FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, September 29, 1998

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[English]

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

Appearing before the finance committee are a number of foreign financial institutions serving the Canadian market. These financial institutions play an important role in the financial services sector. They provide new sources of competition, as envisaged by the federal government. They bring to Canada new ways of doing business. What we can learn from these witnesses is particularly important, as they have chosen to serve the Canadian market in unique and innovative ways.

As with all witnesses, we ask that you address the report of the task force and tell us what you like about the recommendations and what you do not approve of. In particular, though, I would like you to tell the committee what role you expect foreign financial institutions to play in Canada. We'd like you to describe the process you had to go through in order to enter the Canadian market, what difficulties you faced, and how you believe the recommendations of the MacKay report would make it easier for others to enter the market.

We have with us, from Capital One Financial Corporation, Mr. David Willey, senior vice-president and treasurer, and Christopher T. Curtis, associate general counsel. From the First Union Corporation we have Wayne Ehgoetz, head, Canadian operations, and Jean Anderson, legal counsel, McMillan Birch, Toronto. We also have, from Norwest Financial/Trans Canada Credit, Richard Owens, and from the Wells Fargo Bank, Gadi Meir, assistant vice-president. From ING Direct, we have Arkadi Kuhlman, president and CEO, and Karen Dalton, director of risk management. Welcome, everyone.

We will begin with Capital One Financial Corporation.

Mr. David M. Willey (Senior Vice-President and Treasurer, Capital One Financial Corporation): Good afternoon. My name is David Willey and I'm a senior vice-president and the treasurer of Capital One Financial Corporation. Appearing with me is Chris Curtis, associate general counsel of Capital One. I'd also like to acknowledge Mr. Richard Owens, a partner of Smith, Lyons, who appears here today on behalf of Norwest. Mr. Owens also represents Capital One, and his assistance has been invaluable as we work through the Canadian bank regulatory process.

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I'd like to thank the committee for inviting us to appear before you today. This is Capital One's second appearance before your committee. I testified before you almost exactly two years ago, in responding to the government's 1996 white paper proposal to cut back the legal authorization that Capital One had just received and instead to require us to establish a schedule II bank.

As I appear before you today, I reflect on what a difference two years can make. First, two years ago Capital One was not doing business in Canada at all, but today Capital One has hundreds of thousands of credit card customers in Canada, and it has just embarked on a second business line in Canada, that is, instalment lending.

Second, as a direct result of this committee and the Senate banking committee issuing reports criticizing the white paper proposal to which we and others objected, that proposal was withdrawn. For that, we and our many customers in Canada thank you.

Instead, more progressive proposals have been put forward. Spurred on by this committee and the Senate banking committee, the government has proposed adoption of a foreign bank branching regime for the first time in Canada's history, and Canada has committed in the WTO process to implement that regime by next year.

As I did two years ago, let me give you some brief background about Capital One's activities outside of Canada. Capital One Financial Corporation is a financial services company whose principal subsidiary, Capital One Bank, issues credit cards in the United States and the United Kingdom. As of June 30, 1998, Capital One had approximately $23 billion Canadian worth of accounts receivable under management and 14 million customers worldwide. Capital One is one of the top 10 issuers of MasterCard and Visa credit cards in the United States. That is our main line of business. We also make instalment loans in the U.S. and the U.K., and I carry on some other lines of business in the U.S.

Capital One is not simply another issuer of credit cards. In the late 1980s we saw that everyone in the U.S. was charging the same price for credit cards, about a 19.8% annual percentage rate. Not being bankers by training we saw an opportunity to bring a new approach to the industry. We used powerful statistical models to shape our marketing and credit practices, allowing us to offer lower rates to many customers and a greater diversity of products, including offering credit cards to some customers who would not have qualified under traditional bank lending standards.

U.S. customers have benefited greatly from the increased competition brought to the market by Capital One and others through lower pricing, improved product attributes, and a greater availability of credit. Although we are a much smaller company than the larger U.S. card issuers, such as Citibank and MBNA, our role in the changing U.S. credit card market has been significant, and it is in fact acknowledged in the task force report that is the subject of your hearing today. Background paper number one, page 75, references some of this.

Capital One began issuing credit cards in Canada in late 1996, soon after my last appearance here. We now have a significant and rapidly growing credit card business in Canada.

Also, we recently initiated an instalment loan business in Canada, although I note that in contrast to the good policy news of the last two years, the government has imposed a $200 million asset cap on that business in what appears to be a hold-over from the restrictive regulatory approaches this committee has been instrumental in relegating to the past.

Since 1996 the Canadian credit card market has changed dramatically. In 1996 there was little product variety and rates were high. The Canadian banks charged annual percentage rates in the high teens. Low-rate cards were few and were not actively marketed. In the past two years the market has moved sharply in the direction of a greater diversification of products and lower rates for Canadian consumers. Capital One was the first to introduce a platinum credit card in Canada, with a high credit line and extensive benefits. Now, in fact, most issuers include a platinum card in their product line.

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The number of low-rate card offerings has doubled. The rates offered on the low-rate cards have dropped by as much as three full percentage points, and the cards are now being actively marketed by mail and other channels.

Rates on standard cards have dropped as well, with some issuers offering introductory rates of 6% or 7%. Long-term rates have also dropped. It is important to recognize that these diverse products and lower rates are now offered not just by the new foreign entrants, Capital One and MBNA among them, but by the large domestic issuers themselves, who have moved rapidly to respond to the new competitive environment. The Canadian credit card market is an object lesson in the benefits of increased competition.

Capital One supports the liberalizing of proposals of the MacKay task force. A liberal foreign bank entry regime has been important to Capital One. It permitted us, a smaller company than the giants of the industry and a much smaller company than the schedule I banks, to enter the Canadian market in an experimental way, leading to a successful business and the competitive benefits I described a moment ago. Continued liberalization will continue to facilitate that process, in the credit card business and no doubt in other lines of financial services as well.

I would like to focus on three recommendations of the MacKay task force as being especially significant. First, the task force endorses the government's proposal to establish a foreign bank branching regime in Canada. We endorse that proposal as well. Branching in Canada would add significantly to Capital One's range of flexible business vehicles, especially if the branching regime is made available to both commercial banks and savings banks. Financial institutions in the United States are governed by regulatory regimes that are comparable to each other.

Second, we endorse the task force's admonition that prudential regulation should not be imposed where it is not needed, whether in response to “level playing field” concerns or for other reasons. Unnecessary regulation impedes business and deprives consumers of the full benefits of competition that they might otherwise enjoy. Specifically, the task force advises that significant prudential regulation is not needed with respect to an entity that does not take retail deposits. Capital One does not take retail deposits in Canada.

Finally, we endorse the task force's recommendation to remove withholding taxes on interest on cross-border borrowings. Because Capital One does not take retail deposits in Canada, the reform would substantially increase the availability of funding for Capital One's business in Canada and hence lower the business's cost of funds, and no doubt would do the same for many other businesses in Canada as well. That, of course, would result in improved pricing to consumers.

In conclusion, Capital One is delighted by the changing regulatory outlook in Canada as reflected in the task force's recommendations. We suggest that the committee urge the government to move forward on implementation of the task force's recommendations, especially those that I described a moment ago, as soon as possible.

Thank you very much for the opportunity to participate in the discussion today.

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

We will now hear from First Union Corporation, Mr. Wayne Ehgoetz. Welcome.

Mr. Wayne Ehgoetz (Head, Canadian Operations, First Union Corporation): I'd like to thank you for inviting Congress Financial Corporation Canada to participate in your study of the task force's report. I am the managing director of Congress Financial Corporation Canada. The last time I appeared before the committee Congress Financial was a wholly owned subsidiary of Corestates Financial Corporation. As a sign of the times, we are now a wholly owned subsidiary of First Union Corporation, the sixth largest bank in North America, because First Union and Corestates merged in April.

Even before the many good recommendations in the MacKay report are implemented, we should note that the Canadian financial sector has much to its credit. As Austin Adams, First Union's executive vice-president noted in a Globe and Mail article on September 21, Canada has one of the most modern and efficient systems in the world.

By implementing the task force's recommendations to make it easier and less costly for foreign banks to enter Canada, Canada's financial system would serve Canadians even better and at a lower cost.

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Providing choice to small and medium-sized companies is where Congress Financial has won most of its business in Canada. We are Canada's largest provider of working capital asset-based financing and to date have authorized in excess of $2 billion Canadian.

We also today have offices in Toronto, Montreal, and Calgary. In many cases, the businesses to which we lend would not have received money from the banks, because only we have the expertise and monitoring capabilities to provide this specialized form of lending.

Our main competitors are not banks but other unregulated financial service providers, such as GE Capital, Penfund, First Treasury, Finova, and CCFL. If additional regulations are placed on Congress Financial simply because it is owned by a foreign bank, it would only serve to increase our costs. We would then have to pass these costs on to Canadian customers.

Congress Financial borrows only from sophisticated investors, either in the commercial paper market or through bank loans. It does not deal with individuals and does not make personal, family, or household loans. It does not take deposits of any kind.

As noted in the report, Canada has a long history of making it difficult for foreign banks to provide services in Canada. Mr. MacKay in his testimony specifically noted the low rating Canada received in a survey of competition from foreign banks in domestic markets—41st out of 53 countries surveyed.

The Department of Finance consultation paper on foreign bank entry, released in September last year, provided a glimmer of hope that foreign banks might have an easier time serving Canadians. At the same time, however, the two options it put forward would either impose restrictions that would limit the entry of foreign banks or make it more costly for them to operate in Canada.

We strongly support the following statement in the task force report:

Prudential regulation should not be used where it is not required.

We see no problem with a regime that requires foreign banks to register and comply with consumer protection measures, provided they apply to other similar suppliers of financial services. But if depositors' or policy holders' interests are not at risk and the operation poses no threat to the payment system, then there is no need for any more regulation. That will only limit competition and the choice available to Canadians.

For Congress Financial, neither of the two options in Finance's consultation paper works well. The first option would permit First Union to operate as either a regulated or unregulated operation in Canada, but not both. Given that it already has a substantial unregulated operation in Canada in Congress Financial, this would preclude First Union from establishing a banking business, even though that would serve to increase competition and choice in the banking arena.

The second option, calling for foreign banks to set up lightly regulated subsidiaries, makes little sense as well. Why regulate Congress Financial even lightly, whatever that means, when it poses no danger to depositors, policy holders, or the financial system?

The regulation will only mean higher costs to Congress, which we would then have to pass on to our customers or reduce the amount we could lend to small and medium-sized businesses.

In conclusion, we would like to end by urging this committee to recommend quick action on the task force conclusion that where there are no prudential concerns, foreign banks operating in Canada should be subject to no regulation, or at worst, the lightest possible. Issues of competitive equity can be dealt with by permitting Canadian banks to reorganize under holding companies. Canadians will only benefit from the increased competition and new services that foreign banks can provide.

Thank you.

The Chairman: Thank you very much, Mr. Ehgoetz, for your presentation.

We'll now hear from Norwest Financial/Trans Canada Credit. Mr. Richard Owens.

Welcome.

Mr. Richard Owens (Norwest Financial/Trans Canada Credit): Thank you very much, Mr. Chairman.

My name is Richard Owens. I'm a partner with a Toronto law firm, Smith, Lyons, and I'm representing Norwest Financial Corporation today. As Mr. Willey mentioned, I'm also a counsel to Capital One. With me is Steve Wagner, a senior in-house counsel to Norwest Financial. Norwest Financial is in turn the parent corporation of Trans Canada Credit Corporation. With me as well is Mr. Nick Scarfo, the general counsel to Trans Canada Credit.

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Trans Canada Credit carries on a consumer finance business across Canada. It issues MasterCards, provides loans to small business as well as consumers, and provides credit card services to the commercial credit card market. In the time it has been here, it has grown from 700 employees to 1,400 employees presently. It was born from the trans-Canada business of the insolvent Central Capital Corporation, which was in turn acquired by Norwest.

Briefly, Norwest wishes to endorse the principles established by the task force: that no prudential regulation should be imposed except as necessary, where prudential risk is presented; that competition from foreign banks is important; and that it will make a difference to the domestic marketplace, as the presence of Norwest, Wells Fargo, Capital One, and the others in this room and in the Canadian marketplace have demonstrated. Such competition is increasingly effective in the Canadian marketplace, and it continues to serve the Canadian market well.

The remarks today from Norwest will deal with the entry of foreign banks by ownership of unregulated financial services providers, by way of orders under section 521 of the Bank Act.

Trans Canada is one such entity. Norwest acquired a section 521 order under the Bank Act in order to make the acquisition of Trans Canada.

Such entities are not schedule II banks; they do not take deposits. These companies risk only their shareholders' capital in Canada, the same way that Newcourt Credit and other unregulated Canadian financial services providers do. They do not risk the funds of any depositor, or policyholder, or trust beneficiary, or the like, because they have none.

We're a subsidiary of a branch of a foreign bank. The report states:

Where a subsidiary of a branch of a foreign bank does not engage in activities that give rise to prudential concerns (that is, the taking of retail deposits), we [the task force] believe that the lightest possible regulation should apply.

Here the task force is referring to businesses like Trans Canada and its affiliates. We feel that this logic should prevail to remove the remaining barriers to entry for foreign banks carrying on non-deposit-taking businesses.

Based on the recommendations in the report, it should be accepted that foreign banks that wish to carry on consumer finance or credit card businesses and the like and that raise no prudential concerns will not be restricted from entry to Canada or subject to prudential regulation once here. The regulation of market conduct is in turn responsibly handled by the provincial government and is, in any event, generally outside the jurisdiction of the federal government.

The report of the task force alludes to the use of prudential regulation in the past as a means to “level the playing field” where it is perceived that Canadian banks could not carry on the same businesses in the same way or under the same ownership structure and suggests that it is not in the interests of Canadian consumers or the efficient functioning of the Canadian economy to impose prudential regulation on foreign competitors simply for this purpose. We couldn't agree more.

Prudential regulation is, at best, poorly suited to control competition in the marketplace. Such attempts to level the playing field have been plagued by misunderstandings of the competitive dynamics of the markets for financial services.

Banking regulators should not be in the business of erecting barriers to trade. Moreover, I think the perception of foreign banks' competitive advantage is largely illusory. I don't think they have been properly studied, and once they were, we would discover that Canadian banks have their own advantages in the marketplace. As the task force has pointed out, the effects of such anti-competitive efforts are ultimately felt by the consumer, who has less choice with respect to financial services and greater cost of obtaining those services.

As the task force points out, moreover, the holding company regime that it recommends, which we believe is a good idea whose time has come, would, in any event, alleviate any concerns expressed in the past by Canadian banks that unregulated subsidiaries of foreign banks had any unfair competitive advantage.

Beyond those principles, we have some particular suggestions.

Applications for entry by foreign banks to own unregulated businesses such as Trans Canada are governed by section 521 of the Bank Act. At present, these applications are approved by the Governor in Council. Such a high level of oversight, however, does not appear to us to be necessary. Such approvals of businesses where there are no prudential concerns in the conduct of a business should instead become the responsibility of the Superintendent of Financial Institutions. If some political oversight is necessary, which we don't believe is the case, then responsibility should be given to the Minister of Finance but not the entire cabinet. This would streamline the application process and shorten the time it takes a new entrant to come to market.

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It's also important to recognize that the debate about foreign bank entry is not only about banking in Canada but also about these unregulated entities, and when we talk about branching, we're also talking about entities like Trans Canada and Capital One and others that don't purport to take deposits, that don't give rise to the same prudential concerns, and that therefore should not be constrained in the way in which they're permitted to carry on their businesses in Canada.

Policies presently restrict the ability under the Bank Act to set up a business that is not in fact incorporated in Canada. We don't think there's any reason for this, and we suggest that businesses should be given greater freedom if they wish to carry on business as a partnership or a proprietorship or a branch in Canada rather than solely through a corporate entity. This in turn has the potential to reduce costs, create some tax benefits, and lower costs to consumers.

Under the Bank Act there is presently the ability for the Minister of Finance to distinguish between so-called near and regulated banks by way of an order that denies certain freedom to operate to unregulated entities in Canada, which in turn are owned by entities that are deemed to be more regulated in foreign jurisdictions. Thus, parent institutions are classified either as near banks or as true regulated banks. If they happen to fall into the latter category, even though they may be doing the same thing in Canada as a near bank is, they're treated differently. They have less regulatory freedom.

The distinction is not entirely principled in that we have an entity like General Electric Capital Corporation, a bigger financial services provider than Royal Bank, treated as a near bank, whereas a limited special purpose financial services provider, such as Capital One, although it is growing, has been treated as a regulated institution. This distinction, frankly, doesn't serve any useful purpose. Neither entity presents any different risks in Canada, and they should be treated the same and allowed to compete on an equal footing.

Finally, it has been the practice for foreign banks to give undertakings to the crown to restrict their businesses in Canada. Such undertakings or contractual agreements not to grow or not to enter into new businesses without further consents do not appear to us to be necessary where there are no prudential concerns. The law already restricts taking deposits or offering trust services or other regulated activities without specific consents or specific forms of incorporation. These undertakings now do not serve any purpose, and entities, once in Canada, should be given full freedom to compete within the range of unregulated or non-prudential activities.

Moreover, these undertakings have been used to impose a $200 million asset cap, alluded to by Mr. Willey. This has been a temporary measure to ensure that new entrants do not grow beyond a certain size while the policy debate regarding foreign banks has continued in this country. That asset cap no longer serves anybody's purpose and it should be removed.

To sum up then, we agree very strongly with the recommendations of the McKay task force respecting the role of prudential regulation, which should only occur where there are actual prudential concerns and not as a means to limit competition.

We agree that foreign banks should be given considerable freedom to operate in Canada and that they should have greater freedom to choose the corporate structure they use in Canada.

We would suggest that such applications or other applications to enter Canada could be streamlined if they were proved, not by the full cabinet but rather by the Superintendent of Financial Institutions.

We suggest the distinction currently in subsection 521(1.05) of the Bank Act between near and regulated banks be abolished.

We suggest that undertakings no longer be required and that the $200 million asset cap be removed.

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Finally, one last observation. You asked about the role of foreign banks in Canada. I think the growth of Trans Canada Credit Corporation in the Canadian marketplace has shown the value of the expertise of Norwest in Canada, just as we have seen competition in the credit card markets spurred by the presence of Capital One, and I have seen the value of foreign institutions in creating liquidity in the distressed loan market in Canada in leaner times than these. I think the lesson is that it's a big world and there's a lot of expertise and financial services outside our borders, and we should not adopt any rule that lessens our ability to take advantage of that to make this a more vibrant marketplace.

On behalf of Norwest, thank you very much again for the opportunity to make these remarks today.

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

We will now go to Wells Fargo Bank and Mr. Gadi Meir. Welcome.

Mr. Gadi Meir (Assistant Vice-President, Wells Fargo Bank): Thank you. My name is Gadi Meir and I'm from Wells Fargo Bank. I'm here from San Francisco today.

I think the case of Wells Fargo Bank will be of interest to this committee, probably for two major reasons. First, we are unique in that we provide small business lending. That was of particular concern to the MacKay report and of interest to the Canadian economy and to this group. Second, I think we are unique in the structure in which we come into the Canadian market. We are doing cross-border lending entirely from the U.S. and we have no physical presence in Canada.

I'm going to give a little background about Wells Fargo, a little explanation of the program we have in Canada, and then address some of the questions you had as to how we came into Canada, under what kind of regulatory regime did we come in, what are some of the constraints we're facing right now, what does the task force have to say about that, and our response.

You can follow along. I've handed out an outline and I'm going to start at page 3 in the interest of time. There should be a one-page summary, which was translated into French, of our recommendations.

To begin, first a little background about Wells Fargo. We have a long history, like many of the Canadian banks. Our operations in California date back to the 1850s. Just to get a sense of the long history and just to add a little colour to this, I went into the archives, which are actually on our web site, to look at what happened 150 years ago around this week in Wells Fargo's history. At that time we were doing gold storage and transporting of mail and so on—and other things, it seems. On September 24, 1862, there was a letter from the war department sent to an agent in San Francisco for the arrest of a person using treasonable language.

So Wells Fargo has a rich history and a number of different products and services, including some very bizarre ones.

