is to spread and absorb risk. They state that this function is very different from the financial intermediation performed by banks, life insurers, investment dealers, and mutual fund companies. Not all financial services are the same, and the task force has acknowledged that in our case.

• 0915

They go on to talk about “bancassurance” in Europe as a worldwide phenomenon, yet virtually all the examples they point to in their material come from the life insurance industry. Moreover, in its own background paper, the task force points out that banks in the United States do not have the power to own insurance companies—a power that Canada's major banks have enjoyed since 1992. And when it comes to Europe, its background paper admits that only an insignificant share of property and casualty insurance is sold through the banks.

One of the reasons for this low market share of property and casualty insurance in Europe is that in contrast to the five major banks in Canada, you have 10,000 banks in the United States, 600 in France and the United Kingdom, and over 3,600 in Germany. You have a hyper-competitive banking environment in those countries, which prevents dominant market shares arising.

The report then goes on to argue that banks need expanded powers in insurance in order to compete with provincial deposit-taking institutions. I have to say this is a stretch, that provincial deposit-taking institutions have such great advantages over banks, but nevertheless that's what the report implies.

A number of credit unions in the country do sell insurance and have for many years. In fact in almost every province—I think in every province—credit unions sell insurance. This is most aggressively the case in Quebec, where Desjardins insurance representatives can sell insurance in credit unions but have no access to the files of credit union customers. The task force recommendation would go far beyond this point and ultimately allow bank employees to sell both insurance and credit products and have direct access to customer information.

When he appeared before the committee earlier this week, the chair of the task force told members that Quebec's Bill 188 could be a model for banks selling insurance in their branches. I want to avoid getting into a technical discussion at this stage, but I'd like to make a couple of points about Bill 188, because I think it's going to come up in these hearings.

The legislation does confer expanded powers on Desjardins, but Desjardins occupies a unique place in Quebec society and politics, one that is not really comparable to our banks. This bill, Bill 188, was passed in June in the National Assembly through closure. During the last few days of the debate, nearly 250 amendments were introduced in the bill, which never got public debate. Most of the parts of this bill, as we sit here today, have not been proclaimed. So we simply do not know whether it will work, let alone whether it is a model or what kind of model it is. We do know that every major consumer organization in the province of Quebec publicly opposed this legislation.

If the major banks were to be given the expanded insurance powers proposed by the task force, our estimates suggest that well over 20,000 jobs across Canada would be lost in our industry. The bulk of these jobs would be lost among independent insurance brokers located in small towns and cities all across Canada.

Banks would create some replacement jobs, but these would not be anywhere near the number of jobs lost. Insurance jobs created by the banks would in all likelihood be located almost exclusively in a few urban centres. In other words, jobs created by the banks would not be in the same location, they would not be held by the same people, and they would be substantially fewer in number than our current employment levels.

The burden of this dislocation would fall disproportionately on non-urban areas. Add to this a similar dislocation when thousands of jobs are lost through attrition if any of the proposed mergers are approved and you have very high numbers indeed. Yet nowhere in the report did the task force extensively analyze the employment impact of these recommendations. It was simply content to say in passing, “Some existing jobs may well be lost.”

The task force vision is that all that is needed to counter the devastating effects of banks selling insurance in their branches is legislation on privacy and tied selling and a short transition period. That vision is too narrow.

• 0920

We agree that better protection of personal privacy is needed and that stronger provisions are required to deal with tied selling, and we intend to work closely with this committee on those matters. However, privacy and tied selling controls are not adequate on their own. Even though we had tied selling legislation operating in the country during the period in which the task force was conducting its work, its own surveys show that 16% of people claimed to have experienced some form of unfair selling, yet few, if any, to our knowledge, ever reported this abuse to a government regulator.

Consumers not only have to be protected from flagrant abuses; they also need policies that actively promote a balanced, competitive marketplace and preserve jobs. This too should be part of the vision for financial services.

I've only to remind you of what Mr. Baillie, chairman of the TD Bank, told a group of MPs—in fact it may have been this group—when he was asked to explain why he had changed his mind and decided that the TD should merge with the CIBC. He said, and I quote:

It is one thing to face a competitor twice your size and another to face a behemoth that is three and a half times your size.

I wonder how Mr. Baillie would feel were he an employee of a property and casualty insurance company or a small-town broker and he knew that the assets of just one of these possibly merged banks were ten times the size of our entire industry.

The task force has given you its vision. Of course I think we all agree that political decisions should be inspired by informed vision, but every vision has its dark side. I have tried to give you a sense of some of the practical problems created by the task force recommendations. At some point, vision and practicality have to meet.

The task force supposes a future where smaller financial institutions will thrive and provide new competition to the major banks. Well, maybe, and I certainly hope so. But how long will this take, and how successful will it be if in the meantime two or three Canadian megabanks develop that can successfully stifle domestic competition?

In our view, the danger is that these things could just as easily unfold in the opposite direction. Already the CEOs of the Laurentian Bank and the Canadian Western Bank have acknowledged that the task force's proposals could lead a number of smaller financial institutions, including them, to merge. In this case competition would be reduced.

At the same time, the head of the sixth-largest bank in the United States, First Union, was quoted recently as saying that the possibility of facing the big banks in Canada prevents a number of foreign banks from entering the market. Rather than a more competitive financial services sector, the task force's vision could leave us with significantly fewer financial institutions. Indeed it could well lead to more bank dominance.

Let me conclude by reminding you of a few things the task force said in its report in relation to its vision for our industry—the parts of it at least that are advances from the 1997 debate.

The task force says our industry is distinct from all other financial institutions. They admit that there is no strong evidence in other countries of bank sales of insurance leading to lower costs or increased productivity. In fact in the two insurance examples they studied domestically, CIBC and Desjardins, they concluded that prices are in the middle of the pack. On page 96 they acknowledge that bank retailing of insurance poses major problems with respect to privacy and tied selling. And on pages 95 and 96 they acknowledge that dislocation will occur and jobs will be lost.

Do these facts justify going forward with the task force proposal? Our conclusion is that the starting point for a wider debate should not be the expansion of bank powers. That is an old, tired story. It is extremely important to consider first how all of this gets phased so that we see some results before we move to others.

Perhaps we should not begin by resurrecting notions that were settled just two years ago. We should begin with the most dominant segment and direct our efforts to bringing the same kinds of competitive forces that characterize property and casualty insurance to our banking industry. If this approach were taken, jobs would be created, not lost, and the vision of the task force might have some chance of being realized.

Thank you, Mr. Chairman.

• 0925

The Chairman: Thank you very much, Mr. Anderson, for a very thoughtful presentation.

As you know, in this committee we hear different perspectives from different individuals representing different sectors of the financial services sector. Therefore we're going to be asking some questions related to some of the statements that other individuals have made so that we can have a balanced approach in this process.

We'll begin with Mr. Harris.

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

Mr. Anderson and Mr. Yakabuski, I apologize for missing the first part of your presentation. However, I have read a lot of the briefs you've presented previous to this meeting.

I have a couple of questions. I just want to see if you can give me an idea of the impact on the insurance industry since the banks, in another way, have actually entered the business through subsidiaries, through buying existing companies and setting up existing companies. In particular maybe you could talk about the call-centre selling of insurance and how that's affected your industry.

Mr. George Anderson: If I may say, I think one of the myths out there is that banks invented call centres and that doing business on the telephone is a new technological device. The insurance industry has been binding insurance on the telephone since the telephone was invented, and doing business that way.

Of course we have always had direct insurers in the business as well as those who operate through the brokerage network. Indeed, when the Royal Bank decided to get into the direct response business, it bought its whole system from Co-operators Insurance. So we are not seeing from the banks anything particularly innovative there, although that market is very competitive and many of our members compete head-to-head with those institutions.

The overall effect has been that the pricing and direct response marketing of the two institutions studied in the report, CIBC and Desjardins, have been in the middle of the pack. They have captured more market share here through that device than perhaps has been captured in Europe. Banks are doing reasonably well under the rules that currently exist.

What they have not been able to do is find a situation where they can lead with credit applications and then come along and ask for insurance products, because that would be unfair. And they have not been able to mine their customer lists that they acquire in the course of selling RRSPs and use them to target market insurance customers.

Mr. Dick Harris: If I can just interrupt for a moment, I know that with many banks, when you become a customer of theirs, somewhere along the way, you authorize or do not authorize them to supply your name and information to any subsidiaries or affiliated companies. In the case where an authorization were given, that information could very well, I guess, be passed on. Can it be passed on to a subsidiary insurance company?

Mr. George Anderson: No. It's my understanding that there's a prohibition notwithstanding that, so that cannot happen.

Mr. Dick Harris: I see.

Mr. Mark Yakabuski (Vice-President, Government Relations, Insurance Bureau of Canada): It's for anything but insurance products. Under the current legislation, even with authorization, the banks cannot use bank customer information for the purpose of selling insurance.

Mr. Dick Harris: I see. What you're saying then is that with CIBC and Desjardins, basically the impact on pricing to the consumer has not changed dramatically since they came into the—

Mr. George Anderson: No, partly because, at least in the case of the banks—and I'm less familiar with the dynamics of Desjardins—there are huge costs to the marketing they do. I'm sure you look at television from time to time. Those ads aren't cheap, and they find their way into the product price at the end of the day.

Mr. Dick Harris: So your argument is that the entry of the banks into the insurance business through retailing in their branches would not or may not dramatically alter the pricing of the insurance products currently being sold?

Mr. George Anderson: Yes. All the studies that have been done point to the possibility that pricing may be in the middle of the pack, but you cannot discount the business tactic of deliberately undercutting the market on a product line in order to get market share, and of course that worries us.

• 0930

Mr. Dick Harris: Okay. So just in wrapping up, your statements are that the industry is well served at the present time with the current players and has a pretty aggressive competition nature to it; that the entry of the banks into the insurance business will not have a huge impact on the net cost benefit to consumers and probably will not provide any additional types of insurance services than already exist; and you maintain that the reason the banks want to get into the insurance business is in order to increase their cross-selling opportunities with other products they sell. Does that wrap up your argument?

Mr. George Anderson: I think that's it.

Overriding all of that of course is that banks are in this business now, and that's often forgotten in the debate. A lot of their case, if you look at what Mr. Protti handed out last night—which I would love the opportunity to go through—deals with life insurance. It does not deal with property and casualty insurance.

As the task force has said, there is a convergence of financial services where those financial services are intermediary in nature. Property and casualty insurance is not that type of business.

Mr. Dick Harris: I have one last thing. The MacKay report talks in its recommendations about a transition period, if the government were to go ahead with the recommendations. They talk about the smaller players—I think it's with assets up to $5 million.

Mr. Mark Yakabuski: In the market capitalization.

Mr. Dick Harris: Right. They would be allowed to come in in the first instance. What was the period, five years?

Mr. George Anderson: Until 2002.

Mr. Dick Harris: Right, and then after that, the larger players would be able to come in.

Mr. George Anderson: Correct.

Mr. Dick Harris: Considering that the government gives its approval, what's your opinion of that transition period? How do you view that? Do you view that as something that's doable or as something that's simply not acceptable, from your point of view?

Mr. George Anderson: It's completely impractical to say that some banks can sell insurance and some banks cannot, or that smaller institutions can come in and larger institutions have to stay out. The net effect is the same: you are paving the way for the big banks to come in in four years. We think that would be a mistake.

And the strategy is tortured, if you read the report. It's “We're going to let some institutions in. Oh, maybe we'd better add two banks, because in Quebec, Desjardins did this.” It simply becomes a domino.

It's a bit like the Rhinoceros Party policy that we're all going to start driving on the left side of the road, starting with small cars and then eventually going to buses. The effect would be the same.

Mr. Mark Yakabuski: One of the other points with respect to the transition period is this. In the report, the task force wants to argue that somehow we can have privacy legislation in place, and not just at the federal level, because you would have to have it at the provincial level as well. Remember, insurance sales are a matter of provincial jurisdiction. So in order to have a harmonized regime for selling insurance across the country, you would have to have this massive coordination of regimes at the federal and provincial levels. Realistically, you know this is going to take some period of time to accomplish.

So when Mr. MacKay and the task force talk about a transition period up until 2002, our view is that there really wouldn't be any transition period at all, because it would take a long time to get harmonized regulation in place with respect to privacy and tied selling, and that might not even be done by 2002, at which time the major banks would have this power automatically. So there's a big problem there.

Mr. Dick Harris: Okay. Just in closing, I have a concern about the impact on the smaller independent insurance houses, the brokers.

• 0935

It seems to me that unlike in a lot of other industries, where people may, because of their background, be more flexible in doing other things, if you're in the insurance business and you've had years of training specifically in that industry, it's a pretty big shock to the system if conditions require that you move somewhere else, into some other type of occupation, having had such a narrow focus. Can you give us an idea of the impact that entry could have on small independent brokers?

Mr. George Anderson: That's why we say the transition to the new regime will leave all these people behind. Sure, some new jobs will be created in the banking sector, but they won't be the types of jobs that are done in the local community, and they won't be the same people hired to do them. That dislocation could be quite severe.

It's very similar to the dislocation we see in the cod industry in Newfoundland. You could argue that in a couple of years there may be as many jobs in the Newfoundland economy as there were five years ago, but tell that to a cod fisherman. Tell an insurance agent who is working in Alberta that there are lots of nice jobs and a call centre in Toronto. That doesn't mean much to them, and that's the point. You're going to see this dislocation, and people are going to be left unemployed.

I'm sure when the brokers come they will talk more about this, but it's our contention that small communities are going to be hit disproportionately.

The Chairman: Thank you, Mr. Harris.

[Translation]

Mr. Loubier.

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Mr. Anderson, I'd like to start with a comment. Nearly two years ago, when the debate was resurrected over the option of allowing banks to sell insurance, the Bloc Québécois expressed strong opposition to this proposal. We even travelled across the province to meet with insurance brokers and held two major information sessions in Montreal and Quebec City. We concluded that we had sufficient ammunition to oppose this proposal.

Recently, the MacKay task force gave us an additional argument for opposing bancassurance. A study conducted by McKinsey & Co., while favourable to the concept of bancassurance - I admit that this is a rather odd term—characterized Canada's retail banks as follows:

—vulnerable to attack and yet to fully realize the true operational excellence needed to meet and beat world-class competitors either at home or abroad. In international markets, Canadian banks appear to have few comparative advantages.

This characterization was consistent with our analysis and therefore reassured us. Before any thought is given to expanding the operations of banks, ways must be found to make their existing operations more efficient. Therefore, this was one additional argument to support our position.

I had an opportunity to point out to Mr. MacKay and to Mr. Ducros that their report contained a major shortcoming. The problem is not with the analysis, which was well thought out and very well done, or with their vision for the future, which contrary to what you stated earlier, appears quite accurate to me. The problem I have with the report is that the 124 recommendations it contains are not listed in any particular order of priority and that no indication is given as to whether a recommendation is merely useful or in fact necessary. Many of the recommendations are merely of incidental interest and serve no useful purpose. They could cause unnecessary harm to the 20,000 brokers you spoke of earlier, without enhancing in any way the efficiency of the financial sector or promoting the growth of its operations. Therefore, we are no more supportive of the concept of bancassurance then we were before. On the contrary, we are more staunchly opposed to the idea than ever.

If I may digress for a moment, I'd like to comment on Quebec's bill 188. Unlike the proposal contained in the MacKay report and contrary to what we have been hearing in recent years, Bill 188 sets out a rather strict framework, particularly as regards professional qualifications and certification. Its sets out clear guidelines. When the MacKay report was released, the initial reaction of Quebec's insurance brokers was that it went even further than Bill 188. At least they found something positive to say about the report.

• 0940

Getting back to page 10 of your submission, you make a statement with which I disagree:

The task force sees a future where smaller financial institutions will thrive and provide new competition to the major banks. But how long will that last? And how successful will it be if, in the meantime, two or three Canadian megabanks develop?

Your vision appears somewhat static, as you seem to be focusing only on the current situation. You state that given the current legislative framework and the competition that exists in the insurance sector for small and medium-sized players, the arrival on the scene of a megabank, without any measures to offset this, could prove damaging to SMEs in the financial services sector. However, if you look at one of the other recommendations in the MacKay report— as I said earlier, if some priorities had been identified, we would have been more comfortable dealing with the report and its recommendations.

Mr. MacKay and Mr. Ducros are proposing changes to the ownership policy to encourage strategic alliances between small and medium-sized players so that in terms of overall capital, their combined holdings would be equal to or even greater than those of the two megabanks. Might this not be the key to a better future than the one that you paint here for the financial sector? That's my first question.

As for my second question, given the MacKay report proposal which I consider to be extremely important, so much so that it should have been highlighted more, before any kind of decision is made on the proposed merger of the four major Canadian banks, wouldn't it t be fairer to alter the ownership regime to provide for a transition period during which strategic alliances could be forged so that all players can start from the same position on a level playing field when the flood gates are finally opened?

These are my first two questions. I will no doubt have more later.

[English]

Mr. George Anderson: Thank you, Mr. Loubier.

We tried to indicate in our report that one of our concerns is exactly that. These recommendations appear not to take any practical account of the timing issues involved in bringing them to fruition. Timing issues, as many of the bankers themselves have noted—I saw Henri-Paul Rousseau was in the paper yesterday—are critical, because if you, for example, can hypothesize a situation where the mergers occur and we have two or three large banks, what incentive is that for others to compete?

Our view is that you have to take a deliberate, step-by-step approach to this particular issue and let some of that competition begin to flourish before you do things that could possibly stifle it. That's the problem we have. Our view is that these mergers are not about international competitiveness; they're about the domestic situation in Canada. Banks desire to be domestically dominant in the fields in which they operate. That's the fundamental issue before us. If we allow that to proceed without knowing the offset in terms of, say, making the credit unions more competitive with the banks, we will have made a mistake.

The last thing we need is a big-bang financial policy like we had in 1992. MacKay himself has said the 1992 policy is working pretty well; there's not much wrong with it. Take a look at our section. What are the defects in our industry that he cites as requiring massive immediate change? None, he says. None. And there is no particular urgency to making all these decisions right now.

So I agree with you: we need to phase things and to consider what would be the most appropriate moves we could take now to enhance domestic competitiveness in our banking industry, because that surely is the main issue.

[Translation]

Mr. Yvan Loubier: My question is directed to Mr. Anderson and Mr. Yakabuski. If Paul Martin decided tomorrow morning to change the ownership policy, if he were to allow you to forge strategic alliances with other sectors or amongst yourselves, if he authorized you to create financial holdings, all of this prior to agreeing to the bank merger proposals, would you be in a position to say: "tomorrow morning, we are taking the financial sector in a new direction and we are confident that we can create a competitive environment on the Canadian market. Moreover, we are confident that in seven or eight years' time—and here I will disagree somewhat with you—when the international environment has changed, markets are much more open and the past will not matter, we will be well equipped to face international competition"?

• 0945

Given the scenario that I have just depicted, do you think the insurance industry might go along with this? Do you think that this would be a fairer approach at the outset than if the government were to authorize the mergers and give the four major banks a strong comparative advantage over your industry which has no strategic options, such as the option of creating holdings to face competition both at home and abroad?

[English]

Mr. George Anderson: Mr. Loubier, I'm going to have to take that under advisement. I don't think I'm sufficiently familiar with the dynamics of all those recommendations to be able to tell you that formula is the magic bullet that is going to make everything else right.

I do know this. As long as we have five institutions with such predominant control in our domestic economy—a control that is not reproduced in any other market in the G-7—we have a problem of competitive balance and sector dominance. Those issues have to be dealt with before anything else moves ahead, because they set the tone for everything else that follows.

If we are faced with a situation where simultaneously we are allowed to put three banks in place and they're allowed into the property and casualty insurance industry, vision or no vision, I invite you to look at history, what happened in the trust industry and in the brokerage industry when that was allowed to occur. The effects will be devastating.

I don't know if administrative arrangements for how companies organize their holdings are going to be sufficient to deal with that question. I have not consulted my members about that, so I don't feel ready to really give you a definitive answer.

[Translation]

Mr. Mark Yakabuski: As we mentioned at the outset, one of the problems currently facing our sector is that casualty insurance companies are clearly different from those that retail life insurance. The casualty business is predicated on risk. Our operations, therefore, differ substantially from those of other companies and the option of having some financial holdings may not be as attractive to us.

That being said, we have always maintained—and I have been saying this for the past two years since the review was launched in 1997—that our recommendation to the Finance Department would be that it deal first with those issues related to the competitiveness of the banking sector and go on to examine the other matters later. This, we feel, would be the proper order in which to proceed. Of course, it makes a great deal of sense that there may be different priorities at different times.

Mr. Yvan Loubier: You say that the MacKay report presents a vision of the future in which amazing changes have occurred. You seem to disagree with this, even though everything we read about rapid changes in the financial sector seems to indicate that in seven or eight years, the financial services sector, and even the banking and insurance industries, will no longer be recognizable. They will have changed radically.

Recently, I read an article in which it was reported that during the twenty months it took for the MacKay task force to conduct its activities, two virtual banks, the Citizens Bank of Canada, a subsidiary of the Vancouver City Savings Credit Unions, and ING Bank, as well as two American companies specializing in credit cards, MBNA and Capital One, went into business. I believe this counters somewhat the statement by the senior executive from First Union Corp.

I believe the Americans realize the opportunities associated with new markets. The financial services sector was on the agenda at the last meeting of the World Trade Organization, the former GATT, and the next round of talks could focus even more on freer trade and fewer barriers to trade. My impression is that the United States is preparing itself because it sees the Canadian market as highly interesting and lucrative. Where there is a dollar to be made, you can be sure to find the Americans. That's why in my view, we urgently need to initiate changes, particularly as regards the ownership regime, so that strategic alliances can be created to counterbalance the mergers. Competition in and of itself is not a bad thing; it is the rules governing competition that can either spell failure or success.

• 0950

[English]

Mr. George Anderson: Yes, we don't deny for a minute that the forces of change are at work. I tried to indicate in my remarks that we have been responding to that. Our industry does not look the same today as it did eight years ago, and we're well aware of that.

What we're concerned about is that you have a vision here that could go two ways. What we're appealing for is some political judgment in terms of what the real effects of this set of changes might be on our economy if they don't go the way the vision says they might. History is full of people with vision getting the wrong results. So we don't deny the premise on which MacKay moves forward, but we do say his solutions don't necessarily give you the results you might wish, and some of them we think just don't apply. Many of them do.

The Chairman: Thank you, Mr. Loubier.

I'm going to follow up on Mr. Loubier's question. I want to also give you a chance, Mr. Anderson, to clarify the record, because just a few moments ago you said that if we allow the bank mergers and at the same time also give banks the right to sell insurance at the branch level, then that will result in a concentration of power within one entity, namely the banks. You're not implying that if we don't allow the merger, you're okay with the banks selling insurance?

Mr. George Anderson: No, because the issues again go back to ones debated in 1992 and 1997. Our banks are large enough, let alone what they'd be like if they were merged. Their competitive advantages are still enormous vis-à-vis our industry.

The Chairman: I just wanted to give you a chance to clarify that.

Let me ask you something. I'm looking at page 8, where you say:

If the major banks were to be given the expanded insurance powers proposed by the Task Force, our estimates suggest that well over 20,000 jobs across Canada would be lost in the P&C insurance industry.

This implies that the banks would be replacing these people. Is that correct?

Mr. George Anderson: To some extent, although we say it's definitely not a one-for-one. There will be some job creation on the bank side at the same time as there are losses.

The Chairman: So there would be fewer jobs?

Mr. George Anderson: Many fewer jobs, yes.

The Chairman: So what does that say about the efficiency of these 20,000 people?

Mr. George Anderson: Well, it says they do a job that's different from the kind of job the banks envision being done. The banks are running their marketing through call centres from centralized locations all over the country. The supposed efficiencies that gives them have not translated into any price advantage whatsoever.

Surely the ultimate test of efficiency is, what's the price to the consumer? The price to the consumer through this technique has not gone to the low end of the range of offerings. What that tells me is that whatever efficiencies may be claimed are not being worked through in terms of the end price of the product to the consumer.

This is partly because of the heavy, heavy costs of advertising that these kinds of marketing techniques take. As I said to one other member, you can't turn on your television without seeing an ad for direct response marketing. Those are expensive ads. They work their way into the cost of the product.

We have a local, consumer-oriented, labour-intensive type of operation in our business because that's what it takes to settle claims with people in an ice storm. You can't do it on the telephone. This is set against a kind of vanilla-version phone-in system whose costs are very heavily borne up by advertising claims and that is having to pay costs to settle claims that are actually higher than many of our other companies.

I say the test is, what is the end price to the consumer? I don't see the advantage.

The Chairman: What do you say to people who argue that the reason these firms are advertising heavily is that they're new entrants, so they have to let the market know they exist? I'm just trying to get to the bottom of the issue.

Mr. George Anderson: Yes, I think that's partly true.

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Mr. Mark Yakabuski: And one of the reasons they choose to advertise is of course that any of the banks that have begun insurance operations in Canada have decided not to use a broker system.

