FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, September 30, 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. We have the pleasure of having with us the president of the Canadian Association of Insurance and Financial Advisors, Mr. David Thibaudeau, and its chairman, Mr. Robert Fleischacker.

Welcome, gentlemen. You're not new to the finance committee, of course. You've appeared here before, so you know how this operates. You have approximately ten minutes to make your remarks. Thereafter, we'll engage in a question and answer session.

Mr. David Thibaudeau (President and Chief Executive Officer, Canadian Association of Insurance and Financial Advisors): Thank you, Mr. Chairman. As introduced earlier, with me today is Bob Fleischacker, who is the elected chair of CAIFA.

The Canadian Association of Insurance and Financial Advisors, formerly the Life Underwriters Association of Canada, is a not-for-profit professional association. Our 18,000 voluntary members provide financial advice, and market and sell products for many types of financial institutions in Canada, from life insurance companies to banks. CAIFA members sell the majority of life and health insurance products in the country.

Before I get into the substance of our recommendations on the MacKay report, I would like to publicly thank Harold MacKay, his task force and their staff for a wide-ranging report on the future of the financial services sector. We may not agree with every recommendation in the MacKay report—and you won't be surprised to learn that we don't—but we must recognize the report as being comprehensive, forward-looking and sincerely attempting to put the consumer first.

Because the report is so comprehensive, however, I want to urge committee members not to feel bound to either accept or reject the report in its entirety, but to pick and choose recommendations that you believe make sense for your constituents.

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While CAIFA will deliver to the committee next week a written submission addressing a number of the MacKay report's recommendations, today I'd like to briefly address just a couple of the MacKay report's recommendations that are of particular interest to CAIFA members: tied selling and insurance retailing.

CAIFA has long urged the federal government to protect financial services consumers from tied selling, particularly by banks. We appeared before your committee this spring to present our research on tied selling, and to recommend the proclamation of the anti-tied-selling provisions in the Bank Act. We also provided this committee with a list of consumers and small business owners who believe they were tied selling victims, and we were gratified that you invited some of the Canadians on our list to come before your committee to testify in person about their tied selling experiences.

CAIFA applauds this committee for standing up for consumers and small business by recommending in your June report on tied selling that section 459.1 of the Bank Act be proclaimed. I understand that this section of the Bank Act will in fact be proclaimed today, and I want to again thank this committee—and also Minister Peterson and his colleagues—for taking such decisive action on behalf of consumers.

I believe these actions, combined with the MacKay report's polling data, speak loudly to those who have long denied that tied selling exists in the financial services marketplace. The task force reported being “surprised at the number of Canadians who reported— that they felt that a loan or a mortgage might not have been approved unless another product was purchased from the same institution.” One in six Canadians and one in four self-employed Canadians felt that over the past three years “one of their loans or mortgage may not be approved unless they also purchased another product like insurance from their institution.”

According to Ekos Research, which did the polling for the task force, “there is little doubt that many Canadians think they experienced” tied selling. If anything, we believe the Ekos poll may have understated the extent of tied selling in Canada, thus contributing to some mistaken conclusions by the task force with respect to insurance retailing. There are a number of reasons for this belief.

First of all, the definition of tied selling used in the Ekos questionnaire refers only to a loan or a mortgage, and excludes credit cards, a common source of credit for consumers and particularly small business. According to the Canadian Federation of Independent Business, about one in eight of their members uses a credit card as one of the major sources of business credit. For businesses with four employees or less, that number rises to more than one in six. Had the Ekos question on tied selling included credit cards, we suspect the reported rate of tied selling would have been higher among both consumers in general and the self-employed in particular.

Second, the Ekos question gives insurance as the only example of a product that might have been tied to a loan. Since banks cannot sell most types of insurance in their branches, this example is not likely to trigger incidents of tied selling in the minds of respondents. In our research at CAIFA, banks were six times more likely to tie an unwanted mutual fund or other RRSP product to a loan than they were insurance. We believe the reported rate of tied selling would have been higher if the Ekos question had instead asked, “Have you personally ever felt that one of your loans or mortgage may not be approved unless you also purchased another product like a mutual fund from your institution?”

Mr. Chairman, I make these points not to diminish the task force's conclusion that tied selling is a problem, but rather to emphasize that tied selling may be more of a problem than the task force realizes. CAIFA believes the Ekos polling data supports, at the very least, the task force recommendation for a “stronger and broader ban on coercive tied selling than now exists.” Such a ban should include, as a minimum, an expanded definition of tied selling, a disclosure statement, and access to certain legal remedies in the case of tied selling. We believe these measures are a step in the right direction, but we do not share the task force's optimism that they will make a significant difference in the near future.

As we indicated in our March submission to this committee, tied selling is ingrained in bank culture and will take some time to yield to any new regulations, no matter how strict. The fact that tied selling has been illegal under the Competition Act since 1976 does not seem to have impeded the growth of a tied selling culture within some deposit-taking institutions.

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Furthermore, it is not only the culture of banks that must change. Canadians' attitudes toward banks must change as well. According to Ekos Research, almost half of those who say they experienced tied selling gave in to the coercion. Mr. Chairman, the most severe anti-tied-selling regime in the world will have limited impact if Canadian consumers continue to feel powerless when sitting across the desk from a bank loan officer. We therefore must seriously question the likelihood that the entrenched tied selling culture will change significantly by 2002, as hoped by the MacKay task force.

Having discussed tied selling, I want to now turn to the related issue of insurance retailing by banks, or “bancassurance”.

The MacKay report recommends that the current policy of prohibiting deposit-taking institutions from retailing insurance in their branches should be overturned effective 2002 for deposit-taking institutions with shareholder equity above $5 billion, and sooner than that for those below that threshold. In terms of benefits to consumers of bancassurance, the report argues that the main benefit of bancassurance—in fact the only benefit—is that it would expand the opportunity for Canadians to purchase insurance. This is an important point that deserves emphasis. According to the MacKay report, your constituents should not expect lower prices or better service if banks can sell insurance in their branches.

To support its conclusion that Canadians may not have enough life insurance, the report cites figures from Ekos Research indicating that 71% of Canadians report owning some form of life insurance. The figure for couples and individuals with children is higher, since these are the groups that would have a higher than average need for insurance. A 1998 survey by the Life Insurance Marketing Research Association, LIMRA, actually found a higher level of coverage than did the Ekos poll. The LIMRA survey found that 82% of Canadian households are protected by life insurance. This is up from 80% in 1994.

Why the difference? We suspect it was the different methodology used by the two research firms. The LIMRA survey was conducted with the financial decision maker in each household, the person most likely to know about such matters as life insurance coverage. The Ekos survey, by contrast, was conducted with “anyone over the age of 18 and a permanent resident of Canada”. According to LIMRA, therefore, eight out of ten Canadian households are covered by life insurance, and two out of ten households “feel some member is likely to purchase a policy in the near future.” Again, both figures would almost certainly be higher for couples and individuals with children.

While I would be the first to acknowledge that our industry has work to do to increase the level of life insurance ownership among lower-income Canadians, I want to dispel the notion that seems to be implied in the MacKay report that the Canadian life insurance market can be considered underserved unless 100% of Canadians own life insurance. The task force even admits as much in its report, noting that their “survey did not identify why different respondents do not have insurance and the task force is cautious about concluding that there is an underserved market in Canada.”

Mr. Chairman, if the life insurance market in Canada is already well served, and if the level of coverage is already increasing, this would seem to undermine the task force's primary argument for bancassurance.

Furthermore, on the question of serving low-income Canadians, there is no reason to expect banks would serve that market any better than the life insurance industry currently does. The banks' track record in providing low-income Canadians access to basic banking services led the task force to conclude that, “notwithstanding the stated policy of the banks— there is still a considerable problem `on the ground' in serving a class of customer that is not likely to be profitable to the branch.” The task force went on to observe that, “the major problems preventing further progress are attitudinal and cultural, not problems of process.”

Mr. Chairman, if low-income Canadians have a hard time gaining access to even basic banking services that they are willing to come into the branch and line up for—so-called pull products—why would anyone expect banks to do the hard work involved in persuading these so-called unprofitable consumers that they need life insurance?

I'd like to turn now to the considerable costs of lifting the ban on banks retailing insurance from their branches. The primary risk of bancassurance identified in the MacKay report is tied selling, but the task force believes its proposals will effectively address this issue. Why is the task force so optimistic?

When the task force observes that it has seen no evidence that markets have been seriously disrupted in countries where banks retail insurance, it doesn't factor in the price consumers may have had to pay. The MacKay report offers no evidence from any of these countries that tied selling can in fact be controlled with the regulatory package it is proposing. No parallels are offered between Canada's uniquely concentrated banking sector, with its entrenched culture of tied selling, and any other jurisdiction in the world where banks now retail insurance.

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Furthermore, we believe that the task force, in addition to underestimating the tied selling problem in Canada, may also fundamentally misunderstand it. The task force observes that “the potential for coercive tied selling exists whenever multiple products are delivered through the same retailer” and goes on to suggest rhetorically that perhaps “insurance agents should not be able to sell other products such as securities or provide financial planning advice for the fear that they would engage in tied selling or abuse personal information.”