Bringing it to today, we are America's number one or number two largest small business lender, depending on how the numbers come out after a number of the mergers in the States. We have $10 billion in commitments in small business loans. A majority of those loans are under $50,000. That is a level below which many other banks have found it unprofitable to lend. Eighty percent of our customers have sales under $1 million, so we're really after very small businesses.

We've had a tremendous amount of growth. The success has been built from a large investment in scoring technology, a great investment in trial and error, direct marketing in wave after wave to try to learn what works and to improve our scoring models, and a total re-engineering of our sales process, taking out the face-to-face lending procedure so that we can do it on a remote basis.

We're very committed to this business. It's a very important line of business for us. In the States we have made a public commitment to lend $45 billion in small business loans in the next 10 years. Within that is a $10-billion commitment to lend money to women-owned businesses, and that's in alliance with the National Foundation of Women Business Owners.

That's a little bit about Wells Fargo. Now to our program in Canada.

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Given our success in the States, we brought this proven model to the Canadian market. Our product is a line of credit up to $75,000, unsecured. Unsecured is important because for all those service-based businesses and knowledge-based businesses, unsecured credit is very important. That was also outlined quite a bit in the McKay report.

We solicit entirely through the mail and telemarketing, fax, phone. There are no branches. There is no physical presence here at all. We lend to the entire spectrum of industries and the product stands on its own. There's no tied selling. We have no interest in deposits or other products. It's a stand-alone product.

Part of the advantage is that it's an extremely simplified process, a half-page application form that a small business owner can fill out in a matter of minutes. There is no need to don the suit and tie, march downtown, meet the branch manager, and bring mounds and mounds of financial statements, tax returns, articles of incorporation, and so on. There's no restriction on the funds, and our operations are almost entirely out of the U.S.

The benefit to Canada, I think, is fairly obvious to this committee. It's choice. It means another product for Canadian small businesses. It's a proven product in the States and we're bringing it to Canada. It's a new alternative source. Many small businesses have a relationship with only one bank and find it hard to get lending from other banks. So we bring an alternative. Of course there is the job creation argument and helping small businesses graduate into bigger businesses.

Now onto the regulatory story. When we were planning to come to Canada, we obviously did not want to be in breach of the Bank Act and we wanted to continue to provide our program entirely out of the U.S. in a centralized way, in the same way we do to other states around the U.S. Most of the operations are out of California, but we lend in all 50 states. In 40-some states we don't have any physical presence.

We felt we were outside of the Bank Act, but because of Wells Fargo's profile, we approached OSFI to make sure our interpretation of the Bank Act was the same as theirs. Due to uncertainty in the legislation as to what is defined as doing the business of banking in Canada, we agreed to certain constraints that OSFI insisted on. This is the reason why we're here. There is a lack of clarity in the law regarding our particular type of entrance into the market.

So let me go through some of the constraints that we have agreed to and that we really need alleviated.

We must mail all our solicitations and all our statements out of the U.S. instead of being able to drop-ship them to a Canada Post office, say, in Winnipeg, which we had discussions about. Our customer service agents are required to be domiciled in the U.S. These are people who just answer inquiries about balances and whether the transaction has gone through or what have you. It's tough in the States to find customer service reps who know where P.E.I. is or what P.E.I. stands for, or who can speak French that would be acceptable to Quebec customers.

Another constraint we have is that payments that Canadian customers send to us have to be sent into the U.S. We're prohibited from using a lock box arrangement in Canada. What this means is that we give them envelopes and they fill out their payment and send it to Seattle. In Seattle we have a courier who brings it back to Vancouver, where our correspondent bank then processes the cheque.

The other constraint is that our customers are not allowed to use ATMs in Canada to access their line of credit. This is an access feature that we have in the U.S. that customers enjoy. I think the impact on customers is pretty obvious. There are delays in getting their mailings and their statements. There's reduced access: they don't get to use the ATM. There are inconveniences: they have to mail their statements to the U.S. and they have to mail them several days in advance because of the additional time required for mail to get to the U.S. and then back, and this results in increased cost.

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Let me just tell you one of the impacts on Wells Fargo. It has been very difficult to evaluate this portfolio from a credit standpoint because these payments are not coming in as they should, and we have a lot of payments that are coming in late. We have examples of letters coming from Saskatchewan that are taking 17 days to get to Seattle and then back to Vancouver.

The MacKay task force looked at it and came to the conclusion that these requirements make no sense from a business or prudential point of view. We wholeheartedly agree.

Let's look at the task force recommendations, and I'll give you my comments on them.

The task force looked at cross-border financial services in cases where there's no physical presence, and they recommended that in such cases where you do not have a physical presence, there should be a certification process. Wells Fargo wholeheartedly supports that recommendation, and we urge that this be introduced as quickly as possible.

We do, however, want to clarify some of the aspects of that. The task force was general in that recommendation, and we want to make sure this committee understands some of the details on this.

We want to make sure that Wells Fargo can get the certification, independent of what other affiliates and other divisions of the bank do. At the moment, we're involved in a merger with Norwest. They have a section 521 order in Canada. That's going to be separate from our business, so we are hoping that this certification process will be available to us, independent of whatever schedule II or section 521 we have in Canada.

Secondly, we want to make sure that the certification process is quick and simple. Once we agree to the undertakings that are outlined in the MacKay report, we hope it's a fairly smooth process.

The MacKay report talks about a dispute resolution process, and we have no objection to that. We just want to make sure—and this isn't specified there—that the contracts and the customer agreements can still be under the law, in our case under California law, which is the way we lend now in Canada.

We want that because that is the law we're most familiar with and that's the way we do our program throughout the U.S., and it has been successful in Canada so far. But by all means, we'll have a dispute resolution process available to Canadians in Canada.

Another thing is that the definition of physical presence needs to be a little more well defined. At the moment, all this mailing in Canada and so on is prohibited specifically because there's no clear definition. So we want to make sure that there's a clear definition of what physical presence is, and we would want it to mean something along the lines of a permanent location in Canada, owned and operated by the foreign lender. That way we would be sure to be on side with respect to these regulations.

The one thing the MacKay report left out is this issue of the access of the ATMs, and we want to make sure that it is possible for our customers to be able to use ATMs in Canada to access their lines of credit.

How that works is when we give a line of credit to a small business, we send out cheques that they can use, but we also send out plastic; we send out a card with a MasterCard logo, which they can use at Canadian Tire or what have you. But they can also use it at ATMs, and at the moment we're prohibited from doing that due to an odd section within the Bank Act under one of the subsections of section 508 that specifically prohibits ATM use.

We also want to say that we support the task force's recommendation that withholding tax be removed for interest on arm's length borrowings. More detail on that is in the task force. I don't want to go into detail here, but feel free to ask questions on that.

In conclusion, we think we have a lot to offer to the Canadian market. We have a successful program in the U.S. that has been introduced here, that meets a very important need to small businesses in Canada. We're bringing our leading-edge technology, our proven delivery system, and these loans at a competitive price. We also bring a healthy risk appetite, which is one way in which we are differentiated from the Canadian banks.

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Our success in Canada will depend on, first, the receptivity of Canadian small businesses, and so far our mailings have shown that Canadian small businesses are very receptive to our offer. The second thing, of course, is that it will depend on the regulatory framework. We think if the MacKay reforms are introduced, we will be able to increase the efficiency and the competitiveness of this product, and this can only help Canadian small businesses.

Therefore, what we're looking for is a more open, transparent, and flexible regulatory system, one that removes some of the unnecessary barriers to innovation and that encourages foreign banks to provide these kinds of services in Canada.

I welcome any questions at the end. Thank you very much.

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

We'll now hear from ING Direct, Mr. Arkadi Kuhlman. Welcome.

Mr. Arkadi Kuhlman (President and CEO, ING Direct): Thank you, Mr. Chairman, and thank you, members of the committee, for allowing ING Direct to share our thoughts with you today on the recent MacKay report and the debate on the financial services industry restructuring.

In our opinion, the MacKay report is Canada's wake-up call. Today we have an opportunity to discuss whether Canada should sleep in or whether Canada should jump in.

We would like to differentiate ourselves a moment from the other panellists you have heard from so far. ING Direct is a retail deposit-taking and consumer loan bank. We're not a specialty or a mono-line player. We're a grassroots organization that serves Canadian consumers with high value, easy-to-use banking products, including savings, loans, mortgages, and RRSP products. In that sense, we're more representative of Main Street than Bay Street. We're really “by Canadians, for Canadians”, and we're using foreign capital to do it. I think that has been an illustrious tradition in Canada to date.

ING Direct, despite all of its start-up challenges, has managed to not only prosper and survive, but in its first year of business has been able to obtain 100,000 people who have said yes. We've been able to acquire $1 billion in consumer deposits, and we paid Canadians over $35 million in additional interest, which otherwise would have gone to big bank shareholders. The conclusion you can draw is that Canadians want these consumer products.

Competition is important to Canada, and what barriers continue to exist, by the recommendations of the task force, are obvious—124 recommendations, a lot of which are great in concept but few that would, at the end of the day, eliminate an unlevel playing field that exists. It's the basic structure of the banking system that we'd have to deal with, and in that sense the MacKay report is not a blueprint.

A lot of work needs to be done on the specific aspects of the underlying foundation, which includes CDIC insurance, the regulatory burden, capital tax, and even the payment system itself. Ultimately, without these changes in these four key areas, competition is going to be limited. The consumers are going to continue to pay for the inefficiency in the system as a whole.

Let me begin by first saying that Canadians are better served by competition and by moving Canada to world standards and a greater sense of openness. The sentiment certainly is loudly communicated in the task force's findings. Their belief is that competition creates more choice and better pricing for consumers. This should mean less fewer service charges and higher interest paid on savings. We believe that competition in Canada can provide market opportunities that come from other developed countries where technology regulation and regulatory efficiency certainly prevail.

Competition also creates jobs. ING Direct has created over 175 jobs in Canada. We'd like to create more. As a matter of fact, we'd like to create a technological base in Canada and actually offer our products into the United States. But for obvious reasons, which I'm going to talk about a little later, you'll see why this is almost an impossibility for us.

Competition also brings Canadians into the global economy, and certainly GATT and the World Trade Organization have called upon this country to open up its borders. It's unfortunate that up to now Canada's banks have restricted access to Canada. Now that the banks want to merge and we want to do this as part of a growth strategy and for the sake of efficiency in the name of competition, we hear a lot of talk about agreement with the recommendations of the task force report, the World Trade Organization, and GATT. But I think we have heard this talk many times before.

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In order to have competition there must be a real level playing field for all competitors. ING Direct has not had an easy time, and it comes with some relief that the MacKay task force recognizes just how anti-competitive this country has been for start-ups.

With 124 “what ifs”, this is the point of political compromise—what says, what goes, what happens next, what do we do about the implementation, what steps do we take to actually make the whole system work better?

The report makes very few recommendations that specifically attack the structure of the banking industry. Without structural changes and a solid implementation plan, I'm not sure how we're going to see any of this so-called efficiency or benefit trickling down to consumers at the end of the day.

Let's talk about a couple of the specifics. CDIC, which is insurance-based, basically asks to pay a level of premiums. We're now moving to a risk-weighted formula based on premiums. As an expense this ends up being 10% of our revenue. Certainly, if you're looking at a discount, direct deliverer of consumer products, 10% revenue for insurance is a barrier to entry no matter which way you look at it, and we need to find a way to basically call a spade a spade. If it's a barrier to entry, we should say so, and we should make foreign banks aware of it before they start the game. Obviously, it would be positive if CDIC had a larger and stronger role in the industry.

In terms of the regulatory burden, we're still caught with the same problem of one shoe fits all. Whether you're a small foreign bank, a start-up, or a very large domestic player, you're saddled with the same regulatory issues. This not only costs a lot of money, but also it complicates the matter in terms of the kinds of businesses one should opportunistically be moving towards and pursuing.

Capital tax. We're again in the same situation of having to hold more capital than large domestic banks have to. ING as a group is rated internationally as a AA. So are all the major Canadian banks. Yet in Canada we're forced to pay 25% more tax. If you are a retail, domestic, discount, direct bank trying to offer a very high-value product to your customer, paying 25% more tax adds up.

Nearly 50% of our customer costs per month is taken up by capital tax, CDIC insurance, and payment-clearing fees. The MacKay task force recognizes this fact. We're going to have to make some progress if we want to provide better-valued products to consumers at the end of the day.

CPA. If we open up the system and allow more people in, regulated and unregulated, and if we look to enhance and secure the payment system, we're going to have to recognize the fact that with more players we're going to have to have a stronger and better regulated CPA.

The Canadian Payment Association has an issue with direct clearers and indirect clearers. You cannot have foreign banks or small players who buy their clearing services from direct clearers being punished by the prices that are set, the rules by which transactions are transacted, and the time at which transactions go through.

You must be aware that there is guerrilla warfare going on at the consumer level, where customers are having tremendous problems moving money back and forth between the institutions of their choice. I don't know how we can go ahead and allow banks to consolidate without addressing this anti-competitive position in the marketplace.

Unless the government, through the Ministry of Finance, decides to concentrate on the basics, the banks will be in control of the development of the system as we go forward. This begs a very old and ancient question, which has been answered by every other industry, and that is, is what is good for the banks good for the country? Should they be allowed to merge without changes to the basic structure of the industry? If we don't make such changes, the status quo will remain, and we think it should be otherwise.

Admittedly, the consumer is not generally aware of the unlevel playing field and of the impact of these issues on banking services themselves, although the costs of these issues are passed on in the form of fees, service charges, low interest on deposits, or high interest on loans. It is no wonder that in this last week consumers have again had to pay for uncertainties. It is timely that we are here today with the committee only to find out that when the Bank of Canada raised its interest rates 1%, all banks increased their rates on loans. The deposits meandered up and meandered down again. You have to ask the question if Canadian consumers are again paying for the corporate and trading losses of the big banks internationally and nationally. It's pretty transparent to most of us in the industry.

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Consumers are now told that they can expect branch closures as a result of mergers. You have to ask the question, have consumers been paying to keep the branches open? Consumers, however, have been paying for technology changes all along, so have they really been paying twice—once to keep the branch open, once to pay for the new infrastructure and the new technology going forward?

Re-engineering in almost every other industry sector in Canada is paid by shareholders. The book hit that you take on the restructuring charge gets reflected in an increase in your multiple and shares in the market price, which basically says to the market that restructuring is good, you'll make that up in profits in the future. Why is it in the banking industry that consumers have to pay for the restructuring charge all the way through? I call it a disproportionate balance in terms of the risk and the need to pay.

Last but not least, there are a couple of things that are still left undone. It's interesting that we talk about privilege in this country. I'm somewhat concerned about social responsibility and the need to safeguard the system, while at the same time I'm always afraid for the consumer, that the consumer is left at the end dealing with basic banking services that should be his given right and are basically relegated to a level of privilege.

In this case, you've heard me talk before about the need for a window of last resort. I cannot but emphasize that in this debate we must look at the concept of our post bank, an ability for us to basically allow Canadians the right to have the access of a simple deposit, cash a pay cheque, or apply for a simple mortgage or a loan if no one else will take them. In this country we have not been willing to address the fact that privilege has its limits, but there is a need for rights, and rights for consumers in the future are a necessity if we're going to have to deal with a bigger, open, and more volatile marketplace.

In all, let's improve the road before we start using it. It has been stated before and it does seem to ring true. Thank you very much for your time.

The Chairman: Thank you very much, Mr. Kuhlman. We'll now proceed to the question and answer session, beginning with Mr. Harris.

Mr. Dick Harris (Prince George—Bulkley Valley, Ref.): Thank you, Mr. Chairman. Gentlemen, thanks for your excellent presentations. You've given us some pretty good reading material following this session. I want to direct my first question to Mr. Willey, Mr. Curtis, and Mr. Owens, representing lending institutions, not necessarily bank types.

My question deals with trying to establish your attitude toward small business lending specifically in the area of what could be termed micro-lending and start-up lending for small business. It's an area where I believe there's a huge void in this country right now, for a loan to start up a home-based business, say up to $20,000. To start up a one-man plumbing or home renovation business you need to buy some equipment. In most cases, you have the skills to get into the business and operate, but you don't have the collateral and security to back up a bank loan.

I wonder if each one of you could give us a thumbnail sketch of how your institution views that type of lending. Be sure to include the concept of start-up lending as well, if you could.

Mr. David Willey: I would like to take a momentary diversion to explain Capital One a little bit. We have two national institution subsidiaries, Capital One Bank and Capital One Federal Savings Bank. The difference between them is that Capital One Bank is actually limited by its charter to making only consumer credit card loans. Capital One FSB, our savings bank, was established a couple of years ago specifically to be able to engage in other types of financial services business.

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Your question really speaks to Capital One FSB. In fact, in the last year or two we've begun to test exactly the sort of lending you're talking about. These are loans to small businesses. In many cases it's a couple of people, in terms of its head count—very much in the micro-lending, start-up kind of mode. We're a year or so into that. We're employing the same approach to that lending as we have with the consumer credit card lending, the only difference being that we're less far down the road in developing that product. We're very interested in it, and in fact it's one of the reasons we were always eager to branch into Canada, although until this point it has not been possible.

But certainly if the savings institution were permitted to branch into Canada, that would be one of the products we would have the facility to bring in at that point. It is an area of interest to us, albeit one we've engaged in for only a limited period of time.

Mr. Dick Harris: Thank you.

Mr. Richard Owens: Regarding the market for those kinds of loans, you cited a hurdle that has discouraged or impeded the ability of small businesses to obtain financing in the past. That has been the lack of equity or the lack of security to offer for the loan. What that points to, I think, is a fairly limited approach to the way loans can be made, which is the way business has been carried on in this country for a long time. That's not necessarily to criticize what bankers have done, but it's to say we need to do some thinking about how to improve access to those kinds of funds in this country.

The answer, insofar as I can divine it from my perspective as an independent lawyer and looking at the number of participants in this room, has something to do with the expertise and technology that foreign-based lenders can bring to the country—not because they're foreign, but because that's where it seems to be coming from. It is entities like Capital One, Norwest, and Wells Fargo that have become so expert at understanding their markets and marketing to them and knowing the risks at a level that is much more sophisticated and much more demographically based than the level that says this much security merits this much credit.

That's going to bring new techniques, new capabilities, to Canada, which will spur more competition and ultimately more liquidity in those markets in this country.

Steve, I don't know if you have anything to add to that.

Mr. Steve R. Wagner (Assistant General Counsel, Norwest Financial): One thing I would add is that Trans Canada in Canada and Norwest Financial in the U.S. are primarily engaged in the consumer finance business. One thing we do is buy sales finance contracts from small businesses, providers of various goods or services and the like, and that acts as a method of providing financing for small businesses. It basically allows the small business to market its goods and services, and then we would pick up the sales finance contracts, the paper that we'd provide the various dealers with. That, in effect, provides a method of providing capital to small businesses. I don't think we really have too much of a specialty at our level of providing start-up capital or venture capital for small businesses.

The Chairman: Mr. Wagner, Mr. Harris, or Mr. Meir.

Mr. Dick Harris: I'd like to hear from Mr. Meir.

Mr. Gadi Meir: Okay. Initially you didn't ask Wells Fargo.

I think our product definitely addresses your question about unsecure lending to small businesses. With that product we don't look at the collateral or the equity of the business. We use statistical models along the lines of what Richard was talking about. We use sophisticated statistical models based on mounds and mounds of lending that we've done already to understand the risks of companies. And we take a portfolio approach. We understand that a lot of these are going to go bad, and as long as we price for it then we can give loans profitably.

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With respect to start-ups, the earliest we lend to companies is after two years of business. I think nobody has cracked that nut yet, to be perfectly frank, as to how to finance start-ups. As soon as we crack it, we'll be in the market doing it.

What's happened in a number of markets we've seen is that there are joint ventures between government bodies and banks or financial institutions, jointly coming out to solve those.

Mr. Dick Harris: I suppose the point I'm trying to get at is that I don't believe government should be involved in the lending of funds to support business ventures. I believe that in a free enterprise society it should be the people who are in the money lending business who should be looking after the entire market, right from mom and pop start-up operations to very large companies who borrow capital in the hundreds of millions of dollars.