I'll tell you what the advantage of a broker system is. You can set up an insurance company with $5 million of capital in this country. You can't set up a bank with $5 million in capital. The barriers to entry in our business are extremely low, as Mr. Anderson pointed out.

One of the things that makes it a lot easier for companies to come into our business as well is that you have a network of 60,000 insurance brokers operating in the country already. They represent between six and twelve companies, those guys. A new company comes in and says they want to be able to sell insurance, so they make a few deals with some brokers, and all of a sudden they're in business. They don't have to set up a call centre. They don't have a lot of overhead beyond that.

The existence of an independent broker network is a major advantage to bringing new companies quickly into the business, and it's a much more low-cost set-up than if you're setting up a new company from scratch, setting up call centres, etc.

The Chairman: What do you say to people who say, “These 20,000 people who work in the industry have to of course earn a living; they have to generate income. Somebody pays for their income, and I think it's the consumer”? That's what they say. What do you say about that?

Mr. Mark Yakabuski: I'll tell you what happened in Quebec. Let's deal with an example that the MacKay report likes to cite frequently. In 1987 Desjardins was given the power to sell insurance in their credit union branches in Quebec. If we look at employment in the broker sector in Quebec, it is down by about 30% vis-à-vis the rest of Canada, where banks have not had the power to sell insurance in their branches. So we see the comparison. It has cost jobs.

What has been the counterweight on the consumer side? The Office of Consumer Protection in Quebec did a survey recently of auto insurance in eight major centres in Quebec. What were its findings? It found that the price of auto insurance offered by Desjardins was not the lowest cost in any of those centres; that it was middle of the ground in virtually all of the cities and localities surveyed. That tells me that what you have is jobs lost on one side and no comparable consumer benefits being brought on the other side. That's the experience.

The Chairman: So basically what you're saying is the following: you're concerned about corporate concentration; your system is efficient as is, regardless of the fact that if the banks were to get into the business, you'd lose 20,000 jobs; and the people who are stating that are wrong, because they're really comparing apples and oranges—it's two different services being rendered.

Mr. Mark Yakabuski: Yes.

The Chairman: Okay.

Mr. Pratt.

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

I'm curious about this figure of 20,000 jobs lost. Can you give us some idea of how that figure was arrived at? Did your organization commission any study, or is this something that has just been picked out of thin air as a guestimate?

Mr. George Anderson: No, we didn't pick it out of thin air. We actually asked Standard & Poor's to look at this dynamic. We thought they were a good choice, because as you'll see in the bankers' presentation, the bankers quote them on employment in New Zealand, so we asked them to look at employment in Canada. I'm actually understating their results in order not to appear too dramatic about it. That's their number, and their economists are prepared to stand behind that number.

Mr. David Pratt: Is that information you could share with the committee?

Mr. George Anderson: We'd be very happy to set up a session to brief the committee on the results of that and to bring the Standard & Poor's economists to the table to do so, yes.

Mr. David Pratt: One of the other questions I had, Mr. Chairman, was this.

Obviously one of the fears of the insurance industry seems to be that the banks would undercut the prices. We have a fair number of low-income Canadians who at this point cannot afford full insurance coverage. Do you not think there would be some consumer benefit to these people being able to afford coverage finally?

Mr. George Anderson: When that statement is made by the bankers, you have to ask them what insurance they're talking about. Almost inevitably, they are not talking about property and casualty insurance. The reason for that is if you own a car in Canada, you must have insurance. The notion that the automobile market, which is our largest market, has not served people is a fiction. The law requires you to have insurance.

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If you own a house and you have a mortgage, you have to have insurance on that mortgage. And if you don't have a mortgage, the argument could be that you're not low-income to the extent that somebody who does have a mortgage might be. So I think that argument, which has been around for a lot of years, is an argument about to what extent the banks feel they can penetrate the low-income life market.

But let me say this. I just don't see where the banks are targeting low-income Canadians as their primary clientele. That to me does not seem to be the direction they're going in. They're going in the direction of: How many well-set Canadians can I sell all these products to and tie up their wealth in my institution?

In fact there are programs now—and I wouldn't claim that they operate in Canadian banks, because I'm not sure they do; let's assume that they don't yet—that can actually, when you call in, rank you according to your profitability and put you in a queue if your profitability is low as a customer, so that the agent can deal with somebody who's of a higher income. Those programs exist.

Targeting low-income Canadians is not what our banks have been all about, and I don't see them all of a sudden finding religion on that score this time around.

The Chairman: Thank you, Mr. Pratt.

Thank you, Mr. Anderson.

We're going to go to Mr. Martin and Mr. Brison for five minutes each, because we have to listen also to Mr. Duff Conacher.

Mr. Pat Martin (Winnipeg Centre, NDP): Thank you very much, Mr. Chair.

I'm representing the NDP caucus, and I think you'll find there's a lot of sympathy amongst our caucus for your point of view. I'm glad to get your presentation.

I'm interested in one thing. You've just spoken a little bit about the idea of tied selling, and you mentioned that the credit unions in the province of Quebec can in fact sell insurance, but the difference you point out in your study is that they don't have access to personal records.

I have a detailed letter here from the CEO of Rice Financial Group, who raises this very concern. He talks about the possibility of an unfair competitive advantage and even the overzealous lending and offers of credit that might stem from that. I was wondering if you could maybe elaborate a little bit more on your remarks about the whole idea of tied selling and the dangers of it.

Mr. George Anderson: This kind of legislation can operate to punish transgression where transgression is obvious. The problem we have in the way in which we organize the delivery of our financial services is that this is a very fine line, the fine line between aggressive cross-selling, which in many banks there are incentive programs to encourage employees to do— You come away with three products, you get a gold star; you come away with two products, you get a silver star. These incentive programs exist. They encourage people to cross-sell, and the banks will tell you that's the secret of their whole enterprise.

There's a fine line when it comes to this kind of soft or implied pressure, particularly when you're leading with a credit application. When somebody is sitting there waiting for a mortgage to get approved and the agent at the other end says, “Oh, by the way, we don't have a relationship with you. This has to go to the mortgage committee. Can you give me something? Where is your RRSP?”— I actually overhead this conversation: “Where's your RRSP? I have to say we have a relationship.”

In MacKay's own survey, 16% of Canadians said they felt that kind of undue pressure. How many of them brought it forward to the committee when the committee had hearings on this? Not very many. Why? Because they're worried.

You can have legislative regimes, and we have encouraged that, but you know, we're talking about human beings working every day in every branch of the country. That cannot be policed, and it would be, I think, a hopeless, feckless pursuit to try to do it.

Mr. Pat Martin: I understand.

Mr. George Anderson: You can punish where people are caught, but you can't stop it.

Mr. Pat Martin: Thank you, Mr. Anderson.

I have one more question. The impact of one of these merged megabanks failing or collapsing would be devastating, of course. Can you answer, in the little bit of time we have left, one question? In the event of a collapse, would these customers of the services that you traditionally sell, who would now be customers of one of these merged megabanks, be more vulnerable as customers of the megabanks, or in their current relationship with your industry?

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Mr. George Anderson: I don't know that I can answer that. We have a compensation program for where our companies fail, a property and casualty compensation insurance program. Those people who buy insurance would be covered under that and presumably therefore would get the same kind of protection; at least we envision that.

The idea that the Canadian government would ever let a megabank go down, I think—although I've learned in my life never to say never—is a very dubious concept, because of the effect on the country. You begin to ask yourself, will the bank take the country down with it when it goes? So in all probability, if we get banks of this size, every effort would be made to put the strength of the country behind them in the event they got into trouble.

Mr. Pat Martin: I have a final comment on that; it's not a question.

In the event of a failure now, the limit you can be compensated is $60,000 in a bank.

Mr. George Anderson: You can mix and match, though. You can get up quite high by naming the products with different people in your household.

Mr. Mark Yakabuski: It's a bit different in our industry.

Mr. George Anderson: Ours is $250,000 for a single insurance policy.

The Chairman: Thank you.

Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): Thank you, Mr. Chair. I have three or four very short questions.

What percentage of your membership is selling mutual funds and RRSP products?

Mr. George Anderson: As strict property and casualty insurers, virtually none. Some of our companies do offer other lines under other incorporated entities. For example, some of our members sell life and through life would sell RRSPs, but not many.

Mr. Scott Brison: It may be unique to my riding, but there seem to be quite a number who are selling all those, maybe through separate corporate entities.

Mr. Mark Yakabuski: Some brokerages have a property and casualty division and a life insurance division. However, very seldom does the same broker sell both an auto, home, and business insurance policy and life insurance. A brokerage may decide to be in both businesses, but generally those products are provided by two different companies. Very few P and C companies have extensive operations in any other business.

Mr. Scott Brison: You've said that CIBC's involvement and Desjardins' involvement have not resulted in dramatically lower prices for the consumer, but price undercutting is a concern.

Mr. George Anderson: Price undercutting is a concern if the branches are allowed as the engine of delivery, because there you have the possibility of bundling products and saying to people, “Take these four products and here's the price we'll offer you.” They make that cheaper for one purpose and one purpose alone: to capture market share.

Mr. Scott Brison: I have a chart in front of me that compares the percentage of total assets and the percentage of total profits for the various sectors in the financial services industry. For example, the chartered banks have 69% of the assets and 55% of the profits; trust companies have 2% of the assets and around 2.5% of the profits; loan companies have 9% of the assets and approximately 10% of the profits; and life insurance companies have 16% of the assets and 19% of the profits. Property and casualty companies have around 2.96% of the assets but 13% of the profits.

Doesn't it seem, based on the disproportionate ratio of profits to assets for your industry, which far outstrips any other player in the sector, that there is a little room for competition somewhere?

Mr. George Anderson: Well, there's huge competition in the industry now. Let me give you an example. And I'd like to know where you're reading those figures from, because the return on equity for our industry has been the lowest in the financial services sector for many years, and don't forget we have to make provision—

Mr. Scott Brison: It's the Fraser Institute.

Mr. Mark Yakabuski: Our business is not an asset-based business.

Mr. George Anderson: We have to make provision for catastrophic losses arising, as we did this past summer. I'd like to take under advisement where you're getting those figures.

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Generally speaking, I can tell you this. In the last decade, we have paid more in salaries and taxes than we have made in profit. That is certainly the case.

In terms of competition affecting price, the price of homeowner insurance in Canada has tracked below the rate of inflation for a decade. In Ontario, in the automobile business, where 30% of the income of this industry rests, prices have fallen 10% in the last 18 months. I don't know another financial service where you could look at 30% of its product offering and say the price to the consumer has dropped 10% recently.

Mr. Mark Yakabuski: This is where your analysis has to be very clear in the sense that we've made the point here: don't confuse us with life insurers. If you're a life insurer and you have long-term life in there and you have annuities, you're an asset-based business. It's very similar to wealth management; you create a lot of assets in that process.

When you're in the P and C business, your risk is on the liability side. So our assets are consistently much smaller than those of other financial institutions. If you were to compare our profitability on assets, you'd be making a completely unfair comparison. What you should be doing is making a comparison of our profitability vis-à-vis our liabilities.

Mr. Scott Brison: One of MacKay's recommendations was that an individual or a company could start a bank effectively with $10 million worth of capital. You've said currently it's $5 million to start an insurance company. Also, for new financial institutions, there would be a 10-year holiday from federal capital tax. What's to stop your members or individuals or insurance companies from starting banks and competing with banks? You're given a 10-year capital holiday and you're given full and unfettered access to the payment system.

Mr. George Anderson: I go back to a point made in the MacKay report. We are not an intermediary financial service. You're asking people who are experts at risk assessments to start judging credit applications. We don't have the skill.

Our industry operates to protect Canadians against catastrophic loss. If you're looking at investing your capital, I'd think you'd want to invest it in making sure you could do that rather than trying to see if you could write cheques and get into the Canadian payment system and compete with one of these big banks. The payoff won't be there.

Mr. Scott Brison: Arguably your involvement in other areas of the financial services sector would enable you to develop an asset base that would allow you to reduce your premiums because of the fact that you would not have to rely on, for instance, an income-to-asset ratio that is so dramatic. You could actually diversify and ultimately provide a better level of service for less money.

Mr. George Anderson: Not if the start-up costs are what we anticipate. There's more to starting a business competing with the banks than having the capital and the desire.

Mr. Scott Brison: With the distance as a determinant in the cost of telecommunications, I would argue that the costs are very little.

Mr. George Anderson: That's certainly not the case now. The barriers to entry are extreme. One of the cases that we've made is, why doesn't the committee think about how you time all this to see whether that supposition is true or not, whether in fact it would work? But I don't think you'll find our members, because of the specialty nature of our business, rushing to become banks.

Mr. Scott Brison: In 1992, was your argument that this should never happen, or that your industry needs more time?

Mr. George Anderson: Some people in the House, when they rose to say it wasn't going to happen, said the industry needs more time. Our argument was that this is not the primary problem of financial services in Canada. This is in fact the smallest market in all the financial services market. It has the largest number of competing players. Why would anybody start there to fix the financial services problem in Canada, when I think it's fair to say that most of your constituents are telling you banking competition is the problem, not property and casualty insurance competition? That's our case.

Mr. Scott Brison: Thank you.

The Chairman: Thank you, Mr. Brison.

Mr. Anderson and Mr. Yakabuski, thank you very much for your presentation and for expressing the point of view of the Insurance Bureau of Canada. We certainly appreciate it, and we'd also like to thank you for the technical briefings you've provided the committee in the past.

I'm going to take just a one-minute break and we will be back with Mr. Duff Conacher.

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The Chairman: I'd like to call the meeting to order and welcome Mr. Duff Conacher from the Canadian Community Reinvestment Coalition.

You have appeared before parliamentary committees before; therefore you know the procedure. Welcome.

Mr. Duff Conacher (Chair, Canadian Community Reinvestment Coalition; Coordinator, Democracy Watch): Thank you very much, Mr. Chair.

I am going to start with a brief statement and review some of the materials we have submitted to you for the purpose of this hearing, and then I'll take any questions you may have.

Thank you very much for the opportunity to appear today to respond to the Task Force on the Future of the Canadian Financial Services Sector report. I am the coordinator of Democracy Watch, a citizen advocacy group based here in Ottawa, and we have organized the Canadian Community Reinvestment Coalition. You should have received already a list of the members of the coalition. We are now over 100 organizations, from every province and the Northwest Territories, representing over 3 million Canadians.

We've also submitted a list of notable Canadians who support the coalition and the coalition's recommendations, and in addition a one-page summary of the coalition's recommendations, which have been set out in detail in six position papers that we released last fall and also in May in response to the proposed bank mergers. I will be leaving a copy of the position papers in full with the clerk of the committee.

You will also see a two-page list of myths and facts about Canada's big banks and the mergers, which I will take you through in brief, and then a one- to two-page summary of each of our position papers, which will give you a quick reference to the recommendations we are making in terms of reform of the financial services sector in Canada.

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I've also submitted just this morning—and this is what I will focus on in my presentation—a three-page submission that goes through each of our recommendations and gives the corresponding task force recommendation and the changes that we see are needed to close the gaps in what the task force has recommended.

We are a very broad-based coalition of over 100 organizations, as I mentioned, representing anti-poverty, social justice, consumer, community economic development, labour, small business, student, and women's groups from across the country.

We are most concerned by the lack of accountability of financial institutions and the lack of disclosure and tracking of how financial institutions are serving Canadians. A wise person once said sunshine is a good disinfectant. We want to shine a brighter light on the banks and other financial institutions so that we can determine how well they're serving Canadians and require them to take corrective action if they are not serving Canadians well and fairly across the country.

Sunshine also closes the gap between banks' rhetoric and the reality of customers. To give you one example of that, in the August 3 issue of Maclean's it was revealed that despite the banks' claims that there is no discrimination in lending to small business, they actually train their loans officers at the Institute of Canadian Bankers using a textbook that says, among other things, “On an individual level, it has been suggested that entrepreneurs are deviant or marginal characters spurred on by adverse experiences in early childhood.”

The textbook also says, “—male-owned businesses perform better than female-owned businesses,” in part because women's upbringing “focuses on `sharing' and `taking turns,' rather than on winning and taking risks.”

Finally, the textbook also says, “A survey by Multiculturalism Canada”—a survey that Multiculturalism Canada said never occurred—“revealed that, among immigrant groups, Greeks and Jews are the most entrepreneurial. Other studies have also revealed that there is a minimal level of entrepreneurial activity among Caribbean and Filipino immigrants residing in Canada.”

Mr. Dick Harris: Can I ask that what Mr. Conacher is reading from be photocopied so that we could have copies of it immediately?

Mr. Mac Harb (Ottawa Centre, Lib.): Yes, I think that would be very useful.

Mr. Duff Conacher: It's simply an article from Maclean's, and I can easily submit that to you.

Mr. Dick Harris: Oh, I understood that he was reading directly from a textbook.

Mr. Duff Conacher: No, those are the quotations in the Maclean's article from the textbook that the Institute of Canadian Bankers uses.

The Chairman: Mr. Conacher, that's what I understood. That's why I didn't interrupt you. Keep going.

Mr. Duff Conacher: As you can see in this case and in many others, when some investigation is done, when a light is shone on attitudes and activities of financial institutions, it reveals that there is a gap between the rhetoric of the financial institutions and the reality for their customers.

In other areas as well, national surveys by the National Quality Institute—surveys of over 8,000 Canadians over the past two years—have shown that banks rank in the bottom five of 21 industries in terms of customer satisfaction. The task force cited this survey. And the banks' own statistics show that lending to job-creating small and medium-sized businesses decreased between 1995 and 1997.

In addition, there are at least 400,000 adult Canadians without a bank account. Despite the banks' claims that they have solved this problem, many recent surveys have shown that they still maintain excessive and unjustifiable barriers to people opening an account, barriers such as requiring that you be employed, requiring that you maintain a minimum balance in an account, and requiring an excessive amount of ID that goes far beyond what is needed to identify a person.

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Again, those surveys have shown that banks make many claims about how they're serving people, but when they're tested and audited and inspected, it's found that they do not serve people very well.

The accountability system we want put in place in many areas has five key facets. First of all is disclosure. You have to require the banks and other financial institutions to disclose what they're doing. Otherwise you don't know the extent of the problem and you don't know what actions are needed to correct the problem.

You need strong rules concerning the rights of Canadians to being served fairly and well. You also need inspection of whether the banks are keeping in line with those rules, and to do that, you need a strong independent enforcement agency in every area with the resources to do that inspection.

Finally, you need significant penalties, because you are dealing with institutions that have billions of dollars in assets, and any small penalties will simply be viewed by them as a cost of doing business.

Now I'll take you through the recommendations as compared to the task force recommendations and then the gaps we see.

Overall we agree with the vision and framework set out in the task force's report. It makes it clear that financial institutions will only serve all Canadians fairly and well if consumers are empowered, if disclosure and transparency rules are strict and comprehensive, and if a comprehensive accountability system is enacted. It also makes it clear that financial institutions, especially banks, must serve all stakeholders fairly and well, because they have benefited historically from regulatory protections and they also provide essential services to Canadians.

A majority of Canadians, according to the task force surveys, feel that banks should be held to a higher standard of performance than other corporations. According to two national surveys, including one that the task force put in place, nine out of ten Canadians believe it is essential to have an account with a bank in today's society. So we place the banks much closer to public utilities in terms of the nature of the corporations. The banks of course want to view themselves as private corporations. The task force disagrees very strongly with this.

How do we hold the banks accountable? Well, as they have in the U.S., we need a detailed disclosure and review system of banks' and other financial institutions' performance in lending, investment, and service to consumer. There should be a review and grading of performance and they should set out incentives and sanctions to encourage institutions to improve performance.

As you can see by what we've listed, there are recommendations from the task force for community accountability statements that all financial institutions should be required to file. The problem we see with these statements and some of the other disclosure requirements that the task force sets out is that they leave out key elements of an accountability system.

First of all, certain things are not required to be disclosed, such as the number of complaints and the pattern of opening and closing branches. Also, there are details missing in terms of what the task force is recommending concerning small business lending disclosure—details that are needed. Otherwise you will not be able to hold banks accountable for poor performance in lending, investing, and serving small business, which after all is the job-creating sector of the country.

In addition, financial institutions are allowed to define “community” and also the format and the content of these statements. We feel that will leave gaps and that the statements will turn into simply public relations statements for the banks.

We feel also that the statements should be reviewed annually by the government, with public input, and that there should be incentives such as have been put in place in Ontario, such as a surtax and not contracting out government business to institutions that have a poor performance record. Ontario has done both of those. And as in the U.S., a poor performance record should be grounds for denial of an application to expand, including takeovers or mergers.

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Our second recommendation is to prohibit the current proposed bank mergers and place a moratorium on bank mergers and takeovers and expansions of bank powers until two years after the law that I just talked about in our first recommendation is enacted in Canada, based on the U.S. system that's been in place for over 20 years, and also until changes to the competition laws, including foreign bank entry, are made. This time is needed to determine whether foreign banks or any other institutions actually will provide significant competition to Canada's big banks, and also to determine whether our big banks serve Canadians fairly and well across the country.

I won't go into detail on the mergers. They are detailed in the myths and facts piece here. Essentially we see no case for the proposed mergers. Our banks are very big. They have world-class profits, and profitability has been cited as a more important factor than size, by the task force and also by the Bank of Canada, in the success of a financial institution.

Global competition is not a threat. There is a lot of evidence that our banks treat Canadians very poorly, and we shouldn't allow them to get bigger just to serve more people badly.

In terms of job losses and withdrawal of service from communities, the experience in other countries shows that the bank mergers would have those significant negative impacts. Also, experience from other countries shows that bigger banks charge bigger fees and lend less to job-creating small and medium-sized businesses.

So there should be a moratorium on bank mergers and takeovers and on expansion of bank powers until we have the data to know whether there is significant competition in the country and also until we put in place an accountability mechanism based on the U.S. system.

Going on to our next recommendation, we see some gaps in the ownership and holding company structure rules that the task force has set out—gaps that will mean it will be difficult to ensure that our banking system remains Canadian-owned and can be regulated effectively.

Also, as I've mentioned, the merger review process that the task force has set out does not include assessing the record of an institution in serving people currently and taking that into account in terms of allowing a merger. In the U.S. they do this, and as I mentioned, it's grounds to turn down an expansion, merger, or takeover if an institution has a poor record.

As you may know, this occurred with the Bank of Montreal's wholly-owned subsidiary, Harris Bank, in 1993-94. They were reviewed under the U.S. system and they had a poor grade. They were failing to serve all people fairly and well, so their application to take over another bank in Illinois was denied. The government should have the same power here in Canada.

In addition, another accountability mechanism we see as a priority is the creation of a financial consumer organization through financial institutions mailing out a one-page flyer, just like this. This is from the U.S., where they have done this in four states with utilities. It's a fold-up envelope that comes in the utility bill and invites people to join a watchdog group over utilities. We want a similar watchdog group created for financial institutions.

The task force has recommended that governments and financial institutions facilitate the success of such an organization by enclosing the flyer. The flyer would go out to 20 million Canadians. In the U.S. they usually receive a 3% to 5% response rate. We did a national poll that said 43% of Canadians would be willing to join. But if we had a 3% to 5% rate only, we'd have a group of 600,000 to 1 million members that would have the resources to help Canadians in very key areas, as the task force sets out—complaint handling, comparative shopping, representing them in policy-making—all at no cost to the government and no cost to the institutions.

We could form a broad-based, well-resourced organization that can counter the power of the bank lobby, which, according to one report, spent $7 million pushing for the mergers. As you know, it employs many of the people who are sitting behind me and who are here every day, monitoring everything you say, and it also places ads nationally.

Citizens are at a disadvantage in all these ways, in terms of shopping around and having their complaints handled effectively. This would close the gap. The task force has recommended it. We have approached all financial institutions to ask them to voluntarily enclose this. They have said no.

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We see no reason to wait. Require them to do it, as they have required utilities to do in the U.S. It's very key to having an empowered consumer.

Recommendation five: we feel that access to basic banking services should be ensured and that there should be a right for all Canadians. Unfortunately the task force has said, “The banks should take a number of steps, but we're going to give them more time.” Citizen groups, anti-poverty groups, and consumer groups have been pushing for over ten years, trying to get the banks to provide service fairly to all Canadians and at a fair price.

The government has had a voluntary code since February 1997, which the task force says is not working. They did their own survey, and their own researcher was turned down at four of seven branches when they tried to open an account. There should be no further delay. Give everyone a right to a bank account. Require banks to provide access to basic banking services.

Also, in terms of branch closures, we endorse the task force's recommendation that four months' notice be given. However, we also want disclosure of the profit-loss record of any branch that's proposed to be closed. Banks often say they're closing a branch because it's not profitable, but they don't say what the profit or loss record is; they refuse to disclose it. The community needs full information to assess the reasons for a bank branch closure, especially when the banks are withdrawing from many communities that are disadvantaged, as has been shown by a national survey by a group in Montreal called Option consommateurs.