I believe that line of thinking misses the point, that the financial advisers who belong to CAIFA do not grant credit and have no economic power whatsoever over their clients. They therefore could not attempt a tied sale even if they wanted to. Under the current regime, the consumer is in the driver's seat, not the financial adviser; and switching life insurance agents is a lot easier than switching banks, particularly for small businesses.

Banks, on the other hand, have the power to grant, increase or deny credit to individuals who may desperately need that credit to purchase a first home or the small business owners who need a bridge to their accounts payable and accounts receivable. Consumers are acutely aware of that power, as the Ekos polling numbers indicated.

Given our belief that the task force has both underestimated the extent and misjudged the nature of the tied selling problem in Canada, we believe this committee should think twice before accepting their assurance that their tied selling solution will have substantially cured it by 2002.

What about the other main risk of bancassurance—misuse of personal information? According to the task force's polling data, 56% of Canadians “expressed concern that banks would have too much credit and personal information which they would use for inappropriate purposes if they were allowed to sell insurance from their branches.”

That is consistent with past research and, if anything, understates the concern of Canadians. For example, a 1995 Compas survey found that 83% of Canadians support a ban on banks scanning their credit card and cheque-writing transactions to market insurance to them; and 85% support a ban on banks using their customer account information related to large deposits or inheritance to market insurance to them.

CAIFA therefore supports the MacKay report's recommendation that the federal government move beyond voluntary privacy codes and legislate privacy provisions that will apply to private sector entities. We also welcome the Prime Minister's recent announcement regarding on-line privacy. We would note, however, that the task force “recognizes that it may take some time to develop a consistent and comprehensive approach to privacy legislation for the private sector.” CAIFA sees the absence of such a privacy regime as just one more argument against lifting the ban on bancassurance.

In conclusion, we believe that the benefits to Canadian consumers of bancassurance are sketchy at best, but the risks to consumers, in the form of tied selling and privacy violations, are very real. We believe these very real costs clearly outweigh the alleged benefits.

This unfavourable equation may explain the low level of consumer interest in bancassurance found by the task force. While it is true that three out of four Canadians told Ekos Research they wanted a choice of where to buy their insurance, this should come as no surprise. Few people will voluntary waive their freedom of choice. The more important figure, in our view, is that about half of Canadians said they “are not that concerned about whether banks can sell insurance products from their branches.” In other words, half of Canadians won't be disappointed if you opt for consumer protection and maintain the ban on insurance retailing. Another 21% are undecided.

Given the clear lack of urgency among Canadians for seeing banks sell insurance in their branches any time soon, and given the likely considerable net cost to consumers if the government gives banks that power, CAIFA would recommend subjecting the MacKay task force bancassurance recommendation to considerable additional scrutiny before considering its implementation.

Thank you for the opportunity to participate in these hearings. Mr. Fleischacker and I would be happy to answer any questions.

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

We will now go to a question and answer session. We'll begin with Mr. Epp.

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

Thank you for your presentation. I enjoyed that.

I also understand, Mr. Chairman, that we will be focusing only on Mr. Thibaudeau and Mr. Fleischacker at this time, and we'll get to the others afterwards.

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The Chairman: That is correct.

Mr. Ken Epp: I am intrigued with the idea that you are so tenacious in protecting your industry. By the way, I should precede my comments by urging you not to judge my stand on this position, based on the questions, because I have a tendency, having talked for 31 years, that when you make a statement over here, I'm going to go over here in order to draw out all your thoughts and ideas. So don't draw any untoward prior conclusions about where I stand.

But here you are tenaciously protecting your industry and your agents, quite obviously. If I were an insurance person and a financial adviser and some big outfit like the bank was moving in, I think I'd be fighting like crazy, too, in order to protect my turf. I don't blame you for doing that. I'm sure that's the function of your association.

So what I hear from you here is that you're just saying “We don't want to have our turf infringed upon, and please leave us alone; we're doing a good job.” Is that a correct statement for me to make?

Mr. David Thibaudeau: To deal with that question, I'd like first to make the statement that sometimes it gets misunderstood.

There are a lot of people in this industry from different areas. We represent financial advisers. We represent people who are not the insurance industry. They're not the industry in itself. Most of our members are insurance agents and brokers, that's true. But they're in a position, and many of them will work for a bank-owned life insurance company.

The issue we see here is, from the consumer aspect, sure, there will be some impact; there's no doubt. We haven't come at this from the fact that there's going to be an impact on some of our members. There's no doubt about that. But the real issue here is a consumer issue, and it was the focus that MacKay had in his report. So what we've done is say, well, if that's really an issue, how can we expect that it's going to be fixed soon enough in order to make it a level field for the consumer?

Mr. Ken Epp: To me, the level field for the consumer is when I can phone up one of my friends who's a broker, or I can phone up some insurance company and ask them to send an agent to my house, or I can run over to the bank that sells insurance, because I need a product.

Usually, by the way, in my life, I have found that I don't need to go and phone them. Usually someone phones me and says “I'm coming over to see whether I can help you with something that you don't know you need.”

So, first, I'm not sure that having the banks provide that service is going to impinge on your service if your service is so exceptionally superior to what the banks are going to be doing; and secondly, I think it does expand the consumer's choice. So why would you begin it?

Mr. David Thibaudeau: I'd like to answer that and come back to where I was before.

If you were a consumer in a position such as I was when I was in the practice of doing financial advising, who was suggesting to me that you weren't going to have much of a choice about your RSP this year because the last year wasn't so good for your business and now your line of credit was up for grabs so you were going to have to do your RSP with the bank—I think that's not a position of choice.

You were suggesting you could go somewhere and buy it here and there. We don't have an issue with that. We think the consumer should have a free choice. The key issue here is, do you have to deal here because of this other tie you have? It's a lever. Not all Canadians are under that lever, because they may not all need that credit. But there are a lot of them who do.

Mr. Ken Epp: Let me then go toward what you're saying. I believe I heard and read correctly that your stand is that the banks shouldn't be permitted to sell insurance, period, that they should stay right out of it. But in the event that they do get that and there's supposed to be some sort of regime that would prevent tied selling, how can that possibly work? How can we ever identify and clearly define that in a specific instance tied selling took place? It could be a very subtle pressure. As you indicated, it could be something just like, you know, the word is out that in this particular bank you have a better chance of getting your credit approved, or your loan approved, if you've also purchased some other product from them. So it could be something that is totally undefinable in terms of any regulation enforcement, but something that is still present. How would you handle that?

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Mr. David Thibaudeau: Let's put it this way. The issues exist today, and people actually had this happen and they have made testimony to that. The law that was just proclaimed defines what is coercive tied selling. I think that under that definition it's the attitude— that's why we say it's going to take quite a while because the Canadian people need to change their attitude about dealing with a bank. Even when they know they're being coerced they don't stand up to it.

So this is going to take some time. We're really saying you can't just say here's a law, now go for it. I think you have to put the law there, you have to start changing the attitudes, you have to change the customs, the culture, and maybe then we'll be able to open it up.

Mr. Ken Epp: Mr. Chairman, I think I would like to defer. There are many other committee members and I'll come back if there's more time.

The Chairman: I appreciate that.

I just have one question. Mr. Thibaudeau, I want to know why you decided in your brief, since this is a committee that is looking at the future of the financial services sector, to present a brief that speaks to the present as a representation of the future?

Mr. David Thibaudeau: Mr. Chairman, I'm not sure I understand that question.

The Chairman: Well, you're not painting a picture for the future in the sense of the financial services sector, nor have you clearly identified what your industry's role is going to be in the future within the financial services sector. It's just a kind of reminder that this committee is really focused on trying to shape legislation that will speak to a future vision of this sector. What I hear from you basically here is that you like the status quo, that you like the present.

Mr. David Thibaudeau: Excuse me, but that's not quite accurate. I think what we're saying here is that we like a lot of the things that went on in MacKay, which will be in our printed report. The concerns we had today were to deal with the issues of tied selling and privacy. As I said, we have tied selling legislation today. We would urge for the future that privacy legislation be put in place and have that legislation work. Consider very closely before allowing the large banks the ability to retail insurance by 2002.

It's not like status quo. It's far from it. But it's status quo until you have the mechanisms there to police what's going to be going on, because we know there are two things happening. It's there, it's a culture, and on top of that there's the attitude of Canadian consumers.

The Chairman: So you're saying get the minimum privacy requirements in and then let the banks sell insurance.

Mr. David Thibaudeau: Well, if in fact we can see that they work. One of the recommendations was the neutral ombudsman. There may be other recommendations. If these things happen and we begin to see that this is not an issue, then it isn't. But it's clear that it is an issue. In MacKay's report, our research, and any of the research that's gone on, it's an issue.

The Chairman: Would we be allowed to find out whether or not it works without their selling insurance? I'm just trying to figure out how you're going to figure out whether it's working or not.