So I've been searching for a representation during this process from an institution that has a real interest in micro-lending, and I'm not finding much there.

Mr. Arkadi Kuhlman: Could I comment on that?

ING Direct actually has a loan program that you're probably not aware of. It is an unsecured loan. The limit on it is $50,000. The application is taken on the phone. We usually give approval within 15 to 30 minutes. Thirty percent of all the uptake we get on that, which is roughly about $10 million a week right now, is on average around $30,000. It's done by people who basically have one or two employees. These are really micro-businesses. They do things on their own. They either work out of their home or in a partnership. Almost 55% of them are from rural Canada. They are not living in the big cities but are deemed to have rural addresses.

We have found this program to be extremely easy and extremely meaningful. It is basically done on an unsecured basis, which is one of the key problems with individuals trying to obtain funds to basically refinance. The other interesting point is that 25% of our financing is all there to refinance the high products that are being offered by my colleagues over here. We're sort of at the bottom of this food chain.

So there is somebody in the marketplace doing what I think you're looking for.

The Chairman: I appreciate that.

Mr. Loubier, do you have a question?

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): I would like to ask four main questions. I find it very interesting that foreign banks should be involved in the work of the Finance Committee and in this discussion of the MacKay Report. I congratulate you for having supplied documents in French. Some of our Canadian financial institutions, which have not deigned to do so from the beginning of the consultations, for the past five years in fact, could take lessons from you.

And now for my first two questions. How do representatives of foreign banks view the issue of the merger of the four major Canadian banks? Is openness and deregulation, as suggested in the MacKay Report, enough to elicit greater interest in the Canadian market than in recent years, when regulation was tighter? I will ask my other two questions when we return.

[English]

The Chairman: Who would like to begin? Mr. Willey?

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Mr. David Willey: Yes.

Actually, I come at this from two different angles, as I am both involved in the consumer side of the business but also as treasurer of the company involved in the borrowing on Capital One's behalf from Canadian commercial banks. I have a different answer, depending on which hat I'm wearing, I guess.

On the one hand, I think the larger the bank, the more support they're able to provide. On the other hand, the fewer the number of banks in the marketplace, concerns about competitiveness obviously start to arise. I think the balance the task force report has taken in both encouraging or, I should say, supporting the merger— or providing the framework, I guess—one cannot get too supportive of the merging—with a more enlightened and aggressive allowance of foreign bank entry to increase the number of players in the financial services marketplace is the right balance. That's the way to both allow the banks to become large enough to compete on a global scale, which I see all over the place— In fact, two of the fellows on the panel today are in the midst of one. That's obviously important, but at the same time to maintain competitiveness you also need to balance that with the allowance of other participants to enter the market as well. On balance, I think both of those elements are necessary to achieve all of the objectives of the task force and of the committee.

The Chairman: Does anybody else want to comment? Mr. Curtis.

Mr. Christopher T. Curtis (Associate General Counsel, Capital One Financial Corporation): I'd just like to add a couple of thoughts in addition to Mr. Willey's.

First, to underline a point he made, a fairly obvious one, which is that if the domestic market becomes much more concentrated, as the proposed mergers would have the effect of doing, it becomes all the more important to maintain a regime of free foreign bank entry to ensure that a level of competition is maintained.

The second point I'd make is there is a fairly specific issue with respect to one of those proposed mergers, which is that of a merger between a Visa issuer and a MasterCard issuer. I believe the MasterCard association has represented to the Competition Bureau that in an atmosphere or a regime of so-called non-duality as Canada has, which is that an issuer must issue either Visa or MasterCard but cannot issue both, in contrast to the United States, in that environment, if the Bank of Montreal, as the major MasterCard issuer were to disappear from the MasterCard scene, MasterCard might no longer be a viable brand and there'd be only one major credit card brand left in Canada. I'm not sure we have an answer as to what the government should say, if anything, in that respect with respect to that merger, but I think it's an issue that deserves some attention.

The Chairman: Thank you, Mr. Curtis.

Mr. Owens.

[Translation]

Mr. Yvan Loubier: Allow me to clarify one minor point before continuing our discussion. Your comments are very interesting, but the point of my question was rather to ask whether you believed that if the recommendations made by Mr. MacKay and his Vice President, Mr. Ducros, were implemented, foreign financial services firms would find conditions attractive enough to establish operations here? Do you believe that the implementation of these recommendations would counterbalance the impact of increased concentration in the banking industry?

There are people who are bitterly opposed to the merger of the banks and who laugh at the argument about foreign financial services, banks or any other financial activity segment finding the market attractive. They virtually laugh at the idea and say, "Look at the past; it will tell you what the future will be." There is no point in explaining to them that in spite of a dramatic increase in your level of activity here, the reason it still remains restricted is that your penetration was limited by regulations, because they do not appear to be convinced. What would you say to them? If markets were deregulated and opened up, would foreign banks and financial institutions take a more favourable view of the Canadian market? Can this really counter the impact of concentration?

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[English]

Mr. David Willey: I apologize for not directly responding to you before, but I think I understand the question better now.

There are a couple of points to make. One is that clearly the task force recommendations make the Canadian marketplace more attractive to foreign banks. I'll speak for Capital One. Clearly it makes it more attractive to Capital One if we are able to branch, if we are able to fund and make loans across the border without a tax burden, and so forth. All of that is certainly nothing but more positive for a foreign bank to come into Canada.

I will point out, though, that we would not in fact be here save for the fact that we wanted to be here very badly and have worked very hard to be here. Quite honestly, the aggregate effect of the trade association roles, the regulatory environment, the funding environment—six or eight different factors made it very difficult for us to be here, and were it not for a lot of perseverance, we wouldn't have come in here.

So I come from a perspective—and certainly you sensed it in my remarks earlier—that this is much better. But while I think that's true, it's also true that the situation of a couple of years ago was much more restrictive, and we simply persevered to be here. It clearly makes it more attractive to us and would make us more interested in pursuing a more expansive business here.

Mr. Christopher Curtis: What I would add to that thought is that a lot will depend on the details of the implementation of the task force's recommendations. There is the expression, “the devil is in the details”, and that could be the case here.

To give a couple of examples, the task force recommends that the government proceed with its proposed branching regime, as do we. There are a number of aspects of the branching regime that are unresolved, or at least not addressed in the government's public pronouncements so far. When the actual legislation is introduced, it will bear careful study to ascertain exactly how flexible a vehicle that is for foreign bank entry.

The other example I would give is the kind of resounding statement in the task force report advocating no or limited prudential regulation where it is not needed. As I recall, Mr. Ehgoetz quoted that passage, which we also found to be quite striking, but it speaks at a very high level. To see how helpful it actually is for foreign banks, I think it will be necessary to see how it's implemented with respect to them and in particular with respect to new companies entering for the first time.

That passage in the task force report immediately follows a description of the Department of Finance's recommendations of a year ago, which Mr. Ehgoetz also described and criticized. We also are not very happy about those particular proposals, options number one and two, so called. I won't go into detail about them here, but suffice it to say that when it came to making a specific recommendation about what to do with that proposal of the Department of Finance, the task force did not say. It is possible to conclude from what the task force did say at a high level that the members did not like those proposals, but you really can't tell.

So there too is an example where much will depend on the road the government takes in implementing the task force's proposals, if it does.

The Chairman: Thank you.

Mr. Richard Owens: First, we're obviously pleased to make the submissions today available in French, and we hope we have been able to make our meaning as clear in the country's other official language as in our own.

In terms of the merger issue, to answer your first question, as was alluded to by Mr. Willey, Norwest and Wells Fargo, two of the participants today, in fact are merging in the United States. Given that and the belief in the efficacy of the market that is implicit in our remarks today, it would hardly behoove us to object to the mergers.

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These mergers are driven by the market. We see this kind of consolidation in the financial services industry occurring all over the world, certainly throughout North America, and obviously the market has judged it to make some sense.

We don't believe it is beneficial to hinder the operation of the market. While it is probably true that Canadian banks have grown disproportionately large and concentrated, to some extent because of what could be described as a relatively protectionist statutory regime as well as their own expertise, it probably doesn't make any sense to try to reverse that development now. Rather, let's let those institutions, if they deem it appropriate, to ripen into the large, world-class institutions they think is the appropriate way to grow. But make sure the market is open as widely as possible for other participants to fill in whatever gaps may arise. That's not at all to suggest that there should not be appropriate discussion of the right terms for those mergers and the regulation of the way they occur. Broadly speaking, it probably is the right thing to allow them to go forward, but to ensure that competition from foreign banks and other domestic participants fills whatever gap may be left.

That leads nicely to your second question, which is, will that happen? Once some of the deficiencies identified by the MacKay task force are corrected, will the market be sufficiently attractive for that competition to arise?

What we've seen over the past virtually two decades now is a gradual opening up of the market to foreign banks. That process has been a gradual one. It is set out in an article I recently published on the history of foreign bank regulation in Canada. As the market has opened up, institutions of various shapes and sizes have come in, initially as schedule II banks, which was the only way they were permitted to come in in 1980. But more recently there has been a more diverse range of shapes, sizes, and niches, such as Wells Fargo, Norwest, and Capital One demonstrate. So we have seen the efficacy of gradual liberalization in attracting new institutions.

You've also heard today that some objections remain. We believe that improvements can be made and that greater liberalization can occur. As this happens, I think, as Mr. Willey described, the market will become more attractive to other institutions, new participants will perceive fewer hurdles to entry, and the market will become more active.

The issues Mr. MacKay has raised in the task force report, the issues we have raised today, some of the issues Mr. Kuhlman has raised concerning in particular the one-shoe-fits-all form of regulation for foreign-owned institutions all need to be addressed. I emphatically endorse what Mr. Curtis said, which is that the devil is in the details. We will have to get the details right. It can't be just any branch regime. It has to be one that properly fits the cost and structure of the industry participants. We urge that consultation with industry representatives continue as legislation is developed. It will a fruitful process, and there will be new activity in these markets once that legislation is proclaimed.

The Chairman: Mr. Meir.

Mr. Gadi Meir: I want to echo the comments of Mr. Willey. When Wells Fargo came into the country, because of this lack of clarity and with the whole legal proceeding, it was quite difficult to come to some sort of accommodation with OSFI.

Without the liberalization mentioned in the MacKay report, I'm not sure another competitor would be interested in entering the market. I'm not sure how long the way we operate is sustainable without improvements to the regulation along the lines I spoke of in the presentation.

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I think the merger will increase the opportunities for players like us, and I see it as necessary. For example, in certain towns where maybe there are only two branches and a business has a relationship with one particular bank, I would hope you would want to make it easier for foreign lenders to provide financing alternatives. But the regulations would have to be eased. We do see an easing of regulations and welcome that, but I agree that we would like to see the details of it. We would also urge consultation, because the task force reports do not go into enough detail to make us comfortable.

The Chairman: Thank you, Mr. Meir.

Mr. Kuhlman.

Mr. Arkadi Kuhlman: I just have a short comment, if I may, not to prolong this but to give you a simple idea regarding world standards. It took us more than 14 months to get our licence here in Canada. It took us two months to get our licence in Spain. It took one-third the capital to operate the same retail bank in Spain; it took us three times the amount of capital to do it here in Canada. The real question is, if you're really looking at a global kind of playing field, what kinds of choices do you want to make?

The irony is that I think we should find a Canadian solution. Big banks have not served Japan well; big banks have not served Switzerland well. I think in the next couple of weeks we're going to find out that the “big is better” is not going to be served in a lot of other places. I think there is a golden opportunity for us to find a Canadian solution.

For my colleagues from the U.S., it's true that in the consolidation market, when banks consolidate, there are gaps. This is a normal occurrence in the marketplace. We see some tremendous opportunities in the United States created by some of the consolidations, but at the end of the day the marketplace has to basically be in line with the regulatory environment. As I mentioned earlier in my remarks on the regulatory environment, even if the things in the MacKay report are implemented and the devil in the detail is ironed out, there are still lots of inequities in there if we really want to portray ourselves as a leading international G-7 player.

OSFI has to be strengthened. We're talking now about trying to regulate international conglomerates as a way of dealing with this. We're going to have to put sizeable support into that, and we're going to have to certainly beef up the amount of staff and talent and resources we have if we're going to have a more flexible, volatile regulatory environment. These issues are not addressed: who pays, who puts it together, what's the timeframe? How's that going to be dealt with?

Think back to 1970, the opening of the mortgage market for the banks. The banks cleaned up 60% of that market in 18 months. It seems a bit like, in my case, when your daughter or son asks you if they can watch TV, and you say, well, clean up your room. He says he'll clean it up after he watches the show. What do you think is going to happen here when we say you can watch TV but clean up the room afterwards? It ain't going to happen.

The Chairman: Thank you, Mr. Kuhlman.

Mr. McKay.

Mr. John McKay (Scarborough East, Lib.): Thank you, Mr. Chairman.

I'd like to go to one of those devils and direct my question to Mr. Meir. How would I as Joe Consumer sue Wells Fargo?

A voice: Move to California.

Mr. Gadi Meir: There are two parts to that. First of all, as required or as suggested by the MacKay report, there will be a dispute resolution mechanism that would be available in Canada and you could go to a Canadian court and launch a small claim against Wells Fargo. Arbitration rules would be available in a Canadian court; you wouldn't have to go to San Francisco.

The second comment is more important. We're lending to Joe Consumer. Joe Consumer has our money, so if there are any suits— As a practical matter, let me tell you that rarely happens, and in 99% of the cases it's us chasing after a customer.

Mr. John McKay: But you're a virtual reality bank; you have no presence in Canada. The only thing you send into Canada is money, and the contractual provisions of the contract are California-based provisions. I have effectively no recourse if and when you people screw up on a loan.

Mr. Gadi Meir: The only way we could screw up on a loan is on interest and fees. I guess that's what you would refer to.

Mr. John McKay: Interest and fees, timeliness. I may be dependent upon you for another deal. Damages flow from my inability to complete my contractual requirements. I lose a great deal more than the loan itself. How do I get to you?

• 1700

Mr. Gadi Meir: There are a couple of answers, again. With respect to interest and fees, we will be undertaking to comply with all Canadian laws, so interest and fees will be governed by Canadian legislation.

Mr. John McKay: But your representations were that you want to be governed by California.

Mr. Gadi Meir: Let's be specific here. The contract, the customer agreement, that governs the particular loan will be in accordance with California law, but we will adhere to all Canadian laws. In addition, as I said, we will provide a dispute mechanism in Canada so that if you want to launch a suit, you do not have to come to California; you could launch it in a Canadian court.

When they look to see whether it has been fair or not, when it comes to battling out the terms of the contract, they will look at the contract, which is embodied in the customer agreement, and that is governed by California law. That happens with syndicated—

Mr. John McKay: With greatest respect, it seems to me that it's a bit of a mixed answer. What you're telling me is, initiate your lawsuit in Ontario Court, General Division, and then be governed by whatever the contractual provisions are in the contract, which is basically drafted according to American code.

Mr. Gadi Meir: Correct.

Mr. John McKay: In my lawsuit, how do I recover damages against you?

Mr. Gadi Meir: We're Wells Fargo. We're not in the business of skipping on a judgment.

Mr. John McKay: But you've already said you have no assets here.

Mr. Gadi Meir: We do not have any assets here.

But again, as I say, the small business is the one that has the money. So small business takes out $50,000. Well, the debt at the moment is—

Mr. John McKay: But it's cold comfort to me, having borrowed $50,000 and having suffered damages of $150,000 because of various ins and outs of a particular lawsuit.

Mr. Gadi Meir: I welcome your question, and I will think about it and consult with lawyers. But as a practical matter, in the U.S., I can't even think of one case where that has happened.

Mr. Steve Wagner: Maybe this would help just a little bit. California, like most states in the U.S., would give full faith and credit to an Ontario judgment, and there's a gazillion lawyers in California, in particular, that—

Mr. John McKay: But that makes Canada dependent upon the regulatory regime of California. Is that what it boils down to?

Mr. Steve Wagner: Not—

Mr. John McKay: You come before the committee and ask us to endorse the provision in the MacKay report that says go light on regulations. Then, as soon as we raise the issue of an aggrieved consumer, we end up having to be dependent upon the prudence regulations, the other provisions, of California law. Am I correct on that or am I not correct?

Mr. Richard Owens: I'm sorry to jump in the middle of this, but one point I'd make there is that the prudence regulations you allude to of course protect principally the funds of depositors.

Mr. John McKay: Sorry, yes. Okay.

Mr. Richard Owens: So Mr. Meir is right to the extent that his funds are the ones at risk in Canada, and the risk is really—Gadi, please tell me if I mischaracterize this—overwhelmingly Wells Fargo's. They have mitigated this by having a structure that permits relatively efficient and consistent lending and predictable returns.

One of the aspects of that structure is reliance on New York law because they're familiar with it, and that helps to mitigate the risk. Does that create potentially some of the problems for a Canadian consumer that you describe? Potentially, it does. On the other hand, it also creates a framework that allows Wells Fargo to put forward an innovative lending product that can produce funds availability that might not otherwise be available and lower costs to Canadian consumers.

Consumers can make the choice as to whether they're prepared to accept such additional risk as there may be in dealing with a foreign institution. Were I such a consumer, I'd think, well, maybe I'll have some administrative headaches, but it's their money, they face the predominate part of the risk; maybe I'll go for it.

Consumers can make those choices, and I think experience has shown that the number of times when institutions need to be sued for those sorts of damages, particularly when you're dealing with small-value loans, isn't that great.

Mr. John McKay: I'm not going to pursue this devil too much further.

• 1705

I want to go to another devil, and that is tax. How is it that Wells Fargo particularly, but other foreign-based institutions also, are taxed if in fact your recommendation is that there be no withholding tax? How then will the Canadian government collect taxes on activities based in Canada, or will it?

Mr. Gadi Meir: Well, it will not. According to contract law these contracts are completed in the U.S. We are a cross-border provider of financial services, so at the moment these deals are done in the U.S. These contracts are done in the U.S., so we are subject to taxation in our home jurisdiction and to state taxes as well.

The levelling of the playing field is that our tax burden in the U.S. is very close to the tax burden here in Canada. I haven't gone dollar by dollar to calculate it, but it's very close. The withholding tax adds yet another burden, and our calculations show that it adds probably a percent or a percent and a half to the interest we have to charge.

Mr. John McKay: Again, this is a point of clarification. Why do we have a withholding tax if in fact we aren't able to tax you on your activities in Canada?

Mr. Gadi Meir: Why do you have a withholding tax?

Mr. John McKay: Yes.

Mr. Gadi Meir: Do you mean, how does it work right now?

Mr. John McKay: On a point of clarification here—I'm confused. If you are deemed to be carrying on activities on American soil, obviously Canada cannot reach—

Mr. Gadi Meir: There's a special provision in the tax code that says Canadian borrowers of money from a foreign source are subject to a 10% withholding tax on the interest they pay out of the country. At the moment we have entered into an arrangement with Revenue Canada where we pay it on behalf of our customers and we file all the necessary paperwork on behalf of our customers on a voluntary basis.

Mr. John McKay: Is it Wells Fargo's tax or is it the consumer's tax?

Mr. Gadi Meir: Actually, in law it is the consumer's tax, but we build it into the pricing, obviously, and then we pay it on their behalf so that they don't have to go through this paperwork of filing monthly or quarterly to pay it.

Mr. John McKay: I've got a dozen more questions.

The Chairman: Mr. Szabo.

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

The fact of Canadian banking is that its performance has been very reflective of stability and security for the Canadian economy. I find it kind of interesting that the banks in Canada are national banks. Often there is a comparison with the United States and yet the similarities are really not there, because there are really very few banks that could claim to be national banks.

Mr. Kuhlman, I was very interested in a comment you made about Canadian consumers paying for technology upgrades rather than the shareholders. I was curious as to how exactly you would colour code the dollars so that you could trace exactly who paid for technology. If you modified your dividend pay-out ratio, clearly shareholders could be paying for it. You'd never know. It depends on the financial strategy of the organization. It may not be a good idea for a bank to go out and float a new equity issue. It may not be a good idea for the bank to go out and get third-party financing directly for a technology because they've got the cashflow to reinvest in the business. It probably makes good business sense.