The task force has recommended as we have and rejected the bank's claim that the current bank ombudsman is independent and effective enough. We agree that the current bank ombudsman lacks independence and effectiveness. The only gap we see is that we feel, unlike the task force, that the ombudsman should be given the power to make binding rulings.

Essentially what we're setting out in all of these other areas is what the task force has recommended in the area of tied selling and privacy protection. They've recommended a very complete accountability system in those two areas to protect consumers, with the only gap being that they don't state very clearly that penalties should be significant enough to discourage violations by large financial institutions with hundreds of billions of dollars in assets.

If the task force sets out this very complete accountability system, with inspection, enforcement, strict rules, and penalties in these areas of tied selling and privacy, we see it as inconsistent that they have left gaps in other areas. So we ask you to close those gaps.

We also endorse the task force's recommendation that these kinds of corporate conduct, consumer protection, and accountability measures apply to all institutions operating in Canada, whether domestic or foreign, whether with actual branches or virtual. It's very essential to protect consumers from the abuses that all sellers can put forward.

In conclusion, accountability of financial institutions and consumer protection are not special interest issues, because all adult Canadians and many youth deal with financial institutions in one way or another. To date, the government has not taken consumer protection and accountability seriously. They have proceeded with voluntary codes, and those voluntary codes have been proven—for example, in the area of access to basic banking services—to not work. The task force agrees with that.

Whether in service charges or credit card interest rates, the government has taken the stance that consumers should just protect themselves and shop around. That is a statement directly from Doug Peters, former secretary of state for financial institutions, and the industry minister, John Manley: “Shop around and protect yourselves.” The task force disagrees. They say shopping around is very difficult and consumers need strong protections.

We have been working to hold financial institutions accountable to individual and community interests and will continue to work on this. However, if the government does not enact these measures, which are endorsed by a task force dominated by industry interests with only one consumer representative on it—a task force that surveyed Canadians, took a reasonable look at the situation, and concluded that strong accountability and protection measures such as we're recommending—

• 1040

Essentially the task force recommended three-quarters of what we want. We feel, as I've noted, that the gaps need to be closed. If the government does not close these gaps, then for every person whose privacy is invaded, for every person who is subjected to coercion or who signs a contract they don't understand, for every person who has difficulty shopping around and as a result is gouged, and for every complaint that isn't handled properly, the government will be held accountable.

It's time the citizens' agenda be put before the corporate agenda. The task force has made it very clear there's no rush with the mergers. There's no way that the corporate agenda of a few big banks that want to get bigger should be put ahead of the much more important agenda of protecting all consumers and ensuring the accountability of all financial institutions, to make sure they serve all Canadians fairly and well.

The government will be held accountable, because you could have protected consumers, you could have balanced the marketplace, you could have ensured that financial institutions served all Canadians fairly and well. You can do this very simply by following the task force's recommendations and closing the few gaps we see in the recommendations.

Thank you very much. Now I welcome any of your questions.

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

Mr. Harris.

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

Mr. Conacher, I have to lead off with a question about the Maclean's magazine article in your comments. Of course we were all taken aback, and that's why I requested a copy.

I just want to know why, along with the explosive statements you made about the article, or that the article made, you failed to mention that a day later, after the Royal Bank was contacted and I assume once it had reviewed the text, the bank withdrew the text from its training program and the bank's senior public affairs adviser, Ray Heard, issued a statement describing the book's contents as offensive. He added, “As a result of this lapse”—or overlooking of course material—“we will be reviewing all course material developed by ICB to ensure it meets Royal Bank standards.”

So he clearly disavowed portions of the text on the grounds that they were offensive based on ethnic and sexual stereotypes. You neglected to mention that, and I'd like to know why.

Mr. Duff Conacher: I was using it as an example of sunshine being a good disinfectant. As you've pointed out, when some light was shone on the bank's activities, they took corrective action.

I would also note, as you can see, that Brian Smith, spokesman from the Royal Bank, told Maclean's initially, according to this report, that he saw nothing wrong with it initially.

So shine a light on bank activities and they take corrective action—not surprising, in my mind.

Mr. Dick Harris: Once it was reviewed by the bank, they agreed with the comments and they have removed it. I think that's a good thing.

Mr. Duff Conacher: I think it's a good thing as well. I don't think they ever should have been using it, though.

Mr. Dick Harris: Probably not.

You talk about the entry of foreign banks into the banking industry, and it looks as though you're in support of it, because you say bank mergers or expansions of other financial institutions should not take effect until two years after the promised changes to the foreign bank entry laws. I assume that you are, as I am, looking forward to the changes in the foreign branch banking. Is that correct?

Mr. Duff Conacher: Generally we do not think they will have much effect at all, and we would not want them extended any further than what the government has agreed to do under the World Trade Organization agreement, for a couple of reasons.

The government is agreeing to allow foreign banks to branch directly but only take deposits of $150,000 or more. The main reason, according to the Department of Finance, that they're not allowing retail deposits to be taken is that we have a deposit insurance system, and if you allow a branch of a foreign bank that is regulated in another country to set up and take deposits, and then the parent company in the other country takes risky moves and goes insolvent and the branch closes down, there's no way our deposit insurance system should cover the deposits that were in that branch, since our regulators could do nothing to ensure that the parent company was acting in a responsible manner in terms of its investment and loan portfolio.

• 1045

Mr. Dick Harris: But you do support foreign branch banking in Canada based on the recommendations and the WTO agreement?

Mr. Duff Conacher: We have a concern that it will allow those who are wealthy, who have more than $150,000 on deposit in a bank in Canada—which is only about 10% of the market—

Mr. Dick Harris: But won't it also allow more choices in wholesale banking, such as, for the business community, access to financing, etc.?

Mr. Duff Conacher: Well, again, only about 10% of the business community has more than $150,000 on deposit, so they will not be able to deal with those.

Mr. Dick Harris: It will allow Canadian businesses to seek alternate methods of financing, particularly small business financing such as we see now, but it will be expanded with some of the foreign banks that are operating in Canada now.

Mr. Duff Conacher: Possibly. We have seen no evidence, as you see in our myths and facts piece, that there will ever be any significant foreign competition. There are fewer foreign banks in Canada now than there were in 1987, you have a smaller market share, and under NAFTA, the U.S. and Mexican banks have not had the barriers that existed in the past to coming up to Canada.

It may provide a bit of price competition. Generally if you are wealthy or a large business, you can already deal with a foreign bank, so we see little impact on the market. The impact we're concerned about is that if the banks lose market share in their wealthy customers and lose revenue in that area, where are they going to recoup the revenue but from nickel-and-diming—charging more to small businesses and to low-income and middle-income customers?

I just don't see that it will have much impact on the market.

Mr. Dick Harris: In recommendation number one, you're calling for the banks to basically lay most or all of the information about their business on the table, including, if I can read into this, the way they do business, their operating plans, basically their business plans.

Do you think that should apply to other large companies, particularly multinational companies whose success or failure, for one reason or another, would have a major impact on the Canadian economy, such as GM, Chrysler, Ford Motor Company, and some of these other big companies that operate in Canada? Would you suggest that the same rules should be applied to them?

Mr. Duff Conacher: We're not asking for their business plans to be set out. What we're asking for are their business practices, their pattern. It will always be in the past tense, because it will be recording and then disclosing a few months later, at least once a year. And as the task force has recommended, once a year there will be community accountability statements.

Mr. Dick Harris: I think, though, that if a bank or other financial institution were to be required to make public on a branch-by-branch basis, as you put it, details about their lending, their investing, and their service records, and have an annual government review, this would provide a fair amount of strategic information to their competitors. Really I don't know if any business should be required to give their competitors some strategic information about how they're operating.

Mr. Duff Conacher: Well, the United States government disagrees, as do Alan Greenspan, the equivalent of the Superintendent of Financial Institutions in the U.S., and many bankers. We would be happy to arrange to have a U.S. banker come up and speak to you about this. It's a system they've had in the U.S. for over 20 years. It's worked very effectively to hold institutions accountable to meeting community needs and individual needs and to serving people fairly and well. It's revealed discrimination in lending and providing service, and banks have taken corrective action.

The Chairman: Thank you, Mr. Harris.

However, we shouldn't read into this that you want an American model of banking, right?

Mr. Duff Conacher: No. The pattern we've set out—

The Chairman: Just the portion that you like.

Mr. Duff Conacher: For example, the U.S. wants disclosure of mortgages. We are not recommending that at all. We have had no one in the coalition, despite several housing groups being involved in the coalition, raise an issue with mortgages. We simply want community development and business lending tracked, as the industry committee has been tracking it over the past four years, but there are gaps.

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The Chairman: I just wanted you to be clear about the fact that it's just that component of the American banking system that you like. It's not that you want us to develop an American-style financial services sector, is that correct?

Mr. Duff Conacher: That is correct, as you can see in the other recommendations that we've made.

[Translation]

Mr. Ménard.

Mr. Réal Ménard (Hochelaga—Maisonneuve, BQ): As you know, I represent the riding of Hochelaga—Maisonneuve. Twenty years ago, there were twenty banks in my community. Today, only four remain. With the help of your coalition, I went to the United States and met with an individual who is now retired from public life, but who was still active at the time, Congressman Kennedy. He told me about a disclosure process in force in the United States since 1977. I'd really like the hear your views on this matter as well as your position on the thrust of the recommendations that you have presented to us this morning. If your primary objective is to ensure that consumers as a whole have access to credit, then I can understand your position.

Secondly, you are telling us that banks are public institutions that evolve in a very protected environment. In fact, the Chair of socioeconomic studies at UQAM estimated that 80 per cent of all loans awarded by banks are government loans or loans involving very little risk. I'd like you to tell us clearly what kind of undertaking you are seeking from banks in this matter. Later on, I would like to discuss with you the format that the Community Reinvestment Act could take in Canada.

[English]

Mr. Duff Conacher: The commitments are set out and I went through them briefly. Essentially it is to track demand for lending, investment and service and then track how that demand is being met and whether people are being served fairly and well, and to track also in the lending area—loan loss and loan default rates—so that you can determine riskiness of lending to various sizes and types of businesses and communities.

The task force was vague. They said much more information is needed on business lending, small business lending in particular, but they did not set out details. These are the gaps that exist in the current system that has been negotiated between the federal government and the banks. It has broad support. The Senate banking committee at the end of this month will be recommending a community reinvestment act—that's the U.S. legislation—for Canada. When the big banks of Canada were before the Liberal caucus committee in June, they also said that they had no problem with it, and as you heard from Mr. Cleghorn earlier this week, he said he had no problem with his community in Canada.

[Translation]

Mr. Réal Ménard: I have tabled a private members' bill and I hope that I can count on your coalition's support, all partisanship aside. What role do you foresee for the Superintendent of Financial Institutions? As I understand it, in United States, one of the strengths of the Community Reinvestment Act is the provision whereby an annual report must be released and banks must explain their undertakings in the community. As you mentioned, this concept is discussed briefly in the MacKay report, but I think we need more specifics.

Do you think part of the Superintendent of Financial Institutions' mandate should include the requirement on his part to collate bank data and to explain, in an annual report, how banks are reinvesting in the community? Do you agree that there shouldn't be a quota system? The level of involvement by banks in the community depends on the communities themselves. There is more than one way to be actively involved in a community. It is important for consumer associations to be able to monitor bank activities. When the report is released in United States, US consumer groups jump on it. It is even possible to take steps in the United States to block the expansion of a bank into another state if that bank has received a poor evaluation.

What role should the Superintendent of Financial Institutions play in implementing your recommendations?

[English]

Mr. Duff Conacher: The task force has recommended that the Office of the Superintendent of Financial Institutions role be expanded to consumer protection and to tracking some of these accountability measures. They've actually recommended, though, that the community accountability statements be filed with your committee and also with the Department of Finance. As you have said, we feel there should be a tightening up, that the format and the content should be set so that you can compare very easily institution to institution, as they have in the United States.

• 1055

You mentioned that you travelled to the U.S., as did Jim Peterson, the current Secretary of State for International Financial Institutions, who came back and was quoted in the Toronto Star as saying that he thought it was excellent and had great effects.

So everyone who has travelled to the U.S., including the Senate banking committee, has come back convinced that this is a great idea, and the finance minister also has stated he thinks it's a good idea in principle and we just need to work on the specifics. We've set out the specifics here. It's a very effective system of accountability, and we hope the committee will recommend it very strongly and the government will act on it, closing the gaps in the task force's report.

[Translation]

Mr. Réal Ménard: You pointed out that under the current rules, 400,000 Canadians do not qualify to open a bank account. Basically, what you're telling us is that despite an agreement between the Superintendent of Financial Institutions and the Canadian Bankers Association, the rules are still not being followed. Could you elaborate on this point?

What exactly the mean when you say you'd like to see a system of sanctions in place as part of the disclosure process in the event of non-compliance by banks?

[English]

Mr. Duff Conacher: In terms of access, the February 1997 voluntary agreement, it has been agreed by everybody, is not working. The task force says they're skeptical that it has had any effect, and that's because, as I mentioned, their own researcher went out and tried to open an account and cash a cheque in seven branches around Toronto and was turned down in four, in one case because he didn't have a telephone—not exactly a justifiable reason to turn someone down in terms of access to a bank account.

We did our own survey in October 1997 and we found five of the big six banks were violating the February 1997 agreement. That was in October 1997. Also, the Canadian Bankers' Association contracted out to Nielsen Marketing Research to do a mystery shopping survey in May and June, and they have provided the information to the National Anti-Poverty Organization, one of the strong supporters of the coalition. According to that, four out of ten people were denied access to basic banking services, in violation of the February 1997 agreement. So it's clear that it's not working.

In terms of sanctions that are needed for a system like the community reinvestment act system, as I mentioned, in Ontario there's been a surtax put on the banks. They can earn credits against the surtax if they have a good record in serving small business. Ontario has also made it mandatory to show a good record in serving small business when you are bidding for government contracts. The government should not be spending its money giving business to institutions that don't serve all Canadians fairly and well.

And in the United States, as I mentioned in connection with Harris Bank, an application to expand, which includes mergers and takeovers but also opening branches and crossing state lines—that can all be denied if you have a poor record.

We also feel there should be public hearings in communities where the banks are shown to be serving people poorly, where senior representatives of the institution would explain how the institution is going to improve its performance. We think those would be very effective in addition to the fines that already exist in financial institution legislation in the country.

[Translation]

The Chairman: Thank you, Mr. Ménard.

[English]

Mr. Pratt, followed by Mr. Gallaway.

Mr. David Pratt: Thank you, Mr. Chair.

Mr. Conacher, in a lot of your comments you seem to be very supportive of the MacKay report, but clearly on one important point Mr. MacKay differs from your approach with respect to the community reinvestment act and the sorts of processes that would follow from that. In fact he says in his report on page 169:

It has not been established that similar conditions exist in Canada at this time,

—that is, conditions that would justify the implementation of a CRA—

and no instances of the deliberate discrimination that “redlining” would entail were brought to the attention of the Task Force. In the absence of such concerns, and without stronger evidence that there is a real problem to address, we are not prepared to recommend a full-blown CRA approach for Canada.

Do you have any evidence that redlining occurs in Canada where neighbourhoods—for instance, communities within inner cities—are redlined as places where the banks will not provide loans or services?

• 1100

Mr. Duff Conacher: We have lots of evidence that they don't provide services, because, as mentioned, the surveys on access to basic banking services show it's people with low incomes who are denied access at a greater rate than people with middle and upper incomes. As you cross the country, I think you will probably hear, either in written or oral submissions, from Option consommateurs, the National Anti-poverty Organization, and many other member and supporter groups of the coalition that there aren't many cases.

When I first started investigating this issue, I was looking at the Parkdale and Regent Park area of Toronto. I did a survey of the institutions in the area, and I was told by the manager of the Royal Bank branch in Parkdale that they did not have a loans officer on the premises. I asked him what other branches in the city did not have loans officers, and he said the one at Parliament and Wellesley, which as you know is also a low-income area that's very multicultural and has many visible minorities. I don't see that as a coincidence, especially when the manager said, “It's not that we don't feel these people deserve a loans officer, we just don't feel they are on the scale and quality of people who justify having a loans officer at the branch.”

Option consommateurs has shown quite clearly in their study of branch closures that in low-income, disadvantaged communities branch closures have occurred at a higher rate over the past decade than in other communities. So we see the evidence. But in addition, as we have seen with the access to basic banking service, the community accountability statements leave a lot of things to be voluntarily done by the institutions, and in the access to basic banking services voluntary code, it's been shown that it doesn't work.

In a KPMG survey conducted a few years ago, corporations were asked why they incorporated an environmental plan within their businesses. Ninety-five percent stated that the number one reason was that there's regulation. Also, Industry Canada and Treasury Board have studied voluntary codes and they have essentially came to the conclusion that voluntary codes work when compliance is required. That sounds like an oxymoron, because it is one. Voluntary codes work only when they're not voluntary, and they essentially work when they meet all the conditions of regulation.

So we think a brighter light needs to be shone, first of all, but you also need some review. Otherwise, what's the incentive to take corrective action? We've seen that with the access to basic banking—

Mr. David Pratt: Mr. Conacher, would you agree as a general principle that the conditions that resulted in the passage of the CRA in the United States, in terms of any inner city neighbourhood right across the United States, simply don't apply to Canada?

Mr. Duff Conacher: Essentially they didn't have evidence across the U.S. They had surveys, as we have with business surveys; they had surveys on branch closures, as we have, and surveys on access issues, as we have. If you look at the Community Reinvestment Act and the Home Mortgage Disclosure Act, which preceded it, their primary purpose was consumer right to know. We feel that consumers have the right to know this information as well.

Essentially we see a gap, since if you require only disclosure, and it shows a poor performance— We've seen that in the access to basic banking services area, and poor performance alone has not caused the banks to improve in any significant way. So there needs to be a review and there need to be sanctions, in the same way as when an individual performs poorly. We sanction people, so let's do the same thing.

Mr. David Pratt: But on the face of it, when you have two branches, accepting your evidence that there are two branches in Toronto—

Mr. Duff Conacher: At the time. That was in 1990. I think it's changed now as the banks have centralized a lot of their lending. But at the time, yes, those were the only two branches.

Mr. David Pratt: So the conditions may have changed dramatically, either improving or not improving, one way or another.

Mr. Duff Conacher: That's right.

Mr. David Pratt: What I have difficulty with is requiring a massive reporting system across Canada for a problem in which some improvement seems to have been made over the last number of years. That's just my own perception.

• 1105

Mr. Duff Conacher: Well, the task force disagrees. They require what you may term a massive reporting system.

All we're saying is they require small business lending to be tracked and put into these community accountability statements, and we see some gaps in the small business lending disclosure. We feel that tracking the pattern of opening and closing branches systematically would be a very important way of seeing where service is withdrawn, and I think it would be of interest to many members of Parliament. Also, they don't recommend any tracking beyond access to basic banking services in terms of overall service.

It's very simple: the institutions know who is suing them and who they are suing, and they know who has complained and how the complaints have been resolved. A key principle of effective regulation is to require the person in the best position, who has the information in terms of a particular problem and tracking a particular service record, to disclose that information. That's why the task force has said institutions should be required to disclose community accountability statements. Community groups shouldn't be required to try to put them together based on the little bit of evidence that we now have disclosed.

So we simply see gaps in what they're requiring to be disclosed. I don't believe it's a massive reporting system that they're recommending. A lot of the lending disclosure has already been done under the industry committee system. We just need to close these gaps to make it a bit more effective.

The Chairman: Go ahead, Mr. Pratt.

Mr. David Pratt: In the handout you provided the committee, there's a reference at the bottom of the page. It says: “Incentives to improve poor performance should include: as in Ontario, a surtax”. Frankly, I haven't heard of that surtax you're referring to. Can you elaborate?

Mr. Duff Conacher: Yes. In the 1996 budget, the Ontario government put in place both the surtax and also the requirement to have a good performance record before bidding on government contracts.

The surtax is a capital tax, and the institutions can then show a good record in small-business lending, showing that they are providing long-term capital to small business, and receive credits based on the amount they are lending. It has to be new money. It can't be existing money; it's new money they are lending to support small business, and they receive credits against the surtax. So they can effectively eliminate the surtax if they have a good record and are lending enough and supporting small business enough.

That's how it works in Ontario, and we think all provincial governments, territorial governments and the federal government should put it in place. Municipal governments could do the same with property tax.

The Chairman: Mr. Gallaway.

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

First, I want to say what a difference it is having Mr. Conacher here today, because I know he has spoken for consumers in this city for some time and in this place, and to my knowledge he's the first person to come and address squarely the rights of consumers. We often hear the side of the business interests, but not of the other part of the equation, the consumers.

You've raised a number of points that you agree with in the MacKay report. It seems to me that in holding financial institutions accountable in terms of disclosure and accountability you're only dealing with the regulated institutions. You only have to drive down a main street of any city and see places such as Money Mart and Trans Canada Credit. What do you propose to do with them? What would you do in those cases?

Mr. Duff Conacher: Our recommendation 10 says, and the task force agrees, that all of these mechanisms should apply to all financial institutions.

The task force is obviously a federal task force and mainly talking about federally regulated financial institutions, but you'll see in several places they encourage provincial governments to enact the same regulations, that there be harmonization between the regulations, and that currently unregulated credit providers and financial service providers also be regulated. We agree with that very strongly.

Mr. Roger Gallaway: The other part you've often addressed, and you certainly have today, is the basic access question, the access to rudimentary banking services. I want to be fair about this. In a sense, the thrust of the Royal Bank, at least as I understand it—and it may have been conveyed by Mr. Cleghorn when he was here earlier this week—is that if you allow these two entities to merge, it's going to be good for the consumer. You're going to have more services and greater access to banking services.

• 1110

I know that your organization has studied this issue of access, but I wonder if you could just respond to this, perhaps based on cases. I'll say it—in the United States it's not necessarily a bad word—it's a question of basic credibility at this point, because we haven't seen anything. What do you think?

Mr. Duff Conacher: As we said in detail in our sixth position paper and also in this myths/facts piece, the evidence from other countries is that mergers will of course lead to job losses. The estimates here by industry analysts have been 20,000 to 40,000 people. There will be a withdrawal of service as over 1,000 branches close, and it's hard to see that as providing better service overall.

What it will do is push the banks' agenda further down people's throats, in that you have to learn how to push those buttons or you're not going to be able to bank in Canada. The banks make a much higher profit margin from electronic banking than in-branch banking, so they want more people pushing the buttons for themselves and absorbing the costs of the banks for that banking.

Studies in the U.S. also show that bigger banks charge bigger fees. The CBC television show Venture interviewed the head of one of the big banks in the Netherlands that had merged. The study there showed that fees had gone up by $200 million in extra costs to consumer post-merger, and he was asked why they raised their fees after the merger. He said it was because they could, because there was less competition and less choice.

The studies in the U.S. also show that bigger banks post-merger lend a smaller portion of their total lending to small and medium-sized business, the job-creating sector in the country.

So we have all that evidence from other countries and we think that the concentration of market control the two megabanks would have would severely limit customer choice and that they would be able to abuse their power as a result of that.

We'll hear from the Competition Bureau at the end of November, and I expect that in some of the 1,500 local markets they are looking at, about one-third to one-half are going to show a severe reduction in customer choice. That will allow those institutions to abuse that dominance and also to close branches much more quickly. That is definitely part of their agenda, to withdraw service.

Mr. Roger Gallaway: My final question is this. You subscribe to the American Community Reinvestment Act. The principle is to get new credit into communities that need it.

Mr. Duff Conacher: And service as well.

Mr. Roger Gallaway: All right. This is in place in the U.S. What empirical evidence exists that it in fact achieves that objective? I am told there is one particular study that says it has no effect.

Mr. Duff Conacher: Well, not knowing the study you're citing, it's difficult to respond.

Mr. Roger Gallaway: I can tell you what it is, actually. It's from the Cato Institute and was written by William Niskanen. I could certainly get a copy of it for you.

Mr. Duff Conacher: That would be the only study I've heard of that finds no effect of the CRA. According to the government tracking of reinvestment commitments that have been made—and these are commitments made because an institution has had a failing grade and corrective action had to be taken—over $420 billion has been reinvested in mostly low-income, minority, disadvantaged neighbourhoods in the U.S., and another $600 billion has been committed by the banks currently seeking to merge in the U.S., and that's over the next five years. So five years from now, there will be over $1 trillion reinvested, and the banks themselves will tell you, as they told the Senate banking committee when they went to the U.S., that they would not have done this lending without the legislation.

• 1115

In terms of impact, I would refer you simply to give Jim Peterson, Secretary of State for International Financial Institutions, a call and ask his experience when he went down to visit Chicago, because he told the Toronto Star that he saw a great impact on Chicago communities that have been completely revitalized because of the reinvestment that had occurred as a result of the Community Reinvestment Act.