Mr. David Thibaudeau: Well, it's not just insurance. That's what we wanted to make sure of. It's not just insurance. It has to do with other products, and it's happening with other products.

The Chairman: Mr. MacKay.

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

The issue of tied selling interests me greatly. I'm working on the assumption that the insurance industry and the banking industry should be treated equally as far as the provisions of the tied selling law is concerned. Is that a fair assumption?

Mr. David Thibaudeau: That would be my belief, and yes, I think that would be the belief of our organization.

Mr. John McKay: Now, if I have a complaint about tied selling with respect to the insurance industry at this point in time, how do I access that complaint? What process do I go through?

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Mr. David Thibaudeau: Currently you're not likely to have too many issues like that, because we don't lend money. We're advisers. We're not—

Mr. John McKay: But you do sell a variety of products.

Mr. David Thibaudeau: Yes.

Mr. John McKay: I would assume that while selling me a mutual fund, you'd also like to sell me some insurance, or vice versa. So the possibility exists that tied selling could occur even in the insurance industry.

Mr. David Thibaudeau: What we're referring to here, which is what I want to get back to, is what we call coercive tied selling.

Mr. John McKay: Yes, I understand the difference.

Mr. David Thibaudeau: In that situation it's very difficult to be coercive because you have no leverage over this particular client.

Mr. John McKay: I'd like to suggest a model as a means of dealing with this problem, and I'd be interested in your response. The first level of complaint in your case would go to an industry ombudsman, as a dispute resolution mechanism, and we would impose upon the situation what's called a reverse onus. In other words, if I as a consumer had a complaint about you as a seller of an insurance product, it would be assumed to be a valid complaint, and you would have to discharge on the balance of probabilities that it was not an issue of coerced tied selling. What's your reaction to that kind of proposal?

Mr. Robert Fleischacker (Chairman, Canadian Association of Insurance and Financial Advisors): I'd suggest that there's maybe a misunderstanding of the dynamics of the transaction. If I acquire a client, they willingly give me information. I have to work hard to earn that right. For instance, a small business owner who needs credit will give me what I need to know in order to grant credit. If you take credit out of the equation, then everybody's on an equal playing field, and the current legislation is—

Mr. John McKay: Is your position, then, that tied selling does not occur in your industry because no credit is being granted?

Mr. Robert Fleischacker: That has certainly been my experience over 25 years.

Mr. John McKay: So there's no need for tied selling provisions with respect to the insurance industry, period.

Mr. Robert Fleischacker: Currently there is no need. I have no leverage over the client.

Mr. John McKay: I see. In some respects that's counter-intuitive.

I'm assuming that the people who work in your industry are commission based.

Mr. Robert Fleischacker: Some are.

Mr. John McKay: From my experience I would say it would involve a good percentage. If I sell insurance to Mr. Epp, presumably I'm going to receive a commission. It's therefore in my interest to up-sell the products, to try to get Mr. Epp to invest in mutual funds, for example. Is that a reasonable assumption?

Mr. Robert Fleischacker: Yes.

Mr. John McKay: If I sell those products to him, presumably I'm going to make some more money.

Mr. Robert Fleischacker: Yes.

Mr. John McKay: Presumably an element of persuasion will be used to get the customer to buy that product, a little extra incentive, we might say, and possibly some other forms of incentive that might be considered to be coercive. Yet at this point—

Mr. Robert Fleischacker: I don't understand the coercive element there.

Mr. John McKay: It is difficult when there is no credit, I appreciate that. But as long as a commission is involved, there is the potential to use elements of coercion. So I'm wondering why you would be resistant to giving the consumer the ability to complain about coercive activity on the part of your industry.

Mr. Robert Fleischacker: Put him there, but we don't need him.

Mr. John McKay: Okay. But in principle, there's no reason why you shouldn't be treated in the same manner as banks on that issue.

Mr. Robert Fleischacker: But I'd suggest you'd never see us there because we have no leverage.

Mr. John McKay: The banks say the same thing.

Mr. David Thibaudeau: The evidence is in the MacKay report and in our submission, so it does happen. This is not a myth; this is for real.

Mr. John McKay: No, we're not disputing that MacKay has done an excellent job in terms of an analysis of the evidence. We agree. But presumably, if the concept of convergence means anything, then from a regulatory standpoint all financial service providers have to be treated equally in terms of the regulatory environment.

Mr. David Thibaudeau: Yes, I would agree with that. I think that there's a suggestion in the MacKay report to have similar regulation for all financial intermediaries. That's really what we represent. We don't represent the life insurance companies. I want to be sure that we all understand that. We're here representing the people who are intermediary, and the products come from many places.

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The Chairman: Thank you, Mr. McKay.

Monsieur Desrochers.

[Translation]

Mr. Odina Desrochers (Lotbinière, BQ): Mr. Thibaudeau, Mr. Fleischacker, you know that this subject was debated in Quebec last autumn prior to the passage of Bill 188, which set out much stricter rules. Are you familiar with this bill, and do you think that it could serve as a basic model to prevent bancassurance from getting out of hand and invading your turf?

Mr. David Thibaudeau: I believe that Bill 188 was passed in order to protect privacy, etc. it also protects deposit-taking institutions in Quebec, be they credit unions or banks; it stops loans from being transferred from one to the other. That's better than nothing. Is it really the solution? The future will tell.

Mr. Odina Desrochers: It would nevertheless provide a basis for discussion if the concept of bancassurance were ever implemented.

In view of the stakes and changes at hand in the field of financial products, our political party believes that everyone must be treated equally. Before a decision is made concerning the proposed merger of four banks, your industry and the others that provide financial services will have to examine the current context and the overall legislative structure. Do you think that you could participate in a broader debate in which you would have time to go much further into your claims concerning the protection of your present market?

Mr. David Thibaudeau: We will have the opportunity to see how this works and whether it really protects the consumer and whether consumers will really have a choice. We are one group of people and we are in business to provide advice and sell products.

It happens that a client cannot do business elsewhere because they have incurred a debt, regardless of the institution. This prevents the client from doing things that may be in his interest. Therefore we should continue to work to reach a point where people feel— The issue is whether the client has the ability to choose one or the other.

Mr. Odina Desrochers: Thank you, Mr. Chairman. You can continue.

[English]

The Chairman: Mr. Brison.

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

I have a couple of questions. One is on the changes to the payment system, which would allow mutual funds or insurance companies to participate directly in the payment system. If in fact we're opening up the payment system and allowing you full access to compete with the banks in that area— For instance, I guess $30 billion a year in claims under life and health policies annuity contracts are paid out per year. If you are to actually hang on to that as opposed to having to hand it over to banks, isn't it only fair that they can compete with you in your lines of business as well?

Mr. Robert Fleischacker: It's an interesting question. You're not allowing us access to the payment system, you're allowing the manufacturers of our products access to the payment system. That is a good thing and will benefit our customers immensely, but it should not be a quid pro quo on tied selling.

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Mr. Scott Brison: The whole issue of tied selling has been dealt with in the MacKay recommendations. Coercive tied selling, again, is very important. I think Mr. Barrett used the example where if you go in to buy a shirt and they sell you a tie and a pocket handkerchief as well, is that coercive tied selling? Clearly we have to work on the coercive side of it.

Your members would sell insurance and all kinds of financial products. Arguably, stockbrokers, for instance, might find it a little annoying or would describe your activities as being tied selling, recognizing it's not coercive, but they would consider much of what you do— and I've heard stockbrokers articulate that, that in fact you have an ability to sell life insurance that a stockbroker, for instance, doesn't have. There's really been the whole demise of the four pillars.

Mr. Robert Fleischacker: Could you expand on your comment on the stockbrokers?

Mr. Scott Brison: I've heard stockbrokers express that life insurance people selling mutual funds is competing directly with what they're doing, that in fact there is a level of tied selling, not coercive tied selling but tied selling, that is implicit in a life insurance agent selling mutual funds or other investment vehicles.

Mr. Robert Fleischacker: I don't appreciate the distinction between a stockbroker being licensed to sell insurance, as they're allowed to do, and members of our association, some of whom are stockbrokers.

Mr. Scott Brison: Sure, but by the same token, what we're saying is banks effectively— It's not just the changes in terms of giving you greater access to the payment system, but what about the ability for people to start up a new bank, for instance, with $10 million and to in fact participate in the payment system directly?

Many of your members, if you put several together as groups or regionally, could start a new bank under the MacKay recommendations. You could effectively participate in the payment system directly. It's not just the insurance companies themselves.

This is going to be an unprecedented access for you to compete with banks on a regional or a local level. Do you see any potential there at all?

Mr. David Thibaudeau: One of the concerns that we'd see for our people that we haven't had to deal with is if we got into the position of lending money, I think we'd have to follow in the same footsteps that we're suggesting. If I have that right to lend you money, I have an ability to hold that over you. Maybe I shouldn't be selling you any other financial products if I'm lending you money.

Mr. Scott Brison: That may or may not be the case.