To tell you quite frankly, I saw your comment as though it sounded really good that, gee, in Canada they're getting the consumer this, that, and the other way. But I think it's unfair. I think it was a slap at the Canadian banking institutions that was unwarranted when we're trying to maybe get a feeling for Canadians as to whether or not they're getting reasonable value from banking services and the financial services sector in Canada. I'd like you to rethink what I consider to be a slap against the Canadian banking institutions.

Mr. Arkadi Kuhlman: Well, thank you. It's not at all that it was a slap. I think it's in a much different light. I happen to talk to consumers every day, so day in and day out I hear about service charges, interest rates, and the problems average Canadians are basically facing with their financial affairs.

• 1710

It seems to me that over the years Canada has been served very well by Canadian banks. But I think we've also seen a lot of structural changes in a lot of other Canadian industries, which I would think are equally as important to this country. When they have to do major restructuring, to invest in major technology or to close branches, they can take a $1 billion hit, which goes straight to their balance sheet. You restructure. You build for the future. You build for a better product, better value, better prices. That's dealt with in the capital markets. That's not dealt with through a pricing mechanism through consumers.

As the industry moves forward and becomes more competitive and more efficient, the question always is, why does that have to be done through pricing? If you look at the annual reports of the banks for the last 30 years, you'll see an interesting parallel about the amount of reinvestment that goes on, the amount of foreign profits that are made, and the amount of domestic profits that are made. It seems to me that's a pretty logical way of approaching this. I'm not sure it has to be done through consumer pricing.

Mr. Paul Szabo: In the same vein, I'd like to ask Mr. Meir for a comment. In your brief you refer to your Canadian experience, and you give a couple of examples that were included in the first batch of Canadian applications. One was a dry cleaning company in Stittsville, Ontario, which had been in business since 1989, with $400,000 in sales, and which had only managed to obtain $8,000 in credit. The second example was a light truck transport company in Nanaimo, B.C., which had been in business since 1980, with $600,000 in sales, which only had a $7,500 line of credit.

If I were a banker and you said, I've been in business for 20 years, I have $400,000 in sales each and every year, and I want you to give me $75,000, that information would not be sufficient to allow me to make a decision, because you could have been in business for 20 years, you could have had sales of $400,000 a year, but you may have had expenses of $500,000 a year. Clearly, I would not have extended the credit.

The way it was presented here, and I present it to you as well, is that Wells Fargo, which invests nothing in the infrastructure in Canada, invests nothing in employing Canadians in order to contribute to our society, and which pays no income tax to the Canadian economy, comes here and slaps the banks of Canada because they don't want to extend these lines of credit. But I guarantee you that if those applications went to Wells Fargo, it would not grant the credit either on the basis of the information provided.

I think it's really unfortunate that the players who want to do a little bit of cherry-picking within the Canadian financial sector would come and say, I'd like to play on a competitive, level playing field for a little bit of the gravy here, but by the way, I don't want to contribute to or participate fully in the public interest of Canadians.

Mr. Gadi Meir: Thank you very much for that question. That will give me a chance to explain what we're providing to the Canadian market. First of all, with regard to the example you chose, if a company has had $400,000 in sales and $500,000 in expenses, they would not be in business for 20 years. That would be a totally unprofitable business that would go out of business in two or three years. So the example you gave is—

Mr. Paul Szabo: How about $401,000 worth of expenses?

Mr. Gadi Meir: Our statistical models and our lending experience show us that the number of years in business—and it's interesting that you chose that example—is a key indicator of a company's ability to pay back. Whereas other banks are taking reams and reams of financial statements and having a loan officer sit down and go through them, our statistical models show that if we ask something like eight to ten key questions on the application form, we will have a good sense as to whether or not that person will pay us back. Also, when we look at the credit bureau, there are very powerful indicators there.

• 1715

So there is enough information on our simplified application form, which is included there, in order to make that credit decision.

I want to address some of these points. With respect to cherry-picking, we are not cherry-picking at all. It's quite the opposite. In fact, the companies that already have credit or that are such good customers are already going to the Bank of Montreal or the CIBC, where they have a good relationship, and they're getting credit. We are talking to customers who have been continuously frustrated with their banks, and they are saying finally there's an alternative. I too have talked to many customers, and we're getting calls on a daily basis. When we first introduced it and we were in the paper, they were seeking me out through the Wells Fargo phone maze and telling me these horror stories about how they have a nice business, it's been in business for x number of years, and their banker won't listen to them.

We're not cherry-picking at all. We're coming with a much bigger risk appetite. We don't have a risk appetite of 50 basis points or 100 basis points. We have a risk appetite in the hundreds of basis points, and because our statistical models have been built on this experience, we know when a customer is in a category that's maybe 250 basis points loss or 300 basis points loss and then we price for it. The Canadian banks won't price for it. They'll say, we'll give you a line of credit at prime plus one or prime plus two, and if you're riskier than that then we decline you. We'll say, we'll take on the additional risk. Your line is going to be at prime plus 375, 475, 675 or so—those are the increments we use—but we'll grant the loan.

In terms of taxes in Canada, we are paying the withholding tax. That withholding tax is about 100 to 150 basis points, which is equivalent to about half our spread. So in fact we're paying a healthy tax at the moment in Canada.

With respect to employment in Canada, the conditions we outlined in here are exactly what are preventing us from providing telemarketing jobs, mail jobs, marketing jobs in Canada. We are prohibited from having any of our ancillary operations in Canada, and that's addressed in the—

Mr. Paul Szabo: Mr. Chairman, this question has to be answered clearly on the tax. You said, for a second time, that you're paying a “healthy tax”, to quote you. You do not pay the tax to the Canadian government.

Mr. Gadi Meir: We do. I'll send you a copy of the cheques. We pay a withholding tax.

I'll explain it and just go through a small example. If we have a $10,000 loan at, say, 10%, the customer at the end of the year has paid $1,500 in interest. He then owes Revenue Canada 10% of that, which is $150, and we make that payment. The customer owes that, but we've entered into an arrangement where Wells Fargo is paying it on their behalf. On a 10% loan, our return on assets, for simplicity, is about 200 basis points or 2%. One full percent is now going to Revenue Canada.

I'm happy to sit down and explain it a little later.

The Chairman: Perhaps when Mr. Baillie comes this evening we can ask what percentage the banks pay in taxes here in Canada and abroad, because that may in fact illustrate some of the points that were being raised.

Mrs. Redman.

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

One of the things the MacKay task force— the balances it makes about whether or not we look at mergers as something that may be a valid financial decision for banking in Canada. The balance for that, it seems to me when I read it, is to open up to foreign banks, which is the group you represent. Yet it seems to me, when I've heard each of you talk about the services you offer Canadians, that you're really targeting niche markets.

I'll start out directing my question to Mr. Kuhlman, if I can. You are a virtual bank. ING is in Canada. How can you offer a full substitute or full competition for the six main banking institutions in Canada that do offer the chequing accounts and some of the other services that it doesn't sound to me like any one of these institutions is offering?

I know that Canadian banks have virtually gotten out of payroll because it hasn't paid, and I extend that down the road. I wonder if there are not other high-priced banking services that Canadians are eventually going to either pay more for or start doing without because there isn't the competition, because we're looking at the niche markets.

• 1720

I can't help but ask again, why no bricks and mortar? If you're willing to offer these kinds of financial services to Canadians—and I believe it was Mr. Willey or Mr. Curtis who earlier talked about really being anxious to come into the Canadian market—if you're anxious to be here, why not put up the bricks and mortar and be a full banking institution?

Mr. Arkadi Kuhlman: Thank you for the question.

First of all, ING has been in this country for over 50 years, so we have not exactly just arrived on the beach, so to speak.

I think there is some room for specialization in the marketplace. There is a place for specialty financial firms, banks, mono-line players. I think it has been characterized in a political way as cherry-picking, and I think that's rather unfortunate.

ING Direct is a grassroots, broad-based consumer. We have customers in every province in this country. As a matter of fact, we're the ones that reach out to people all across the country.

Bricks and mortar is not the answer. Bricks and mortar is going to get closed and move in the flow like everything else. Nothing that's going to happen here in Canada in 1998 is going to change the fact that bricks and mortar is going to change—absolutely nothing.

We have cafés. We actually sit down with customers and talk to them. You may call that bricks and mortar. We see it as a café where people are having a coffee and talking about banking. People let us know they have no problem dealing with a telephone, they have no problem dealing with the Internet, they have no problem dealing with the mail, and it seems to work quite well for the products they're asking for.

Foreign banks, and certainly ING Direct, are not there to replace all the banks. We're not there to change everything. We're there to basically add a healthy mix to the overall formula.

The question I have, which would be the other way around, is why do we have a legacy of over 35 years littered with foreign banks? Foreign banks have never made it in this country. There's only one or two rare exceptions; everybody has come and gone. Is that in the interest of Canadian consumers? I'm not sure. Should everybody do the same thing? I don't think it's necessary. But I think the characterization sometimes is only used for some very simple and simplistic conclusions.

Mrs. Karen Redman: I would ask if everyone else would like to comment on the question.

Mr. David Willey: I would echo some of the remarks about branching.

Really, Capital One is in many ways a 21st century institution. A lot of that merging you're seeing going on in the U.S. banking world is because bricks and mortar as a delivery mechanism is getting a bit long in the tooth, quite honestly. There will always be a role for that kind of delivery mechanism, but more and more, as Mr. Kuhlman suggests, consumers are interested in direct banking products, whether it's the Internet, or whether it's over the phone, or through the mails—all of which Capital One does. So it's a different approach, and it has advantages. There are some disadvantages to it, quite honestly, but it offers more choice to consumers, and that's a plus, I think, regardless of how you think about it.

I also want to respond to your comment about niche products. I think there are a couple of ways to think about it. One is if you think about a range of different products to consumers and you think one way, that's the traditional banking model—chequing accounts and savings accounts, and so forth. The other way to think about it, though, is making a particular product available to all consumers, and that's in fact what Capital One has done to date by designing products for everybody and offering out value to different consumers.

In some cases, for very low-risk people, the value proposition is a lower cost of the product. In some cases, for people who are not served by traditional banks—and I echo the remarks from the other end of the table—in the U.S., and I think in Canada, as well, for a very long time banks offered a price. If you made the credit hurdle, you got the product. If you didn't, that was too bad; you didn't get the product. But we're able to offer a lot of products for every strata and every type of person out there, which is a service to those consumers as well.

• 1725

So I think that's really what we're trying to bring. To date, we have dreams about being other things, but as we are today, we offer a broad array of lending products to a very broad array of consumers.

The Chairman: Are there any further comments?

Mr. Wagner.

Mr. Steve Wagner: About Trans Canada Credit/Norwest Financial, we do have a branch office distribution network throughout Canada. We have probably 140-some branches in all 10 provinces, and that is basically the way we operate in Canada and the U.S. and in other parts of the world.

We are a niche player in that we're primarily in the consumer finance business. I think we were before this committee two years ago, with our emphasis on not being forced to become a schedule II bank or another federally regulated financial institution. Again, we're basically a niche player. We don't pretend to be all things to all people, but we try to focus on what we know how to do and try to do a good job of it.

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

We're going to have to suspend for probably twenty to thirty minutes because we have to go and vote. But please stay, because we're going to come back with some more questions and some good answers.

We'll come back with Mr. Nystrom and Mr. Brison.

The meeting is suspended.

• 1727

• 1804

The Chairman: I call the meeting back to order. The next questioner will be Mr. Brison.

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

First of all, Mr. Meir, we didn't hear anything treasonous here today from you. I think you can go home after this is over and you won't have any interference.

It's interesting to hear the degree to which all of your financial institutions have in fact made a significant presence in the market. I guess with the death of distance as a determinant in the cost of telecommunications and branches becoming less and less relevant, for a lot of these niche markets in fact you can kind of move by stealth, in a sense. It occurs without necessarily a lot of fanfare. For instance, I learned earlier that ING has increased its customer base tenfold, from 10,000 to 100,000 customers in the past year. It's really surprising.

• 1805

One of the arguments used by the proponents of mergers of the Canadian banks, the proposed mergers, is that the level of foreign competition has grown. There are some who have indicated to us that in fact that is not the case. It's interesting to hear from you that you are here and you are here in a big way.

In terms of the access to the branching opportunities in Canada, I'd be more interested in terms of what you feel your reaction might be in the future, particularly in a Canadian context or a post-merger context in Canada. There seems to be little doubt that there will be some redundancy in branches and some duplication in branches of either Bank of Montreal and Royal or CIBC and TD. Would there be an interest from some of your institutions in terms of operating some of those branches and doing with them what you will? Would there be an interest and a viability from a business perspective?

Mr. Gadi Meir: I can answer very quickly for Wells Fargo. We have no interest in the branches, and I think that's obvious by the kind of operation we have. With respect to the assets, if they have to dissolve or sell off assets, we haven't spoken about it yet, but we would probably look at a portfolio of assets to buy that we could service from the U.S.

Mr. Steve Wagner: With respect to the Norwest banking group, I'm not sure I really have a feel for what level of interest we would have.

Mr. Scott Brison: I have a concern. All of us have an interest in ensuring the most competitive marketplace, and that is one of the reasons why some people are opposed to the mergers. But if for instance the branches are not as relevant in a current context, in terms of the viability of banking or financial services in Canada, and if we're opening up the borders more so for greater competition and at the same time for instance if within Canada we allow the mergers to go through but we handcuff Canadian financial institutions with some guarantee—for instance, there is some discussion now of guarantees about things like maintaining their branch operations as is for a period of several years, job guarantees and that kind of thing—we would in fact be exposing our domestic financial institutions to undue competitive forces and at the same time handcuffing them from actually competing and doing their thing.

National treatment being a reciprocal principle, I understand there are still some discriminatory policies against foreign banks in Canada. Do you know what the barriers to entry for Canadian banks are in the U.S.? In a thumbnail sketch, are they disproportionate? I've been told that they may be disproportionately higher than even the— No?

Mr. Richard Owens: No, that's not true.

This is an issue we looked at in very considerable detail some time ago. Earlier submissions made by Norwest to this committee dealt with that issue. In fact there's a detailed opinion, which was filed also with the task force, which Norwest had prepared by a New York firm of lawyers comparing access to the U.S. market with access to the Canadian market. In fact access to the U.S. market was broader, and in some respects more principled than the Canadian approach, and in fact formed a model for some of the recommendations we made to how the Canadian approach might be changed.

• 1810

I think the opinion dealt with the jurisdictions of California, New York, and the federal jurisdiction. It set out the requirements, given equivalent applications between the two countries. I cannot recall all of the precise details of that opinion today, but I would recommend it to you as an excellent source of information on the topic, and I'd be happy to provide you with a copy.

Mr. Christopher Curtis: I would like to second that as well. Speaking as a U.S. lawyer, there is no 521 order process in the United States because there does not need to be one. Just by reason of being foreign banks, Canadian banks are not hampered from setting up non-bank subsidiaries in the United States as long as what those subsidiaries are doing is not a banking business, which means basically taking deposits. Similarly, the United States has a foreign branching regime similar to that which is being proposed for Canada now and which Canadian banks can take advantage of.

Mr. Scott Brison: I was surprised to learn of the OSFI insistence that, for instance, your call centres and your representatives effectively have to be working in the U.S. Here we are in a country with twice the unemployment rate of the U.S. I was trying to think of what the public policy rationale might be. It's the law of unintended consequences. Certainly it costs jobs to have that policy, which seems perverse. What do you see as the rationale for that?

Mr. Gadi Meir: Yes, it's a good question, and we asked ourselves the same thing.

I don't want to make OSFI out to be the bad guy, but the problem was really with clarity within the law. That's number one. Second, this was really a novel business approach that we were taking.

The situation was that we were delivering this whole business, this product, from the U.S., so the business was being conducted outside of Canada. Under the Bank Act, we wanted to be seen as not doing the business of banking in Canada. That way, we wouldn't have the problem of getting a 521 or a schedule II.

OSFI said that in order to be very clean about this, we should make sure it's perfectly clear that all the activities—apart from underwriting, marketing, and the things that are critical, and even the ancillary things such as the mailing—are done in the U.S., and we agreed. We were eager to get into the market, to start piloting our program, and to start learning about the credit in Canada, so we adhered.

The solution that the MacKay report comes up with is a very good solution. It says it's ridiculous that what we're doing is not doing the business of banking in Canada. They're saying they're going to deem us as doing the business of banking in Canada but are going to permit those activities if we go through the certification process.

Mr. Scott Brison: I know that with ING's purchasing of Barings—was that a couple of years ago now?—one of the concerns in Canada is that, with the mergers of the domestic banks, it would be catastrophic if there was a failure. It would be catastrophic now, and if the banks were larger the risk would be that much more.

I guess the 10% rule and its sustainability will play into your answer on this, but if there were to be a failure, do you feel that much of the Canadian banking assets would be operable by a foreign interest if it was provided with the opportunity to attain them?

Mr. Arkadi Kuhlman: With some of the experiences that have come out, the way forward certainly means we're going to have a lot of large conglomerates, and not just in banking but in all kinds of businesses. As a matter of fact, 65% of the assets and revenues of our group are actually in the insurance side of the business, and another third of it is in asset management.

I think what we're seeing now in Japan and in Europe is that the larger consolidations are going to be part of the solution for failures. If we were ever to have a large domestic failure in Canada, I think in the world forward there probably would be a solution that could be quasi-governmental, quasi-marketplace, quasi—

• 1815

Mr. Scott Brison: So what you're suggesting is that, arguably, if we make the right public policy decisions, globalization may actually increase the stability of the Canadian financial sector, or has the potential to do so.

Mr. Arkadi Kuhlman: It has the potential, as we've seen in other industries. We've seen it in the car industry, the airline industry, and so on.

Mr. Scott Brison: The Norwest and Wells Fargo merger— In a technologically driven industry—and banking and financial services are technologically driven industries—what are the economies of scale? Usually, economies of scale arguments are used for a manufacturing type of industry. What are the economies of scale in an industry such as yours?

Mr. Gadi Meir: Our whole program in Canada is a prime example of economy of scale. We built a program in the U.S. and built all our credit models and our direct mail expertise in the U.S. Now that we have all our models and know-how in place, we've decided to expand, because it doesn't cost us any more to use these models in Canada. We decided to expand to another market that may have the same performance and behaviour as the U.S. We're using very similar models, but they're just tweaked a little bit. We're using the same know-how here, and that's a big benefit to us.

Mr. Scott Brison: What hurdles in the U.S. will you have to clear in terms of public interest and those kinds of things? There is going to be an extremely rigorous process, a public impact analysis of mergers based on what the MacKay task force has posited as a framework for discussion. How similar is the process that MacKay is suggesting compared to what exists in the U.S. now?

Mr. Gadi Meir: I'm not familiar enough with the merger proceedings in the U.S. to answer that, so I'm going to defer to Steve.

Mr. Steve Wagner: I'm relatively familiar with the acquisition process in the U.S. and the need generally for Federal Reserve/Bank Holding Company Act approval.

Under the Bank Holding Company Act, the board of governors in the Federal Reserve—or generally a Federal Reserve bank under delegated authority—is required to balance several factors: whether the proposed benefits of the acquisition outweigh the bad things that might be associated with an acquisition, such as reduced competition or a concentration of resources— It's a sort of public benefit analysis, generally with an emphasis on allowing transactions to go forward in a market economy without undue adverse consequences. Generally, if there are competitive concerns or things of that nature, divestiture can be required and so on.

Mr. Scott Brison: There's one other thing I was interested in. Mr. Meir was talking about the differences in the way you evaluate a potential customer, as opposed to how the Canadian chartered banks might now.

I was in business prior to this life. The Canadian chartered banks certainly all have the same types of lending criteria. It's very ratio-oriented and it involves number crunching. What you were suggesting was something that sounded a little bit like what the Canadian banks used to call character lending. The model actually sounded a little more similar to evaluating people based on past history as opposed to current ratios and those sorts of things. I think that sounds positive.

From our perspective, we want to ensure maximum protection of consumer interests within Canada. We also want to ensure that an existing Canadian financial services sector is provided with the ability to not just compete but to succeed globally, so we're balancing those things.