We would be happy as well, in terms of talking to people in the U.S., including the regulators, including the former equivalent of the Superintendent of Financial Institutions in the U.S., who is now actually a banker in New York, to arrange for any of the committee members to travel and talk with them, as the Senate banking committee has, and I am sure you will find the same thing. It's a very important measure in terms of ensuring that Canadian banks serve all Canadians fairly and well in every community across the country.

Mr. Roger Gallaway: I want to ask one final, very leading question.

Last week we heard from officials from the Office of the Superintendent of Financial Institutions, and I would hope that most Canadians believe they are there to track the viability and the soundness of particular institutions. At the same time, we know that from time to time institutions that fall under the statutory purview of OSFI sometimes fail.

You follow, and have followed for some time, that office. Whose interest is OSFI there to protect? In your opinion, is it there to protect the interest of the consumer or is it there to protect the interest of the government of the day?

Mr. Duff Conacher: I think the superintendent's office often feels in conflict. The task force says they do have consumer protection responsibilities in terms of solvency. So how far do you go? Do you protect people in terms of complaints and overall level of service?

The task force recommends putting some of those functions of oversight over tied selling, privacy, and other consumer protection measures in with OSFI. Essentially what we feel is, if they are a reluctant regulator to take on these areas, then put it in with a regulator that wants to do those jobs, where they don't feel there's a conflict between protecting solvency and protecting depositors and consumer protection and accountability.

One of the issues the task force has raised is that OSFI currently has a mandate also to protect creditors. They feel that this should be removed, and we agree. OSFI should be protecting solvency and protecting depositors, but not protecting creditors.

Essentially, we have some concerns as well with what the task force has done in terms of the ownership rules, especially the rules for holding companies that they've proposed. I'm sure you heard from John Palmer, the current superintendent, similar concerns that it may make it much more difficult to regulate these areas effectively.

So proceed very cautiously. Find a regulator that wants to enforce and keep the banks in line in terms of consumer protection and accountability, and proceed very slowly, we feel, in terms of these ownership structures and changing ownership structures, to ensure that you don't create institutions that can't be regulated.

The Chairman: Thank you.

Mr. Pat Martin.

Mr. Pat Martin: Thank you, Mr. Chairman.

Thank you, Mr. Conacher, for being here. I think it's an absolutely excellent presentation, and it's really heartening for me that somebody like you is out there giving voice to the concerns of this broad-based coalition.

I recognize a number of the organizations in this coalition. In fact, I think I'm a member of half a dozen of them. Certainly it's about time we've come together, and I think maybe the whole MacKay task force and the idea of the bank mergers has pulled this group together to get our concerns on record once and for all regarding the whole financial services sector.

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There are a couple of things I was particularly interested in that you haven't had a chance to comment on yet. I won't go through things you've already clearly articulated.

The riding I represent has two of the poorest postal codes—I think number two and number three—in terms of poverty. It is the riding of Winnipeg Centre in downtown Winnipeg. As the member across pointed out, an awful lot of people in that bottom level of the socio-economic scale don't have bank accounts. They don't have banking services. They have Money Mart cards. There are Money Marts popping up right next to every pawn shop, frankly, meeting a need that our chartered banks are clearly not meeting. I'm glad that it was pointed out and that you've made reference to the issue.

The other thing is the whole idea of micro loans and economic development, or some commitment to community development, but I think you've spent a lot of time on that. I'm glad to add my voice to the idea that something along the lines of the Community Reinvestment Act in the U.S. would be not only desirable but necessary.

The one group you have listed here as a member is SEED Winnipeg, which is a wonderful group of people who actually are in partnership with one of the credit unions. I've been active with that group as well, at one time arranging a loan of $800 for a woman to buy a sewing machine so she could do contract piecework from one of the garment industry plants. That was the difference between abject poverty and a bit of a leg up. She had been turned down flat by the conventional lending institutions.

Another case was that of two dental mechanics from the Philippines who came into my office. They had their credentials and used to have their own business in the Philippines making dentures and things. They needed $8,000 to set up a comparable business here and they had a line-up of clients and dentists who said they would patronize them if they could only get that start, that foot in the door. They had been turned down flat by every conventional lending institution in the city until they went to SEED Winnipeg. So the need is there.

The other thing I would point out is the Crocus Fund, the labour-sponsored investment fund in Manitoba. Of all the venture capital released into the province of Manitoba last year, 80% was from the Crocus Fund, not from the lending institutions. A lot of those businesses that were looking for a business loan to expand weren't really looking for an investor who would take an equity position in their company. They were looking for a conventional business loan and again were turned down flat.

I have only a minute, and I have a question in Question Period coming up. The only thing I would ask you about is this. I think it's a brilliant idea that somebody is mandated to send out something within a mailing. Frankly, I don't know the term you're using for that. In the U.S. it went out with the utilities. I think that's wonderful.

The question I have, or the offer I would even make here is, if the MacKay task force recommends it and this worthwhile group feels it is necessary, why don't the MPs use some of their mailing privileges to help you blanket the country with a leaflet like that and then let's see what the Canadian people really feel. Not just a poll or a survey, but let's send out a couple of million of those and see if you do get a 40% reaction from Canadians. I would make that as an offer and would like to know some of your feelings about that.

Mr. Duff Conacher: That would certainly help as a supplement to having financial institutions mail it out to their 20 million customers. Even at that level, with a 1% return, you'd still have a viable organization with 200,000 members. According to a national survey we've done, people are willing to spend $20 to $30 as a membership fee, so that would mean a $4-million to $6-million budget.

I mentioned that we have approached the institutions and asked them to do this voluntarily, and they have refused. Also, what I didn't mention before is that according to our national poll, 64% of Canadians feel that any institution that is approached and does not volunteer to enclose such a flyer, whether it's a financial institution or a utility or telephone company, should be required by government to enclose the flyer. The task force disagrees that the government and financial institutions should co-operate and facilitate such an organization's success.

You talked about the community reinvestment act. I'm sure you'd be interested to know that currently the disclosure on business lending lumps Manitoba with Saskatchewan, so that you cannot even track what the banks are doing in business lending on a provincial level, let alone a community level. That is why the task force has recommended that the statements go down to the community level.

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It is also Liberal Party policy, because at the October 1996 convention here in Ottawa, over 2,000 delegates from across the country passed three resolutions, one of which specifically mentioned the U.S. legislation and said that it should be enacted here in Canada.

So it's Liberal Party policy. Paul Martin is on the public record saying that he thinks it's a good idea in principle. Jim Peterson thinks it's wonderful. The Senate banking committee, certainly Senator Michael Kirby, has said to the Globe and Mail that the Senate banking committee will be recommending it in a report to be released at the end of this month. Everyone who has travelled to the U.S. has found it works very effectively. It was also in the platform of the Progressive Conservative Party in the 1997 election in terms of greater disclosure, and also a more complete system in the platform of both the NDP and the Bloc Québécois. It has broad-based support, and it should be put in place—at the very least the recommendations that the task force is making, but we see the gaps and we think they should be closed.

Overall, Canadians are saying very clearly that they want better banks, not bigger banks. The majority of Canadians are opposed to the mergers, and a majority feel that banks should be held to a higher standard of performance than other corporations. In a democracy, millions of voters should outweigh millions of dollars spent on corporate lobbying and corporate PR campaigns. This is a true test for this government of how much it believes we live in a democracy.

As I said, we've been pushing for accountability of the financial institutions, and we will be pushing for accountability of the government if the government fails to enact the task force recommendations. We call on you as a committee to recommend that the government do this very strongly.

Thank you very much.

The Chairman: Thank you.

Mr. Conacher, before you leave I want to thank you very much for bringing the consumers' voice to debate. I think it's a very important voice that needs to be heard, and I would also encourage your organization to participate as fully as you possibly can.

As you know, I've sent a letter to all members of Parliament requesting that they kindly hold town hall meetings or community outreach meetings in every riding across the country, because this is indeed a very important issue.

I have a question. Since you are an expert in consumer rights, I want to know where the line is between regulation on the one hand and running the business. Do you know what I mean by that? There's a fine delineation between the two—regulations to make sure you have safeguards and protection.

I'm thinking of your comment in reference to privacy concerns of consumers, a very valid one. I think MacKay does a good job in addressing those particular issues.

I want to give you an example I heard while I was having a conversation with a few people. Let's say you have these community accountability reports and that banks need to come out with more information about what they're doing in each community.

Let me give you an example of a community where there is one large employer producing widgets. On the report of the bank, you basically have that the bank has loaned $1 million to a business. Since that's the only medium-sized or large business in our town, you and I would probably guess they have a loan for $1 million at the bank, or $200,000 or $400,000, whatever the case may be. Down the street, in the next town, there is that company's competitor, who may or may not use that information for strategic advantage. I know this is sort of an isolated incident, and maybe there aren't that many around the country and maybe there are, I'm not sure, but where do you draw the line? In what is in principle an excellent idea in the sense of making sure there's accountability for banks and their loans, do we have any concerns at all about what I just said?

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Mr. Duff Conacher: We are concerned, and we've recommended no change to this part of the current disclosure system or the disclosure system we want put in place.

The current disclosure system that the CBA has negotiated with the government on business lending follows Statistics Canada's privacy protection guidelines, which state that in a particular category of a database that breaks down lending, if you have a grouping that is less than 13, you do not break it out below that level. So if there's only one borrower in a particular category, say loans over $1 million in that community, it wouldn't be broken out. It would be left blank because you would be able to identify that borrower.

They follow the same thing in the U.S. No one's privacy is ever compromised, and if any financial institution, particularly the banks, tells you that's the case, just ask them which guidelines they're following currently. Currently they're following the StatsCan guidelines to protect privacy, and we recommend no change to that at all.

Maybe we can't get a community-by-community breakdown for some types of loan levels, but at least we'll have a regional breakdown possibly. That's better than what we have now, which is only eight areas across the whole country, which gives you no sense— As I mentioned, Manitoba and Saskatchewan are lumped together. So not even on a provincial basis do you have any sense of where they're lending and whether they're meeting needs.

I mentioned the other gaps as well. They're not tracking demand, so you don't know what the demand is for their credit. They're not tracking whether they're meeting that demand, and they're not tracking in any detail the risk level of lending to various sizes and types of business, so you can track whether it's justifiable that they meet demand, whether it's a legitimate demand. In the mortgage lending area in the U.S. they've closed all these gaps. In the business lending area we need a similar system here in Canada.

The Chairman: Can you explain to me what exactly they do track? You've mentioned all sorts of things that they don't track.

Mr. Duff Conacher: Currently what is tracked is the number of borrowers by size of loan and type of industry, broken down into eight different regions. That's the current system in Canada.

Now, the number of borrowers and the amounts loaned out by size of loan for each category give you some sense— and that's why we know, for example, that as a portion of overall lending, lending to small business has decreased between 1995 and 1997. It was just over 7% in 1995 and now it's down to about 6.5% for business loans of under $250,000, which everyone accepts as a proxy for small business loans.

We know as well some of the patterns by those eight different regions, and we know industry breakdown by 17 different industries. But what the task force recommends are community accountability statements, and we agree. It has to get down to a community level, protecting people's privacy. We have no concerns about that. Follow the StatsCan guidelines, but get it down to a community level.

The Chairman: My first question—I guess it's a philosophical question—is where do you, as a consumer, draw the line between regulation and running the business?

Mr. Duff Conacher: Well, I think society and certainly governments draw the line in different ways for different corporations. For public utilities such as telephone, gas, and hydro, when they want to raise their rates we require them to go before the regulator and justify the rate increase to ensure they're not gouging. At the other end, for example corner stores, we don't regulate them that much in terms of whether they're providing service fairly and well to people, other than some measures in human rights codes and things like that.

The task force and Canadians agree that banks in particular should be held to a higher performance standard. That means being regulated more than other corporations, because historically they have benefited from protections that other corporations have not received. The Prime Minister in 1993 stated very clearly, and you'll see this quoted in our position papers, that: “Our banks have benefited from the protection of the Bank Act.” And he said at that time: “It's time that they gave something back.” Well, the task force is saying the same thing. It is time they gave something back. But as we've seen in the access to basic banking services area, they're not going to give something back unless they're required to do so.

So as with the task force, as with most Canadians, we place the banks closer to public utilities than to corner stores. The analogy that the banks' CEOs have used, that they don't want to be taken over by The Home Depot or Wal-Mart, is not an analogy. They are regulated and protected from foreign competition and they have been for three decades. Those protections and regulations have helped them and now we need some protections and regulations to help consumers, small businesses, and the customers of the banks in communities across the country.

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The Chairman: One of the things I find fascinating about these hearings is that they clearly illustrate that there is a difference between theory and practice. For example, if banks A and B merge—and I am not talking about the two proposed mergers now—and bank C and D merge and you have E, F, and G, etc., left in the market, as a consumer advocate would you agree with me that choice, price, service, and quality are all important components in choosing whatever you are buying, whether you're buying a pair of shoes or a financial product or good? Those are important issues.

I don't know if economic theory follows, but if A and B merge and C and D merge and we were to accept the opinion that a post-merger society actually increased prices, and you have bank E offering lower prices and choice and good service, following economic theory—you obviously don't believe this—this bank would become a pretty big bank. They would be taking over all the consumers who would not be happy with the prices, service and whatever else goes wrong in a post-merger society.

Mr. Duff Conacher: The Competition Bureau uses its standards for anti-competitive impacts because those standards are widely accepted to show that bank E would not be able to come in and do that because the top four banks would be so dominant—the 35% threshold in any product or service area, or geographic area, or the 65% threshold. The Competition Bureau has recognized these barriers, as has the finance minister, as has the task force chair and the task force as a whole. The barriers to foreign banks coming in, the barriers to others starting up and competing, are very significant. Essentially the big banks have been protected from foreign competition for three decades and now they want the ultimate protection, which is to become so big and so dominant that they would not be able to be challenged.

We think we are making a very reasonable recommendation. If you accept the merger-seeking banks' arguments now, then you have no choice but to blindly follow their rhetoric about what is happening and what is going to happen in terms of foreign competition. There is no rush. The task force recommended fundamental rule changes to help both domestic competition and foreign competitors. Well, let's see whether they actually increase their market share. If they don't, then I think the Competition Bureau will reach the same conclusion as it's likely to reach at the end of November, that mergers in the Canadian economy would still have serious negative effects on customer choice and would allow institutions to so dominate the marketplace as to abuse their customers.

The Chairman: I will ask you a question, so you can get it on the record, in reference to the fact that there is a difference between theory and practice and that in fact consolidation and mergers have different dynamics at play vis-à-vis the consumer.

Mr. Conacher, on behalf of the committee, I would like to thank you very much for bringing the consumers' voice to the committee.

We will now suspend and return in approximately 45 minutes.

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The Chairman: I would like to call this meeting to order and welcome everyone here this afternoon. We have the pleasure to hear from representatives from the Bank of Montreal: the president and CEO, Matthew Barrett; executive vice-president, corporate services, Drew White; and chief economist, Tim O'Neill. Welcome, gentlemen.

I'm sure you've appeared before parliamentary committees before, so there's no need to give you instructions. However, as a committee we deeply care about establishing a vision for the future of the financial services sector, and you will see that in fact many of the questions that will be asked by the members will reflect that aspiration.

Mr. Barrett, you may begin.

Mr. Matthew W. Barrett (President and CEO, Bank of Montreal): Thank you very much, Mr. Chairman.

When I first began thinking about this appearance, I agonized a little over what I should say to you about the MacKay report. I knew, of course, that the report is the theme of these hearings and that its potential importance for the financial services industry can hardly be exaggerated.

I should like to go on record that in my judgment Mr. MacKay and his colleagues have produced a coherent, comprehensive and well-integrated policy framework for the future of financial services in Canada. In my opinion, they did what they were asked by the government to do, and commendably did it on time and on budget. Canadians everywhere are very much in their debt, and particularly those of us in the financial services industry.

Along with my colleagues Drew White and Tim O'Neill, who as you said are appearing with me today, I will be more than happy to talk about the report in detail in your question and answer period. I thought, however, that in these brief opening remarks—and I promise they will be brief—it could be useful for me to stand back a little and, rather than talk about the report itself, try to describe how I see the rapidly changing environment that led to the appointment of the MacKay task force in the first place.

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I believe we can usefully think of this environment in terms of a series of challenges—challenges for Canada, challenges for the financial services industry, and on a more parochial level, challenges for one financial institution that I can speak for, the Bank of Montreal.

The challenge for Canada as a nation is to respond to powerful worldwide forces of change by shaping a financial services industry that combines maximum benefit for the Canadian consumer with a strong, competitive, Canadian-controlled presence in Canada, in North America and in the international markets. I believe that is the vision of a future financial services industry that you will find in the MacKay report.

A major challenge for our industry is that our productivity, which is measured as the ratio of our non-interest expenses to our revenues, is consistently worse than that of the best United States and international financial institutions, and as the MacKay report points out, this difference has tended to widen in recent years.

The reason is that our industry has increasing difficulty in funding the massive investment required by new technologies, compounded by the continuing high costs of maintaining traditional bricks-and-mortar branch distribution networks alongside these new alternative channels. Competitive pressures and the demands of different groups of customers present us with stark choices: invest in the new technology, or drop out of the competitive race; maintain traditional banking branches, or lose a significant portion of our customer base.

As the MacKay report notes, the three largest banks in the United States spent $5 billion U.S. on technology in 1996, while the three largest banks in Canada spent $1.6 billion. As you all know, the present government is strongly committed to improving the productivity of Canadian companies, and has been ever since the red book of 1993. But a gap in productivity and a gap in productivity-raising investments as large as this in a key industry surely raises troubling questions about our future in a knowledge-based world.

The reality is that Canadian banks, taken altogether, have either costs that are too high or revenues that are too low, or both, for a total gap of roughly $5 billion in comparison with the high productivity of the key competitors that are now emerging in the United States.

At Bank of Montreal we have our fair share of that challenge. We would need to either reduce costs or increase sales, or some combination of both, by a total of about $800 million if we were to just match the most productive U.S. banks. Over time, I have come to believe, as a businessman and a man responsible for many thousands of employees, over 5 million customers and many billions of dollars of other people's money, I am faced essentially with just two choices.

The first choice is a very positive one. The first choice is to grow our business. We would expand our customer base under that strategy, and thereby generate the new revenues that would improve our productivity ratio and help to pay for the multiple channels of access and the high levels of service quality Canadian customers increasingly expect.

The second choice, a less attractive one from my point of view, is to tackle high costs directly. In such a scenario, we would increasingly concentrate on our strong, profitable businesses. In other words, we would not invest in those businesses that were not profitable or that could not be expected to become so in a reasonable period of time. So that would mean that over time Bank of Montreal would emerge much smaller but much more productive and much more able to invest in the chosen businesses. It would no longer, however, be a nationwide full-service bank, and that's not a choice I'd like, given our tradition and our history as Canada's first bank.

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So I chose the first, or what I like to call the growth strategy, and over time, again, I realized that by far the speediest, most cost-efficient way, and at the same time the most visionary way of growing our full-service business was to seek a merger with another Canadian bank. Hence our decision to merge with Royal Bank of Canada. From our own studies and our own reading of the MacKay report, we believe that eventually there will be no more than one or two Canadian financial institutions able to compete with any other in the world, and we want to be in that very select group.

Mr. Chairman, I should like to suggest to you and to the members of this committee that the choice I saw some years ago is essentially the choice that faces Canada today as it considers a decision on the proposed bank mergers.

Canada can approve the proposed mergers and thereby give the banks and other financial institutions the ability to achieve the scale and the productivity they need to grow, to compete, and to fund the nationwide full-service, multiple-access banking system Canadians have always known. Now Canada can, of course, also refuse approval of the mergers. It is clear to me, as I believe it is to other leaders in the industry, that this decision would force Canadian financial institutions to pursue other strategies if they are to remain competitive and achieve their business goals.

I strongly believe these strategies would be second best to the proposed merger of my bank. The benefits flowing from them to our shareholders, our customers, and especially to Canada as a nation would be significantly less than those that would come from the merger. Given that the status quo is not sustainable, however, the second choice, of attacking the cost and revenue ratio directly, would be the only course open to me, and I would pursue it.

In the case of Bank of Montreal, I have been very deeply committed to the first choice, the choice for growth, and I am therefore not able to give you details on what our strategy would be if our merger is rejected. But the essence of what I have to say this morning can be put in a very few words.

When the proposed mergers are judged, they are by many always judged against the status quo, and yet it is agreed by virtually everyone, including the MacKay task force, that the status quo is not an option for any company in the financial services industry. It follows then that the status quo cannot be a realistic or helpful standard of comparison. We should, rather, judge the mergers against the alternatives to them.

I passionately believe that the first choice, the option for growth, including growth through mergers, is the choice that will best serve Canada's national interest. It not only promises more jobs in Canada, more decisions taken in Canada, more access for Canadians in remote regions of this vast country, more foreign earnings flowing into Canada, but it is also the path to the MacKay report's vision of a financial services industry that achieves maximum consumer benefit through intense competition, constant innovation, and flexible regulation, and at the same time it is a strong Canadian-controlled, Canadian-based presence in the market.

Mr. Chairman, in closing, I hope I've suggested to you, even in these brief remarks, that this is not just a question of the future of this or that individual financial institution, but rather a question that to a significant degree would be one of the factors that shape the kind of country Canada will be. Bank of Montreal has made this choice. Now, of course, it is for Canadians to choose. They will have the benefit of the thorough and balanced study by the MacKay task force, as well as the findings of the Competition Bureau, the Superintendent of Financial Institutions, and of course, the reports of this committee and of the banking committee of the Senate. So Canadians will have abundant evidence to call on, and naturally, we hope they will use it to make the choice for growth.

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Thank you, and I look forward to your questions.

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

We will begin with Mr. Harris.

Mr. Dick Harris: Thank you.

Thank you, Mr. Barrett, Mr. O'Neill and Mr. White. I enjoyed your presentation.

I think my first question would be in regard to the MacKay task force report. Perhaps you could maybe elaborate a little bit on these three questions: what practical implications do you think the MacKay task force would have on increasing competition; secondly, if the government does adopt the MacKay task force report, how quickly do you think the recommendations that are in there should be implemented; and thirdly, specifically who do you think will be the new strong sources of competition that would be allowed by the recommendations?

Mr. Matthew Barrett: To the first part of your question, the MacKay task force strongly recommends the liberalization—further liberalization, I might add—of entry of foreign competition into Canada, with which I completely agree.

Secondly, it talks about encouraging domestic-foreign rivals and eliminating anything that's standing in the way of increased competition. I also agree.

It talks about opening up some of the infrastructure that was built by the banks, into making it accessible to smaller players. I agree.

I think it's well grounded and sound economics. I think every country, Canada included, has to discipline domestic rivals by making sure there is entry of foreign competition, and as a result of the interplay of both domestic and foreign rivals, the Canadian customer gets a better deal.

So I'm philosophically and practically in favour of that, and I think the government had signalled its intention to do that. Certainly as a signatory to the MAI, to WTO, to NAFTA, frankly I'm not sure we have a choice anyway.

I think it's a good thing to do. It keeps us sharp. We're already spooked by competition that's coming in, and we just want to make sure there's a Canadian choice in amongst that mix.

Oddly, I'll argue against myself. One way or the other, the consumer is going to win, whether you agree with me or not on this merger, because they will see much more intense competition.

What was the second part of your question?

Mr. Dick Harris: How quickly do you think the recommendations, if they go ahead, should be implemented?

Mr. Matthew Barrett: Quam celerrime posse.

Mr. Dick Harris: Tomorrow, I guess.

Mr. Matthew Barrett: Ideally one would like to see them all implemented as soon as is possible. But some of the suggestions made require regulatory change, some don't. Mergers don't. Being completely biased, I would get the easy ones out of the way that don't require regulatory change.

I think Mr. MacKay was quite forceful in his report and in his subsequent comments, that he communicated a sense of urgency, because having studied what's going on one hour south of us and what's going on in Europe, we don't have the luxury of a lot of Socratic debate unless we want to find ourselves too late. I said yesterday at a meeting that you never know when you're too early, but you always know when you're too late. Therefore, I would like us to move with dispatch, because I think it's a national issue.

Mr. Dick Harris: I have another question in regard to small business.

You have said you believe the merger will allow you to offer a higher-quality service and products at a lower cost, and of course everyone wants that. But I want to talk about another area of small business financing that I guess can be best described as risk-based financing. I know that all financing is risk-based, but as a general rule there seems to have been more of an emphasis on whether a start-up venture, for example, has $5 in their pocket in order to borrow $1 from the bank, that sort of thing, as opposed to saying, “Well, we like your idea. You don't have a whole lot of capital, but we are willing to lend you the money based on our assessment of your plan at, say, prime plus 5%.”

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Now, while no one likes to pay 5% over prime, it still does provide yet another avenue, another area of access for start-up ventures, such as a struggling business that needs a little more working capital to make its plan complete.

What's your view on that? If you're in favour of it, what has prevented the banks from doing this before now?

Mr. Matthew Barrett: First of all, you've hit on a gap, an important gap in the availability of, if I can use banking terms, venture capital funds and merchant banking funds available, particularly at the small ticket level. Most of the venture capital companies around either want the person's body and soul and half the business or they're not interested in small ticket.