You acknowledged that there may be the potential for the price of insurance products, for instance, to go down if the banks were selling them.

You don't acknowledge—

Mr. David Thibaudeau: We were suggesting that in the MacKay report there was no suggestion that the prices would go down or service would improve. It was just that there would be more access.

Mr. Scott Brison: But wouldn't the logical corollary of greater competition be that the prices would go down, particularly for low-income Canadians? On the question of serving low-income Canadians, you say there's no reason to expect that banks would serve that market any better than the life insurance industry does currently. Are you implying that perhaps you're not doing such a good job serving low-income Canadians?

Mr. David Thibaudeau: I think the figures are there. We're talking about eight out of ten Canadians who have life insurance.

Mr. Scott Brison: Low-income Canadians don't typically, do they?

Mr. David Thibaudeau: Well, I think it's relative to their needs.

Mr. Scott Brison: Or their ability to pay for it.

Mr. David Thibaudeau: And the ability to pay, that's true.

Mr. Scott Brison: Yes. They are the ones who need life insurance the most in many ways because there simply isn't the ability, if there were a disaster, to—

I guess the question is, are you trying to protect your members or consumers ultimately? What is your mandate in your representations to us on the MacKay task force?

Mr. David Thibaudeau: I think it is consumers. The way it works is if a practitioner has maybe 200 to 300 clients, of those 300 clients, let's say, there may be a coercion situation in 50 cases, or maybe in some instances it's only in 10 that it happens to them. So it really doesn't take a lot of business away from them. We're not really coming at it from this field, the field our people are in. I can see it in some other areas of insurance, but in this specific area, most of our members would not be impacted highly from it, but moderately. I think a certain group of our people would be impacted by the banks being able to retail, but our cause is really focused on the consumer, and the reason it's focused there is because that's who we deal with.

• 1620

Mr. Scott Brison: Thank you.

The Chairman: Ms. Bulte.

Ms. Sarmite Bulte (Parkdale—High Park, Lib.): Thank you.

I'd like to follow up on a question that Mr. Desrochers asked you on the Mouvement des caisses Desjardins. Certainly one of the strengths that the Desjardins network boasts is the fact that it owns subsidiary companies in insurance, trust services and securities brokerage service industries, commercial and industrial investment, and certainly in the area of insurance. They are leaders in home care insurance. They are exemplary. They are the largest financial institution in Quebec and the sixth largest in Canada. While we may look at them as a credit union, they are truly a full service financial institution, which they see as one of their strengths, because they can offer those services to their members, and that's the strength they see.

Based on the experience of the Desjardins network, has your association reviewed the whole issue of tied selling within the context of the Desjardins network?

Mr. Robert Fleischacker: There's a different cultural dynamic taking place within their major market that doesn't exist in the rest of Canada, so I don't believe that's a totally fair comparison.

The Chairman: Can you explain the dynamic that's going on?

Mr. Robert Fleischacker: The caisses populaires in Quebec are dramatically different from any other financial institution in the rest of Canada, and that gives them—it's a very different equation.

Ms. Sarmite Bulte: If you look at the MacKay task force, one of the things being looked at is strengthening the whole credit union system. You can't examine the credit union system without looking at the Desjardins movement.

Certainly Ontario—and I see we're going to have someone from Credit Union Central this evening—is looking at the Desjardins system as possibly a way for it to be implemented in Ontario.

I'm asking about it because if we're going to strengthen that second tier, as MacKay has proposed, to the co-operative banks and the other things—it's not just banks; I think we're also looking at credit unions here. You feel that the whole issue of tied selling is going to go across the board with all the different tiers of financial institutions that come in. Is that correct?

The Chairman: Mr. Thibaudeau, and then we'll go to Mr. Desrochers.

Mr. David Thibaudeau: Do you want me to answer this question first?

The Chairman: Yes, absolutely.

Mr. David Thibaudeau: The credit information regulations are in existence, and those have to do with some other financial institutions that lend money on mortgages and so on, as a lot of life insurance companies do. We were very strong on suggesting that they be proclaimed.

We think there is a real issue between a lender, a person who lends, and a person who sells other financial products. We can turn our head the other way as the steam roller—

If we go back in history—and MacKay made some reference to it—you see the bank lending money and taking deposits, period. Now you see the bank doing this, you see the bank doing that, you see the bank doing this. You see the bank doing securities. You see them doing everything. And they still have the lending ability. Now we want to give credit unions the ability to sell like banks, and we're into a game where you're putting a lever on the person, the individual out there, where I've got you by the loan.

It's like the company store story. I owe my soul to the company store. I'm not saying it's that dramatic, but it's certainly moving in that direction. I think if we're looking into the future we ought to consider that. We ought to consider how we can break that culture going on, because it's moving hard.

No one's asking for this—only one group is asking for this.

• 1625

[Translation]

The Chairman: Mr. Desrochers.

Mr. Odina Desrochers: In Quebec, Bill 188 was passed and set out certain rules to prevent credit unions from providing insurance. Bill 188 was debated by all stakeholders in the financial products sector. It nevertheless was the subject of broad consensus.

You said earlier that you thought the concept would spread to the other provinces starting with the “caisses populaires” model. That cannot happen because changes have been made and the cultures and mentalities are different. Mr. Thibaudeau, are my observations correct?

Mr. David Thibaudeau: That is what Mr. Fleischacker said.

[English]

The Chairman: Thank you, Mr. Desrochers.

Mr. Discepola, you have the final question.

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): I want to clarify the chair's question to you because I don't think I got the answer clearly, and I want to ask it again.

Am I correct in assuming that if we settle the problem of coercive tied selling and the personal disclosure issues, you or your association members do not have any qualms about allowing banks to sell insurance over the counter?

Mr. David Thibaudeau: It's hard for me to suggest that all our members would feel that way today, because what we're doing is thinking about a possibility. The reasonable possibility that I see out there is that if we saw these things working, if we could see that this would deal with the issue of the lender having power over the consumer, then we probably wouldn't have an issue with them retailing. It just means that you wouldn't be allowed to get access to target people, you wouldn't be able to use the cheque book to decide who to go to see.

When people get calls after they might get a small inheritance—a sizeable deposit goes in a bank account and you haven't heard from the bank in years, and three days later you get a call. Somebody is watching. I don't think Canadians are all that interested in that watching.

Mr. Nick Discepola: What's the difference if you get a call from your bank manager or if you get solicited on the phone from an insurance broker?

Mr. Robert Fleischacker: I can speak to that. The insurance broker wasn't privy to the information that you got the inheritance. It was a coincidence that he called or somebody else alerted him.

Mr. Nick Discepola: Just a mere coincidence.

Mr. Robert Fleischacker: We can create coincidences, but it has nothing to do with access to their private information.

Mr. Nick Discepola: One of the key issues for me is the access to the privacy of the information.

Mr. Robert Fleischacker: Right.

Mr. Nick Discepola: But I don't think it's just limited to the banks. I've been in Ottawa five years, I have an apartment, I haven't given my address to anybody, and now all of a sudden in the past two years I'm getting all kinds of junk mail from credit card companies. So it's either the City of Ottawa that's given my name to somebody or my landlord, and I don't know how you're going to go to the extreme of protecting even down to that minute detail.

If we're trying to establish a level playing field, I would have thought that maybe your association members would have come here—and nobody has to this date, not even the foreign banks yesterday—and asked maybe for the same privilege of taking deposit, because to me that gives the banks a tremendous advantage.

When I can, through my cost of production indirectly, reduce my costs by borrowing at 3% or paying 3% on deposits and then lending it out at 7% or 8%, whereas the others can't have that same privilege— If your group could do that with the $30 billion that you have, it would seem to me a tremendous privilege. Maybe we should allow financial companies to take deposits also. Maybe that would put you on the same level playing field.

Mr. David Thibaudeau: Well, it would put the different companies. For instance, in MacKay they're suggesting that insurance companies that are able to take these deposits set up the payment system so you can use the Joe Blow card—

Mr. Nick Discepola: Why aren't you asking for it, then?

Mr. David Thibaudeau: Well, in our paper we're saying that's a good idea. We think that's a good idea. The thing is we don't get that. Our members are the people who work between you and the insurance company or the bank or the credit union or anybody else. So if you're tied up because someone has a lever on you, we can't help you a whole lot.

• 1630

Mr. Nick Discepola: Do you think that if you had access to the payment system, access to deposit-taking institutions, you could really take on the big six banks, or big four, or big three? Could you create enough of the competition that we're after?

Mr. David Thibaudeau: Yes, but you're dealing with an individual entrepreneur who's out there building a business with clients who have faith in that individual to help them with what they're doing. Our members now will have better access to help someone facilitate their financial planning, because there will be more institutions able to use the payment system. It might be a mutual fund company. It could be an insurance company. It could be one of the new or foreign banks that are niching the marketplace. There's a lot of facility in those recommendations that will be good for our members. There's no doubt about it.