• 1820

As a business person, I wish you guys had had more of a presence here a few years ago, when at the age of 19 I first tried to get a business going, start a company. But that being the case, I can say on behalf of our party that we want to see better competition in Canada and better service. I think the only way to do that is to allow more competition, both from foreign interests and also from the new banks that can emerge under the MacKay recommendations. But we would be naive to open up the borders more and at the same time handcuff our Canadian financial institutions and not allow them to merge, not allow them to compete and protect Canadian jobs.

Thank you very much.

The Chairman: Thank you.

Mr. Szabo, do you have a question?

Mr. Paul Szabo: Thank you, Mr. Chairman.

Much of the discussion we've had about the MacKay task force report really seems to be settling down to the regulatory question, and a number of you have mentioned reducing the regulatory burden. As a principle, I think it's a sound principle. Business should be able to regulate itself.

In Canada, however, where you get within the financial services sector hybrid operations of sorts, where we have banking and insurance, and the suggestion in the task force that automobile leasing also become part of it, when you consider that we have both federal and provincial jurisdictional authorities and regulations, it seems to me that it's very difficult to make much headway on restructuring the financial services sector without first dealing with your regulatory environment.

So I'll maybe ask for your words of wisdom in terms of the comparative regulatory environments and the way you see Canada should go, and whether you have any comments with regard to whether regulatory reform is a prelude to in fact restructuring or opening up the competitive environment within this sector as a whole.

Mr. Arkadi Kuhlman: From my remarks, I think you've certainly echoed exactly what our position is. We definitely look at the regulatory environment as paramount in terms of increasing its effectiveness.

OSFI must be strengthened to deal with multi-functional tasks, such as now looking at holding companies and cross-border companies and global companies that operate in different formats here.

OSFI does need support. They need funding, increased talent, increased supervisory capabilities, and in the weeds that's most important, because if we're going to have some kind of an open format on competition, we're going to have to figure out a way to basically get OSFI the resources so that it can do that.

The other thing is, with our G-7 initiative on playing a leadership role internationally, I don't see how we can do that without significantly strengthening our knowledge base and regulatory abilities here.

One of the reasons we have some of the problems currently with the regulatory burden is that we still have this one shoe fits all. I think some of that could be resolved for different types of organizations, different business practices, if OSFI were basically beefed up. I think it's one of the key things we have to address.

The fear is that OSFI needs to have the tools. I don't know where the tools are going to come from, in terms of funding and mandates, to basically take on that task.

Mr. Richard Owens: To add to that, I think one of the key issues in terms of fixing regulatory issues is the very issue here today, which is entry criteria for foreign banks, or for institutions that are called foreign banks.

The definition of foreign bank under the Bank Act is extremely broad, and it funnels through the federal regulatory process all applicants who are interested in carrying on a financial services business in Canada and determines who gets to walk through that gate and on what terms.

The question we're addressing today is really the central regulatory question, reform of which is critical to foreign bank entry, to the increase of the availability of services in Canada. That is a federal jurisdiction. It is principally exercised through the relevant provisions, the foreign bank provisions of the Bank Act, sections 508 through 521.

• 1825

That's the main hurdle. That's the chief gateway. So that's what really needs to be focused on, and from the entry point of view, that more than anything else is critical.

Secondly, this being Canada, one hardly needs to say that to the extent that regulation could be harmonized and that it were possible to get the provinces and the federal government to come up with a structure that actually worked together, that would be terrifically beneficial. I know efforts have been made in this, and I don't mean to disparage them in any way.

What we have now are some accidents of jurisdiction that are the legacy of our constitutional history, where the federal government has control over banks but nobody really has ever determined exactly what banking is, compared to other financial services. There is some accommodation of federal jurisdiction with respect to insurance and trust; although it's really a provincial jurisdiction, it's sort of settled that the feds can manage it now. Everything else in the conduct of business is entirely a provincial responsibility. So it really is a bit of a mishmash.

The principles aren't entirely contradictory, but their application may mean that a single lender, a Capital One or a Norwest, has to have eleven different disclosure forms relating to cost of borrowing, depending upon which jurisdiction is enforcing its rule. That doesn't do anybody any good. It's inefficient. So I would suggest, let's focus on the details; let's get the devil out of the details in terms of foreign bank access, in terms of the restriction of foreign bank access in the Bank Act. To the extent that our regulators can continue to work to perhaps relieve some of the redundancies across the country, that would be a real burden off the backs of those foreign and domestic institutions.

The Chairman: Mr. Pillitteri.

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

Of course many of the questions have been asked. But staying over here listening about competition, I hear that competition would be better for consumers. Yet I hear, by more deregulation— As you are right now charging 300 points, 500 points, 800 points, that means 3%, 5%, 8% more above the bank rate, and you're providing the service. Yet if there were more deregulation, that doesn't mean that your appetite is going to be less than the 3%, 5%, or 8% that you would be charging the Canadian consumer. Therefore, I don't really see that much of a reason, in some way, to open it up more to competition, because it would be more “buyer beware”.

Also, from Mr. Kuhlman I hear remarks saying that for the last 35 years banks have gone by the wayside here; they've not been able to make it in Canada for the simple reason— We've had it.

Actually, in a sense, we're protecting our Canadian banks. Nobody can take them over. They've had mergers, and our Canadian banks cannot be taken over. I'm pretty sure that most of you would like to be in the same position as our six national banks here in Canada.

If that is competition that you want to bring in— Or is it a service that maybe Canadians are not getting? Access to capital at 5% to 6% to 10% higher than the bank rate— Are you really trying to say to me that by opening it up more, the interest rates are going to be coming down in this country and service is going to be better in this country? Right now I hear that you want more openness to come into servicing the Canadian people. Yet on the other hand, you're not going to be changing from these prices you're charging.

I'd like like to have a comment from you, Mr. Kuhlman. If you had the possibility to be a Canadian bank as they are today, you would feel pretty comfortable, wouldn't you? And if you wanted any changes, do you think the merger— Do you think they are not big enough, that they need to merge to be world-competitive?

• 1830

Mr. Arkadi Kuhlman: I think you're quite right. I think the issue is that everybody would love to have a better vantage point on the playing field. Our view is actually a little different from the rest of the panel. We're not concerned about access; we're concerned about a level playing field.

When it comes to rates, we're a discount, grassroots bank. We charge 8% on our loans. That's three-quarters over our cost. We pay 4.75% now on deposits. I don't know of any other bank in Canada that pays that rate. So when it comes down to where consumers are, I think we're pretty price-competitive in terms of where we've gone to the market for the services that we're selling.

I think the other issue is strictly the question about fairness. Our shareholders committed hundreds of millions of dollars in capital to come into the marketplace to basically provide a service. If we as Canadians want to either have competition or do not want to have competition, or want to have competition to some degree, I think that's our choice. It's a political process that decides what the will is in terms of how much we want. What we're saying is that we should just decide what the ground rules are and make them fair.

What I find somewhat problematic is that people keep arguing about how the big bad foreign banks are coming and are going to kill us, that we're going to have to do something about it, that we're going to have to get bigger. What I'm saying is that the big bad foreign banks aren't coming, because we have basically limited exactly by how much they're going to come. We have somehow built up a fence, and it's up to us as Canadians to either take it down or leave it there. But I think we we should be somewhat straight about the dialogue.

Our shareholders would have absolutely no problem if we only knew what the rules of the road are. Either say Canada is open or Canada is closed, or Canada is open to this degree. As a representation of foreign shareholders, that's all we are really asking, and nothing more.

The Chairman: Mr. Epp.

Mr. Ken Epp (Elk Island, Ref.): I've just been browsing through this Wells Fargo report, and I'm intrigued by your success. In the United States, you seem to have $100 billion worth of assets. You almost have enough to put a downpayment on Canada. To me, it is a huge financial success to have those kinds of assets. I'm not suggesting you do that; I'm just putting it in perspective.

We have a report here that you are the leader in the United States in loans to business people— and businesswomen particularly, with a $10 billion commitment in loans to small business for women. I really am surprised that you're able to do that without ever asking for financial statements from these people. I guess I like the model. Instead of letting you into this country, maybe we should encourage somebody in Canada to start such an enterprise and ship the product to the United States, because it works well there too.

I don't really have a question. It's just a comment on that.

The Chairman: Mr. Loubier.

[Translation]

Mr. Yvan Loubier: I also have a comment to make. Earlier, Mr. Pillitteri asked why the Canadian market should be open to foreign banks? In my humble opinion, there are three good reasons. If I had been allowed to appear this morning, I could have discussed these as well. The first reason is that being open to the world is always a good thing; it's a basic principle. The second is that for 10 years now, in all the trade negotiations that have gone on, whether under GATT, which became the WTO, or under the North American Free Trade Agreement, there has been a gradual increase in openness; clauses were adopted by member countries to open up the financial services market. The third is that you cannot have your cake and eat it too. The Canadian banks—

[English]

Mr. Gary Pillitteri: Not with the caisses populaires in Quebec.

[Translation]

Mr. Yvan Loubier: At the moment, Mr. Pillitteri, Canadian banks earn over 40 percent of their revenue abroad. Canadian banks have some 60 subsidiaries in foreign countries. Some generate as much as 50 percent of their revenue abroad. If other countries are willing to open up their markets and we make profits from them, internationally, how can we continue to keep the Canadian market closed to foreign banks? It doesn't stand up to objective analysis; nor will it be able to withstand the coming rounds of trade negotiations over the next seven or eight years.

• 1835

That is what I wished to add, Mr. Chairman. It was not a question, but simply a comment in connection with Mr. Pillitteri's question.

[English]

Mr. Gary Pillitteri: Mr. Chairman, I feel I have to respond to Mr. Loubier.

I was not about to say anything about closing the Canadian market, closing our borders to institutions coming into Canada. There is an openness. I just wanted to make it clear about this opening up to competition. If interest rates would have gone lower in Canada—

You know, Mr. Loubier, I'm also a farmer, so let me tell you something. We talk about cherry-picking. There's been so much cherry-picking around here, especially in this country, that there is no cherry-picking industry left in Canada. I just wanted to make clear that this relates to agriculture, and maybe this same thing could happen with other businesses from the outside when they do cherry-picking. There could be nothing left for the Canadian consumer. That's what I was saying, not anything about not opening up.

Open up to outside, yes, definitely. Even last year, you were very well open to opening up to branch banking when the government was ready to bring in legislation. You know the government is going to bring in legislation for that, so let's not be saying that we want to keep it closed. It is about to become more open.

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

I have a question, and it's related to the future of the financial services sector. Of course, when we talk about the future and about the MacKay task force, I often ask myself whose future we're talking about. Are we talking about my future? Are we talking about my children's future? I think the banking sector or the financial services sector that my children will live in will be very different from the one we are accustomed to.

For the benefit of the committee, I'm just wondering if you can clearly depict some of the characteristics that you see for the future of the financial services sector here in Canada. I know the global nature of your sector will become very pronounced in the next ten to twenty years, of course. I want to get a feeling of where you, as experts in the field, see foreign banks fitting into the new Canadian financial services sector.

Mr. Wagner?

Mr. Steve Wagner: Again, from the Norwest perspective, we have historically been more of a niche player. Our emphasis over the last few years has been to avoid having our Canadian operations actually be a bank. Basically, for the last hundred years our organization has been very successful in the consumer finance arena. We've been very competitive in that area, we've been successful in that area, and we've seen a good deal of consolidation in that area. I guess what we foresee in the Canadian marketplace—or what we'd like to see anyway—is the ability to compete and basically provide the services that we've historically provided.

That probably doesn't address maybe the broader question that you're asking, but I think it may be about the best I can do from our perspective.

Mr. Richard Owens: Yes, that's a big question. We could spend a lot of time trying to answer it, but, given the nature of the future, we'd probably never entirely succeed.

There are a couple of comments I'd add to what Steve said. I think one would be that, first of all, you'll see that Canada is a good market. It's a rich market. Foreign institutions will continue to be here offering traditional services because the market requires it from a perspective of spreading risk, from a perspective of having enough institutions to properly serve the corporate lending and traditional corporate finance markets.

I think you'll also see foreign institutions playing an increasingly aggressive higher-profile role in helping the market to change and in bringing new innovations to the market—and we see some initial examples here today. In part, that's the legacy of the way the financial services marketplace in Canada has developed, in that it's been somewhat, I won't say immune, but somewhat protected from foreign competition up till now.

• 1840

So it's been difficult for institutions, as we've seen and as Mr. Kuhlman has described, to establish themselves in traditional ways in the Canadian marketplace since 1980. The ways of bricks and mortar and the ways of traditional client service are very difficult in Canada because there haven't been the experiences on which to base new business cases of start-up institutions founding themselves in that way, and there are these enormous networks of branches of existing Canadian banks, which are very hard to compete against.

So it's the new niches and the opportunities for new technologies for the delivery of financial services that are creating opportunities for entities like ING Direct to, as I say, show innovation in the market. And I suspect within the next ten years that landscape won't change so dramatically, that you won't see the same types of growth. They won't be the innovative areas, the niche areas that will form the platforms for the growth of these institutions.

Hongkong Bank has succeeded in creating a good branch network as a foreign-owned bank. Citibank failed; they have a few branches. Almost nobody else has even really tried. Experience has been a little bit different with the ability of Norwest to establish branches in its own niche, and the insurers again have had a different experience because they've been able to use Canadian intermediaries, which allows them to offer their services more widely, just like the mutual fund providers.

The Chairman: Would that be a growth in specialization?

Mr. Richard Owens: Absolutely. I think that comes with the opportunities presented by new technologies. They enable products to be refined based on data that nobody had access to before. And as the use of information technology in the business grows and the ability to exploit that data grows, products will become evermore specific to certain classes and more efficient and more cost-effective for specific sectors of the market.

The Chairman: It's been a week and a half that we've been really debating this and listening to people as a committee, but there's one element that is quite evident in our view, and that is the fact that we must be in the middle of a paradigm shift, because we get people appearing in front of us who are very much tied to the brick and mortar economy, and then we get other individuals who are very much excited by technological advancements.

It reminds me of a story that someone told me in reference to the fact that if our automotive industry were to have progressed as quickly and had reduced the price as much as the computer power and technology that has been generated, a Lexus would cost two dollars, it would travel at the speed of sound, and it would do that with an ounce of gas. That just puts the speed of change into perspective.

I'd like to know from you what role technology will play in the future, particularly as it relates to foreign banks, foreign institutions within Canada's global marketplace.

Mr. Arkadi Kuhlman: Perhaps I could try to make a brief comment, although I agree it's tough to address all of it. There are a couple of interesting observations in the way you have put it—being in the middle of the paradigm shift. I think I fully understand the dilemma and both the opportunity and the risk in that.

As was mentioned, technology is a sort of insidious way of moving across borders. We, for instance, through our shareholder have access to probably one of the world's best smart-card technologies. It's been piloted in a number of countries. There have been a number of smart-card initiatives that have been tried in this country by our existing large banks, with different successes. We've now found an application that might actually work quite well.

• 1845

I think that kind of trial and error being done in Canada is positive, because it has a lot of spin-offs. There are discussions under way now with Bell, so there are strategic alliances. Our strategic alliance with Canadian Tire is based almost solely on technology and infrastructure, which they, together with us and another technology provider, are putting in place.

A couple of things have been learned from our experiences over the last 30 years. One of them is that we, as Canadian bankers, have always misjudged the curve of technology. We misjudged ATMs, where the curve was a lot steeper than we thought it would be, and we were late. We misjudged the curve on debit cards, which was steeper than we thought. We misjudged the curve on smart cards, and that story remains to be told. We certainly missed the curve on telephone banking, EDI, and e-commerce.

I think it's really important that while we find that middle ground, Canada continues to experiment and to push on these fronts. A lot of our basic banking services have become “commoditized”, as has happened with other services. There was a time when it made sense to have 23 or 30 different kinds of savings accounts. I think that now it's getting down to one. Look what's happening with brokerage services, where they can now offer a full-service brokerage.

Literally as we speak, we're seeing an explosion in financial planning and financial intermediaries, where there's a clear-cut difference in the marketplace between the traditional services being provided by branches and those that are now being provided by financial planners. The services are basically assembled by the financial planners from a number of manufacturers.

The system of intermediation that exists in the United States is coming about in Canada, and I think it's a positive thing, because it forces the players to decide where their expertise is, where their resources should go, and where their opportunities are. Are they to be a distributor, a manufacturer, an assimilator, or an end provider? I think it's very important for Canada to keep a very robust, positive environment in order to accommodate these initiatives.

With all due respect, I think more can be done. I think we should expect more from ourselves. This is not an indictment of yesterday; it's basically a call for doing more for tomorrow.

The Chairman: In any major evolution or revolution, whether you're talking about the transition from the agricultural society to the industrial age and now to the information age, there will always be individuals who are going to be hurt. We often speak about the fact that today there is a polarization of classes based on technological know-how.

I also think corporate Canada, whether it's a foreign bank or a domestic bank, also has a social responsibility, above and beyond the economic responsibility, to make sure that those individuals who are very much tied to the brick and mortar and to the so-called old economy are also given access to services they need in order to get on with their daily lives.

What do you see as the role of financial institutions as we shift from one age to the next?

Mr. Wagner.

Mr. Steve Wagner: I see less distinction among the various financial institutions from what we've seen in the past, where there has been a sense that maybe a bank has a certain role to play and an insurance company has a certain role to play. As the creation and delivery of financial services-type products evolve, you see banks getting more involved with insurance-type products and insurance companies getting more involved with brokerage-type products.

So my sense is that as far as the delivery of financial services products is concerned, on the one hand there's going to be more specialization that is outside of traditional institutional boundaries. Yet on the other hand you might see more amalgamation or conglomeration of financial services to make more of a financial services supermarket.

• 1850

I think in the final analysis it's going to be what is it that the customer really wants, because I think the consumer is ultimately going to drive the way these products are bundled and distributed.

The Chairman: Any major evolution historically has also created aggregate growth vis-à-vis job creation. Do you feel the shift to the information age will actually generate more jobs for the people in your industry?

Mr. Kuhlman.

Mr. Arkadi Kuhlman: I think it does, but in very unobvious ways. There's a lot of money being spent, for instance, on technology and marketing. If we look at the traditional sort of expense mix we've been used to as traditional bankers, going forward the percentages change radically. We're now spending more money on marketing, for example. Traditionally it used to be about 5% of our expense base; now it's about 33%. That expense base goes into ads and people that generate ads, graphic artists, and people that put up billboards and run newspapers and all those kinds of things. So I think there's a mix, and the shift is quite different.

The other thing is, I think not much really changes in the area of social responsibility. We contributed last year about 8.5% of our expense base toward causes for hospitals. We support universities. We support medical research. We have spent a fair bit of money with the zoo on wildlife initiatives. I think those things are about good corporate citizenship. I think we should expect that of all financial players, whether domestic or foreign, and we would expect that to go forward.

In the larger scheme, it's interesting, the customers— One of the things we have to think about is that the most easily accessible tool we have is the telephone. Every Canadian has one, including, as I was reminded by someone on this committee some time ago, 415,000 rotary dialers. There is a question of whether or not they can get access. But through our televisions and our telephones we do have access. Being in one of the largest countries in the world, with the biggest access, Canadians have an ability to get commodity services. If you talk to a lot of our customers, this is the sidewalk of Canada. The things they used to get in a very complicated way, such as making a deposit or a withdrawal or a transfer, can now be done much more efficiently while still giving them the kind of access and things they need.

So going forward, I'm very optimistic that Canadians can be served well by a variety of means.

The Chairman: I have a final question on the issue of the mergers. I'm not talking about the two proposed mergers, but rather merger as a legitimate business practice. In his report Mr. MacKay speaks at length, and I might say I think it's one of the underpinnings of his report, about wanting to develop an entrepreneurial financial services sector.

I was wondering whether you agree that mergers per se can in fact be an important element for the creation of greater entrepreneurship in the financial services sector.

Mr. Wagner.

Mr. Steve Wagner: I would think so. I guess our experience has been that some of our most recent acquisitions over the last few years have involved smaller organizations that again have found some kind of niche. Entrepreneurs have created these financial services or similar types of businesses, and then a company such as ours comes in and pays a pretty healthy premium for that business, to supply more capital to it, to grow the business. I think it's a pretty good-sized carrot on a stick for most entrepreneurs.