I only say this to give credibility to the answer I'm going to end with. We recognized this gap in the market and created a venture capital bank for small business, for tickets under $100 million, for example. We then created a merchant banking bank. What happens is that businesses grow for two or three years, they see an opportunity to grow further, they need a lot of debt to do it, but they don't have enough equity, so therefore the merchant bank would kick in.

What we and the Royal Bank— and the Royal Bank also set this up. This is all in the last two or three years. What we have available right now is about half a billion dollars of such capital, and we have promised to double it over five years to meet the very niche you're talking about.

The other point you make about microlending is another area, I think, for investigation. I made an announcement about a week ago. I'd gone across the country and talked to small-business people from Vancouver down to Newfoundland in small groups of 15 or 20, because I knew that the small business issue is a very, very crucial issue and indeed is a proxy for whether the banks care about Canadians, because small business is the big job creator.

I might add—and I don't mean it boastfully—that the Bank of Montreal has been recognized by the harshest critics as being the most small-business-friendly bank. John Cleghorn and I have agreed that the best practices that exist within the Bank of Montreal will prevail in the new bank. We have also gone further and said that we will set up the first specialist national new bank for small business. It will have a core of 2,500 professionals. We will make it a separate line of business. It will have career paths going from the most junior to the most senior. In the past in banking—I grew up in banking since I was 18—unfortunately small business lending was a stepping stone to glory; you went on somewhere else. We're going to create a bank where that's what you do for a living. Therefore we'll be able to reduce the turnover, which is a major irritant to our small-business customers.

The second thing that John and I put into that new bank for small business vision was based on feedback I got from customers. They're saying there still isn't enough decentralization, there still isn't enough local empowerment, and you need your account managers to be more au fait with (a) my business and (b) the local environment. So we have a major decentralization initiative planned, combined with the creation of advisory councils for each region of Canada that would keep the bank honest in its small-business activities.

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Mr. Dick Harris: If I can, I'll just close with a comment, and then Mr. Epp may have a question.

Mr. Barrett, I appreciate your comments, and I really think there's an important area in what you called microlending. There are a lot of Canadians out there who, for some reason or another, are losing their jobs. There are large numbers who are turning to small home-based businesses to start up, or to small corner or neighbourhood businesses, whether it be in the service, retail or wholesale sector. But no matter what the statistics say, there simply isn't the conventional financing out there to look after the person who needs maybe $5,000 or $7,000 or $10,000. Quite frankly, they have to find this money most often from government sources.

I, for one, do not believe the government should have the responsibility to lend money to these people who are trying to make it on their own. I think it should be conventional banks or conventional lenders. I would just encourage your bank and the Royal Bank to make some sort of firm commitment that this is an area of priority to you, and one that you intend to follow through on.

Mr. Matthew Barrett: We're grappling with it as we speak, sir, and intend for its inclusion in the public interest assessment. I think you're right. An initiative that we have already started on, although it's modest at the moment, is a partnership with Calmeadow. I think Calmeadow has taken very good leadership in this area, with some very innovative ideas on how you can do lending for people who conventionally wouldn't qualify for lending.

I think we need to go beyond that. We're working on that and hope to have a firm statement and firm commitments with respect to a new approach to microlending in the future. And that isn't just a vague promise. We will commit to it and address it in the public interest assessment document.

Mr. Dick Harris: I'll look forward to that.

Mr. Matthew Barrett: Thank you.

The Chairman: Mr. Epp, one question.

Mr. Ken Epp (Elk Island, Ref.): Just one? I have a whole bunch. You'll come back to me then later, right?

The Chairman: Yes, sir.

Mr. Ken Epp: First of all, you have given a commitment that there are to be no branch closings in small communities. If you merge, one or the other will stay open. Some of those branches undoubtedly will come to the point where they will lose money; they'll be money-losers for your big corporation. I would like to know what commitment you're giving to how long you're going to keep them open in a money-losing situation.

Mr. Matthew Barrett: You're right. Fundamentally, bad economics is difficult. But I think what we are saying is that, for the foreseeable future—and I don't quite know what that means, but as long as I can think of—by dint of the benefits accruing to us from the merger, we are able to make that commitment irrespectively. In other words, it effectively equips us with an ability to do more cross-subsidy.

We are committed to access for all Canadians. In fact, we're committed to increasing it substantially between the two banks, not decreasing it. The good news is that the combination of technology—and I don't mean technology for the customer, but technology for bank employees—is allowing us to open a hundred new branches in grocery stores. I announced that a couple of weeks ago. We also have a joint venture with the Government of Canada to open branches in their post offices. This is a very exciting development, and in the last couple of months we've therefore opened twenty in locations that have never seen banking service before.

So we are committed to being as ubiquitous as possible, and to reaching out to as many customers as we can. We can now do in 400 square feet with 3 people what we used to do in 4,000 square feet with 20 people. So I think we're going to be able to bring and keep branch access in not fewer but more rural communities than we have in the past. We will deal with the specifics of that as well in the public interest assessment.

Mr. Ken Epp: Can I ask a supplementary to that? Tied in with this obviously is the commitment to not lay off staff. You've given a commitment that you're going to get into a retraining program in order to redeploy them into other areas if they're needed for technical expertise.

You've just said that you can do with three people what used to take twenty or forty. That's true. We observe that in the banks. To me, if you're going to apply that principle in most or all of your branches, it's going to result in a reduction of people. How are you going to manage that?

• 1245

Mr. Matthew Barrett: I think you're getting into new products and new services. The product range is much broader than it used to be. When I was a kid in the bank, you had a chequing account and a savings account and that was it. Now there's a broad range of investment products, mutual funds, specialist branches for investors. We have mobile branches in buses. About a year ago, I launched a virtual bank called mbanx, and there are 700 new jobs in that bank alone.

So demographics is an issue. The financial dynamism or financial activity of customers is increasing, not decreasing. I'm therefore not concerned that there aren't growth opportunities for us if we can hold on to our customers, that there aren't opportunities for us to expand employment. In fact, if you look at the aggregates of employment in the industry or even within individual banks—

Since I got this job, the Bank of Montreal has transformed 60% of the entire workforce. In that case, I'm publicly against mass layoffs because, aside from the individuals concerned, they demoralize the people left behind. We have gone to extraordinary lengths. That's why I built the Institute for Learning back in 1992: so that we could put 14,000 or 15,000 people a year through new training that would equip them for their new jobs while the old ones were going away. We have a 90% to 95% success rate in retraining and redeploying people. That's the approach we will take. That's why I can say with such confidence that there will be no mass layoffs and that frightening people with that threat is not helpful.

I think certainly 90% of our employees are excited about the prospects of a merger, if it happens. They know they're the ones most affected, but they know our track record and that we walk the talk.

Why won't you get 100%? You get a very small percentage of cases in which people are either unwilling or unable to take the training and the new jobs, or perhaps they're unwilling to transfer or move to where the new jobs are. But our experience over the last ten years has been that it's only about 5% of people that you find in that category. Most people, given the chance, the opportunity to retrain—

I have been on record as saying that when you hear about mass layoffs, management has been asleep at the switch. If management had anticipated in time that they were in the buggy whip business and had retrained the people waxing the buggy whips for the transportation industry, then you wouldn't have these massive dislocations. I think it's a socially responsible thing to do, and I think it's the right, smart thing to do from a business point of view. In the end, we win or fail based on the three feet of space between our employees and our front customers, so employee morale is crucial to us. It's a small price to pay to maintain that morale, and we're willing to pay it.

Yes, we would make more money if we were to do a “night of the long knives” and, as a result of this merger, lay off 8,000 to 10,000 people. We'd make more money in the short run, but in the long run we would do more cultural damage than we'd get up front. So I think it's also in our self-interest to minimize any problems, to keep to the irreducible minimum the amount of employees who are anxious about their lives.

The Chairman: Thank you, Mr. Barrett.

Mr. Loubier.

[Translation]

Mr. Yvan Loubier: Basically, I have two questions. First, though, I have some preliminary remarks. I've listened to you, Mr. Barrett, and to the representatives of the three other banks who wish to merge their operations.

You maintain that there will be no massive job losses, that in fact jobs will be created, that new branches will be opened, that once the mergers take place, consumers will have better access to services, that in all regions of Canada, the cost to consumers will be lower and that they will have access to a wider range of financial products. I want to believe you, but the problem is not many people believe what you're saying.

We tested out our theory throughout the course of the summer. We carried out some pre-budget consultations across the province and asked a number of questions, not only about bank mergers, but also about the future of the financial sector. We found that few people believe what the banks are saying.

• 1250

In order to get people to actually believe you more, would you be prepared—this is not a personal attack—to promote one of the recommendations in the MacKay report, namely that any undertaking on your part, be it to protect or even to create jobs and improve access to services after the mergers go through, services to SMEs and so forth, be enforceable by law and subject to the type of supervision described by MacKay? Would you be willing to see harsh sanctions imposed for non-compliance? Perhaps people would tend to believe you a little more then if that were the case.

[English]

Mr. Matthew Barrett: I am on record since the MacKay task force as saying absolutely. Does it make me a little nervous? Certainly when Mr. MacKay said he'd throw us in the slammer, that kind of got my attention, and in the bank we've tried to decide who's the designated scapegoat if that happens. It's not me.

I'll tell you why. Again, you can look at something and say, boy, this is negative, it's more bureaucracy or more regulation. But if I could be awfully personal and candid with you, I am tired of the mythology. I am tired of arguing. No matter what I say, people are going to say “But of course he's going to say that; he's the bank chairman.” If it takes a third party to prove it and to eliminate some of the disinformation that is peddled about sometimes by our competitors, then I'm for it, even if it causes a bit more bureaucracy.

So yes, I think we need to establish a covenant with the Canadian public on what we will do vis-à-vis these mergers. We need to enshrine that in the public interest assessment. I'm not at all fearful of the government setting up a watchdog agency and making sure I live by them, and John Cleghorn feels the same.

[Translation]

Mr. Yvan Loubier: Are you saying that you would even be prepared to promote that proposal and to put your undertakings respecting job creation, services for small businesses and consumer costs in writing? Did I understand you correctly?

[English]

Mr. Matthew Barrett: Yes, I am, because I don't want to mislead you. The only thing before you get to doing it that gives me a little cause for concern is how far do I have to go? We are a commercial enterprise and there are competitors, and therefore one is caught between wanting to be as open as possible with you to get approval and not opening our flank for everyone to steal our good ideas. This is a competitive landscape, so within reason—

I'm fairly certain we will be able to go far enough to satisfy you, but I hope I wouldn't be asked, as part of the process, to provide all of our good ideas to everybody. I've already signalled the new bank for small business, and you can bet the competitors are scurrying around trying to figure out how to counter that one. It's not normal for a businessman to be asked to say what his competitive strategy is and tell all of his competitors, who get ready to neutralize it.

So the only caveat I'd make is please don't push me into a position that makes it impossible for any business to disclose confidential stuff that it hopes to gain advantage from in the marketplace. But having said that, I think we'll be able to go far enough to satisfy you.

[Translation]

Mr. Yvan Loubier: Rest assured, Mr. Barrett, that it's not your ideas we want, but some results. If you make some undertakings respecting job creation, access to services, quality and competitive prices and if you fail to deliver on them— Earlier, I referred to the MacKay report which argued that these undertakings should be enforceable in law and that legislation should provide sanctions for non-compliance. Your business strategies are not our concern and we have sufficient confidence in the free enterprise system to respect your choices.

My second question relates to the second page of your news release where you state the following:

I submit to you that the attempts of our competitors to derail the mergers by political means are de facto proof that they know we will be able to do things for our customers that they cannot do.

I am neither a competitor nor a dogmatic opponent of the merger proposals because there are changes that must occur in the coming years. If we don't want to be outclassed by foreign competition or lose touch with our own markets, we must make some changes.

• 1255

What do you say to your opponents who argue that it would be unfair for the government to authorize the mergers without allowing them to enjoy from the outset all of the advantages that the mergers would bring to you and that another approach should be taken, perhaps legislative changes respecting the ownership regime, to give those banks that do not wish to merge and other financial sector players an opportunity to forge strategic alliances and establish multi-sectoral holdings, not only to offset the resulting higher concentration in the industry, but also to ensure that there are not just two major players in the financial sector to confront globalization and a more liberal financial services sector over the next ten years? What do you say to them when they argue that it would be better to have seven or eight players on the Canadian market to maintain a certain acceptable level of domestic competition to better serve consumers and meet the challenges of global competition? The competitors will be ten, twenty or even thirty times bigger and the rules will be far more liberal than they are now. How do you respond to these charges?

For example, which you be amenable to the government immediately moving to amend the legislative framework and allowing other players in the financial and banking sector who do not wish to merge to forge strategic alliances, even before any merger plans are approved, so that everyone starts off on the same footing in this new competitive environment? Would you be prepared as well, before the mergers proceed, to see the ownership regime changed so that holdings can be created to offset your position of strength, both domestically and abroad?

[English]

Mr. Matthew Barrett: If I could start off by saying what we are not intending, I would love to see 10 or 15 dynamic, internationally competitive financial institutions in Canada.

And this was not about a “beggar thy neighbour” or whatever. There are various strategic options that professional businessmen are always evaluating. They always have in their right-hand drawer a number of different strategies they can pursue and then they pick the ones that are best for them. All I was responding to in my remark is that I think people— In other words, if the Government of Canada wishes to give more powers to smaller institutions and give banking powers to bigger institutions, I am in favour of it. This is not about trying to have some zero sum game; it's trying to have a Canadian industry that can hold its own in a NAFTA context with, from a banking point of view, a borderless system.

So I would not oppose at all anything that helps other financial institutions improve. Where I get frustrated, and I'll be honest with you, is that I think they might be better served looking for positive strategies than a scorched earth policy of trying to bring down the mergers instead of pursuing strategies that I think would be in the interests of their institutions. Some are. On the demutualization, I would applaud the insurance industry; I think it's a critically strategic variable for them. I think they need the stock trading cards. They need to expand their range of businesses. They'll need a trading card in order to buy and acquire other businesses. I think that's a very positive move. There's talk of the payment system. If opening up the payment system helps people to compete, fine.

We are not doing this to try to hurt the Canadian financial services industry. So if in allowing us to be strong competitors you also make a lot of other competitors stronger, I would applaud it.

• 1300

[Translation]

Mr. Yvan Loubier: If your competitors announced to you that they will stop trying to derail your merger plans if, much like in a Formula 1 race, they can start from the same position as you and are given the legislative tools to forge strategic alliances and establish financial holdings to offset the power of the merging banks, would you agree to let the government supply them with these tools? Wouldn't this approach appease the players in the financial sector who are vehemently opposed to the merger plans?

[English]

Mr. Matthew Barrett: I don't know. You see, this is where it gets difficult. You're asking me to opine about other people's strategies and I don't know what their strategies are. If their strategy is to coast, be complacent and leave it to the next generation to worry about, then I'm not prepared to hitch my wagon to that kind of inertia.

From my point of view, I think you can do both. I believe there is nothing egregious or harmful about the mergers. I could put to you, if I may, that in 1994 I raised this spectre publicly in Canada. I was pooh-poohed at that time as well when I predicted the emergence of super megabanks in the United States. The only thing I was wrong about was the speed. It actually went twice as fast as I thought.

So we can't fiddle while Rome burns. We can't sit around having a Socratic debate and having the speed of the whole train held up by the slowest caboose. I wouldn't want the destiny of my own institution to be tied to the appetite, or lack of it, other people have for change. I think you can do both. Give them the opportunity, yes, but don't ask us to wait for other people, because they may never catch up. I wouldn't want to make our initiative dependent on what the strategies of other people are. I'd like it judged on its own merits ideally, but if as you're judging it on its own merits you think there are other things that—

What I would like to see these other institutions coming to you with is the kinds of things they think they need to be successful, and I'm all for them if you give them approval. I'm not trying to derail their strategy; I don't know why they're trying to derail mine.

The Chairman: Thank you, Mr. Loubier.

I have a brief question. I want to return to the MacKay report, because I think that is in fact what we're studying here.

The MacKay task force report sees mergers as a dynamic process and a legitimate business strategy. However, it goes on to say that that depends upon the people who are able to successfully combine difference organizations and corporate cultures and take advantage of economies of scale and scope and dynamic synergies.

Now, the pro-merger advocates usually use the example of the Netherlands as a model that in fact speaks to the benefits of mergers. However, if I may read the MacKay report for a second, it states that Canada already has a higher concentration ratio, that we in fact have more efficient banks, and that we have a higher proportion of our population employed in the financial services sector.

I want to know exactly what has the Dutch sector achieved that we have failed to achieve. While they have some very large international banks, what are the beneficial consequences to the Dutch economy?

Mr. Matthew Barrett: First, it's a long answer, so excuse me if I go on too long; cut me off. Well, you will anyway, I guess.

What you're seeing in Europe is a deepening integration of the economies in the European Union in EMU at Maastricht, etc. You saw some massive repositioning of the various banks, particularly from the smaller countries, who worried about the hegemony of Germany, the U.K. or France in terms of their ability. Faced with that, a lot of these—the Swiss, the Dutch, the Belgians and the Austrians—said, well, do I have a shot at having viable pan-European institutions that are capable of handling the business for customers and clients across an increasingly seamless Europe? So there has in fact been overt public policy encouragement of consolidation virtually throughout Europe.

• 1305

The analogues in Europe or Australia or wherever are revealing and illustrative, but I have to tell you my preoccupation is more with the United States. One of the great benefits we have as a nation is that we have as our neighbour the most powerful nation on earth, and therefore a wonderful market for our exports. The flip side of the coin is that we have the most powerful corporations on earth, in banking and non-banking, that are starting to come north. We therefore have a competitive reality in Canada, vis-à-vis U.S. competition, that an awful lot of other countries don't have simply because of physical distance, culture, language, etc.

I don't want to broaden the discussion, but I think the situation is that in many sectors Canada needs to worry about whether or not it's going to revert to being an importer or an exporter of services, not just for its banking industry but, I would argue, for its industrial composition. What industries can we be competitive in, notwithstanding that we are a relatively small population, particularly in relation to the United States?

When I think of the United States, I think of California. California is one state—and it's a big state—with the population of Canada and, oddly enough, a GDP about the size of Canada's. It has two banks and it's just lost the head office of one of them to North Carolina. Two banks in a state the size of Canada.

My own bank has been in the United States on the ground since the mid-eighties, centred in the midwest. We own the Harris Bank in the United States. I scrambled like crazy, bought eighteen banks, and tripled the size of that bank in the last four years. It's still being dwarfed daily by consolidations going on all around it by super megabanks like Nations Bank, Bank One, the Bank of America. NBD bought First Chicago and in turn got bought out.

I'm now faced with looking at my investments in the United States. Last year, 57% of the Bank of Montreal's income came from outside Canada. I'm caught with the price of U.S. banks and the expense of de novo expansion. The organic expansion of it without acquisitions is becoming very difficult, so I have to now worry about whether or not I can sustain that operation in the United States. One of the ways out of that dilemma is to get together with the Royal Bank, which has aspirations in the United States.

All of the Canadian banks do wholesale banking and corporate stuff, but we are the only one with operating services, the only one that does banking on the ground. We have 150 branch locations in the Chicago area, and that's a very attractive feature of our aspect to the Royal Bank. Combined, because of our market cap, I think we will be able to be much more aggressive in expanding our operations in the United States than I can be on my own.

I don't know if that answers your question, but I would ask that the people deliberating on the issue keep in mind that we are cheek by jowl with an economic superpower that has daunting businesses in all sectors. Those businesses look south and everywhere else, but they will surely look north, as we're seeing with Bank One and Wells Fargo.

I've been in this business 36 years. I know every CEO of every American bank. At least three times I have been approached by CEOs who wanted to take me out but didn't know about the 10% rule. I told them, “No, there's a 10% rule.” They said, “Well, 100% of Americans can own Canadian banks.” I said yes. They said, “You said 10%; therefore ten people can own Canadian banks.” I said, “Yes, but they can't know each other.”

• 1310

You see, these banks are very expansionist. It would be a dangerous naivety to assume that they're preoccupied with just their own markets. That's what happened to the retailing industry in this country. I have clients—I won't say their names for obvious reasons—whom I talked to years ago and warned that in their merchandising they needed to restructure the retailing industry here or they would get killed. What happened is that the Wal-Marts, the Home Depots, etc., arrived and now the retailing industry is reeling in this country.

So that's why I use that metaphor. I was trying to bring it down from 40,000 feet. I was trying to use a metaphor that would resonate, that people pass every day, when I said I didn't want to be the corner hardware store waiting for Home Depot to arrive.

I'm on the board of a company that built a company called Aikenhead's. Home Depot arrived and we had to sell Aikenhead's to Home Depot. We couldn't compete.

So this is the financial equivalent of category killers—you have country-wide mortgages that are bigger than all the Canadian banks combined coming into Canada. I lost a credit card business with the Government of Canada to Citicorp. I lost a business travel business, the Government of Canada's business, to AMEX. Am I criticizing the government? No, I'm not. They got a better deal. But I'll give you an inside story. I ordered our people to bid break-even because I wanted the prestige of having the government's business, and at break-even I couldn't match players with ten times my scale.

That's my worry, that these people are not obvious to the man on the street. So when your colleague asked me how I hoped to get this information out on the street— It's not easy. It is not easy to discuss in 15-second sound bytes the impact of globalization, changing demography, technology, and free trade agreements all coming together, and the likely effect they will have on Canadian industry. It ain't an easy sell.

The Chairman: Well, you didn't do it in 15 seconds here.

Mr. Gallaway.

Mr. Roger Gallaway: Thank you, Mr. Chairman.

Mr. Barrett, you've talked about access to banking. You said “We are committed to increasing access to banking.” I must tell you I was talking to one of your customers, who is a constituent of mine, last night. He's been following this very closely. You're talking about “it ain't easy” and this is being televised, so you've made a pitch today. But he made the analogy that this whole process was a lot like the Burt Bacharach song Promises, Promises. There's a lot of hyperbole. There's the covenant you're referring to that's coming in the future—the covenant with Canadians on what the banks are prepared to do.

Yet when you look at some of the numbers, the fact of the matter is that this year to date the Bank of Montreal has had a net branch closure number of, I believe, 35. In the Bank of Montreal last year the net number of openings versus closures was 27. So you're now saying that somehow this mystery of a merger is going to increase access. It's going to somehow be good for Canadians. If you've closed 35 to date this year, net number, and 27 last year, and now you're saying to Canadians that you want to merge because this is somehow going to be better, I want to know, having regard to this, how is this going to increase access to banking? As we see, the trend is going the other way in terms of branches. Knowing that, why would you ask Canadians, to use your words, to hitch their collective wagon to that kind of inertia—the inertia of closing branches?

Mr. Matthew Barrett: This is an extraordinarily difficult dilemma for me, because I risk being accused of fear-mongering or threatening or whatever. When you see branch closures, what you're seeing are branches that are unprofitable, or cases where the town has declined and demand for banking services is too low to support the economics of a branch in that area.

I guess what I'm saying to you, sir, quite bluntly, is that the savings we would achieve across a broad range of issues, including duplication of technologies, etc., would frankly allow us to keep open branches that would otherwise be candidates for closure, because we will achieve our productivity goals and we are committed to access. That's why I'm able to say that.

• 1315

As for the promises, promises, promises, I don't know what else to say, other than that if we make promises, set up whatever you want to set up to make sure we meet the promises, and if we don't, sanction us. I don't know what else I can say; otherwise everything I say will be dismissed. I'm caught in a catch-22. If you don't believe the promises for any reason, then put in somebody who does nothing else but look over our shoulder and check that we've complied with them. Beyond that, I don't know what else to say, sir.

Mr. Roger Gallaway: Thank you. That's fair.

I think this idea of a covenant or guarantee is a fascinating idea, and I certainly think it's a movement at least for the banks to reach out to Canadians, because I don't think Canadians, in our history, have ever felt that banks have reached out to them except when they didn't want them there.

Mr. Matthew Barrett: That's sort of unfair, sir.

Mr. Roger Gallaway: I don't mean it in that sense, but the only time they had any real contact with banks was when they were having a problem.

In any event, this idea of a guarantee is fascinating to me, because it would seem to me— Mr. Cleghorn, when he was here earlier this week, talked about guarantees in terms of costs to the consumer, that there would be some type of guarantee—and how this would take take place I presume only you know—that there would be savings to the consumer in terms of banking charges; there would be guarantees with respect to jobs, branches, issues of this nature that one would expect. Yet if a bank makes a guarantee and has a problem honouring that guarantee, obviously you're going to have to employ people you don't want to employ, or pay them out, which is a cost. There's a number of costs attached to that ricochet back to either your shareholders or the customers of the bank.

So I wonder if you could expound a little more, then, on what you foresee in terms of these guarantees or covenants.