The only issue we have is that it's early in the piece to think we can have the lending institutions sell insurance in their branches, where they know you have a dollar in the bank and they want to go and get it and target you as an individual. That's not fair to you. It's not a big issue for me as a member of CAIFA; it's an issue for you, the consumer, more than it is to me.

Mr. Robert Fleischacker: To say at this juncture that by 2002 they should do it— There's no period to demonstrate a change in the culture.

I think your question was, if we do this, this, and this, will we back off on that? Let's see how the world unfolds. But to just give it now is—

Mr. Nick Discepola: We can't do that. It's an irreversible process. Once we give the green light, we're not going to be able to take back those conditions.

Mr. Robert Fleischacker: That's right.

Mr. David Thibaudeau: That's my point. We don't want you to give it the green light until we've—

Mr. Nick Discepola: But then you're saying keep the status quo, which is not an alternative either.

Mr. David Thibaudeau: No, we're saying put in the privacy legislation. We're saying get the coercive tied selling provisions working, and let's see how it works—$100,000 or you go to jail, right? Let's see how many people go to jail.

Mr. Nick Discepola: They're all going to tell us it's going to work, so we're not going to be any further ahead. Right?

Mr. David Thibaudeau: We want to see it—

Mr. Nick Discepola: They claim right now that they don't do coercive tied selling.

Mr. David Thibaudeau: The evidence says they do. Are you going to listen to that group? One group tells you it doesn't do it; then all the pollsters go out and find evidence to show it's being done. Where are you putting your money?

The Chairman: Thank you very much.

On a final note, the lender has power over an individual if in fact the individual does not have choice. Is that correct?

Mr. David Thibaudeau: That's correct.

The Chairman: And you establish choice in an economy by enhancing competition for a number of products? I think that's a real safeguard that consumers have.

This committee, from the comments I've heard overall, is very keen on establishing a very competitive environment, because competition seems to provide a safeguard for the consumer. This is very much a consumer-sensitive exercise we've undertaken.

We thank you very much for your input, and also for your kind words on the leadership this committee took on the tied selling provision. Thank you very much.

Now we will move on and listen to the Insurance Brokers Association of Canada. We welcome Mr. Mike Toole, president-elect, and Mr. Rick Frost, chairman.

Mr. Mike Toole (President-Elect, Insurance Brokers Association of Canada): I'd like to thank you, Mr. Chairman, for the opportunity to meet with you today.

We represent Canada's 60,000 independent property and casualty insurance brokers and their staff. I'm the president of our national association. I'm a volunteer and a brokerage owner from Fredericton, New Brunswick, and I am here with other volunteer members from our board of directors and also brokerage owners from across Canada.

With me are Rick Frost, our chairman of the board, from Kamloops, B.C.; our president-elect, Jim Ball, from Vancouver; and our vice-president, Robert Ballard, from Montreal. We have two staff members with us today: our executive director, Mabel Sansom, from Toronto; and our director of public affairs, Dan Tessier, from Ottawa.

• 1635

The MacKay task force report contains a number of important recommendations, many of which relate to consumer protection. We would welcome the opportunity to comment on these issues at a later date. Today, however, we would like to restrict our comments to some of the broad themes raised in the report and the recommendations that directly affect our industry. In this regard the MacKay task force has failed to fulfil its mandate. We question the premise on which the task force bases its recommendations. We also question why there are so many critical oversights, especially as they relate to property and casualty insurance.

Has the MacKay task force fulfilled its mandate as outlined in the terms of reference? Simply put, no.

The task force has been asked “to assess the quality of competition within the financial services sector, including various segments of that sector.” Regrettably for our sector, this has not happened. Nowhere does the task force recognize the intense competition characterizing the property and casualty sector in Canada. Nowhere does the report mention that Canadians have benefited from fair property and casualty insurance prices. Nowhere does the report reflect our sector's ability to respond swiftly and effectively to the needs of Canadians, especially in times of crisis such as the 1998 ice storm. We had presented a number of key policy issues that needed to be addressed to ensure that Canadians will continue to enjoy the benefits of a healthy and competitive property and casualty insurance sector. For whatever reason, the task force chose to ignore these important policy issues.

In outlining the forces of change such as technology, globalization, and market trends, the report does not deal with all the domestic and international competitive realities of today. It does, however, focus on the future to such an extent that it ignores what is on our doorstep now. The forces of change are certainly important, but they should not lead us to act prematurely or incorrectly. That is the real danger.

The report implies that the winds of change are so strong that our federal government may not have the freedom to pursue an independent policy for its financial services sector. Nonsense. Every nation on earth is perfectly capable of setting its own policy agenda. We recognize the need to give our financial institutions the flexibility to compete on the world market, but Canada and the stability and security of our domestic market must come first.

The report rightly notes that the international community has responded in a number of ways to globalization and technology. The first of these is convergence of function, whereby the boundaries separating the traditional four pillars are fast disappearing. In the second, disaggregation of function, financial institutions divest certain parts of their business to focus on specialty areas and niche markets. A third is in mergers and acquisitions.

So why is this point so important and why are we so concerned about it?

The task force has allowed the concept of convergence to dictate how the whole sector should be reformed. It has totally ignored one of the most critical trends affecting the financial services sector around the world. Nowhere in the report is the disaggregation of function option fully examined or considered. Why? Had it taken this market trend into account, we are confident that many of the task force recommendations would have been vastly different.

We had suggested that the restructuring should be an evolutionary process, not a cataclysmic event. An excellent opportunity to pace the reform process and provide Canadians with a manageable plan of action has therefore been missed.

This brings us to our major objection to the report. We are bitterly disappointed with the report's assessment of the Canadian property and casualty sector, and here's why.

First, the report fails to recognize the distinct nature of property and casualty insurance in its recommendations. In so failing, the task force may be paving the way for unfair policies to emerge. If this is allowed, banks will have an unfair competitive advantage, defeating one of the main objectives of the 1992 reforms.

On this point, the federal Superintendent of Financial Institutions recently commented that he had been struck by the lack of real understanding of the property and casualty sector and the tendency to lump it together with other financial institutions. This problem, he stated, “is the root of some of the policy decisions that have been made in the past, and it is likely to be a factor looking forward as well.”

• 1640

Second, the report ignores the contribution of, and services provided by, the P and C sector. There's no mention whatsoever that Canadians enjoy the benefits of having one of the most competitive and cost-effective property and casualty sectors in the world. This is an example of the point we raised earlier regarding the complete failure of the task force to fully assess the competitiveness of Canada's financial services sector.

Third, the report totally ignores the role of independent brokers. Why? We are responsible for the distribution of about 75% of the P and C insurance in Canada. Is this not an important factor to consider? Do these jobs not count? Furthermore, there are important policy and regulatory issues that already put independent brokers at a serious competitive disadvantage, and yet no references were made to these serious issues. Again, it raises the question why.

Fourth, the report also overlooks the important socio-economic contributions made by, and the regional benefits accruing from, the P and C sector. Independent brokers and their staff account for approximately 60,000 of the 100,000 women and men employed in the P and C sector. The vast majority of these jobs are at the community level, in virtually every rural and urban centre across Canada.

We are appalled by this serious oversight, given that the task force had been specifically asked to consider jobs, job creation and small business.

If the banks are once again given special privileges, thousands of independent brokers and their staff will lose their jobs and businesses. Yet nowhere in this report did the task force assess the impact of its bank insurance recommendation. It only notes: “Some existing jobs may be lost.” This is a major understatement, and is totally unacceptable.

Fifth, the report overlooks the fact that banks are already in the business of insurance and that the current fair competition rules of the Bank Act are working well. Our government has balanced the interests of small business with those of big business. There is absolutely no evidence to suggest that banks are at a disadvantage.

Sixth, the report's own analysis is not conclusive, nor is it convincing. There is also insufficient research and data to justify its findings as they relate to our sector. Given these shortcomings, it is remarkable that the task force concludes that banks should be given an unfair competitive advantage in distributing property and casualty insurance.

The task force advocates that position on the grounds that banks' selling insurance is common around the world, especially in Europe. The reality is that European banks have had great difficulty penetrating the property and casualty market. One reason is that the banks have recognized that P and C insurance is distinct from the traditional investment products and services they offer.

The task force also suggests that lower insurance premiums may occur because new entrants are often able to enter the insurance market using lower-cost distribution channels. This position, though, is built on a false premise: there is no evidence anywhere that the distribution costs for an independent broker network are higher than those of the banks selling insurance through their branches. We believe, in fact, the opposite is true.

A Wall Street Journal article noted recently that European banks “have been pursuing this goal of cross-selling to retain customers for the last 30 years or so, and so far nobody has presented a model of it working very effectively” and that the “jury remains out on the concept”. The article states: “Too often, diverse product mixes have been used to cover up underperforming units, with gains from one division hiding losses from another.” As a result, European banks are being pressured by investors to focus on their more clearly defined strengths and lines of business. This is reflected in the disaggregation of function we talked about earlier. Perhaps we should learn from the European experience.