The Chairman: Any further comments? Mr. Kuhlman.

Mr. Arkadi Kuhlman: We certainly are in favour of mergers in general; they have a place in the landscape. I think, though, it's the character of the merger that is significant. Certainly the evidence worldwide shows that some mergers work well and some mergers fail. I think it gets down to their character, to what is to be accomplished and how it's to be executed. The old saying is if you put an elephant together with an elephant all you get is just another bigger elephant.

• 1855

I think it's the hidden side that should be looked at, in terms of how that generates growth and how it generates redeployment of assets and how the organizations are going to change themselves to basically perform better, whether that's through efficiency, productivity, or profits.

I think the case for the mergers has to be made for the public interest in terms of what their nature is and what their intentions are. I think the openness to mergers should be there. The question is, what really is going to be accomplished? That could be articulated.

The Chairman: Thank you. On behalf of the committee, I certainly would like to express to you our sincere gratitude for an excellent panel.

Mr. Desrochers.

[Translation]

Mr. Odina Desrochers (Lotbinière, BQ): I would like to move two motions under the Standing Orders. As the motions do not involve our guests, you may request that they withdraw. I have matters to discuss with you, Mr. Chairman.

Mr. Yvan Loubier: Has he asked them to leave?

Mr. Odina Desrochers: Yes.

[English]

The Chairman: I certainly would like to once again thank our guests for appearing and express to you our sincere gratitude for an excellent panel. Thank you.

[Translation]

Mr. Odina Desrochers: Mr. Chairman, I would like to move two motions in connection with the fact that by colleague was denied the opportunity to appear this morning before the committee examining the MacKay Report. My motion reads as follows:

That the Finance Committee authorizes the Member for Saint-Hyacinthe—Bagot, Mr. Yvan Loubier, to appear before the MacKay Report Committee on behalf of his party.

My second motion, Mr. Chairman, reads as follows:

That the Finance Committee confirm the appearance on October 30, at 9:00 a.m., of the leader of the Bloc Québécois, Mr. Gilles Duceppe, to table his report on the pre-budget consultations held by him and his colleagues during the summer.

[English]

The Chairman: Any debate on this?

(Motions agreed to)

[Translation]

Mr. Yvan Loubier: The issue has been settled, Mr. Chairman. It's as simple as that. Thank you very much.

[English]

The Chairman: We'll suspend for five minutes and then be back.

• 1858

• 1917

The Chairman: I'd like to call the meeting back to order and welcome Mr. A. Charles Baillie, president and chief executive officer of the Toronto Dominion Bank, along with Mr. Robert P. Kelly, vice-chairman.

You have approximately ten to fifteen minutes to make your introductory remarks. Thereafter, we will engage in a question and answer session.

Mr. A. Charles Baillie (President and Chief Executive Officer, Toronto Dominion Bank): Thank you. We appreciate this opportunity to appear before you to contribute to the discussion about the future of the financial sector and the future of Canada.

I would like to take the opportunity to talk about the future today because I believe a lot of attention has been focused on the individual deals, the individual banks, the individual personalities of the bankers involved, and the short-term impact of major changes to our financial system. Not enough attention has been focused on much larger and more important questions: Where should the government take our country's financial sector? What is the vision? Those are vital questions because the decisions made by this committee and this Parliament will have a profound impact not just on a few banks, but on the broader financial sector and the future of our country.

The MacKay report presented a sound analysis of the forces that are transforming our industry on a global basis. The report also presented recommendations that would transform our industry. For the record, we at TD concur with the position presented by the Canadian Bankers Association: the MacKay report takes a balanced approach, with no clear industry winners or losers, and the recommendations must be considered in their entirety in order to ensure a level playing field and full, fair competition. This will be very challenging because some groups like some parts and some will want others. It will be tempting to cherry-pick, but to do so would upset the balance, ultimately harming consumers and the financial sector.

The MacKay task force has called for change and has recommended specific changes in our industry, stating that the status quo is no longer a viable option. The MacKay report did not presume to set out a vision of what the Canadian industry could or should look like. The opportunity is yours—the lawmakers, the elected officials charged with serving and furthering the national interest. The vision is yours to express. The opportunity is historic, and the consequences will be profound.

As noted, the MacKay recommendations would transform our industry, but into what would you want to transform it? What kind of industry do you want for Canada?

One vision of Canada would have us at the table as a major North American financial centre—Canadian-controlled and Canadian-headquartered—that is influential in global financial affairs. The other would see us slip further from the top tier and become a gradually declining influence in financial affairs, and indeed in world affairs. Canada might remain a healthy domestic financial marketplace, but it would not be a global financial force.

• 1920

Those two visions are at the end of two basic roads that the government could follow. One would allow big to buy big, would allow the mergers of major Canadian banks, of major Canadian insurance companies, major Canadian mutual funds and major Canadian investment managers. It would give Canada the potential for six to eight very strong Canadian-owned, Canadian-based, world-class financial institutions. And I mean “world class” in the context of the rapidly changing global marketplace, marked as it is by the trends identified by the MacKay task force: consolidation and rationalization, with large mergers in the United States and in other financial centres around the world.

Alongside this group of major Canadian financial institutions, there would be a host of other healthy financial suppliers, including major foreign-owned full-service institutions, as well as a range of domestic and foreign financial businesses, some large, some small, some full-service, some specialized. With that kind of make-up, Canada would have a seat at the table internationally, as a thriving financial centre. At the same time, our domestic marketplace would be well served and Canadian consumers would have a wide variety of choices among suppliers.

The other road is to say no to mergers, to say big shall not buy big, to say our institutions are already big enough for Canada, and to rule out our competing effectively in world markets. Canadian financial institutions would also see their domestic shares dwindle, squaring off against much larger foreign-owned competitors. That would be a valid choice if your vision for Canada does not encompass excellence. Such a choice would not be catastrophic. It would not be a crisis. The decline of our influence as institutions and Canada's position as a global financial centre would be gradual.

Our major banks and insurance companies and mutual funds companies are large enough to continue to operate profitably and to develop strategies to operate in a narrower range of businesses in order to generate acceptable return for shareholders. But what of the long term? Where would we be? Certainly with consolidation continuing elsewhere—and make no mistake, bank mergers are a worldwide phenomenon—we would gradually lose our place at the table. There would be certain areas and businesses in which we simply could not compete.

Consolidation elsewhere results in our major institutions ranking further and further from the top tier. Other countries and regions of the world are eager to take our place. Other countries and cities see the value in being a major financial centre. If they have not already done so, they are encouraging mergers. France, the Netherlands, and Singapore are examples. Charlotte, North Carolina, through encouraging its banks to merge and acquire, has become the number two financial centre in the United States.

In the changing global markets, it has become apparent that the strategies TD has pursued as a major Canadian full-service financial institution must be reinforced and backed up by greater size and scale. This is the key to maintaining the kinds of massive investments in technology and new businesses that are essential to long-term growth, and to retaining the benefits in terms of jobs, economic returns, progress and influence that such growth will bring.

I'm not just talking about TD. I'm not just talking about our proposed merger with CIBC. I'm talking about Canada. Being at the table as part of the G-7 for the past decade has been good for Canada. It has been good for our industries. It has been good for our presence in the world. It has been good for our influence. It has been good for our economy. It began with Wilfrid Laurier's vision that the 20th century would belong to Canada. In spite of our small population, we have had enough world-class Canadian institutions that we are still at the table. But with the forces of change now sweeping the world, will we be there in the 21st century?

• 1925

Gradually, as they fall further from the top tier, some of our institutions will exit businesses in which they cannot compete effectively. They will have to do so in order to generate an acceptable return for shareholders—and that is absolutely critical. We operate in a market economy. We are owned by our shareholders, and their interests must be served. In the case of banks, our shareholders include one out of every two working Canadians. That is a substantial public interest, and it is one that has perhaps been overlooked in this debate.

TD has already made an exit from two businesses in the last couple of years: our custody business and our payroll business. Those are international businesses that require massive volumes in order to be viable, and massive investments in technology in order to be competitive. We simply could not justify such a vast investment. It would have drained our other businesses.

Spending on technology has become more critical than ever to keeping pace with the new competition, the new global giants in these and other businesses. The sheer numbers tell the story. There was a time when TD spent on technology roughly what NationsBank did. Since that time, Nations has merged several times. With its merger with Bank of America, Nations last year spent $3.8 billion equivalent Canadian on technology. We spent $500 million. There was a time when we spent roughly what MBNA spent on credit card technology. Last year, MBNA spent the equivalent of $150 million Canadian on card technology. We spent $6.5 million.

There didn't used to be a gap, but now there's a significant one. That gap is growing. And as I mentioned before, the consequences are not hypothetical. We did withdraw from custody and we did withdraw from payroll.

As another example, TD has an enviable record in leading loan underwritings. We just ranked second in the U.S. in leverage deals, and seventh in leading all loans. No other non-U.S. bank was in the top ten, but last quarter we saw Nations Bank commit to two loans of almost $4 billion Canadian each. At our size, we would only be able to commit to around half that amount on a single loan. The fact is that as more and more of our clients merge they will be seeking larger loans. Larger banks are better positioned to provide these loans.

To suggest that banks need not grow or indeed should not grow in tandem with their clients is simply counter to common sense. How long can we compete with these giants in every realm of business? How long can we continue to offer consumers a full service approach with leading-edge products and services? How long before we have to narrow our business focus further?

In responding to the realities of the changing global marketplace, we at TD have a vision of joining forces with a major competitor so that we can ensure we create a Canadian institution that is at the table for the long term; so that we can grow and flourish in the new environment; so that we can sustain the job, tax and investment benefits in Canada; so that we can provide a broad range of competitive products and services to customers; and so that we can produce good returns for shareholders.

Canadian ownership of global concerns ultimately means keeping more jobs in Canada. As a strong financial centre, we have the opportunity to maintain and to continue to build a world-class talent pool. But if we are held back and the giants to the south are able to penetrate our markets while keeping many of those jobs offshore, further bolstering New York and Charlotte, but not adding much here, where does that lead?

• 1930

There aren't any guarantees of success in today's marketplace; change is too rapid. But there is a road we can follow that will take us in one direction, or a road that we can follow that will take us in another. If we accept the vision of Canada as a country with a group of major Canadian institutions that help keep Canada at the table, then we can find a way to get there, a way to meet and address the concerns about mergers in our domestic market—the impact on consumers, the impact on jobs, the impact on rural communities, and the impact on small business. These are valid concerns. Indeed, they are issues Canada's banks must face with or without mergers.

We know these concerns must be addressed. We are committed to working with you and other stakeholders on this because the public interest includes our customers, our shareholders, and our employees. We want to work with you on the best means of protecting these interests through the merger process so that the national interest can be served well into the future.

Would mergers change the landscape? Yes. Would they pose some challenges? Yes. Would there be a need to ensure competition and consumer protection? Yes. All these things must be looked at and addressed. We want to address them.

We want to work with you and with our other stakeholders to make sure this works well for everyone. That can and must be part of the vision of having a strong financial system, anchored by a strong contingent of major Canadian institutions, being at the table in the 21st century. We can dare to be there, or we can be content to be a nation with ebbing influence, with major financial decisions made elsewhere.

I believe this is the largest issue we face in terms of the long-term national interest and I ask you to give us the opportunity to succeed in the next century as an institution, as an industry, and as a nation.

Thank you very much, Mr. Chairman.

The Chairman: Thank you, Mr. Baillie.

We'll go to the question and answer session now. Mr. Harris.

Mr. Dick Harris: Mr. Baillie, thank you for your presentation.

Obviously you must know that of all the issues dealt with in the MacKay task force, the mergers are probably the number one topic across the country, and your report did deal in the largest part with the question of the mergers, so we might as well pose some questions around that.

When Mr. Barrett from the Bank of Montreal was here, he explained to us that should the mergers not go ahead, plan B would probably be for the Bank of Montreal to begin to divest itself in areas of low profitability. I don't imagine they're in many areas that lose money, but areas of low profitability. They would begin to bring their focus to the most profitable areas. As a result, he advised us, we would probably see a shrinking of services that are available to the Canadian public now. Do you share that view as plan B if the mergers are not approved?

Mr. A. Charles Baillie: Well, I think it's inevitable. I had hoped until recently that we would be able to compete the way we were and be a meaningful bank and continue to provide the level of service that we believe, warts and all, is the best retail level of service of any banking system in the world. I know not everyone thinks the banks are wonderful, but that's something we believe.

What's happened is that things are changing so quickly and the power of technology in the new services in banking is so great that the gap I explained opened up, where we used to spend as much as Nations and now they spend $3.3 billion more than we do in a year.

• 1935

I think that inevitably means that there are going to be services where the technology spend means that the bigger character has a broader array of services to manipulate things in a different way, offer a wider variety of products in that one area, and that we will gradually have to divest. We did have to divest in custody because we couldn't afford the technology spend, and we did have to divest in payroll because we couldn't afford it.

I don't know what's next. It might be cards because of the spend being bigger. I hope it's not cards, because that's a very good business for us at the moment.

Inevitably, over time, I think you will see that unless we can get the scale to more closely approximate the competitors that are coming into this country, we are going to have to have a narrower and narrower focus.

Mr. Dick Harris: Thank you.

Let me move now to the desire of the banks to enter into the insurance business through retail sales through their branches. The insurance industry argues, and I think with a lot of validity, that the industry is well served by the current players, and that there is already a very vibrant competition in the insurance business.

What conditions do you as a banker see are present in the insurance industry that would show a need for players as large as the banks to get into the insurance business?

Mr. A. Charles Baillie: I preface my response by saying that to some extent you have to discount what the industry players say, what I say, and what the insurance companies say, and look at the interest of the consumer. To me, the broader choice for the consumer, the better; the more places and the more options for insurance, the better.

Looking at some of the MacKay research, it came up with something like 17% of Canadians did not have insurance—and this figure may not be accurate to the first point, but it's pretty close. Roughly 50% of Canadians were not approached about insurance in the past year. So I think there is a sector out there that could be looked after by the banks.

Insurance works well in the country now; we're well served. I just think the more choice, the better.

Mr. Dick Harris: Thank you. I'll pass to Mr. Epp.

Thank you, Mr. Baillie.

Mr. Ken Epp: On that same topic, if you are denied the right to go into insurance, how big an impact would that be on your business?

Mr. A. Charles Baillie: It's an opportunity lost, in a sense.

We're criticized for closing branches, but at one time we delivered all our service through the branch. Then we introduced automated teller machines, and then we introduced telephone banking, debit cards, home PC banking, and soon the smart cards.

In our bank, 80% of the transactions take place away from the branch. So as a bank we're very interested in getting more products to put through our branch system so that we can justify having more branches open. It's not just our own products; we're very keen on selling third-party products through our system as well. Insurance would be one that would help carry the overhead.

Mr. Ken Epp: Okay. I presume the same rationale would apply to your desire to get into automobile leasing. It seems to me, though, from my observation, whether a person buys a car or leases a car, the banks land up financing it, in any case.

Where does the money come from when someone leases a car now? Invariably, it's through a deal with a bank, or at least 50% of the time or more, I would think. For purchases, I would say close to 80% or 90% of them that are financed would be financed through the banks. What is to gain by having you get into that business?

• 1940

Mr. A. Charles Baillie: Again, I'd go back to the consumer and whether the consumer is better off by our offering auto leasing. The MacKay task force found that the spread for leasing rates was 1.2% higher in Canada than in the U.S., and attributed some of that to the fact that the banks were able to be in auto leasing in the U.S. and therefore there was more competition and the consumer got a better deal.

Your point may be valid in the sense that the auto manufacturers borrow from banks, so when they finance auto leasing some of it comes from the banks, but they do go directly into the bond market and directly into commercial paper. Auto financing was something we were very big in, and it has shifted largely from borrowing to leasing and we're precluded from being in that.

Again, I think we should try to go back to the consumer and whether the consumer will be better off, and to me the much higher spread in Canada means there's room for competition.

Mr. Ken Epp: Now, in the event that these things are approved so that you can get into insurance and into car leasing and some of the other enterprises that I'm sure you'll think of next—you'll probably want to lease business equipment to businesses too, and where will it all end?—are you then also in favour and supportive of opening up the payments system? Then, for example, insurance companies could compete on a level playing field with you when they're selling insurance. Right now they have a considerable cost involved where really they have to do all of their transactions through the banks, who would then be their competitors.

Mr. A. Charles Baillie: We're for opening the payment system up. We think the more competition the better. When I was very young I worked in New York for our bank, and I came back from that thinking the more competition the better in whatever we do, because the more competition the more you are on your toes and the better it hones your skills.

The insurance companies, through a trust company subsidiary, could always take part in the payments system. The choice is whether it's cheaper for you to do it directly or through a bank, and it depends on your volumes. But I don't think at this point any of the banks are objecting to opening the payments system.

The one thing we are saying about the payments system is let's make sure we've got a good regulatory overview of it, because the downside to opening it would be if you got to the point where you just let anyone in. If the other participants in the payments system were worried about the credit of the new participant, you could get into the situation where there might be a three- or four-day float if you deposited a cheque to your account and you might not get credit for it for a few days, the way it happens in the U.S. One of the wonderful things about our system is that you can deposit in Halifax today and get credit in Vancouver the same day.

But I think there's no doubt we can let in insurance companies and so on, and they're creditworthy, so that is not a problem. I was just taking it to an extreme.

Mr. Ken Epp: Yes. You mentioned just in passing that you may be getting out of the credit card business. I can't believe that.

Mr. A. Charles Baillie: Sorry, no. I said we had exited two businesses because we couldn't compete. And then I said that MBNA, which specializes in credit cards, spent $150 million on credit card technology last year. We spent $6.5 million and Bank One and Capital One are coming or in this country as well.

I was just speculating what would be the next product where we wouldn't be competitive. I'm getting hypothetical, but if through that spend they can develop better affinity cards and they can tailor things better and faster for you so that they're more appealing to you than our product, that would be something we'd have to look at in the long run.

What I really said was what's next? I said I hoped it wasn't credit cards, because at this point in time credit cards are a very good business. In no way did I mean to imply we're getting out of the credit card business.

Mr. Ken Epp: Thank you for that clarification, because, at least based on both my own experience and also on comments that I receive from people in my riding, if there's any place the bank makes money, it has to be with credit cards.

Mr. A. Charles Baillie: It's a good business. It's not as good for us as the retailers.

Mr. Ken Epp: It isn't?

Mr. A. Charles Baillie: No. The retailers charge such a high rate.

• 1945

Mr. Ken Epp: I'm sure you're speaking very modestly about the advantage to you.

Mr. A. Charles Baillie: No, our rates are much lower than the retailers'.

Mr. Ken Epp: I'm aware of that.

I think the only question I have is with respect to your view that if you're merging with another bank, you're going to become the largest financial institution in Canada. Do you think that will give you enough strength and power to compete around the world in such a good way that you become the only financial institution in Canada? Will you be able to eat the others?

Mr. A. Charles Baillie: On most measurements we would use we would not be the largest if both merger applications are approved; the other one would be larger. And I think they will prove very substantial competition for us. I think what you'll find, and what I see, is these characters I'm talking about—whether it's MBNA, Capital One, or Bank One in credit cards; Countrywide in mortgages; Scudder, Templeton, or Fidelity in mutual funds; ING or Citizens in electronic banking; Wells Fargo in small business; or Heller, Associates, Finova, or Norwest in consumer and commercial finance—they haven't hurt us much yet, but virtually none of them were here five years ago. And virtually all of them are much bigger than us in the products in which they specialize. Over time they'll go after our best customers and will provide very strong competition for us. I think we're going to have a lot of competition, and you don't need to worry about only one bank.

Mr. Ken Epp: You're talking about competition, but one of the concerns is the applicability and the availability of good banking and credit services for small business. I think Canadian banks have done a very poor job in the area of providing services for small business. In fact I've read they claim that with every loan they make, if it's less than $150,000 they lose money on it. I don't know if that's true, but you have 15 pages of book work to do, and then you need to hire 20 people to check that all out. Your overhead is very high for these loans that you put out. Meanwhile, the person who needs the loan isn't able to get it. It's not been a very good scene. What are your plans to improve that?

Mr. A. Charles Baillie: I can only talk about our bank.