Mr. Matthew Barrett: I think the MacKay task force report— and I was happy for that, because one of the problems is you're throwing darts at different things because you're hoping that's the hot button. There were some very clear ones. Certainly small business was a hot button, certainly remote locations was a hot button, certainly jobs. I didn't need brain surgery to figure those three out, so therefore we dealt with those. But then when you go beyond that, I was concerned— I thought, well, that's fine, but that's not enough.

So when the task force report came out and provided a framework of topics and subjects that in their view should be incorporated and that would disclose the public interest or not, I was very happy, because I thought finally I had something I could shoot for in terms of response. The only thing I don't know is— the task force went on to say “and other things the minister may prescribe”. So I don't know yet if Ottawa will come back and say they want us to deal with all those things but a few others as well. But I see that as our opportunity to— and if we deal with it inadequately, the minister will tell us to take a hike.

So we will do our best to put our best foot forward on those issues, and then the question is how will these be measurable, and how can you give assurance to the Canadian public that there will be a watchdog agency in place to make sure it happens and then report to the Canadian public on when it happens?

It sounds a little defensive, but if people are entrusting me with $200 billion of their money, they might want to trust me on a few other things as well. We're in the banking business; it's a fiduciary business. If two bank chairmen—I mean, we're not perfect—were to go out and say that we'd made this commitment, the public relations damage alone, aside from other sanctions, would be so severe that it would be unbearable.

So I think you can take a huge amount of comfort from the fact that whatever we put in and agree to and lay out for everyone to see in a completely transparent way what our commitments are, and what our vision is, and what our aspirations are—and there are differences between some of those things—once we lay it out we will abide by it, because we will be around to pay the piper if we don't. I think you have to take a leap of faith or a leap of trust at one time or another. One can speculate about all kinds of behaviour and never do anything. But I think we will honour them, sir.

• 1320

The Chairman: Thank you, Mr. Gallaway.

One question each for the following members: Ms. Cohen, Mr. Clouthier, Mr. Harb.

Mr. Matthew Barrett: I'll try to be short in my answers, Mr. Chairman.

Ms. Shaughnessy Cohen (Windsor—St. Clair, Lib.): I've never asked just one question in my life. I don't know where to go here.

The Chairman: There's a first time for everything.

Ms. Shaughnessy Cohen: I'm going to combine two and see if I can get away with it.

I'm from Windsor, which is really Canada's motor city, so I have a lot of concerns about motor vehicle leasing and the ideas that banks have with respect to motor vehicle leasing, but also with respect to insurance. I think those two things are sort of a package.

I'll be blunt. In the past I've lobbied against it and I'm inclined to think that I will in the future, but since you're here, I think we have to acknowledge that the manufacturing of motor vehicles in Canada is in large part the engine of our economy, if you accept that Ontario is also an important engine to the economy.

Mr. Matthew Barrett: Matched only by financial services in Ontario.

Ms. Shaughnessy Cohen: Yes, except there's a difference. Automotive companies actually produce something. Financial services—

Mr. Matthew Barrett: Produce jobs.

Ms. Shaughnessy Cohen: —produce some jobs.

Mr. Matthew Barrett: Lots of jobs.

Ms. Shaughnessy Cohen: And they produce money for their stockholders and for their shareholders as well, who are members of the CAW and teachers and members of Parliament and ordinary people everywhere, and I do want to acknowledge that. I'm really not a great enemy of the banks. But I'm a great friend of the big three.

Mr. Matthew Barrett: I like Americans too. I really do.

Ms. Shaughnessy Cohen: My concern, sir, is that motor vehicle leasing is a very important part of controlling the manufacturing process and controlling distribution of their product. The big three use motor vehicle leasing as a way to get cars out of the plant efficiently, as a way to offer bonuses. By offering bonuses to customers, for instance, they can move those red Chevies that aren't selling all that well, or they can move other vehicles, and it becomes a really important part of the distribution process.

I'm concerned that this, plus the incredible number of jobs that rely on motor vehicle companies—indirect jobs in sales and other areas—will be at risk if we allow banks to just freely take on that service. I've never really heard from a bank what the direct argument is in favour of that, how this would help the motor vehicle industry—which is what I'm interested in doing—how this would produce more jobs, how this would protect the direct and indirect jobs in the motor vehicle industry that are there today.

Mr. Matthew Barrett: Different institutions have different passions for auto leasing and/or insurance than others, but let's stay at the philosophical level for a moment and then I'll get down off 40,000 feet.

The prism through which the MacKay task force viewed an awful lot of its research and everything else was with the Canadian consumer in mind—i.e., the driver and not the dealer, the bank customer and not the bank. Therefore, they looked at such things as whether initiatives are more or less likely to lead to a better deal for consumers. They correctly identified a lease as a loan, and that more competition in that might derive a better deal for the car buyer. I think that's really where banks are coming from. It would take Socrates to distinguish a lease from a loan.

• 1325

Where I think there's some confusion in the dealership community is that we're not interested in getting into the car business. I think the business can evolve around strategic alliance terms with the dealerships and with the banks.

So I think you go down a slippery slope, because the logic says that banks would take leasing business away from the car dealers only if it were a better deal for the consumer. And you go down a slippery slope if you're saying, well, I'm not going to give a better deal to the consumer because I want to keep more jobs in the dealership. The other thing is that the jobs that would need to be created on the other side in order to get into that deal would be an offsetting factor in the economy at large.

John Cleghorn may have a huge passion for— but as for me, I have a lot of fish to fry.

Let me turn to insurance, which is different. I wish they wouldn't couple these two issues, because they're really two separate issues. The MacKay report won't say it, but I will. It's a national absurdity that we are allowed in the insurance business but not allowed to distribute it through these much-loved branches and channels of distribution that are most easily accessible to Canadians. So either we shouldn't be in the business at all or we should be allowed to distribute it in a way that provides the maximum competition and the best deal for the customer.

So I don't really know in the end how you can square the banks being allowed to own an insurance company but not being allowed to distribute insurance through the branches, since everyone is saying that the branches are so important. I just don't know how you square those two issues. We have in the past and we may well again in the future, but viewed from a competitive and consumer perspective, it just doesn't make sense. Viewed from an insurance broker perspective, it makes sense, absolutely, because it's another competitor. I hate competitors too. I wish they'd all go away. But I'm sure that the bakery store, when the supermarket arrived, didn't like it either.

I think public policy can't hold up issues that— in the end, if it isn't better for the consumer, then they won't take any business away.

So that's my answer on those two issues.

The Chairman: Mr. Coderre.

[Translation]

Mr. Denis Coderre (Bourassa, Lib.): I don't think it's absurd at all to let insurers sell insurance instead of banks. As a former life insurance broker, I don't think there is anything absurd about this in the least. One thing I know for certain is that Canada is more than just Montreal, Vancouver and Toronto. We must also protect non-urban areas, particularly those in Quebec where I come from.

Personally, I have yet to make up my mind about bank mergers. I agree, Mr. Barrett, that there is a great deal of misinformation—I would call it a perception problem—being disseminated about certain situations.

However, I realize today that despite everything that is being said, it is increasingly difficult for a consumer to borrow money. It is increasingly difficult for a prospective entrepreneur to borrow money. In short, it is increasingly difficult to access funds. I'm not an economist and I'm not part of the banking system—rather I've been on the receiving end—but I can't tell you that putting up risk capital is necessarily going to pay off. Businesses always talk about wanting to grow and the amounts involved may be in the hundreds of millions of dollars. However, in the case of the ordinary citizen, we're talking about loans of $2,000, $3,000 or $4,000, which isn't always profitable for the institutions.

I have a question for you. I'm quite willing to believe you, Mr. Barrett. The problem is you just said that banking is a business and that the goal of any business is to turn a profit. Because some branches are not profitable, you have decided quite simply to shut them down.

I've gone over the list of your bank branches in Quebec which are not slated for closure. These branches are located in Cookshire, Napierville, Quyon, Waskaganish, Wemindji, and Shawville.

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This does not include regions in La Mauricie, the Lower St. Lawrence, the Saguenay - Lac Saint-Jean region, Laurentides, the North Shore, Lanaudière and the Eastern Townships. Ultimately, it will be an open market and if a branch in these regions—I'm talking about three-quarters of the province—is not profitable, you will shut it down.

Do you not believe that if the country is to grow, banking must be much more than just a business? Do you not feel that it is almost an essential service and that if we want to remain truly Canadian, we must not only keep these branches open, but start talking less about profitability and more about accessibility? You say that you are prepared to lend more money to people. Shouldn't you then ensure that ordinary citizens benefit from the mergers in the form of improved access to banking services?

[English]

Mr. Matthew Barrett: Thank you. I'm having trouble disagreeing with most of what you say. I think it is more than a business because we have the privilege of taking other people's money and giving that money elsewhere. Could I just say that when you strip away all the fancy language one of the most fundamental rules and functions and missions of a banking system within an economy is the mobilization of savings and investment generated in the country, and the use of those moneys by investing in financing risk-taking in the economy.

Let me give you an interesting statistic. One good aggregate you could look at to see whether that system is working well or not is this number from the Bank of Montreal. Last year we raised $57 billion in deposits. We lent $58 billion to individuals and small businesses in Canada. Every single dollar we raised was lent to other Canadians. So in effect that's what we're doing; from different regions of the country some are net suppliers, some are net users of funds.

People think we have an aversion to small ticket. I grew up on retail banking. It's in my blood, but it's not sentiment or because it's in my blood; it's very profitable. Last year 75% of Bank of Montreal's income—in a year in which corporate banking, investment banking, wholesale banking knocked the record books, hit the record books on their earnings, they were 25% of our total earnings. Individuals and small to medium-sized businesses are the Bank of Montreal and they are the Royal Bank.

All this fancy glamorous stuff about corporate and investment banking is a lot of hype. I am so committed to that because it's extremely profitable. It's inherently diversified. The risks are lower because you have the large numbers working for you, you don't have over-concentrations of risk, etc., and we are lending damned near every dollar we raise to individuals and small to medium-sized businesses.

On the wholesale side, when you get up to corporate Canada, we raise those funds on the wholesale markets and in the capital markets to fund international business, to fund corporate business, etc. But all the money we raise is lent to small ticket. Can we do better? Of course we can. I'm not here suggesting to you that everything is perfect.

One of the questioners, Mr. Harris, asked about microlending. I think that is a niche. I think we have been, perhaps wrongly, too averse to going into the very high interest rates—prime plus five, prime plus eight—that you would find in companies like the Household Finances. What they do is to take on much riskier loans but charge huge premiums so that their loan losses are much higher but they make more net money. I think that's a niche we might want to take a look at. There are gaps that we can do better on in the consumer finance and the small business finance side.

But the numbers suggest that if you're viewing it in the aggregate, we're doing the job. If you were the Minister of Finance you'd be asking, “Are these people diverting the savings of Canadians into wealth-creating risk-taking in the economy?” The answer is—the numbers are right there—we are. It doesn't mean we can't do better.

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The Chairman: Okay, keep the questions brief.

Mr. Harb, followed by Mr. Clouthier.

Mr. Mac Harb: Thank you very much, Mr. Barrett. I greatly enjoyed your presentation. You really focused on hope rather than fear, and you put before us fact rather than fiction.

Your opponents are saying that with the merger you control 70% of the banking assets in Canada. Also, they are saying that with the World Trade Organization's approval of financial institutions operating here in Canada, competition will not be on the ground because of the fact that you will have to have at least $150,000 to deposit in those banks.

My question to you is, are these statements true or false?

At the same time I want to make a very quick comment, with your permission, Mr. Chair, about a question my colleague raised with you about the closure of some branches. You have no way out. With electronic banking, more and more people are opting to go to those ATM machines, they are using their phones, they are using the Internet. So with technology, whether you or the chair want it, or your board of directors want it, I as a consumer may not want it. I would rather see you rationalizing and developing some sort of proper business plan that in the end benefits Canadians as a whole, rather than leaving an empty shell with nobody going into it. So I think your approach is a wise one, the right one.

Mr. Matthew Barrett: We have to do both, I think.

Mr. Mac Harb: Yes, absolutely.

As for your comment about who owns banks, big corporations don't own banks; unions own banks, teachers own banks, mutual funds own banks. Everyone owns banks, because only 10% of any given bank can be owned by a corporation. Is that correct?

Mr. Matthew Barrett: That's correct.

Mr. Mac Harb: So I would like you to comment on the questions I raised: whether in fact foreign banks will only accept a $150,000 deposit and they cannot give mortgages in Canada, and also this 70% asset question.

Mr. Matthew Barrett: I don't know about that. I guess that's—

Mr. Drew White (Executive Vice-President, Corporate Services, Bank of Montreal): Can I answer?

I think it was a recommendation in terms of the committee, which was talking about new entrants coming into Canada. Part of what they were trying to look at was whether we would allow new entrants to come into Canada and lend very easily. So what they said was if you come in and lend, you cannot borrow from the Canadian public; you have to do it on the wholesale market. And part of the reason they were using $150,000 as a threshold was to say it would not be covered by CDIC insurance, in which case the bank would not have to fulfil the requirements of CDIC.

There is nothing to stop a foreign bank coming in. ING is a Dutch foreign bank that comes in and borrows money of $1,000, $2,000—they don't have a limit of $150,000.

Mr. Matthew Barrett: Hongkong Bank, Citibank.

Mr. Drew White: I'm not saying the statement is not correct; I think it's stretching it.

Mr. Mac Harb: Stretching the truth.

And the other one, the 70%?

Mr. Matthew Barrett: Of course, the good news on that one is I hope that— I mean, I've been the sound of one hand clapping, arguing with that number for eight months. The good news, at least from my point of view, is that neither MacKay nor the Competition Bureau buys the argument, because increasingly our businesses can't be viewed as a ball of wool. They are in fact— So what you do is look at it by function—deposit taking, lending, mortgage lending—because these are all individual activities. If you look at those across the system— First of all, banks in the aggregate have less than half the system. That's a huge shock to Canadians because we're so ubiquitous. We have more branches than McDonald's, so they think we're the only game in town. But in fact, over half the financial assets are held outside the banking system.

When you look at Bank of Montreal, across most of its product lines on a national basis, it has about a 10% share of market. That's why we went into this merger agreement with a lot of hope, because when we ran the numbers ourselves we said, when you put the two together, you're going to have about a 20% to 25% share of most of the product lines, and therefore at the aggregate level at least, that isn't going to give offence to the Competition Bureau.

Now, they will drill down below the aggregates and they may want remedies in different regions or whatever, but in the aggregates we felt we were on pretty safe ground. But it's clever, if you're against it, to define it as 70% of something that's half. It was intended to mislead and it was intended to scare people and it worked in some quarters, but I think the combination of the government's own task force and the government's own Competition Bureau—

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By the way, the good news is we don't have to debate it, because there is a Competition Bureau, an agency of the government that doesn't care one way or the other for me or anybody else, that will ultimately opine on concentration. If it turns out to be offensive, they'll slam us down. If it turns out not to be, then surely the debate is over.

The Chairman: Mr. Clouthier.

Mr. Hec Clouthier (Renfrew—Nipissing—Pembroke, Lib.): Mr. Chairman, did you notice the brevity of Mr. White's comment as opposed to the verbosity of the chairman, Mr. Barrett? I realize, Mr. Barrett, that you are a rags to riches story, from teller to chairman, and this is easily seen because we couldn't let you stay at the teller's window; we'd never get anything done. They had to put you in an office.

I do notice that Mr. Barrett did quote Socrates on a few occasions. I know he's been there 36 years, although he probably looks younger than I, but he really is much older, because I checked out his bio. Socrates once said that we should regard the aged as travellers who have gone on a journey on which we too may have to go and of whom we should inquire whether the road is smooth and easy or rugged and difficult.

Now, Mr. Barrett will want us to believe that by these mergers this rugged and difficult part is becoming much smoother and easier for the consumers, and conceptually speaking—and I guess I could be at variance with some of my own colleagues when I say this—I am not viscerally opposed to the bank mergers. The thing is, and I'm sure that you have eloquently and rather loquaciously commented on it this morning, that people are concerned about jobs, and people are concerned about service. My concern, Mr. Barrett, coming from the field of business— when I had a real job I was a businessperson before I got elected. And again I could be at variance with my colleagues here—Denis is giving me a dirty look. I'm a small businessperson, so I like the idea of a bank designated particularly for small and medium-sized enterprise within the bank. It's just that it's too bad that the sword of Damocles had to be hanging over the head before the banks actually came forward with such a resolution, to have a bank within a bank designated for small business.

Now, I'm not saying we need a new Magna Carta for the small and medium-sized business, but I would just like to reinforce to you, Mr. Barrett, the necessity to look after and be more concerned with small and medium-sized business. As you've clearly stated today, that is the backbone of our economy, the backbone of the country, and no one will disagree with that.

Coming from that field, I would just like to gently remind you that if something happens down the road, and I predicate it with “if”, that this merger is allowed to go through, that covenant you spoke about that I like to call the Magna Carta for the small and medium-sized business is that you remain faithful to that statement that you would be concerned about that particular enterprise.

I know you're going to look after many other people, but my particular concern is small and medium-sized business.

Dare I give him the floor, Mr. Chairman, to comment on that?

The Chairman: I think he probably agrees with you.

Mr. Matthew Barrett: I'll try to be less flamboyant than your hat.

Mr. Hec Clouthier: I told you if I took it off you'd know why I needed it.

Mr. Matthew Barrett: We have 500,000 small business customers in Bank of Montreal alone. We and Royal will have well over a million. We don't have to be dragged kicking and screaming.

In 1990, when I was fortunate enough to scratch and claw my way into this job, the first priority— we saw a gap in our loan penetration of small business and we elevated it in 1990 to the number one priority of the bank. Since then we have tripled the footings, where we're now lending $9 billion out to small businesses, when we used to lend $2.7 billion.

So I'm committed to them. I desperately want to win their favour because they're very profitable. Everyone focuses on the lending, but for me, we get their cash management business, we get their operating services, and we get their family business, and their employees', because a small businessman or woman doesn't make a distinction between their personal banking and their commercial banking. So getting that sector wrong is fatal, in my opinion, and I'm going to do my best to get it more right than we've ever got it before, I promise you.

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Mr. Hec Clouthier: I'm not an apologist for the banks; they can speak for themselves. But profit is not a dirty word, and I would like people to remember that.

The Chairman: Your position is quite clear.

Mr. Bélanger.

Mr. Mauril Bélanger (Ottawa—Vanier, Lib.): Thank you, Mr. Chairman.

Mr. Barrett, you mentioned at the start that you, and by that I presume you mean the bank, would have no objection to accepting requests from other sectors of the industry to open competition, essentially—if they have a game plan, bring it here and don't derail me, or words to that effect. I'd be curious to know, if you wouldn't mind, which area where there are government-imposed restrictions favouring the banks would the Bank of Montreal favour lifting?

For instance, how readily would the banks open the cheque clearing system, the payment clearing system or whatever it's called, and the securities clearing system as well? That's the kind of thing I think might be helpful to those who are following these debates, as I'm not regularly. I'm filling in for a colleague whose son is in the hospital.

What I'm hearing from constituents is, if they need to compete, fine, but what about competition at the other end? So if you wouldn't mind elaborating on that a bit, that might be very useful.

Mr. Matthew Barrett: I have with me one of my specialists who has worked on the payment system in particular. Do you want to comment on some of this?

Mr. Drew White: Sure. I think if one looks at the MacKay task force, one of the elements that MacKay clearly identified was the payment system. Currently the payment system, the CPA, is a company or an organization created by Parliament.

Mr. Mauril Bélanger: It's controlled by the banks.

Mr. Drew White: It's an interesting point. The definition is “control”. The banks have certain members on the board.

Mr. Mauril Bélanger: How many?

Mr. Drew White: Less than half.

Mr. Mauril Bélanger: And they control the securities companies, who have the others.

Mr. Matthew Barrett: Let me cut to the chase. Over a year ago I recommended opening the payment system. All I ask is that— I think it's not unfair that if a small number of people invest a great deal of money to create an infrastructure and run it, those who want to use it should pay a fair share to use it, that's all. But beyond that, over a year before we ever announced any intention to merge, I was on record with the task force, saying that I'm in favour of opening it up. If you want to make insurance company banks, do it with my blessing. Let them into the payment system so they can write cheques with my blessing.

The Chairman: Mr. Martin.

Mr. Pat Martin: Thank you, Mr. Chairman.

Mr. Barrett, Mr. White and Mr. O'Neill, I think you probably know where I stand on this issue. I came to your shareholders meeting in Winnipeg, and I seconded Mr. Michaud's motions on corporate governance, and so on.

Mr. Matthew Barrett: I wonder now, on banning political donations, do you have a view on that, Mr. Martin?

Mr. Pat Martin: Yes, I do, and I actually liked the one where you wanted to limit your salary to 20 times the average bank teller.

Mr. Matthew Barrett: I didn't like that one.

Mr. Pat Martin: That was a dandy. I thought it would get more support.

As you know, the NDP caucus has a national campaign going with a bunch of partners across the country, and we're trying to do all we can to stop the bank mergers because we firmly believe it's not in the interests of ordinary Canadians. All we foresee, no matter what you've told us today, is branches closing, jobs being lost, less competition in the industry, and less access to basic financial services for ordinary Canadians, all those four things.

Nothing we've heard to date leads us to believe bigger is going to be better, and we aren't alone in that point of view. We have strange bedfellows in this, such as the Canadian Federation of Independent Business and their 60,000-odd members, small business people who are calling loud and clear to stop this because it isn't necessary and it will be bad for them.

I want to go through one or two things that I'm running into personally in my own riding that lead me to believe this thing.

I live in a very poor inner-city riding. In fact, it has two of the poorest postal zones in the country; I believe it's second and third. On every street corner now, Money Marts are popping up, not Banks of Montreal, frankly. Poor people don't have bank accounts any more; they have Money Mart cards so they can get their cheques cashed at 3%, or whatever it is—$3 on $100 to get their cheques cashed. These people are getting gouged. So those people don't have access to the most basic of financial services.

SEED Winnipeg is an organization that tries to fund micro enterprises, people who need $800. In one case, they gave money to a woman who wanted to buy a sewing machine so she could do piecework in her home for one of the garment plants there. She couldn't get it until these church groups and poverty groups went to a credit union to try to set up this micro loan system.

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There's also Crocus Fund, the labour-sponsored investment fund. Some 80% of all the venture capital in Manitoba that was released last year went through the Crocus Fund.

Businesses are going to the normal lending institutions, but unless they can prove they don't need the money, they're getting turned down flat. They end up getting an investor taking some kind of an equity position in their company when really all they wanted was a loan so they could expand their business, hire more people, and hopefully develop downtown.

So you're telling us—you're telling Canadians—to trust you that if this merger goes through, you're going to start providing all those things; that all those shortcomings that people see in the financial sector now are all going to be fixed. Canadians are asking why you are waiting until this merger. You've been showing record profits quarter after quarter, year after year. What has been stopping you from doing it until today? Why should we believe you when you say that, by some magic moment tomorrow morning, everything is going to be okay and you will start meeting the needs of ordinary Canadians?

I'm not calling you a liar, Mr. Barrett, but I don't want anybody here to think I believe you. I really don't.

Mr. Matthew Barrett: That's fine, but I don't accept your ingoing premise at all, of course. The assumption that somehow or other the Canadian financial services industry is not doing a good job for Canadians is absolutely—

Mr. Pat Martin: But hundreds of organizations do. Everybody from—

Mr. Matthew Barrett: —not supported by the facts. It is not supported by the MacKay task force. The banking system in Canada is one of the most respected in the world.

Mr. Pat Martin: What really counts is ordinary Canadians, the people we represent, and we're trying to express their wishes.

Mr. Matthew Barrett: So do I. I have five million of them, and we wouldn't be in business if we didn't have those five million.

Mr. Pat Martin: A lot of them have serious complaints, Mr. Barrett.

Mr. Matthew Barrett: Seventy percent of them rate our service as very good or excellent.

Mr. Pat Martin: Mr. Barrett, a lot of them have serious complaints, serious grievances about the way you've been conducting your business.

Mr. Matthew Barrett: I'm sure, and I'm sure the ones who go to constituency offices are the ones who feel bad. Maybe we do goof up—

Mr. Pat Martin: There are about 200 organizations listed here, including the National Anti-Poverty Organization, SEED Winnipeg, and the Canadian Federation of Students.

Mr. Matthew Barrett: Would you suggest the government set up banks for these people themselves?

Mr. Pat Martin: I would suggest that as one of the chartered banks that is in a very privileged position in this country, you have an obligation to meet the needs of these people as well as those of the maybe more profitable end of the business.

Mr. Matthew Barrett: I think we are.

Mr. Pat Martin: In terms of branches closing, when you're making record profits and one of your operations maybe isn't making quite the level of profit you might like or may even be losing a few dollars, I think you could justify keeping that branch open even if it's not profitable on a branch-by-branch basis. People need those services.

Mr. Matthew Barrett: I think they do, and I think we do an awful lot more of that than you're aware of, obviously.