The issue of banks and insurance has been hotly debated for some time. Nothing has changed since 1992, when Parliament unanimously supported the government's decision regarding banks and insurance. Nothing has changed since Parliament endorsed this decision again less than two years ago as part of the 1997 review.

Our member brokers from across Canada tell us that their MPs remain strongly supportive of the fair competition provisions of the Bank Act.

There is no evidence to suggest that consumers are promoting this debate. They certainly are not clamouring for bigger, more powerful banks. The task force's own research shows that a majority of Canadians believe banks have too much power and influence already. It also concludes that a majority of Canadians are satisfied with the level of service from their insurance broker and that there is adequate competition in the insurance marketplace. Our surveys reinforce these findings.

• 1645

As for small business, the Canadian Federation of Independent Business has stated before this committee on many occasions a strong opposition to expanded insurance powers for banks.

So who is pushing for unnecessary changes, and why does the task force endorse a policy and a regulatory and statutory framework that favours banks over other groups?

The task force proposes a framework for the P and C sector that will reduce competition, not increase it; that will increase costs, not lower them; and that will provide less consumer choice, not more. The issue is not about competition in the P and C insurance sector. The real issue is about a lack of competition in Canada's banking sector. Let's not get sidetracked by trying to fix something that is not broken.

Setting aside the issues we raised today, it is critical that the government not overlook the single most important factor during this process, and that is the human factor. We are dealing with men and women and their families, not profit and loss statements. When corporate gains become more important than people, we need to pause and reflect on whether the pendulum has swung too far.

Clearly, the situation in Canada is unique and requires special consideration. We hope you agree. Thank you.

I'll be available to answer your questions, Mr. Chairman.

The Chairman: Thank you very much.

Mr. Epp.

Mr. Ken Epp: Thank you again.

You heard my preamble before: don't judge me by my questioning.

Your sector deals with property damage. Is that the extent of it? Perhaps you could just expand on that.

Mr. Mike Toole: I'll defer to Rick Frost.

Mr. Rick Frost (Chairman, Insurance Brokers Association of Canada): Unlike the group we just heard from, our members are almost exclusively involved in the property and casualty business in Canada. That would include things such as home and apartment insurance, business insurance, those property risks, and then the liability risks. So the buildings you see as you're driving around are the types of things we insure as brokers.

Mr. Ken Epp: Would your members sell things such as aviation insurance to private aviators?

Mr. Rick Frost: Yes.

Mr. Ken Epp: I asked those questions because of my interest and so that I will have a clear understanding of the issues.

I want to challenge you right off the bat. On page 5 you make a very blatant statement. You say “The Task Force proposes a framework for the P&C sector that will reduce competition, not increase it—”. Now, I don't know how you can say that, because here are all of your members, 100,000 of them—not 100,000 agents but 100,000 people employed—and now we're going to add to that the members in, say, the banks who are also able to enter into this. That to me causes more competition. What do you mean when you say that will reduce competition?

Mr. Rick Frost: First of all, we have in Canada 230 insurance companies, so you'd think at first sight the addition of perhaps 5 or 6 of them wouldn't make that much difference. The fact is that we have over 60,000 brokers selling insurance in Canada. The problem, as we see it, is that the banks are such a powerful vehicle in themselves that what they'll do is go into the marketplace, lower the rates, capture the business, drive the competition out, and then raise the prices when they've got rid of a good chunk of these competitors. At the moment no one insurance company controls more than 10% of the market.

I haven't seen any of the banks suggest to the House finance committee that they go through insurance brokers, for example, to sell insurance. That's one option that's open to them. I think we have to be clear that we're not against banks selling insurance. Since the 1992 reforms they have been able to do that. What we're opposed to is the unfair advantage of having banks able to retail from their branch. We don't believe you should be able to tie a loan product to an insurance product.

Mr. Ken Epp: So you're continuing the same theme of tied selling as was mentioned by the previous witnesses, and you were here to hear them.

You say that will increase costs. Here is a bank or some other organization that's able to sell a product in the property insurance area without having to hire specialized people. You can just have people come to the counter. The facility is already there, so you save the cost of additional buildings. Clearly, that's going to reduce costs, because these people will be able to sell this product at a much lower price than you can with all your individual buildings, all your agents, all your staff, and everything. We will reduce that duplication and the costs will be less, and the consumers will most surely be charged less.

• 1650

Mr. Jim Ball (President-Elect, Insurance Brokers Association of Canada): If I might answer, when have banks ever reduced costs? They're looking for an advantage here. They're already in the business. They've been very successful so far. Last year, the CIBC's insurance company reported premium income of $245 million. That puts them in the top 25% of companies across Canada. So they already are competing, and they're competing fairly. They're going after the business the same way we are. They have to advertise, they have to prospect, they have to do all the things we do to get that customer in to sell him insurance.

In addition to what's been mentioned by my colleagues and the previous speaker, the unfair part comes when we think they're going to have an unfair advantage when you take a mortgage out on your home with the bank. You're required to provide them with a copy of your insurance, so when you come to me as your broker, I send to the bank a copy of your policy. That includes the insurance company, it includes when it comes up and when it expires, it includes what coverages you have, and in many cases it includes the price. I might as well give the keys to my agency to that bank. They have all the control right then and there. That's not fair competition. Where is that fair?

These things that happened in 1992 are working. Our industry is so competitive that most people in the commercial businesses that I specialize in are paying less for their insurance now than they did five years ago. Why is that? It's because I don't represent the insurance companies. I represent the customer. I offer choice to my customers. If you buy from a bank, you are buying their product and their product alone. If you come to me, I play your risk off against the eight insurance companies that I do business with until I get you the best possible price available. That's what keeps costs down. As Rick said, once the banks get into the business and start concentrating power, they can outspend us by any means. The competition eventually becomes uncompetitive.

Mr. Ken Epp: But by your own admission, CIBC has done great. They're in the top quarter already. They don't get there because they come to me and say they're going to charge me more for my insurance than I pay with my local broker right now. They get there because they're going to charge me less. That's how they manage to get so many more people, and if that's a lower price for the consumer for the same product, why would we be against that? This parliamentary committee should be in favour of promoting a better price for the consumer.

Mr. Rick Frost: If I may, the response to that would be that we watched the CIBC when they first entered the insurance business, and they did exactly what they said they would. They came to this committee and said they were going to offer lower automobile insurance, and we saw that take place. We also saw that, within about six months, they put their rates up by 10%. In a recent review that was filed in Ontario, we also saw that if you look where the CIBC is now that they've captured that market share, they're very clearly in the middle of the pack.

They've done exactly what we told this House committee they would do. They've gone in low, bought market share, and raised prices. That's why we think it's not in the consumers' best interests in the long term. It's going to remove competition, not add competition.

Mr. Ken Epp: Okay.

The third item in this sentence says it “will provide less consumer choice”. I don't buy that. We have eighteen different insurance companies in my little town. There are two or three brokers that will deal with whomever they can find. Along now come the five banks in my town—maybe soon to be three, but who knows?—and they are now going to offer me a choice. So I have all these eighteen, plus the brokers, plus the banks now.

Mr. Nick Discepola: The eighteen will fold up.

Mr. Ken Epp: Well, I'm asking these guys.

You are saying that this will literally drive these eighteen independents out of business.

Mr. Rick Frost: If these changes go through, it will drive the eighteen independents out of business. I can tell you that I, for one, am probably going to be trying to do some other line of work. Secondly, in your town, they still have the opportunity. You can pick up the phone and deal with the bank if that's what you so choose.

The only issue we're arguing is that you don't allow banks to retail at the branch level. That's the only issue. We're not saying that banks shouldn't be able to sell insurance. We're saying they should do it on a level playing field, the same as we're having to do.

Mr. Michael Toole: Can I just add to that?

What we're saying is that the revisions of 1992 are working. They found a balance between protecting the interests of small businesses like ours, and those of the big banks. That balance allows the banks to retail insurance, and it allows us to do it on a level playing field with them. I think that's where the public interest comes in.

• 1655

You have to look at the long-term implications. You have to look at what the banks have done with stock brokerages and trust companies. They've gobbled them up and they're the only remaining force around, and they'll do the same to us. That's all we're saying.

Mr. Ken Epp: Mr. Chairman, I have lots of questions, but as before, I'll defer to other members. If there is time, I'll then come back.

The Chairman: Thank you.

I just want to clear up a point that came as a result of Mr. Epp's question. You said they price in the middle of the pack, therefore they remove competition. Is that true of other firms that price in the middle of the pack or not?

Mr. Michael Toole: Robert is from Quebec, so maybe he could talk on Desjardins, because they're basically the same type of operation.

[Translation]

Mr. Robert Ballard (Vice-President, Insurance Brokers Association of Canada): In Quebec, Desjardins, like the Canadian Imperial Bank of Commerce, started with much lower rates in order to develop a large market share, and now Desjardins is in the middle of the field. Like the CIBC, Desjardins is no longer the cheapest competitor in the market, as it was at the beginning.

[English]

The Chairman: Just because they're in the middle of the pack?