Putting it in a global context, small business is a lending problem in every country. A lot of small-business requests are valid and should be lent on debt money. Others are—it's in the entrepreneurial nature—so confident and they think their idea is so good that you should be willing to lend them the money no matter what.

We have made a lot of progress in lowering the cost of administering small loans—any kind of loan, but small loans—because that's where we were putting the pressure to get the costs down. And we have taken small business, made it a special division of the bank, put a senior person in charge, and both Bob Kelly and I—Bob is in charge of the retail branch bank—have been putting on pressure to build market share. We've done a very good job in the last couple of years of building market share in small business in authorizations outstanding and number of customers.

According to the Thompson Lightstone survey that came out recently, 93% of our small-business loans are approved; we were number one in customer satisfaction with our relationship managers; and we're number one in “Would you refer your bank to a small business friend?”

It's a business we're very keen on, and we're doing— We brought in a credit card small-business loan product, which will go up to $50,000, and you don't go through the normal applications and so on. We've got an overdraft plan. We've got a business service plan. It's an area we're very keen on, and I think you will see better and better things. It's not because you have to bludgeon us on the head; it's because we decided small business is a good business for the banks.

Mr. Ken Epp: So you're improving there, whether you merge or not?

Mr. A. Charles Baillie: Yes.

Mr. Ken Epp: Mr. Chairman, I am now going to defer to others in the committee. Maybe we'll have time for you to come back to me.

The Chairman: Thank you, Mr. Epp.

Mr. Pillitteri.

• 1950

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

Mr. Baillie, it's good to see you again.

I think it was a few months ago, in the summer, when you came before another task force and you were asked a lot of questions. One of the questions we asked you was if it was the scope of size that you needed because you need the size for technology. The answer, if I recall, was that we're far in advance of any other country, specifically the United States, and our technology is much higher. As you just stated, you can go into any bank, make a deposit in St. John's and within a day it's deposited in Vancouver. We know that larger institutions in the United States take as much as a week before a cheque can clear. I understand that.

I also understand the scope of size. We had to give up our payroll business because they could do it better; they could cherry-pick better. Of course all the banks in Canada have given up their payroll basically to one company in the States.

In your presentation you make the point of custody. You no longer have that custody of the business. Yet another institution here in Canada has the custody and retains it because it has an expertise. We might as well mention it, the Royal Bank, because they bought a trust company that had that expertise. Am I right?

Mr. A. Charles Baillie: Yes. I don't want to put words in the Royal Bank's mouth, but I think if you ask the Royal Bank, they would fear that over time they're not big enough to play in the custody business because it's become such a global business, with massive technology investment requirements.

Mr. Robert P. Kelly (Vice-Chairman, Toronto Dominion Bank): They were already the largest, as well.

Mr. Gary Pillitteri: On the other hand, if you were to merge that doesn't mean that you would bring back the payroll business. You would still leave it out there.

Mr. A. Charles Baillie: No, that's realistic. I don't think we could claim that by merging we could go and bring those two businesses back. They were the most obvious ones to go.

What I am worried about is the size of the gap in technology spending. Inevitably, there will be other businesses—I can't identify exactly which ones at this point—that over time we have to exit for the technological inability to compete reason.

Mr. Gary Pillitteri: Also, in the same remark you made about custody, they'll find out later on that it's not large enough. So we have the technologies in the Canadian banks and you're not large enough, even if you were to merge, in payroll or custody.

You also stated you weren't in the credit card business because the population ratio was not there. Wells Fargo, Capital One, and other institutions come into Canada and target those markets. Could you not have done that same job they are doing through a subsidiary? Or was it that you were reactive rather than proactive in the business, that only when you saw within the industry that they were coming in that you had to act fast?

Mr. A. Charles Baillie: With the population base they have built up in their territory in the U.S., they can afford to spend a lot on technology and spread it over a large customer base. Whether or not we reacted five years ago, two years ago, or this year, they still are spending $150 million. We're spending $6.5 million. If we doubled it, it would be only $13 million. So that's a difficult one.

• 1955

Mr. Gary Pillitteri: In your presentation here, Mr. Baillie, a question was asked by Mr. Epp about being in auto leasing and being in insurance. As the insurance companies have the possibility for a subsidiary to come into the payment system, they can open up the banks. And you in return could be in the insurance business through branching. Isn't that a level playing field?

The banks already have the payment system. We don't have to open it up; it's been open since 1992. Isn't it the same level playing field with the insurance companies—that you could operate through a subsidiary in selling insurance but not through the branch, and the insurance company could open up a bank but not over the counter?

Mr. A. Charles Baillie: And not use its branches?

Mr. Gary Pillitteri: That's right. It's the same thing.

Mr. A. Charles Baillie: For deposits.

Mr. Gary Pillitteri: I have another question, on the auto leasing. You say in the United States they're able to be in the auto leasing business and the cost factor is about 1.5% lower than in Canada. Isn't it also a factor that it's lower because the marketplace is larger? And of course not only is the marketplace much larger, but they're not in it full-time; they're in and out of it on a roller coaster, depending on how the market is going with the money. They're not totally committed to the auto leasing, as you want to be committed here in Canada.

Mr. A. Charles Baillie: Well, the American banks do have the freedom to be in the auto leasing business, and the rate spread to the consumer is 1.2% lower in the U.S. I think all I'm saying is on the surface it looks a lot better for the consumer if the banks are in the business. It will make it much less expensive.

The peculiar thing to me is there's no problem with that in the U.S., where the auto companies are headquartered and owned, but in Canada I would have thought the best hand of cards we ever had was auto leasing, because the McKay task force said 80% of the auto leasing is done by the big three manufacturers, who are not Canadian.

Mr. Gary Pillitteri: We had the auto dealers here today, and that was not their response. That was not the case. They say of course that some of the auto leasing they give out, but a lot of it they do themselves.

I want to ask you a final question.

Mr. Robert Kelly: Just on that, 80% of auto leasing is done by the big three auto makers, and it goes directly to the United States. We have to remember too that in Canada our service charges are less than half of those in the United States and our margins are much lower than in the United States. So it seems rather odd that leasing is more expensive in this country than in the United States. More competition is a good thing. We'll do a very good job at disclosing and making access to auto leasing much simpler and easier for Canadians. I'm sure the cost will come down as well.

Mr. Gary Pillitteri: They have that disclosure here in the auto leasing, at the banks. They do not have that in the United States. Let's also be clear on that part. For auto leasing here they have a disclosure when you go in, but in the United States the banks don't have that disclosure the same as they have in Canada.

Mr. Robert Kelly: I look in the Toronto Star on the weekend and I look at the auto section, and I very seldom see the price of a car or the interest rate. I see the cost per month.

Mr. Gary Pillitteri: I want to ask you a final question, Mr. Baillie. As you appeared before the other committee at one time, you said the status quo is not an option, and we have to do something. The other bank, which was likely to merge with you— I remember my colleague asked you a question, and I remember some of my questions were direct. I said that I was a small-businessman, but I was a visionary and I had to build my business. It took me three lending institutions before I finally completed my business. Had there not been only three there, I probably would have not been able to, because I don't know how competitive— You say you need large size to be more competitive. On the other hand, I don't think I would have been able to if there were only three lending institutions.

• 2000

Let me ask you a question that was asked to you. Sir, every time I went to the bank, I had to bring a business plan. And if they didn't like my first business plan, I had to bring in another one. You have a franchise from the Government of Canada, provided by Parliament, in order to operate a business. You say your responsibility is to the shareholders on the one hand, but on the other it is also to the Government of Canada, because you are allowed a franchise.

Where's your business plan, a total business plan, about the mergers?

Mr. A. Charles Baillie: My understanding is that the business plan will be in the public impact assessment review. It's difficult for us to present a business plan until we know what is acceptable to the Competition Bureau, because they will allow certain things or not allow certain things. Once we have that framework and when we're through that and we can work with our new partner, we can come up with a business plan and present it. My belief is the Competition Bureau results will be out by the time we do the public impact assessment review. We would present it then.

Mr. Gary Pillitteri: You see, Mr. Baillie, we both serve the same customer, and that is the taxpayer. To you it's the taxpayer, and to me—and also what I call my client, who is the voter.

Mr. A. Charles Baillie: Yes.

Mr. Gary Pillitteri: Thank you.

The Chairman: If I may just follow up on the issue of process, I want to know from Mr. Baillie if in fact he is in agreement with the merger review process as outlined by MacKay and some of the issues related to regional impacts, international competitiveness, employment, and so on.

I'm also interested by the comment you just made in the sense that you will have the public interest criteria completed after the Competition Bureau reports. The reason we are studying this is that we also have to report to the Minister of Finance to find out if in fact we like this public interest criterion. We may delete some things and we may add certain things. Would you say you probably have this material already? You probably have the costs and benefits to individual consumers and regional impacts, etc. So for all intents and purposes you've done your homework already. Is that correct?

Mr. A. Charles Baillie: We've done a quick look at what we can end up with and what it would look like if we were making the decision. What we don't know yet is what the Competition Bureau will require, what this committee and the Senate committee will require, and what the finance department will require. So it's very hard.

We've looked at different things—if you were to ask us to do such and such, what it would cost, what we could handle and so on. For example, if we were told to divest x branches in southwestern Ontario, it would look very different from what it would like if we didn't have to divest them.

If you were to ask us a specific question, we could tell you the impact of that, but we don't yet know or have a good sense of under what conditions we would be allowed to merge.

The Chairman: And you think the Competition Bureau is going to provide that information for you?

Mr. A. Charles Baillie: They will at least provide some of what would be anti-competitive and what we would have to solve.

The Chairman: Okay.

Ms. Bennett.

Ms. Carolyn Bennett (St. Paul's, Lib.): Thank you, Mr. Chairman.

You indicated that the MacKay report should be taken as a package. I guess my question is about timing. Mr. MacKay in his report said that we shouldn't be waiting until 2002 to get on with this. What do you think would be the earliest time you would see this being able to be implemented? Are there things you would see as easy things you would do first and then the rest would fall into place, or is it something like a house of cards and it has to sort of all go at once?

• 2005

Mr. A. Charles Baillie: My fear is if we waited for the house of cards to be in shape it might not be for another 20 years. So I think we should do what we can as soon as we can. I really do subscribe to his comment, and I meant to answer the chairman that to delay is to deny opportunities. From our point of view, the sooner it can be dealt with, the better.

I know any delay is our problem and we have to come to grips with that and manage that, but the longer it takes is the longer time that we're not looking at other opportunities and making investments that we otherwise could. We're distracted by the merger activity and we're spending a lot of time on it that management and a lot of our employees could be spending on trying to build the business.

There may be things in it that you people look at and you don't want to implement and so on. My point just on looking at it as a package was that it looks as if he did try to finely balance it so it was a consumer-oriented document, and with the institutions my sense was he tried to make no winners and losers.

I don't think it's that productive if our industry is arguing to get something but doesn't want to let the insurance industry have that, and they're doing it the other way, and some other groups— In that sense, that's all I meant.

Ms. Carolyn Bennett: If there was cherry-picking with the document, the balance would be lost and there would end up being winners and losers?

Mr. A. Charles Baillie: Yes. It looks to me as if that's what they tried to come out with in the task force.

Ms. Carolyn Bennett: We obviously were impressed with the car leasing people earlier today. One of the things that was interesting to me was the whole idea that the banks would actually end up owning these cars. There was this picture that the title would be yours and that you then three years later would actually have to sell off all these cars. Would it mean that you were eventually in the used car business?

Mr. A. Charles Baillie: We wouldn't want to be doing that at all. We would see full-service leases, which are effectively full pay-out leases. We want to get in a number of businesses, and you alluded to our wanting to be in more, but that is not one we want to be in—the used car business.

I'm intrigued that you were impressed with the auto leasing one, because when I look at it, the 80% that the MacKay task force said was handled by the car companies are clearly not Canadian companies. They're not owned here, not headquartered here. Then I think roughly 10% of the rest was done by the GEs and so on, which again are not Canadian companies. So at most there would be 10% done by the dealers who are Canadian and spend their money and pay their taxes here.

Ms. Carolyn Bennett: I guess the issue was that because the car companies actually have a home plant somewhere else, would the banks be in a position to lend less than prime if there's a certain line of cars that's coming through that's not moving very fast. It was the dealers we heard from, and they feel that's a good thing for them, to actually have the flexibility to be able to discount a certain line of cars that's not moving particularly well. They think you guys probably won't be doing that.

Mr. A. Charles Baillie: Oh, they could still do that. But all I'm saying is the study showed that the spread in the U.S. is 1.2% lower than in Canada. As Bob Kelly said, our service charges are lower here, our loan spreads are lower, so you would think the spread should be lower here. Instead it's the opposite way.

There are a lot of things we would like to talk you into that are difficult ones, but we think the auto leasing is one that the consumer wins by the choice and the consumer should get a lower rate. Why not, other things being equal, support Canadian institutions as opposed to foreign institutions?

Mr. Robert Kelly: The task force very clearly said, as well, that any impact would be felt by the auto manufacturers' finance companies, not by the dealers, because the business is basically the auto manufacturers' finance companies'.

Ms. Carolyn Bennett: That just wasn't what the dealers were saying. They feel there's already a good way the banks are financing them, financing the loans, and they like that.

Mr. A. Charles Baillie: They do a lot of their financing without the banks' involvement. We get a little bit of it, but a lot of it is directly commercial paper or the bond market.

Ms. Carolyn Bennett: Okay.

The Chairman: Thank you, Ms. Bennett.

Mr. Szabo.

• 2010

Mr. Paul Szabo: Thank you, Mr. Chairman.

Mr. Baillie, I must admit that your enthusiasm is a little infectious, and I applaud you for speaking constructively and positively about your vision on behalf of the TD Bank.

I think you're probably not going to be surprised to know that each one of us has been approached by parties from all sides of the arguments. Indeed, some of the most interesting speculation actually relates to the proposal between TD and the CIBC, to the extent that this whole thing started with the Royal and the Bank of Montreal first off the mark. That was a very significant event. It didn't start out right, but strategically I think it was probably a very good thing from the standpoint of the banks, because all of a sudden there was an awful lot of attention. One even went so far as to suggest that the CIBC-TD merger proposal was in fact a defensive measure rather than an offensive measure. Clearly, you can't stand still while somebody else is going to make a move.

You know the task force is coming down. You also know that, even with basic calculations, the combined market positions of the two merged entities would probably exceed at least one of the Competition Bureau's criteria, at which point they would basically say this can't go forward, that you should come back with another application, and would point out the deficiencies.

I thought the cynicism is kind of interesting. I also think the issues that have been raised by the MacKay task force are vital, because we're not talking about tomorrow, we're talking about the long term. It's time to do a little bit of work.

I would, however, be remiss if I just simply threw out some kudos without asking you a couple of tough questions. Let's see how the TD Bank responds.

In the September 15, 1998, Globe and Mail, Matthew Barrett referred to the comments of the CEO of Scotiabank, Mr. Godsoe. The discussion was basically along the line that if we exceed market share in a particular market, we'd have to divest. Divesting would therefore provide a golden opportunity for those who are not going to merge to snap up market share, which is good for shareholders. Therefore, since Mr. Godsoe is the CEO and responsible to his shareholders, he should be speaking on behalf of mergers or otherwise remain quiet.

I would like your response to Mr. Godsoe's position, given that he's not taking Mr. Barrett's advice to remain quiet. He is in fact quite vocally opposed to mergers, I would suggest in a constructive way, as much as you are constructively in favour of mergers. Do you believe the best interest of you, the CEO of the TD, is to your shareholders? Or are you prepared to maybe admit the task force report, in terms of talking about public interest, is in fact everybody other than shareholders?

Mr. A. Charles Baillie: The first comment I'd make would be that Peter Godsoe is entitled to say what he wants to say. And he should say what he wants to say, of course. I don't want to be stifling any part of the debate.

My bosses are my shareholders, so I do have a real responsibility to them. Like your constituency, however, my constituency is much broader. We're not going to do very well for our shareholders if we don't treat our constituencies well—our customers, our employees, and the public.

There are going to be differing views on this, and I think we're going to legitimately have those different views. I don't want to be Toronto-centric, but I think it's good for Canada to have a major financial centre. I really want to see that for Toronto, and I believe the way to do it is to allow the mergers in order to have two banks that will be big enough that we're not going to be taken over unless we manage them poorly and that will be big enough so that we can be pretty well assured that they're going to stay in Toronto. That will cement Toronto as being a headquarters city.

• 2015

I'm sure you've seen all the statistics, but I want to point out that 60% of our industry's income is in Canada, 84% of our jobs are in Canada, and 90% of our taxes are paid in this country.

Some believe that even if you don't allow mergers, Toronto can still be a meaningful financial centre. That can be a valid view. I believe otherwise, but I'm not going to disparage anyone's point of view.

Mr. Paul Szabo: The finance committee dealt with the issue of tied selling. I think the position of the banks was that this is a practice that is not condoned by the banks, and I believed that. But in fact there was ample evidence that the practice has taken place in the past. Does it mean that the banks really can't police themselves or enforce the rules at the branch level and therefore we really can't trust the banks?

Mr. A. Charles Baillie: I looked at the research. I think the MacKay task force said 16% of people felt that they had been put under some pressure in respect to tied selling. But that was not by banks; that was by financial institutions.

We think we do a pretty good job. We do differentiate between tied selling and cross-selling, because we do like to cross-sell. But we've tried to make it very clear that tied selling is not acceptable.

Bob Kelly checked on how many tied selling complaints we've received. Why don't you talk a bit about it, Bob?

Mr. Robert Kelly: Over the last 18 months we've received four complaints on tied selling. Our staff knows very clearly that is not allowed, that it is actually an abuse of our human resources conduct procedures, and that they'll be in trouble if they engage in tied selling. Today I checked with our human resource people as well, and they're very aware of it. So with only four complaints out of four million customers, we think we're doing a pretty good job.

Mr. A. Charles Baillie: I would like to see us try to do it on a self-regulatory basis. It doesn't have to be done on an individual bank basis; it could be done by the industry. In fact, our preference would be to go beyond the industry and to include all financial institutions. We think that the enactment of legislation would be overkill. But if there is to be legislation, we'd like to see all the financial institutions involved in it, because we think we try pretty hard and the research was based on all financial institutions.

Mr. Paul Szabo: That's helpful.

Mr. A. Charles Baillie: We're not saying we're perfect, though, by any means.

Mr. Paul Szabo: That's humble.

Mr. Baillie, in your statement you talked about your expenditure on technology. Not to criticize you personally, but the fact that the TD Bank spent $500 million and a U.S. bank spent seven times as much does not necessarily mean that we have a higher level of technological expertise or facilities. It could mean that we just have a lot more of the same thing, such as 100 PCs instead of 10 PCs. Having a PC does not make you technologically superior in terms of your ability to provide a product or service.

What's the real situation in terms of advancing technology? Maybe my question really is are you doing any R and D, real fundamental research, on the technologies that link up with your vision of financial services in the future?

Mr. A. Charles Baillie: I didn't get into this, but one of the things that's interesting—and these are rough figures—is that about 75% of our technology spending is maintenance-oriented and 25% would be on new systems and so on. Our sense is that if we can merge, we can lower that 75% spent on maintenance to 60%, or hopefully even 50%, so that we wouldn't just have a bigger pot to spend, we would have more to spend on non-maintenance items, which hopefully would bring you the new products and so on.

• 2020

Mr. Paul Szabo: The last item, and I think it's the most important for me, Mr. Baillie, has to do with the concept of competition. I have some mixed signals from you, and I want you to see if you can help me out here.

You said the more competition the better, for the reason that it helps to keep you on your toes. But you also gave examples of where you got out of a couple of businesses because you couldn't compete. Now where I need some help is whether this says that the banks are only going to continue if they get the authority to get into some businesses; they will give it a little try, and if they can't get the returns they want they will drop it, because they're going to concentrate elsewhere. Or are you saying that this wasn't compatible with our knitting of the banks, the real businesses that we were in, and we made some corrections?

The contradiction here is that it appears that maybe even our major banks are not afraid to compete with anybody coming in because they know they can remain that half-step ahead of everybody else and knock them out of the box if they really have to. But the example of the businesses that you've got out of for the reason that you couldn't compete according to your explanation is inconsistent with the openness to more competition. Which is it?