Mr. Pat Martin: That could be.

Mr. Matthew Barrett: But there are limits when the teachers' pension fund comes in to me on profitability, on productivity, on behalf of their members' pensions. So I have several constituencies, too.

I have to provide a return on capital. The bank is underpinned by $12 billion worth of capital that I have to provide a return on. If you take the cost of equity out of those great big, fat profits that you see, they don't look so hot. So we get a lot of pressure.

Mr. Pat Martin: Mr. Barrett, you have an obligation to provide basic services, too.

I met recently with President Masire of Botswana. He had a problem similar to what we have with the chartered banks in his country. The deal was that the government would give them the exclusive monopoly to provide certain services on the condition that they provide good service to all of these very unprofitable operations in outposts and in small communities. After about ten years, they weren't living up to that deal, and he kicked them all out. He said they would have no more privileges, no more charters. The borders were opened and he let everybody have a go at it. He was not going to give the banks exclusive anything any more because they didn't live up to their word. A lot of Canadians are saying we're almost at that point now.

Mr. Matthew Barrett: There are 2,500 providers in Canada. That's hardly exclusive. I'm not asking for exclusivity.

Mr. Pat Martin: There are actually fewer foreign banks here today than there were in 1987—59 down to 45.

Mr. Matthew Barrett: Why do you think that is, Mr. Martin?

Mr. Pat Martin: Well, you're saying that if you don't merge, you're going to be bombarded with this foreign competition. In actual fact, there are fewer.

Mr. Matthew Barrett: Until now, U.S. banks could not compete with the value proposition being provided by Canadian banks. That's why they didn't come.

Mr. Pat Martin: Until now.

Mr. Matthew Barrett: They're coming now because the benefits they've derived from consolidations and mergers are giving them a price advantage.

Mr. Pat Martin: The numbers show there are actually fewer today than there were in 1987, so when you say “now”, I don't know if you mean “as of this minute”.

Mr. Matthew Barrett: There have been four in the last four weeks.

Mr. Pat Martin: The recent trend has been a drop in the number of foreign banks operating here.

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Mr. Matthew Barrett: I'm not sure I'm going to convince you, Mr. Martin. I've done my best. I can say no more, I guess.

The Chairman: Thank you, Mr. Martin.

Mr. Brison.

Mr. Scott Brison: Thank you, Mr. Chairman. The irony for me to be sitting to the left of the NDP is fairly significant.

Mr. Pat Martin: If you elect David Orchard as your leader, you will be left.

Mr. Scott Brison: That would be “unite the light”, I think. We'll give him the $10 million worth of debt and carry on with our business.

Politicians seeking guarantees from another group that they keep their promises has a certain amount of irony in it as well. In any case, I appreciate your presentation.

We had George Anderson here earlier today on behalf of the Insurance Bureau of Canada, and of course he's very concerned about the independent brokering insurance business, if the banks are to be involved in the distribution end of it. He cited the example of Caisse centrale Desjardins and their involvement in the insurance business. He said there had been a 30% drop in employment with the insurance brokers in Quebec and no decrease in the price of insurance.

I'd like your feedback on that. How would that benefit consumers?

Mr. Matthew Barrett: I wonder why the customers left them then. I just don't know.

Mr. Scott Brison: I don't know.

Mr. Matthew Barrett: It doesn't make sense. It sounds odd to me. Normally, a shift like that occurs because of a better-value proposition. So I can't speculate on what that might be. I wouldn't leave my insurance broker unless somebody phoned me up and gave me a couple of hundred bucks off my daughter's latest smash-up in the car. I wouldn't leave unless I got a better deal, so I don't quite understand the dynamics. I can't comment on it because it doesn't make sense to me.

Mr. Scott Brison: He suggested as well that the banks, as you mentioned earlier, could just distribute through the existing network, if you wanted to get into that business in that way.

The 10% rule has been addressed a little bit by the MacKay task force—in fact a softening of the 10% rule. In the long term, do you think the 10% rule is in fact sustainable? Does it make sense in the current context or in a global environment?

Mr. Matthew Barrett: It's a very interesting and complex issue. Paradoxically, I argue against myself.

In our submission to the MacKay task force, we give quite a scholarly argument on why the 10% rule doesn't matter.

When I was at Mr. Ianno's task force meeting, somebody asked me about it and I said—and what I said was misquoted in the newspaper so let me try to say what I said now—as a businessman and a bank chairman who has obligations to shareholders, I don't want anything that makes their shares less valuable than they might otherwise be. Therefore, I could make an argument and dress it up in various ways that would say the 10% rule should go away.

One of the other reasons I said it should go away— There is a huge misunderstanding in this country that's a tough one to get out, and it is that the banks are protected. The 10% rule was never for the banks. The 10% rule was for the government to maintain sovereignty over its banking system, and by the way, it's not all that unusual. Countries that don't have 10% rules have ministerial discretion, and while they'll allow the takeover of tier two banks—I know, I've done it—try taking one of their clearing banks out and you might find you run into a roadblock that is just as rigid as the 10% rule.

If I were the Minister of Finance I would think twice before I would eliminate the 10% rule and risk the loss of Canadian control of your financial institutions, control meaning the migration— The old argument used to be, you didn't want to lose control because the credit allocation process would be driven from abroad and not based on local or national sensitivities. I'm less concerned with that. People will go wherever they make money. So I think the globalized world will take business where it can get it.

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But I do think it has implications for head offices because I know what I've done with the American banks I've bought. I've stripped their head offices and hauled them to my head office here in Canada. I've wired their technology into my technology and their learning programs into my Institute for Learning. So the reverse would happen. You'd risk losing high-paying R and D, technology, and head office jobs, and if I were Minister of Finance, I wouldn't drop it for that reason. You can play around with it. But if he keeps ministerial discretion, as I'm hearing today, he has the ultimate power to take into account the national interest.

I remember that when the Hongkong Bank went after the Royal Bank of Scotland, they were told no. Years later they were allowed to get Midland. So I think there may be circumstances under which the minister might want to allow it, and I think he should be given that flexibility. So if you replace the rigidity of 10% with ministerial approval, then I think you still have safety for Canada. He has the flexibility to be able to make choices, as he did—I can't remember him as a person—but as the country did, for example, when the Bank of British Columbia got into difficulty. So he'd have that flexibility.

There may be other issues regarding the 10% rule. Although it's difficult to do because of the existence of NAFTA, a distinction might be made that would allow some relaxation domestically to help the formation of more financial institution players. I haven't thought through how you could do it and still stay onside with national treatment legislation and NAFTA. It's tricky, but I wouldn't be adverse to it.

Mr. Scott Brison: What are the advantages to your bank of using the holding company model or of seeing that model expanded?

Mr. Matthew Barrett: I like the idea because I like the flexibility of being able to bolt on other businesses. I think the traditional concern about a holding company was that it could involve someone who was unrelated to banking so that you'd get a commercial-financial linkage, and that has always proven to be dangerous, including in Canada. I think that was what was intended. But a holding company within a vertically and horizontally integrated financial services industry doesn't seem to me to cause any risk, and it might allow the bank some flexibility in how it organizes itself.

I'd like to see it. But I'm not uptight about it one way or the other because de facto we can create a virtual holding company mentality with the centre being, if you like, head office, which provides capital, human capital and overarching values, while the rest of the company runs more as a series of lines of business. So I think you can achieve a lot of the holding company stuff without formally becoming one. But all things being equal, I'd like the option, because what we're discovering is that down the road you might want to bolt on some technology companies that are not, strictly speaking, financial services but that would be synergistic with your other technology in offering a new package to customers. So I'd like to see that flexibility.

Mr. Scott Brison: One of the Achilles heels, I guess, of the pro-merger movement has been the Bank of Nova Scotia's position as a chartered bank, which has caused some difficulty because it appears that you're not all on the same page on this issue. Mr. Godsoe appears as a sort of Captain Canada on this issue. I'd be interested to hear your perspective on that. Why do they see this in such a different light from how you see it?

The Chairman: Mr. Barrett.

Mr. Matthew Barrett: I'm always reluctant to get into a slinging match with a competitor, particularly someone I've competed with but have been friends with for many years. But I do not understand Mr. Godsoe's position, and I believe Mr. Godsoe would have merged with another institution if that were how the chips fell. But they didn't, and that's a question you'll have to ask Mr. Godsoe. In other words, I am shocked at this new-found philosophical aversion to mergers, based on my discussions in the industry, my discussions with his predecessor, and my discussions with him. I never once heard— this conversion on the road to Damascus is quite recent. You'd have to ask him why.

• 1405

Mr. Scott Brison: Don't get me wrong. Our party has a philosophical aversion to mergers as well, not in the banking sense but in the political sense at this juncture.

Some hon. members: Oh, oh!

Mr. Matthew Barrett: I'm staying out of that one.

The Chairman: It wouldn't have as much of an impact on the market either.

Mr. Scott Brison: Mr. Chair, if I may, being the fifth party in Ottawa, we're always the last ones to ask questions so the onus is on us to make those questions more interesting. It's a little bit like being Liz Taylor's fifth husband; you know what you're supposed to do but you don't know how to make it interesting necessarily.

Thank you very much.

The Chairman: Mr. Epp.

Mr. Ken Epp: I'm quite willing to submit to the rules of competition.

I would like to ask about the research and development end of the business. I'm intrigued with the fact that you're willing to commit almost $1.5 billion a year to research and development. I unfortunately am old enough to remember back when research and development probably wasn't as big a factor in the banks and you could walk into a bank and make a deposit, you could walk into the bank and withdraw some money, you could write a cheque. The bank basically earned its money I suppose by the cash flow that was left in the bank account and so on, and there were no charges.

Then they said we're going to have a whole bunch of research and development—and I'm certainly not opposed to the computerization. I think it's a very wonderful efficiency that's being achieved by the banking system. But now it's so easy for them to charge me first a nickel, then a dime, then a quarter, then 50¢, and who knows where it's going to go. So we end up with these huge transaction fees, and yet that same technology is not used when it should be.

I was intrigued with the question Mr. Martin brought up of the individual who has difficulty cashing a cheque because he or she doesn't have an account, so they're sent to the Money Marts where the people who have the most need for the money get ripped off—well, I shouldn't say ripped off, they get charged the most for the financial service.

I'm intrigued that you're willing to spend this much on research and development and I hope that isn't simply to research and develop how we can get a little more money from our customers. I would hope that you would commit some of that to solving, say, the identification problem of a cheque that comes in from a person who does not have an account at your bank. Surely this technology can be used to identify that the cheque is good and if it is good, you give the person the money for it across the counter.

Your response?

Mr. Matthew Barrett: It's always a tricky issue, the person with the cheque who doesn't have the account. When I was an accountant at Alexis Nihon branch in Montreal, for example, there was a significant population of people who received government cheques and that was all they had, and they didn't have an account. Therefore you had to find some identification, because if I cashed them, the government bounced them back on me and I was stuck with them, not the government. So any fraudulent— Then you remember we had problems with people actually busting open telephone kiosks because they knew it was the time of the month for government cheques. So it's tricky.

I don't think this is imminent, but I was at an NCR technology conference the other morning where the guy showed me a machine that will recognize me by the iris in my eyes. So I think technology will solve it.

Mr. Martin could have come at me in a much more interesting way, frankly. There's a bank that's done a great job—I'm going to study more about it—in South Africa. You had a huge problem with very, very low-income people in the townships. Of course, these people are making $80 a month, so every financial institution in the world ignored them because they said there was no profit in dealing with them. And this bank designed and used technology.

• 1410

A lot of these people couldn't read or write. What they did was put a camera in the ATM that looked at them and built a profile like a fingerprint. It said, oh, we know who you are. A voice told them to hit the red button, because they couldn't read. The bank was hugely successful and very profitable.

So I think the answer to your question is yes, we have to explore how technology can be used more creatively in some of these areas than it has been in the past. We just have to put the money into the research to do it, that's all.

Mr. Ken Epp: Can we possibly expect that there will be a reduction in the charges that ordinary consumers are asked to bear when dealing with the banks on these smaller transactions?

Mr. Matthew Barrett: It's a competitive world. If we get savings, we'd like to think we'll pass some of those savings along to customers in order to put pressure on our competition.

Our entire objective is share of wallet, if I can use an insider's term. The average Canadian uses three or four financial institutions. We are all killing ourselves trying to attract them, to take their business from the other three or four others and consolidate it with us. One is forever trying to think of packages of service or value propositions that encourage customers to give you more of their business. I would expect that if we achieve good productivity savings, we would be able to use them to provide superior value propositions compared to the others. That may be why you're getting some of the negativity from competitors who are not merging—not because they're truly philosophically averse but because they fear we will be able to give a better offer to our customers than they're able to match.

Mr. Ken Epp: It's interesting that you should just use the word “packaging”, because I want to ask you specifically how committed you are to avoiding tied selling. I can see the idea of packages as a more economical way of providing a service, but there's also a situation in which you economically almost force a customer into buying A and B because he wants to buy C from you. Are you committed to—

Mr. Matthew Barrett: I'm deadly against coercive tied selling, which is deeply illegal.

Mr. Ken Epp: But the economics can also be coercive.

Mr. Matthew Barrett: No, I don't see it that way. For example, think of walking in to buy a shirt. Someone asks you if you'd like a tie with it. You say you'd like that tie. He then says this puff goes very well with that tie. He's cross-selling you, and there's nothing wrong with that. That's not tied selling. Tied selling is the waiter saying you can't have dinner unless you have dessert. But if he offers me dessert afterwards, I don't think it's a coercive transaction. He's trying to cross-sell me on more of his products, because you deny the customer the benefit of that.

I think you want the customer to get the benefit of the best deal he can get. But you're absolutely right to stamp out people's saying that you won't be given the loan unless you give them your mutual funds. That would be coercive, inappropriate and, I think, illegal. But if he has it and I say that, by the way, I notice he has mutual funds and I can give him a better deal on that than he has right now, that's just marketing. I don't think there's anything wrong with that.

Mr. Ken Epp: Is there anything wrong with marketing by using obvious lists that you have available to you because of people who clear cheques through you? They're some of your competitors in the financial industry. They don't have access to the payment system so they send their cheques through the banks, and now you have a list of everybody who has payments going to such and such a person. Do you feel you're morally justified in using those lists to target those people in your marketing?

Mr. Matthew Barrett: I'm not sure which lists you're referring to, but we could stay on this one for a long time. That's the tip of the iceberg. Contemporary marketing is getting into things like data warehousing, where data is in fact examined by artificial intelligence and can predict the buying behaviour of customers.

Let me give you a real-life, simple example. Let's say you come to me for a mortgage today. The very act of looking for a mortgage means you have to show all your assets and liabilities. If I see you're paying prime plus 5% for a loan somewhere else, there's nothing wrong with my saying to you that I can take you out of that loan for prime plus 2%. I don't see anything wrong with that. I don't think anyone in the world would. That's just marketing.

I think using lists or information that you don't get in any unseemly way is customer friendly as well as good business. So I don't object to somebody knowing my needs and up-selling me on the phone, because I think, great, thank you, I didn't know that deal was available to me. I can then take it or not take it. But the coercive aspect is what should be stamped out, for sure. I agree with that.

• 1415

Mr. Ken Epp: You must then be totally in favour of opening this up so that a life insurance company, for example, that has to process cheques through the banks— so you know there is an annuity being sold, or bought, or paid out, or whatever, through the banking system. If you can access that data in order to target that person to say you can give them a better deal, then you must be in favour of opening up the payment system so that they would have the same goods on you.

Mr. Matthew Barrett: Yes, absolutely.

Mr. Ken Epp: Good. I'm glad to hear you say that word “absolutely”. Thank you.

I'll quit with that, Mr. Chairman.

The Chairman: That was very efficient. Thank you very much, Mr. Epp.

Mr. Barrett, Mr. White and Mr. O'Neill, on behalf of the committee, I'd like to express to you our sincerest gratitude for your presentation.

In many ways I think what we have witnessed this week, which is really the first week of our hearings, is really the push and pull factors that are created whenever an economy goes through a paradigm shift. The bricks-and-mortar arguments in this particular position in that shift are perhaps valid, although we know on the horizon there is virtual banking, and technology is really very much a part of our reality.

Many people ought to know that there is more technology in one of those happy birthday cards than there was in the 1950s. To me, that is symbolic of the type of transformation that is indeed taking place in our economy.

When you also see the issues related to the four pillars and how those four pillars are no longer here, the change is massive and is coming at us at a phenomenal speed. But that's also true of our economy in general. Five, ten or fifteen years ago, economists used to talk about how we were going to have the polarization of classes in our society based on technological know-how. Today we are witnessing that. What's important for institutions such as banks is to recognize the important role you play in building our economy, providing opportunities for people, and giving them choice.

There are going to be victims of this particular age, as there were when we moved from manufacturing, when we moved the agricultural society, when we moved towards the information age. To not engage in this type of discussion I think would not serve the public policy process very well. It's part and parcel of what we as parliamentarians need to debate vigorously. It's not just about mergers. It's not just about the payment system. It's about an ever-evolving economy that requires leadership. As I often say, none of us can predict the future, but we can certainly help shape it, and that's our role.

On behalf of the committee, thank you.

Mr. Matthew Barrett: Thank you for the courtesy I received today. I thought you were going to kill me.

The Chairman: We're going to suspend for one minute.

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• 1425

The Chairman: I'd like to call the meeting back to order. We'll hear now the representatives from the Investment Funds Institute of Canada and Dundee Bancorp Inc. Representing the Investment Funds Institute of Canada is Mr. John Kaszel, and representing Dundee Bancorp is Mr. Ned Goodman, chairman, president, and chief executive officer. Welcome.

Mr. Kaszel.

Mr. John Kaszel (Director of Academic Affairs and Research, Investment Funds Institute of Canada): Thank you, Mr. Chairman. I know this is Friday and I'll try to keep my comments very brief.

The Investment Funds Institute of Canada was greatly impressed by the extensive report presented by the MacKay task force, especially by their completing it on a timely basis. This report in our opinion will have significant ramifications on how each of the entities in the financial service sector will react to the challenges it is faced with both today and tomorrow.

Our institute thrives on a consensus approach so we will not be making any detailed comments on the well over 120 recommendations, because many of these recommendations have far-reaching effects. But we have made selected comments on the recommendations. I will not be going into any tremendous detail on these recommendations other than the one we believe to be of great importance to our industry, and that's participation in the Canadian Payments Association.

When I was here earlier this month I painted a very rosy picture of the mutual fund industry, both today and moving forward. This rosy picture was reinforced by a study that was released yesterday by the accounting firm of Ernst & Young, which has projected our industry to grow to $1.5 trillion—that's 1.5 with lots of zeros after it—by the year 2008.

To put that number in proper perspective, the industry at the end of August was at $286 billion, relative to the other organizations that we compete with directly, such as the deposit-taking institutions. The banks have $290 billion on deposit, and when we combine all the deposit-taking institutions—the credit unions, the caisses populaires—that's a universe of $429 billion. So the mutual fund industry going forward will play a major role in the savings of Canadians. This phenomenal growth has been achieved, we believe, by a simple premise. We have delivered what the consumer needed and wanted, and that was a better return on their savings.

In order for us to move forward in achieving this trust and confidence by consumers, we believe we need to have access to the Canadian payment system. Access to the Canadian payment system would help us immensely. By being participants in the payment system we can provide a seamless flow of funds to and fro between us and our clients. This will result in efficiencies for all—reduced costs, better returns. By “better returns” I mean there will be a minimum loss in returns during the float period, and of course greater competition.

The MacKay report suggested that participation in the payment system be expanded, and we support their sound and well-reasoned approach that money market funds be the product of the mutual fund industry that could participate in the payment system. We're not asking for any handouts, because we fully believe the system should introduce safeguards to make sure our product lends itself to the needs of the payment system, and that is a product that's highly liquid and very stable.

We would like to add that we look forward to this particular recommendation being adopted in the not-too-distant future because we firmly believe that whatever entity controls the payment system, or influences it unduly, will be the dominant player in the financial services sector.

That is the extent of my comments at this time. I look forward to receiving any questions you may have during the question and answer period. Thank you.

The Chairman: Thank you, Mr. Kaszel.

Mr. Goodman. Welcome.

• 1430

Mr. Ned Goodman (Chairman, President and Chief Executive Officer, Dundee Bancorp Inc.): Thank you very much, ladies and gentlemen. I'm pleased to be here to discuss the task force on the future of the Canadian financial services sector and how it affects us.

I want to thank the Investment Funds Institute for allowing us to share their spot at this late hour on a Friday afternoon. I'll also comment on the fact that this is not the first time we have been denied timely shelf space by one of Canada's large banks, but we'll talk more about that in a few moments.

My name is Ned Goodman, and I am the chairman and chief executive officer of Dundee Bancorp. With me is Don Charter, the president and chief executive officer of our capital markets and securities investment banking subsidiary.

Dundee Bancorp is a publicly traded asset management company, the voting shares of which are more than 50% controlled by me and my family. Dundee is the company that I used to consolidate some investment management holdings some eight years ago. Our key product—and one you may know us by—is Dynamic mutual funds. They were originally established in 1957, and I'm proud to say I personally wrote the first prospectus in 1962. We were a Canadian pioneer in the mutual fund business. Today, if we were still a member of IFIC, we would be nineteenth on their list in size, managing approximately $5.5 billion in mutual funds through the Dundee name, the Dynamic mutual funds name, and a recently formed new mutual fund company called Pow^er Mutual Funds. In the mutual fund business, we are likened to a manufacturer.

I want to tell you a little bit about myself because, unlike Mr. Barrett and some of the other major bankers of this country, I'm not very well known. Doing so, though, will help you to understand how the business I am in got started and how much importance I attach to the entrepreneurial spirit and the competition in the financial services sector.

I'm 60 years old. I was born in Montreal. I was born of an immigrant father and a first-generation Canadian mother. Journalists have labelled me an entrepreneur, a financier. I label myself an investment counsellor and, as a result of the McKay task force, hope to someday label myself “banker”.

I have been involved in the wealth management industry since 1962, co-founding in 1967 Beutel, Goodman & Company Ltd., today one of Canada's largest investment counselling firms. I have been involved in the entrepreneurial startup of a myriad of other Canadian companies, which have since achieved significant size. In 1990, dissociating myself from Beutel, Goodman, I formed Dundee and Goodman & Company, Investment Counsel, and began seriously marketing Dynamic mutual funds. The asset management business has been good to me personally and financially. I have learned over the years that the world is open to entrepreneurs who can achieve competitive advantages.

Today Dundee Bancorp is established in the financial services industry. We have a book value or an equity in excess of $500 million, approximately the same as the Laurentian Bank of Canada. In addition to mutual funds, we offer merchant banking, advice and finance, and we are an investment banker. We're a member of the Toronto Stock Exchange and, today, the Montreal Exchange, and we are a member of the Investment Dealers Association. We provide pension fund investment management as well as private wealth management. In short, in a small way, we provide many of the financial services that all of the big banks have taken over since 1987. We cannot, however, provide traditional banking services in the current regime.

As recognized in the report of the Task Force on the Future of the Canadian Financial Services Sector, wealth management is a major and fundamental part of the financial service industry. It's a retail product of tremendous importance to the consumer, particularly as the population ages and becomes less reliant on company benefit plans. The consumer will benefit directly from a vibrant, safe and innovative financial sector, all of which results from competition at every level.

The banks and life insurance companies have targeted this sector for expansion mainly because of its profitability. The profitability of wealth management exceeds the profitability of traditional banking and life insurance business. Wealth management today is the battleground for growth of the entire financial service industry. Each of the original four pillars—banks, trusts, insurance companies, and investment dealers—have become asset gatherers to earn the fees generated by the very rapidly growing wealth management sector.

• 1435

In the interest of time, I would like to address only two of the issues that I consider to be significant.

First, competition within the distribution channel for retail financial products is critical for consumer choice. Any failure to address the banks' control—and when I say banks, I'm talking about all the large banks in Canada—of the distribution channel dooms to failure any initiative to create fair competition for the benefit of Canadian consumers.

Second, the commercial head start that the existing big banks have as a result of those many years of regulatory preferential treatment thwarts the initiative of the MacKay report to create new banks. We need more banks, not fewer. We need more entrepreneurs, not fewer. We need a system where our consumers can be free to choose. In the United States, there were 207 new banks formed in 1997 alone, while only three new banks were created in Canada in all of the 1990s.

We welcome and applaud—we can't applaud more—the recommendation of the report that Dundee Bancorp and others should be allowed to own or become a Canadian bank, but it must be remembered that we have a long history of entrenchment of bank power, which has given the existing banks a tremendous head start.

The key to providing wealth management product is access to the consumer, the retail investor. Without access to a distribution channel, a provider of financial product cannot compete. The MacKay report acknowledges the critical importance of the distribution channel but specifically excludes comment about this vital segment of the financial service sector. In this regard, the report is fundamentally flawed.

The creation of mutual funds as a major driver in the wealth management industry is a relatively new phenomenon. It was started by independent mutual fund management companies who developed a superior investment product in direct competition to bank deposits.