Mr. Robert Ballard: Desjardins is in the middle of the pack, the same as the CIBC is presently in Ontario. They basically started out very low, and then they increased their rates as they got their market share.

The Chairman: So you're saying that being in the middle of the pack equals reducing competition.

[Translation]

Mr. Robert Ballard: In 1989, there were 2,700 insurance brokerages in Quebec. Now, in 1998, there are 1,700. So we have lost 1,000 brokerage firms since Desjardins started selling insurance. This is because they are in the same market, like the others.

[English]

The Chairman: Thank you.

Mrs. Redman.

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

I think you articulated your case really clearly, and certainly we got the impression that you feel the MacKay task force has overlooked your sector. But one of the things the MacKay task force talks about is the fact that the status quo is no longer an option. That has to do with all of the financial sector, not just banks, trust companies or insurance companies.

I would like to hear back from you on this, because obviously you don't like the recommendation that banks sell insurance. You're looking at your brokerage network. What are the things you would like to see? Where are the recommendations that should have been put forward by the MacKay task force, and not just those that would protect the status quo and life as we understand it now?

We heard from foreign banks last night, and they talked about the disaggregation of function, which is mentioned in your representation. It seems to me that those niche markets will continue to make inroads. The reference was made to cherry-picking in some cases.

If the MacKay task force has misunderstood property and casualty insurance and has not represented it in its recommendations, what are the recommendations that should be there for the next millennium to make sure Canadians are served very well by your sector, given that it's a very changing and evolving landscape?

Mr. Jim Ball: If I could answer that for you, madam, I think what we would like to see are some regulatory considerations to reduce the inconsistencies that exist across the provincial boundaries on insurance, such as the qualification and licensing requirements of each province. We want to see the ability for licensing to be moved back and forth easily so that we can reduce the barriers to selling. I can't sell insurance in Alberta because I'm not licensed there. We would like the harmonization of licensing requirements.

We would like to see step licensing requirements. We're selling promises to pay, so it's very important that we have a lot of understanding and knowledge in order that we can bridge the gap. It's a complicated product. I have 34 years in the business. I still learn something every week. I have to make sure my customers understand this complicated product that they never read, that it's the right one they're buying. Those step licensing requirements mean that I have to go through exam hurdles in order to prove that I can sell insurance. That's not the case in every jurisdiction, so we'd like to see step licensing.

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We'd like to see continuing education in all segments. In B.C. now we have continuing education; I cannot renew my licence every two years unless I have 24 hours of continuing education credit. Alberta does not have continuing education. We want to see that all across the country.

We want to see the requirements for professional liability insurance. If I make a mistake you can sue me; I have $2 million worth of professional liability insurance. Not everybody has to have professional liability insurance, so you have nowhere to go if you get bad advice and you lose your property or your assets.

We would like to see the occupational restrictions altered so they again offer more opportunities in certain jurisdictions for brokers.

The rules of conduct need to be changed so consumer protection rules regarding some of these issues that have been talked about before your committee are there to protect the consumer.

So those are some of the things we would like to see in the future so the playing field stays competitive, stays level. And when that happens, whose interest is best served? The consumer's.

The Chairman: Mr. Szabo.

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

The issue of the banks getting into insurance, going in low, grabbing market share and then raising prices has a flaw in basic logic in that consumers, whom I think we've found to be significantly price elastic, are not so interested in the insurance company they're dealing with. If I can get a better deal, I'm going to look for it. So how do you rationalize that banks go into insurance, get a customer and then significantly increase the price, and still hold that customer, if in fact the customer is price elastic?

Mr. Jim Ball: That's a good question. They may only provide the most competitive prices for the kind of people they want to insure. Most of the cost of insurance is in the claim payment, that's what you buy. The product is the claim, when you have it, and that's where most of the cost is when you buy insurance.

What banks like to do is take only the best, and by taking only the best, they take that spread of risk out of the market. So the average person has to pay more, because they're creaming all the good risks off the top, whereas now these risks are shared, spread around. And as brokers representing customers, we make sure the guy who's had you, a homeowner who's had a couple of break and enters—and Ms. Leung would know how bad break and enter is in Vancouver— I'm there to make sure you can renew your insurance, and I'm there to make sure you get a fair price. I use my clout with the insurance companies I deal with on your behalf.

The banks, selling their own product, want to sell to only the best, and by doing so they're eventually going to raise the price for everybody else.

Mr. Paul Szabo: Okay. The banks are there now operating through subs, and your assessment is that you're competing very well. If the banks were to move into the branches to operate their insurance concerns, what we're really talking about, I think what you were talking about, is the cross-subsidization or leverage they would acquire by having a hybrid operation under the same umbrella. It means the facilities, the resources, the assets, and in fact the opportunity for typically loss leader type of activity, etc., would become more of a risk.

If you're correct that cherry-picking or creaming is in fact happening and would happen to an even greater extent, it means you are dealing with probably a tougher portfolio, which means it's not as profitable, which means you're not going to survive. So you're going to lose some jobs.

I can tell you I agree with you. I used to be the chief financial officer of the Canadian Underwriters' Association, IAO now, and I knew a lot of brokers who were very concerned that they were providing a significant service. One of my concerns, and maybe you want to comment on it, is that it's very easy to be a cherry-picking business and provide a very narrow band of service in terms of providing property and casualty insurance, but are the banks ever going to provide the full service that the existing network of brokers and insurance companies provide? Can they be a de facto insurance company? Or in fact is the strategy all along simply, again, that if technology is going to make my branches more and more obsolete, I have to find something else to do in them, and what we're really trying to do is average down my overhead because it's getting larger relative to the face-to-face business we're doing?

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Mr. Jim Ball: I think you're correct. When we talk about these jobs, you really have to think about where these jobs are. They're in the community. Our offices are on main streets. We're one of the cohesive forces in holding a community together. If we disappear, as some other businesses have been forced to disappear because of big-box retailers and other kinds of trends that are occurring, what does that mean for our quality of life?

We say the trade-off isn't worth it, that those jobs that are lost— You know, I work in my community and live in my community; my employees work in my community and live in the community. We're talking in a bigger sense about our social fabric.

The banks are not interested in that. They're interested in profits. You can see their attitude towards those customers who don't generate revenue. They're forcing them to go to ATM machines, while they're setting up personal banking centres for those people with money, who can get special treatment and special— because they're the ones who are going to produce the income for them, and they'll do the same with insurance.

Mr. Rick Frost: Perhaps I might add to that. One of the other issues is that you have to keep in mind that we're advocates for the consumer. So when a claim goes wrong with the insurance company, we're the people who go in and bring leverage to the company to say “We have this volume of business with you; we don't agree. Let's take a different position. Perhaps there's an alternative solution to this.” In my own case, I've argued before the Supreme Court with insurance companies that had taken a position. As a result of that, I've lost an insurance contract.

I'd like to know what you are going to do when everybody is insured with the bank and the bank says, “I'm sorry, Jim Ball, that claim simply isn't covered.” Who would you go and argue with? Are you going to go argue when you have your business mortgage with them, and your boat and everything else? I don't think so. I think you're going to find that people are just going to go along with it, and I don't think that's in the public interest.

The Chairman: Thank you, Mr. Szabo.

Mr. Brison.

Mr. Scott Brison: When you were saying that the banks are in the middle of the road currently in terms of the pricing—and you were mentioning CIBC and Caisses Desjardins in Quebec—is it possible that all players have effectively lowered their prices somewhat? What has been the impact on the overall pricing structure of the industry of the bank entry?

Mr. Jim Ball: I personally don't think they've had an effect on the pricing, except for those people they want to insure. For example, in British Columbia, the Bank of Hong Kong has set up a subsidiary called Canadian Direct Insurance, and they're clearly only taking the best risks. They've structured their whole underwriting philosophy to take only the best risks, because they know that because we have government insurance, ICBC is required to take everybody else. That's the concern that ICBC has, that eventually if those insurance companies are allowed to continually only take the best risks, it's going to increase the prices for everybody else.

But, you see, they keep telling us—and I see it in the papers every day—that they're going to offer lower prices. To me, that means they're going to have the lowest price. Well, they don't. They price themselves so that they're in the middle of the market.

What they do is advertise and advertise. They can spend millions of dollars, like this Canadian Direct Insurance does, to advertise, get you to phone up, and then they go through their sell. If you're the kind of customer they want, then boy, you're going to get a better price; if you're not, then you have to go back to me or to the Insurance Corporation of British Columbia. And you're going to pay more eventually for that.

Mr. Scott Brison: But shouldn't the lower-risk customer get a better deal?

Mr. Jim Ball: He does now, but he does it in the context of spreading the risk fairly amongst all insurers. That's what insurance is. It's sharing risk. We just facilitate the sharing of risk.

So that means that the good risks have to share that risk with the bad risks, but the pricing is somewhat reflective of that. You get yourself into trouble when you don't price your product properly to account for the kind of risk you're assuming.

Mr. Scott Brison: The property and casualty companies certainly are fairly adept at pricing to ensure that they do quite well financially.