Are we just cocky, and I can dance with anybody you throw at me, or is it that on a strategic basis I'm going to get into as many businesses as I possibly can and over the longer term I'm going to keep only those that make me the most profit for my shareholders?

Mr. A. Charles Baillie: If you gave me my ideal world it would be a monopoly where I didn't have to compete very much and on that basis I could do well.

What I'm saying is for the country we're best to have lots of competition, and I think competition does keep each of the players on his or her toes. Some won't do well in some things and some won't do well in others.

On payroll, in earlier times we could make a business out of that, but what's happened on payroll is that it's become so systems-driven and so technology-driven that you have to spend a tremendous amount, and the people who are in the payroll business with a huge number of customers can just out-compete us on that and we can't be in that business.

What worries me is there will be more of those over time as you get MBNA, for example, spending a lot on card technology or Countrywide spending a lot on mortgage technology and getting variations of products and so on, which makes it difficult for us to compete. We're not going to go lightly into new businesses. We're going to go into businesses that we look at and think we can do well over time on them.

We might make a mistake and a decade later conclude that we didn't see certain trends coming and we would have to withdraw, but we're not going to be frivolous about trying this and trying that. I'm not welcoming competition because I think that we can destroy them. I think in a lot of cases they're going to do very well compared to us because of the scale they have.

Bob, I think you'd like to say something on that.

Mr. Robert Kelly: I think a great example of scale and something where we've been innovative is GreenLine, our discount brokerage. There was no discount brokerage operation in Canada. The industry did not exist in Canada. In 1984, Canada started up the industry through TD Bank and GreenLine. It grew to the position of being a very large provider in this country and two years ago we made acquisitions in the United States. We are now the second-largest provider or discount broker in the world, second only to Charles Schwab and Company.

So we are not afraid of trying new businesses and focusing in on businesses we are convinced we can compete on and compete with any world player. We've made acquisitions in Australia and we've opened up in Hong Kong. We've made acquisitions in the United Kingdom as well. Quite frankly, with our acquisitions in the United States we're adding many banking services to our discount brokerage. We now have tens of thousands of credit cards outstanding in the United States. If you're a resident of Texas or Florida and you have a question about your credit card, you dial up and ask about it, and the telephone is answered in Canada.

• 2025

These are Canadian jobs serving the U.S. market. And quite frankly, one of our goals is to become much larger in the U.S. retail market. That will require acquisitions. It will also require us to get a lot bigger first before we can make larger acquisitions.

Mr. Paul Szabo: Mr. Baillie, thank you very much for your responsiveness. I know as we go through this process we'll have more opportunity to discuss issues with you.

The Chairman: Thank you, Mr. Szabo.

Miss Redman.

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

Mr. Baillie, I'd like to put the merger issue aside, because the MacKay task force deals with a lot of other very pertinent things about the financial sector.

With the recommendations suggested in the MacKay task force, aside from the merger issue, would the Toronto Dominion Bank be a better bank? Would the regulatory burden be heavier with these recommendations in place?

Mr. A. Charles Baillie: We support most of the MacKay task force recommendations. What I do worry a bit about—and it's really going to be regulatory interpretation or zealousness—is there are quite a few recommendations, which, if you took them to an extreme, could increase the cost for our industry in terms of regulation.

Now, the MacKay task force does say we only want to take regulation as far as it makes sense on a cost-benefit type approach. But not everybody reads the full report, so there is the danger of the regulatory side ending up with a big overlay of cost, which competitors coming in on some of the mono-line businesses might not have.

The one other thing in it that I worry a bit about is it wants to make it easier to create new banks. I do like to see more competition, but I remember very well the fate of the Northland Bank and the Canadian Commercial Bank, and it did cost our bank a fair amount of money when we put in our contribution for the first rescue, which didn't work. So while the competition we get from outside is usually well financed and you don't need to worry about the credit-worthiness, I just hope with the new competition we make sure they're financed well enough that we don't have the same experience again.

Mrs. Karen Redman: Earlier today we had foreign bankers here, and we talked to them about their feelings about the MacKay task force. And you talked about getting out of the custody and the payroll business because it made business sense for TD to do that.

One of the questions I'm struggling with as we go through this is that as the financial sector becomes more entrepreneurial and looks at what makes good sense for it as a business and for its shareholders and clients, as Canadians do we need to worry that we're divesting ourselves? I mean, look at Citicorp and, as you've already mentioned, bank cards. As Canadians, should we be concerned with the fact that this may be a service that's happening outside of our national boundaries?

Mr. A. Charles Baillie: My worry, if we were to go along with the status quo, would be that the foreign financial institutions, whether the business is credit cards, mortgages, or mutual funds, will be coming into Canada in the products that are relatively high-margin, attractive products for them. They're not going to be wanting to compete with us in a number of the areas about which you might worry whether we'll continue to provide services there and so on. And if we lose the higher-margin business over time, then we're less strong and less able to continue to reinvest in the businesses that have been the traditional Canadian banking sector.

We're down to about a third of our profitabilities from the branch banking system.

Mr. Robert Kelly: Of the total bank, one-third of the profits is the branches across the country, including credit cards and other retail operations. So most people, when they think of TD Bank, think of TD Bank as being the branches across the country, and that's where the profits are. It's only one-third of our total bank profits, and that's important to realize. And of course it's also that one-third where most of the Competition Bureau and public policy issues are.

• 2030

Mrs. Karen Redman: There is another issue, which came to mind when we were talking to the foreign bankers. As the TD Bank decides whether or not to merge and looks at being a player on the international stage, will you be considering offering full service of the kind Canadians have enjoyed from our bank sector, or would you look at going into niche markets on a global front?

Mr. A. Charles Baillie: I don't think we would offer full-service retail banking outside of Canada, because our view would be that it would be very difficult to get established and to get a big enough critical mass with enough branches. It would take too long to build something like that.

We do plan to compete in the U.S. with an electronic bank and to offer all kinds of services comparable to ING. We're already offering credit cards, mortgages, home equity loans, and bill payments to Waterhouse National Bank customers. We've started with the customers of the discount broker Waterhouse in the U.S. We're also offering this service to Canadians who need service in the U.S., for example, because they spend five months of the year in Florida, that type of thing.

We will have niches around the world. Bob Kelly spoke about discount brokerage. My dream is five years from now to make it easier and less expensive for you, for example, to execute trades around the world than for anyone else.

We were very fortunate to get into discount brokerage early. I think the banks around the world felt that it wasn't a banking business because of the example involving the Bank of America. Early on it bought Charles Schwab, but things didn't work out, so they sold it, and the automatic thought then was that it's not a banking business.

We believe it's very much a banking business. In many ways this is the way banking will be conducted in the future. You will be able to write a cheque on your GreenLine discount brokerage account, to take a loan out on it, and to make deposits to it. As we go around the world as a discount broker, we'll add on—if we can make it work in the U.S—electronic banking in Australia, the U.K., Japan, and Hong Kong. We're adding to it things such as money market funds and index funds. There will be an index fund for each country we go into. So if for some reason you wanted some exposure to the Australian markets, the easiest way might be to buy our Australian index fund.

We're experimenting in Canada with selling insurance through the discount broker. So that's a niche where we got in early. It's a critical-mass business and an experience business, and we do have a jump there. I hope there are people in other countries who are testifying before a parliamentary committee and saying they're really worried about these Canadians coming in; they're going to get a lock on this business because they're so much bigger and they can spend more. But maybe they're not.

The Chairman: Thank you.

Mr. Epp.

Mr. Ken Epp: Thank you.

I have one question, which I'm rather surprised wasn't brought up by any of the other questioners. One of your competitors who appeared before us said that if the mergers went ahead, they were ready to give a commitment that there would be no staff layoffs; they would use retraining and natural attrition to reduce their numbers over time, if needed, and there would be no bank closures in little communities around the country. They said that if they and the business they're merging with each have a branch in a community, they may close one branch, but there would not be a total removal of the branch from the little community. Are you prepared to give that same commitment, or are you on a different wavelength on that question?

Mr. A. Charles Baillie: I think it's very difficult to say there will be no layoffs. There are 74,000 full-time-equivalent employees between the two banks involved in our proposed merger. Our natural attrition rate runs at about 8,000 a year. So our belief is that we can manage any job reduction through attrition, and we should be able to do that quite easily. But there will be cases where you can't retrain people, that type of thing.

• 2035

There isn't a lot of precedent, and you do hear some very frightening numbers. I went back and looked at the Bank of Toronto and Dominion Bank merger. Admittedly it was a long time ago, in 1955, and the world is probably quite different. In each year after that merger we added employees. I just looked for a decade, but they went up every year. As I said, the world may be different, but that is one consideration.

What I'm absolutely convinced of is that if we merge, there will be more jobs in the combined bank five years from now than there would be if we were left on our own, each of us, and you added it up.

We have said that in any rural community where CIBC or TD is the only one there we will not withdraw service. We've made that undertaking.

We haven't been as aggressive on any of those things as the other banks you're talking about because we really have wanted to know— We know the general areas of concern. They are service charges, job losses at their branch, rural service, privacy, tied selling, etc. We think we can come to grips with all those and assuage concerns, but we think it's irresponsible to come out with the solutions before we've been told by your committee or by the Competition Bureau just what the problems are. We are very flexible and we're very willing to work with you and the Competition Bureau and so on, on that.

As for the jobs issue, we think we're a model employer. Our training budgets, between the two of us, amounted to $80 million last year, so we think we can do a good job retraining and we think we're oriented toward growth businesses.

Mr. Ken Epp: Thank you. That was my only question.

The Chairman: I have a question in reference to the tone of the debate around whether the merger should go ahead or not and generally to changes people are advocating as a result of the MacKay report.

I get bankers coming in and saying there's no problem with the merger review process, there's no problem with community accountability report, tied selling, a legislated privacy code, a federal ombudsman, or the community reinvestment act and so on. Why would you accept all that? Why would you accept all that regulation?

Mr. A. Charles Baillie: Well, we may not have much choice.

The Chairman: But that's exactly the point. It's not a question of choice. During this debate, whether it's a bank or an insurance company, you need also to advance a vision for the future.

We had the insurance and auto leasing people here and they were basically protecting their turf. That's fair, but the debate has to go above and beyond that.

I know that in many ways particularly the four banks that have these proposed mergers feel that they need to agree with practically anything members of Parliament throw at them, but I don't like that part of the debate. I want Mr. Baillie, who's with the Toronto Dominion Bank, to say that all this regulation is not good for business. I'd like for people to come out and state exactly what makes sense for the future of the financial services sector. The sense I'm getting right now is that you're in agreement with everything. How can you agree with practically everything that's being thrown at you?

Mr. Baillie, am I right? It almost looks surreal.

Mr. A. Charles Baillie: We were chatting earlier about the fear of the regulatory overkill. I do worry about that, because there does seem to be a lot of it in there. And I do worry about the precedents of the Northland and the Canadian Commercial Bank. Those really are the objections.

• 2040

When you look at the process, my biggest fear is we'll be delayed to death, in a sense, rather than a decision being taken. We would be much better off, if the decision is made not to allow mergers, to have that sooner rather than later, because, as I said earlier, it's distracting our people. It's not just hurting us, but it has implications for the country. The faster the process can be, the better off we are.

The Chairman: I agree with that. Whatever is going to happen should happen and people should know where they stand.

You're in the business of banking and for people to say that with mergers there will be no job losses or it will be dealt with through attrition— Well, listen, if you're merging, there has to be a reason why you're merging. One of them has to be efficiencies. One should be that perhaps through consolidation you're going to have job losses and you're going to close some branches. That's the reality of life and that's the business case.

Quite frankly, what I think is happening is business people are becoming politicians and politicians are becoming business people. There lies the issue. I mean, I've never seen bankers come in front of any committee and agree with every single proposal. If I were a banker, I wouldn't agree with all this regulation that is in MacKay. It's almost at the line where regulations and running the business are very tight.

I'm just saying why don't you stand up for your business and say this is a good business case for the following reasons.

Mr. A. Charles Baillie: On job losses, I said that we would be misleading you to say that there wouldn't be fewer jobs, but given the natural attrition rate, I really do think we can handle that with minimal impact. A natural attrition rate of 8,000 a year is a substantial one on 74,000 employees.

One of the things that concerns me about the country that I should probably say is that in principle I don't think it would be a good thing if we were allowed to merge but had a lot of restrictions put on us that were anti-competitive and anti-productive. It might be fine for our particular merger, but if we start thinking in those terms as a country, it becomes very difficult to compete against the United States. We keep talking about the value of being competitive, being productive and so on and worrying that we have lost some productivity vis-à-vis the U.S.

I should have mentioned that earlier. That is a concern I have when we come out with the proposals and so on.

We believe the mergers are a good thing and they're good enough that we can go along with a number of things to get there, but it would be a shame if we started thinking as a country in terms of anti-productivity conditions.

Mr. Robert Kelly: Could I add to that as well? Another thing that's important to remember here is that we are part of a greater economic union now called North America. In the province we're in at the moment, the province of Ontario, 45% of its GDP is exported, 90% of which is to the United States. We are now operating in a North American economy. It's quite obvious. Charlie Baillie mentioned the list of all the new U.S. competitors coming to Canada. We're doing the same thing going south of the border to compete with the Americans.

We are in a bigger economic market here. We are very proud of our banking system in Canada—how efficient it is, how low-cost it is, how we provide national pricing and national services in thousands of communities across this country. What we want to do is to have the right to take that into the United States and compete as equals.

• 2045

We are also proud of the fact that we are one of the main financial centres in North America, and we want to keep it that way. We run the risk of not enjoying that in the future if we don't have the ability to get on with business and to grow. We're not merging to get smaller; we're merging to get bigger. That's why we're all convinced that we'll have a lot more jobs in Canada in the future than the short-term job losses that will occur as a result of this merger.

The Chairman: How important is it for Canada to develop an entrepreneurial environment for the financial services sector? And do you think that a possible merger—and I'm not talking about yours now—between banks A and B and C and D would help the case?

Mr. A. Charles Baillie: It's incredibly important for Canada to be more entrepreneurial, not just the financial sector but right across the board.

For so many years so much of our economy was dominated by foreign companies. My observation, growing up in the bank, was that you made the real decisions at the head office and you grew and learned in experience at the head office. I think we did not train and grow as many people as we could have; the Americans did a much better job at that. So while we might have one really good character go off and start a company, they could get four or five to go off and start a company.

As to the entrepreneurial implications of our merging, I think you could probably make the case either way. But I think the result of our merging will mean bigger, stronger banks that will be in a position to do more specialized lending.

If you take a place like Peterborough, for example, it's the kind of size that the CIBC or the TD can't warrant having what we would call a commercial banking centre, with the well-honed, trained skills of a number of commercial medium-sized busineses. But by combining we could put a full commercial banking centre in a Peterborough or a Chatham or places like that. Doing that, it means we're in a better position to support entrepreneurial activity or people trying to make their businesses grow.

We've started something called SCC Canada. We make subordinated loans with warrants of $500,000 to $5 million. We've done about 29 loans there. The last time we looked at it, it helped build 750 jobs. If we merge we'll put more capital into something like that.

Do you have anything to say on that, Bob?

Mr. Robert Kelly: I think we're very much focused on the entrepreneurs in this country, and we have to continue to encourage them, because the entrepreneurs of today become the big businesses of tomorrow and they're the people who are driving the jobs.

One of the things Charlie Baillie has been doing with me is really pushing me on the small-business side, and I've been doing the same with our people in the field. Earlier Mr. Epp mentioned that our applications were far too long; they were ten pages or maybe the size of a telephone book. We have our loan applications down to one page now, and you can do it over the Internet, you can do it by fax, or you can go into your local branch.

Mr. A. Charles Baillie: And 80% of our small-business loans would be 24-hour turnaround now.

Mr. Robert Kelly: That's right, and we approved over 90% of them over the past 12 months. So we're helping Canada grow.

The Chairman: Mr. Baillie, just one final question. I don't want to leave you with the impression that I'm not concerned about corporate concentration. I think as bankers and members of financial institutions you're a very important input in the Canadian economy, and many people depend upon you. When you cut the line of credit off a business you can send them under. If you deny their rightful opportunities you can damage people—people's lives, never mind just their businesses.

Having said that, if you were to meet the concentration threshold as stated by the Competition Bureau, it's an argument I often hear that if you have two major banks that all of a sudden are— This is what people against mergers say: that they will reduce choice, they will reduce competition, they will do all these things.

• 2050

If you're a bank, outside of those two major banks, the two mergers, and you identify that in fact in the marketplace these two major banks are not offering good service, they're not offering a good price, they're not offering those things that basically people go to banks for, or any other institution that may provide goods and services— If you were the chairman of that bank, wouldn't you start offering better service and lower prices and probably grow as a result? I mean, if people are not competitive— Do you know what I mean?

Mr. A. Charles Baillie: If I believed that would happen, I would see it as a tremendous opportunity for me as chairman of that bank. But we are merging not to give poorer service and give less choice; we're merging to be better at serving our various constituencies, and small business is one of those. There are going to be productivity gains in the merger, and we're going to pass a number of those on. So I would envisage that both the individual consumer and the small-business character will be faced with lower charges.

The Chairman: That's not the message out there among the Canadian people. The Canadian people think that if mergers go through, they will have less choice and it will not be as competitive. They're concerned about small business; they're concerned about rural Canada; they're concerned about the brick and mortar and all the branches that are going to be shut down. The picture they have of the future is not the bright picture you've depicted to us this evening. It's just not the same thing.

Mr. A. Charles Baillie: We're merging to get better. We wouldn't merge if we didn't want to get better. And by getting better I mean we'll be more efficient and we can pass savings on and pick up more of the accounts in the country, instead of seeing them drift off to the Norwests and the Finovas and so on. We really want to be able to compete.

The question in my mind is whether we can lead the round of lower fees or whether someone else is going to do it first and we have to try to match it. As a natural business strategy, I'd much prefer to be in a position of being strong enough that I could lead the fees going lower. And they are going lower. The characters coming in with scale in the niches they choose are going to be lowering fees over time, and we want to be able to match it or lead it.

The Chairman: Mr. Pillitteri.

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

I want to reaffirm Mr. Kelly's comments about Canadian banks, that Canadian consumers are being served well by the Canadian institutions. I not only firmly believe it, I live it, and so do many other Canadians. Sometimes we don't take the time to say it. Maybe some of them have not travelled outside of Canada. I have travelled quite extensively and have seen sometimes what they say is competition. If that is competition coming into Canada, I am sorry, I don't want it, for the simple reason that they don't really provide as much service as you do as a bank in how we're being treated.

I have one last question. This is not a prop; I can use this in the House. I have plenty of credit. Why do I have to pay 16.5% on this? Today, before you came, sitting on that side of the table the competition—Wells Fargo, First Union, Capital One—are all in this business, the card business, and they've offered me and everyone else at this table a cheaper product. Of course, being a Canadian, I don't want it to be— Yet when you're talking about their loans, their specialty and so on, they're 3%, 5%, 8% higher than you are. I would like to hear your comment on that.

Mr. Robert Kelly: We do have a low interest rate card, so you can do much better with our bank than your bank.

Mr. A. Charles Baillie: I'm not sure if it's 9% or 10%.

Mr. Robert Kelly: So you do have a very low cost alternative. I think those financial institutions or card companies that you refer to are offering, as an introductory offer, a very low rate, which is a very standard practice in the United States. Then after a period of three months or six months, the normal rates apply.

Mr. Gary Pillitteri: I see. So those introductory rates are not the rates that actually stay on for a long time.

Mr. Robert Kelly: Correct.

Mr. Gary Pillitteri: I wanted to state that the kind of service you provide Canadians are not aware of. They sometimes talk about service charges and interest rates. We're well served. And that's what I fear sometimes with the future. If we are served so well, what would you want to change?

• 2055

Mr. A. Charles Baillie: We want to be able to continue to serve you well. We need to invest to do that.

The Chairman: Thank you, Mr. Pillitteri.

Mr. Baillie and Mr. Kelly, on behalf of the committee, thank you very much for what was an excellent presentation. It certainly helped us as we deal with the MacKay task force.

The meeting is adjourned.