Mutual funds are an attractive investment vehicle for consumers, providing flexible and diversified savings alternatives to the deposit and GIC product provided by the deposit-taking institutions. It has been an easy method for consumers to participate in the Canadian and international capital markets and as such has contributed greatly to the creation of wealth in the hands of consumers.

The deposit-taking institutions did not lead the way in the creation of mutual funds as a product for consumers. When they entered the mutual funds business, the banks only responded to a competing product. The banks were not providing the service customers wanted. Importantly, when the banks did respond, it was not with a better product and it was not with a lower cost to consumers.

There are four basic distribution channels for all wealth management products and services: first, the branch networks, the much loved channels of distribution, as Mr. Barrett just told us; second, securities dealers and brokers; third, life insurance sales agents; and fourth, the little-known independent mutual fund dealers who are sometimes called financial planners.

Banks, by definition, own the branch network. More importantly, the banks essentially own the retail consumer base in Canada. By having the sole ability to provide banking services, they have been able to have complete control over the customers while providers of other financial services cannot do so.

The MacKay report recognizes the very dominant position of the banks to consumers on page 147, and I recommend all to read that page at least. The report notes that foreign banks have not come into Canada to provide retail banking. Foreign banks are well aware of the entrenched relationship position of the Canadian domestic banking sector.

Banks in 1987 were allowed to buy brokers and now the retail broker channel is about 80% owned by the banking community. A distribution channel that was once able to provide independent financial advice is now owned by institutions that have their own financial products. They are no longer truly independent.

• 1440

Insurance agents are protected by insurance regulation that has allowed only these people to sell insurance. Segregated funds, which are really mutual funds in disguise, have been the sole domain of a mostly captive sales force for the insurance industry. The only remaining independent channel is the mutual fund dealers, who provide independent advice with respect to the purchase of mutual funds.

The MacKay report states they are an important part of the system due to their ability to provide advice. This is noted on pages 123, 140 and 141. But then the report goes on to dismiss the dealers by referring to them in a pejorative fashion, suggesting they are not licensed or regulated. Let me assure you that any financial planner who sells mutual funds must, at a minimum, be registered with the securities commission as a mutual fund dealer, and as such is regulated by provincial regulators.

To get registered they must meet proficiency requirements. There is an awful lot of misinformation with respect to the expertise of these dealers, but I can tell you they are much better trained and experienced than bank tellers in the function of investment and mutual funds.

If ownership of the two largest forms of distribution is not enough, the banks today dominate the self-regulatory organization governing dealers and brokers. The main self-regulating organization for the brokers is the Investment Dealers Association, the IDA as it is known. The IDA is dominated by the bank-owned brokers today.

The dealers now have their own self-regulating organization, and by edict of the Ontario Securities Commission this self-regulating organization will likewise be part of the IDA. The result is that the banks will now play a dominant role in the regulation of the dealers, that last bastion of competition to the banks.

What does this mean for companies such as Dundee? At Dundee we distribute mutual funds primarily through the independent dealers who provide the much-needed advice and counsel that the consumer of financial services products is currently demanding. We pay commissions to these independent dealers for this service.

Banks distribute their mutual funds through their branches. They do not per se have a distribution cost. Yet our management expense ratio—that is, the cost of running our mutual funds and the cost the consumer has to pay—and that of the banks are essentially identical. The mutual fund industry is a profitable industry—I'm not here to cry poor. To the banks, as johnny-come-latelies using their entrenched relationship at the branch level and someone else's pricing structure to cream a market, much as they're planning to do with leasing and insurance, they are very profitable. In March 1994 Canadian banks held approximately 18% of the mutual fund market share. Today, after the industry has just less than tripled—tripled would have been fine three or four weeks ago, before the markets went down, but let's use tripled—they hold in excess of 30% of the industry. Is there any coincidence a recent CDIC survey has uncovered that many bank mutual fund holders mistakenly think their fund investments are insured against market declines?

Not counting the many bank tellers who have become limited licensed mutual fund sales people, approximately 10% of all those employed in the financial services industry are designated as either independent dealers or insurance sales people. These approximately 50,000 people across Canada, covering small towns like Swift Current, Saskatchewan, or Red Deer, Alberta, or Port Dover, Ontario, make their living by providing advice and counsel about financial products, mainly mutual funds and insurance-related products. These qualified people are our independent sales force. They, along with the banks in Canada, are vying for the exact same individual—a reasonably high-net-worth retired person, business executive, or entrepreneur in the age bracket of 40 to 70 years of age. This customer is the base of the profits of the wealth management industry.

We are all aware of the tremendous growth of the mutual fund industry of Canada and, as of today, of the growth that's to come to the mutual fund industry. What has not been observed is the rapid shift in power amongst the various participants in this fast-growing area. The structural change has occurred for many reasons, almost all of which point to the strength and client relationships of the Canadian banking community.

The balance of power is shifting at an accelerating rate from the independent mutual fund managers like Dundee to the very powerful distributors of mutual fund products, a group that is today dominated by the banks. In addition, there is a small handful of large “financial planning” firms, which likewise are beginning to grow very rapidly.

• 1445

The recent impact of the Ontario Securities Commission's Stromberg report has gone a long way to tilting the playing field towards the banking and those groups with a captive sales force. As a “manufacturer”, for example, the Dundee/Dynamic organization does not have the capability of providing any disproportionate sales incentive to the independent distribution channel. The bank-owned distribution channel, with a captive sales force and an ability to manufacture product, can do as they wish. Banks can provide sales incentive to sell proprietary products over independent product, thereby creating a bias. This bias may ultimately harm the consumer. Don Charter would be pleased to expand on this if anybody would like to know more about how the banks do this.

As I have said, we need more banks, not fewer banks, and we support the initiatives set out in the report in this regard. Ultimately, no new bank will succeed if they cannot obtain clients. Let us realize that to create a bank and gain market share requires a very significant capital outlay and likely many years of losses. The entrenched banks will have little to worry about from any such challenge. The report's hope is that if kept small, the big banks will leave these new banks alone. This is not a strong premise on which an entrepreneur would be willing to risk capital.

Even sports authorities know that when they add expansion teams to an established league, they must weaken the existing teams by a draft in order to start the formation of a viable, entertaining product and a level playing field for new teams. To form a new bank under the report's recommendations is like starting a new baseball team in a league where the established existing teams start each inning with a runner on third base. What makes it even worse is that the management of the established team believes, and wants us to likewise believe, that they actually did hit a triple while nobody was looking.

Our vision for Dundee Bancorp is to be in all the businesses that the Canadian banks currently operate. Essentially, this entails all aspects of wealth management and financial services—an investment banking and wealth management organization. We are a Canadian independent, serving individuals, institutions, corporate, and hopefully someday government clients. We aspire to be in the same business as the banks.

Banks have been given a safety net, and in addition to customer entrenchment, this has given them a decided cost-of-capital advantage, allowing them to participate in equity ownership, some venture capital investment, merchant banking investment, but more importantly, acquisition financing of their competition and growth acquisition, all to the disadvantage of any other financial sector participant who must compete without the high gearing, without the CDIC guarantees, and with a higher cost and more difficult to obtain source of funding.

The MacKay report proposes what it calls a second-tier bank. Unfortunately, because of size restraints, these banks will be viewed as second class, therefore consumers may still want to deal with a first-class bank. There will be a large image and branding problem in developing any new retail bank.

Some banks believe, and it is recognized by the MacKay report, that banks should become larger to compete internationally. It is in international wholesale banking and investment banking where they believe the profits are. Retail banking, other than wealth management, is really a low-profit-margin business. Unfortunately, the MacKay report's intent is to create new small retail banks within this low-margin area.

We have some proposals to be added to those of the MacKay report.

First of all, in distribution, it's not viable to consider financial service sector reform while ignoring the position played by the distribution channel and the domination of distribution by the banking industry. The distribution channel is one of the most quickly evolving and quickly reacting areas in the financial service business. Looking in a rear view mirror is totally inappropriate; it's important to look forward to what trends are currently evolving.

The existing problem has been caused in very large part by the decision in 1987 with respect to eliminating the separation of the four pillars, which allowed the banks to buy up and dominate the investment banking business. In a large part, addressing this now is like an attempt to put the genie back in the bottle. However, in order to ensure the goals of financial sector reform, of providing competitive and viable services to consumers, it's necessary to deal with the distribution process. This requires understanding and involvement in the provincial regulation of that sector. Without ensuring that provincial regulation results in a balanced and level playing field for the various kinds of providers of financial services, any federal initiative to ensure competition will be doomed to failure.

• 1450

We recommend collaboration between financial sector federal regulators and provincial regulators, with a clear mandate from the government to ensure that the consumer protection rules promulgated at the provincial level do not inadvertently provide an advantage to the large bank-dominated distribution channels, which we believe has already occurred.

As we have indicated, the existing banks have an enormous head start, and the creation of new banks will require far more than simply changing the regulations to allow new small banks to be created. We suggest that there are incentives that can be provided to ensure that the two levels of second-tier banks can be created and developed. We have the following suggestions for consideration.

First, second-tier Canadian banks with under $1 billion of capital should be able to provide CDIC coverage for deposits in such banks of $120,000 per account rather than the $60,000 provided by what will become the first-tier banks. That can be worked on; that can be graded out over a period of years or have a grandfathering or something, but there should be an advantage to being a second-tier bank.

The use of bank holding companies should not be permitted for the tier one banks, and the owners of the under-$1-billion tier two banks should not have any restrictions imposed upon them, at least until they get through that $1 billion category.

The second-tier banks will require greater tax advantages in excess of the capital tax suggested. The second-tier banks should be allowed to have unlimited tax loss carry forwards of operating and capital losses and there should be no streaming of these losses in the event of a change of control of the bank. In addition these losses should be permitted to be moved up to the parent company or to the public, the Canadian taxpaying public, through the use of flow-through share mechanisms, allowing other taxpayers to write off these losses in a manner that the second-tier banks can raise capital efficiently.

Due to the large investment in technology that will be required by these new banks, we suggest there be a super write-off for technology expenses incurred by the second-tier banks. Again, these expenses should be allowed to move up to the parent or to be flowed through to other Canadian taxpayers. We'd also like to point out that this would provide an enormous incentive to the knowledge-based industry in Canada. The expenses can be clearly tied to the provider of the knowledge-based technology being Canadian.

Fifth, the first-tier banks should, when syndicating alone to other banks, which is a very common occurrence, be required to include the second-tier banks in a proportion of any of these syndications. We are recommending 25%.

Sixth, the investment dealers, which are wholly owned by the tier one banks, should be required to allow investment dealers affiliated with tier two banks to participate in least 25% of any of their underwriting syndicates.

Seventh, a tier one bank closing a bank branch should be required to notify tier two banks and sell the branch to a tier two bank if they wish to purchase. Furthermore, the tier one bank should be required to advise its customers of the new branch ownership during the closing period.

The largest subject of debate these days, which was obvious as I listened to the previous speaker, is the two proposed bank mergers. I cannot leave here without discussing financial sector reform and without addressing my views on the mergers that are currently proposed.

As I have indicated, it is my view that we need more banks, not fewer banks. My view is that the mergers will only further aggravate and compound the problems faced by anyone attempting to compete with the banks as they increasingly dominate the wealth management sector. Even with the proposals for a second tier of financial institutions, the abilities of these second-tier institutions to compete will be significantly decreased if the large banks are permitted to merge and become even larger. As a discrepancy in size between the first-tier banks and the second-tier banks is increased, the likelihood of success of the smaller banks will be diminished.

There are some who claim that we are putting our economic life in peril by appearing here today with some negative comments about the big banks, especially speaking negatively about their mergers. Peter Godsoe at Scotiabank has been almost alone in taking the anti-merger critical flak. While I do lump Scotiabank into the category of big bank, I have known Peter for many years. He's not the odd man out. I have no difficulty understanding what he's saying. He is an honest patriate whose first concern, like ours, is our consumer. I congratulate him for standing up and fighting for what he thinks is right for Canada and Canadians, and I look forward to competing against him on a level playing field in the banking industry.

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Thank you for staying around on a very nice Friday afternoon, those of you who did. I now welcome any questions you may have for either Don Charter, myself or John Kaszel, because he won't let me speak for IFIC.

The Chairman: Thank you very much, Mr. Goodman, for a very thorough presentation.

Mr. Harris.

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

Thank you, Mr. Goodman, for your excellent presentation. There's a wealth of information here. I like your analogy of the existing teams having a player on third base, and I can certainly visualize what you're talking about there.

My question is about the position played by the distribution channel and the domination of the distribution channel in the banking industry. Let's say that at the end of the day the mergers were not allowed, but a lot of the other recommendations were put in place that allowed your company, plus a lot of other companies, in fact to get into the banking business, as you have stated here. Doesn't the existing system already have domination of the distribution channels? They have the huge list, the database. How does a company like yours, which wants to compete head to head with the banks in so many respects, crack into that distribution channel? What method do you use to crack in there in the first place?

Mr. Ned Goodman: It would be done with great difficulty, obviously, and with expense. Competition always comes down to innovation, the ability to create a better product at a better cost, and to provide better performance. That's what entrepreneurs thrive on. We don't expect to be able to just pick off the high-profit-margin business that is currently in the way and hope that we're going to succeed. We know we're going to have to be better at what we do. We've gotten to where we are by being better at what we do.

The regulators have built on a provincial basis regulations that favour the banking institutions. If I were a regulator, I would want to have a big bank to beat up on if they made a mistake rather than a smaller company. That's why the key recommendation of the seven or eight we've made is to get a level playing field at the distribution level so that we can all compete together on low cost, performance and efficiency.

There's room and we can do it. It's a hard fight, but to use the baseball analogy again, if we're going to invite a new team in, you have to have draft choices. We have to be able to pick off some of the branches the banks don't want. We have to have a few other advantages, at least until such time as we can get ourselves profitable. It's doable, but it's going to take some work.

Mr. Dick Harris: I agree with you. I think it is doable. I believe that the MacKay task force makes provisions for levelling the playing field. As you've pointed out, there are some improvements that could be made. I think the entrepreneurial spirit is still alive and well in Canada, and your company is certainly a testament to that.

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I want to assure you that I'm going to digest all the material you've given. It's well written; it's a good perspective.

I don't have any more questions, but I want to thank you once again for the excellent presentation. I hope we might be free to call you if there's any area that we need clarification on.

Mr. Ned Goodman: That's why we put our telephone numbers down. That's a local number, by the way. It will ring in Toronto.

Mr. Dick Harris: Thanks very much. I have Dynamic mutual funds, by the way.

The Chairman: Thank you, Mr. Harris.

Mr. Brison.

Mr. Scott Brison: Thank you, Mr. Chairman, and thank you for your thoughtful presentation.

I have a couple of comments. In terms of the brokerage industry—and I shared your concern, and continue to share your concern, relative to the bank domination of the brokerage business. That being the case, there are more brokerage firms now than there were at the time the banks bought the brokerage firms, because there has evolved a demand out there for non-bank brokerage entities from a marketing perspective.

You referenced a strength that the chartered banks have in terms of the stability and the size. They also have an Achilles heel with the public, and that is that there are significant groups of people out there, including the entrepreneurial class, that don't really like to deal with the major chartered banks if they don't have to. So I would posit that there's a significant marketing opportunity, from your perspective in that sense, to penetrate.

That was also exemplified at the time—I lived in the U.S. for a few years and there were several mergers. I think Citibank and Chase merged when I was there. Immediately after that the ads on television, in the papers, and on billboards said you didn't have to be with the big megabank; you could deal with Joe's Bank or the Regional Bank of Bangor, or whatever; there was an opportunity from that perspective.

So I would posit that there's a significant opportunity for you.

Mr. Ned Goodman: Statistics are misleading. You're absolutely right, there's a certain class of individual who says “My firm's just been taken over by a bank and I don't wish to work for a bank.” That individual breaks away and opens another firm. With technology today it's quite possible to outsource an awful lot of your requirements. You have a one- or two- or three-person investment dealer who goes on the list, and when you add up the names you have a lot more names.

Clearly, 80% of the retail brokerage community is bank dominated. If you call Merrill Lynch a bank, as I do—because I don't know what else they are—their recent takeover of Midland would dump that number up through 90%. The other 10% is a whole long list of names of single people.

Mr. Scott Brison: The Merrill Lynch case is an interesting one in that for many people who were opposed to bank domination of the brokerage firms, who were looking at Midland Walwyn as the white knight, they are a little disappointed now in that not only did Merrill Lynch—you referred to them as a bank—buy them, but in fact many of those head office jobs that would have been in Toronto are now in New York. It's not the same example that we used to be able to draw on for an opposition to Canadian banks being the brokerage firms. I think it may be analogous to where we're at now in terms of the bank merger question potentially.

You were mentioning as well that bank tellers don't have a lot of expertise in selling mutual funds. I would agree with you. That being the case—and again, I'll preface this by saying that I come from the perspective where I have a real difficulty with banks involved in the brokerage business, and part of that is because my father worked for the Bank of Commerce back in the 1940s and ended up being a stock broker. After having a country store for about 30 years, he ended up being a stock broker in the 1960s. He was in the brokerage industry and worked for one of those companies taken over by the banks. He was at a stage of his life where he said he didn't want to work for a bank again, and he was one of those people who split off and started his own firm with a group of other people and has a boutique brokerage firm.

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So I'm not a pro-bank brokerage firm guy, but I would suggest that the TD Bank, for instance, has done a fairly good job in the distribution of mutual funds and that the quality of advice they provide—

I don't think it's fair to say that the bank tellers—

Mr. Ned Goodman: I think you have to differentiate, because TD really has four distribution systems right in their own bank. They have done a better job of training their people, so they have their tellers; they have TD Evergreen, which is nothing more than a financial planning type of organization; they have TD Green Line, which is a discount broker; and they have a standard brokerage firm.

So yes, having started from scratch, they have a better kick at it, but that's not the case right across the board, and I think TD is still the only bank that will sell other mutual funds through their branch system.

Mr. Scott Brison: Do you honestly believe that insurance people with training on mutual funds are going to be better than bank people with training on mutual funds?

Mr. Ned Goodman: Absolutely. Insurance people have been financial planners for years. They go through training periods. They get proficiency, and it's been proven that they are. Not all of them are mutual fund licensed, but when they get fully licensed they have all the training.

Mr. Scott Brison: On the changes in the payment system, one advantage now is a 10-year holiday from capital tax for banks of only a $10 million capital requirement, which is fairly low.

I really like some of the suggestions you've made here in terms of further enhancing the opportunity for new banks in Canada. I think it's great. Looking at these, my own personal perspective is, if we were to implement a number of these in addition what the McKay task force has suggested, that the mergers or the opportunities even with the mergers, the opportunities for these new banks, would be very significant and we would still see an improvement in the quality of service for Canadians, with or without the mergers.

Mr. Ned Goodman: The analogy I like to use is that I go skiing in Colorado every year, and whenever I need some money, I go to the local bank. The local bank is called Snow Bank. It's a one-branch bank, and it has a capital of less than $1 million. I can go in there and I can cash a cheque and I can get money on my American Express card. I can buy a T-bill. I can buy a mutual fund. I can transfer money back to my account in Canada. I can get any service that I can get in any Canadian bank, and I can do it while I talk to the president of the bank, who happens to be there. It's situated in the town of Dillon, Colorado, and I would suspect that the population of Dillon, Colorado, other than during the ski season, might be 2,000 people, and the bank is profitable.

Mr. Scott Brison: And it's all downhill from there, a slippery slope.

Mr. Ned Goodman: That's Matt's slippery slope.

Mr. Scott Brison: I would think in the long term, in terms of access to capital for entrepreneurs in Canada, in fact the emergence of these new banks has significant potential.

As to one of the benefits of the U.S. banking system, there was actually a study done in the late 1980s that compared the concentration of wealth in Canada to the concentration of wealth in the U.S. In the early 1900s, wealth in Canada was very much concentrated. In the U.S. it was as well, with the duPonts or the Vanderbilts, or the Rockefellers, or whomever. Since then in the U.S. wealth has become dispersed over a wider range of people, and it didn't really happen in Canada. The study had compared the two banking systems, and its position was that in fact the banking system of the U.S. was more conducive to entrepreneurialism and to access to capital, and ultimately to more availability of opportunity.

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I would suggest that if you're in Maine and you get turned down by the Bank of Bangor, you can go to the Bank of Bath; if you're in Georgia and get turned down by the Bank of Snellville, you can go to the Bank of Loganville, which is about 30 miles away.

So I think the opportunities here are significant, with or without the merger. I think the emergence of these new banks and the changes to the payment system are just remarkably positive if we can—

Mr. Ned Goodman: We totally agree. I'm not against mergers per se. I think that when you have an entrenched system that has been in place for so long, you have to think twice about making it even more entrenched.

Mr. Scott Brison: It's very difficult for me to be Machiavellian about this, but if you were to think about it from a marketing perspective, there's some argument that you should be quite happy if the mergers go ahead, if the public is not necessarily supportive of them, and you have these conditions where you can enter as a new bank, or the new banks can— I mean, from a marketing perspective, the opportunities—

Mr. Ned Goodman: I can assure you we are on the edge of that one and can fall on either side.

Mr. Scott Brison: Okay. Great. Thank you very much.

The Chairman: Mr. Goodman, you're an entrepreneur.

Mr. Ned Goodman: I'd like to think so.

The Chairman: That's a positive term, I guess.

Mr. Ned Goodman: I regard it as a positive term.

The Chairman: Wonderful. And I think one of the major components of the MacKay task force is in fact to create more of an entrepreneurial spirit in Canada. What do you think are the major recommendations that we should be looking at towards achieving that end?

Secondly, do you view the MacKay task force as a package, or should we have sort of a phase-in period for a number of the recommendations?

Mr. Ned Goodman: The key ingredient is, as I said earlier, the distribution mode. If we're going to invite— We can talk about electronic banking, we can talk about Internet, we can talk about all that kind of stuff, but as Peter Godsoe continually points out, the market share of the banking industry in Canada has essentially been unchanged for the last forty years. They're all in exactly the same position. They're all providing some Internet, and they're all providing electronics.

There's this myth that the bricks and mortar are a liability at the branch network. I look at the bricks and mortar as being as asset at the branch network. There is even some discussion among the bankers that the movement away from the branch network was a mistake, because the real money is made, as Mr. Barrett said, not only in providing a small business— I think I even wrote it down. He said “A small-businessman or woman doesn't make a distinction between personal banking and business banking”.

So if someone is going to come in and give you their business banking, they're likely going to buy their mutual fund, they're likely going to give you their payroll accounting, they're likely going to give you a whole bunch of things. And while you don't make any money on lending him money for his business, you make money on all the other products, and you make quite a bit.

I come from the entrepreneurial view that you shouldn't make money on the distribution process. When a garment manufacturer has a salesman that goes around selling, he doesn't expect to make money on his salesman. He makes the money on the manufacture of the product. The salesman is an expense. So the distribution system, while it's an expense, is an expense to create profits.

To my mind, the key element in opening the country for entrepreneurial banking is to open up the distribution system, which has been closed. And it's closed for a variety of reasons. The first one, the most important one, is that banks have entrenched themselves to the consumer. I would venture that everyone in this room has a bank account with one of the seven banks of this country. It's just part of life. Every business has a bank account.

So we're entrenched as being customers of that bank, and now that bank has awakened to the fact that they can sell us other products. There's a lot of discussion about tied selling. I listened to Mr. Barrett answer the question, and I think he answered it absolutely correctly. Tied selling is just a fact of life; it's a commercial reality. If you own the customer, you're going to try to sell him as much as you can. I mean, it's pure business. Other than that, we should have utilities.

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So the key is distribution, the opening up of the distribution system. And the most important part of opening it up is to get the provincial regulators, who in their zest for providing prudential rules for the consumer have in fact tilted the distribution system in favour of the banks once again.

The Chairman: Mr. Kaszel, would you like to comment on it?

Mr. John Kaszel: In terms of opportunities for the mutual fund industry, I referenced the Canadian payment system. Now, there's no doubt that Canadians are very much involved with mutual funds, and in order for us to move forward we need to have access to the tools that are now proprietary to the banks, and that's the ability to send funds through the Canadian payment system.

I would think that we need to have broader access to opportunities. And for organizations like Mr. Goodman's, where, being an entrepreneur, he's looking at growing his business and is prepared to take up the challenge, we would be very supportive within our organization to give him that opportunity. We believe that the MacKay report has presented many opportunities. I mentioned it has significant ramifications, and the report has shown some ways by which non-deposit-taking institutions can come that much closer to providing better and wider services to their client base.

The Chairman: Any further questions from the committee?

On behalf of the committee, I'd like to thank you very much for your presentation and contribution to our study. As you know, this is going to be a very challenging exercise, because everybody brings to the table various perspectives on an issue that is somewhat complicated at times. But it is the help of individuals like yourself who work in the industry and see the everyday reality of your sector that will make our job a little bit easier. Thank you very much.

The meeting is adjourned.