• 1710

I have a chart in front of me that compares the assets to the income for various types of financial institutions. In Canada chartered banks, for instance, have 69% of the total assets and 55% of the net income; trust companies have 2% of the assets and about 2.5% of the income; life insurance companies have 16% of the assets and 19% of the income; and property and casualty companies have 3% of the assets and 13% of the income. So it's a very lucrative area. There's nothing wrong with that, but I would suggest that there's greater flexibility in the pricing than perhaps is being delivered to the consumer at this juncture.

Mr. Jim Ball: I don't necessarily agree that general insurance companies make a lot of money. Most of them operate at what they call operating ratios of over 100%, which is based on the premium they charge you. For instance, if they charge you $1 for your insurance, in many cases they're actually paying out more than $1.

Where they make their money is on the investment income, and that to a great degree determines the profitability of an insurance company. They don't make it on their underwriting, because the industry is so competitive that most insurance companies can't make an underwriting profit. They have to rely on the investment side. They take your $100, but they only earn it $1 at a time every day. They have to keep the underwriting part in reserve and invest. We're concerned now that with the interest income decreasing, there's going to be more pressure on pricing, because when the rubber hits the road, that's when the investment income decreases to the point where it doesn't cover the underwriting losses. Our industry is so competitive that it's very hard to make an underwriting profit.

The Chairman: Mr. Frost.

Mr. Rick Frost: I would like to add to some of Jim's comments. I'd like to give you an idea of the competitiveness of the business we deal in. We don't just deal in home and auto insurance. I had one account last year, which was a first nations account, that involved a suspected arson fire followed by a total arson fire for about $250,000. After begging and pleading with 10 insurance companies, we finally got the risk put to bed for $75,000, which was a very competitive rate a year ago. This year, armed with one year's experience of no problems, we felt pretty confident that we'd retain the account. After scouring the entire marketplace, we had secured terms at $45,000. We received a phone call the next day during which we learned that four brokers had presented a quote on that particular account. We were the second lowest. But the account actually went for $30,000, and we lost it.

While I was here in Ottawa, I received a call from my assistant who told me that we lost at $5,000 an unprotected account where the rates have been consistent over the last three years at $7,000. That's the kind of competition we see.

Our fear is that if you start allowing huge banks to dominate in that kind of marketplace, we're going to see what we've seen recently, which is a lot of the insurance companies merging. I'll give you an example again. Last year there were ten markets where we were placing that particular risk. In the course of twelve months we're now down to five markets. We've had to go out and obtain another five.

We think that if you allow this recommendation to go through, in the long term we won't be able to do the kind of job we currently do for our clients. We're concerned that the banks will take the best risks and leave the less attractive risks to fall by the wayside, and they're going to have higher prices.

Thank you.

The Chairman: Are there any further questions, Mr. Brison?

Mr. Scott Brison: Is there any interest on the part of your membership or are you familiar with the recommendations that would improve the ease of entry for individuals or companies that seek access to the payment system by starting a new bank? Arguably, if you really want to reduce premiums, one of the ways is by pursuing different courses of business, and one of those businesses is banking. The MacKay task force has made it much easier for any of you, either individually or with your companies or groups, to enter banking effectively and to have full unfettered access to the payment system and chequing accounts. Basically, you can do anything they can do, with the added advantage, from a marketing perspective, of not being one of the big banks.

• 1715

Mr. Mike Toole: We would look at the disaggregation theory as a valid business strategy, in that case. We are specialists, and we really don't look at banking as being an alternative for us now. Maybe down the road it might be, but we're specialists, and you have to realize— and the task force recommended this in the report.

Banking is different from P and C. The property and casualty business is different. Basically, a broker will seek out risk and quantify it, and a bank will quantify risk and seek to avoid it. They're totally different. The property and casualty business is totally different from the banking industry, and that's why we basically specialize in the business that we're in.

Mr. Dan Tessier (Director, Public Affairs, Insurance Brokers Association of Canada): If I may, as a clarification on one point, the proposal that has been tabled by the MacKay task force affects the life insurance industry, and not the property and casualty insurance sector. I think we need to make that distinction. We do not deal with anything but property and casualty insurance, and that's reflected in the kinds of things these gentlemen do on a daily basis.

Mr. Scott Brison: However, those individuals or companies could enter the payment system by starting up a bank—yes, you can; that is in the MacKay task force.

Mr. Dan Tessier: I think you would find it very difficult for an insurance broker in Flin Flon, for example, or Halifax, to start a bank, when he works with his family out of a—

Mr. Scott Brison: But even on the issue of tied selling, if there's going to be, I would predict an unprecedented level of entry in banking, be it foreign banks or new banks, and the ability for banks to use coercive selling is going to be significantly reduced because, frankly, if somebody tries it on a customer, the customer can walk. A few years ago it was not possible for them to do that. I would argue that the market itself is going to a change.

Mr. Dan Tessier: If I may share with you a personal anecdote, this is an individual who's very close to me, and it so happens that he's a 78-year-old man and is illiterate. Last week he showed up at his local banking institution, not having had any credit cards his entire life, not having had any loans whatsoever his entire life, and was forced to walk away with a Visa card, an ATM card for the bank machines, and could no longer go to the front desk. I talked to him the next day, and he was recounting to me this story that had happened the day before. Well, I called the institution and said, “Did you know that this is, first of all, illegal? But not only is it illegal, it's immoral.”

So to suggest that it's not happening— as Mr. Thibaudeau elegantly expressed earlier today, those things go on, on a day-to-day basis. They are real, very real, and we cannot overlook that.

Mr. Scott Brison: That's why we need more competition, and you're right.

There's one last thing. On page 4 of your statement, you say:

The Task Force also suggests that lower insurance premiums may occur because new entrants are often able to enter the insurance market using lower-cost distribution channels. This position, though, is built on a false premise: there is no evidence anywhere that the distribution costs for an independent broker network are higher than those of banks selling insurance through their branches.

If that is in fact the case, you've nothing to worry about. If banks are not going to benefit from any economies of scale, and effectively you're saying you don't believe in economies of scale in that sense, why would you be concerned? They're going to be dealing with the same cost issues that you deal with.

Mr. Rick Frost: I guess we haven't perhaps made our point clear, that the concern isn't that you allow banks to retail insurance. They're allowed to retail insurance, and we've clearly stated that we have no objection to that. We've seen the 1992 changes working; they seem to be working fairly well.

The biggest criticism is where you have an institution that's able to tie the credit granting provision to the insurance, and I'd suggest to you that if I were going to provide a loan to somebody who's in need of the loan, the insurance cost would be a secondary issue. Perhaps not even from a coercive point of view— but it's very difficult in this country to regulate perception, and if the customer perceives he's going to have his boat loan approved more quickly by taking a few shortcuts and doing it that particular day, I think that's what's going to happen.

• 1720

So I don't think whether they can sell it for less by using the branch plant or not is really going to have any effect on it.

Mr. Scott Brison: The changes in the payment systems and the new banks and foreign banks effectively lead to greater competition among banks in their core area of business, such that they can't do that anyway.

Mr. Rick Frost: That could be.

Mr. Jim Ball: That's why we say go slowly; let's see how these things work out. We know the changes that were made in 1992 are working. Banks are in the insurance business. They're competing effectively. Let's have some competition for them now, and see how things turn out, and then make changes, but not make them just because they're clamouring to have this happen now.

The Chairman: Ms. Leung.

Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank you, Mr. Chairman.

I noticed two presenters from B.C., and I'm from B.C. Welcome.

I understand the insurance companies also go through a lot of mergers now. Now, you did stress that insurance companies are community-based, so if a merger occurs, I guess your perspective will naturally change. For instance, London Life has been bought over by Power Corporation, if I'm correct.

So I'm concerned about what difference it would make—your objectives and your services would change, and I'm sure your prices would too. Would that be totally different from what you described—serving the people in the community, etc.? If you are totally controlled by a big corporation, what is the difference between you and the banks?

Mr. Jim Ball: Don't forget we're not controlled by the insurance companies; we don't work for them. We're independent business people, as brokers. We represent you. We offer you choice and advocacy. Now, granted that choice may be reduced if the insurance companies see there's a need on their part to merge so that one or more of them have more than a 10% market share. That would just reduce the choice we have for you as a customer when we go to place your insurance.

And there are mergers taking place within our own operations as well. But at the same time, when we merge we don't leave the communities we're in, because we're dependent on those communities, and those customers, and the employees for everything we do.

So certainly the mergers of insurance companies will affect our ability to offer you choice, and they may affect some smaller, weaker brokers, but that is competition. They may not survive, but no community, certainly in B.C., will be without an insurance broker as long as we have a level playing field.

Ms. Sophia Leung: Thank you.

Also, I want to comment that in Vancouver, I have already received a couple of people from your profession, so I have some concept of it. It's nice to hear from you here.

The Chairman: Thank you.

Mr. Epp.

Mr. Ken Epp: You talked about the fact that the banks are going to undercut you, and then you enlarged on that and said what they're going to end up doing is take the low-risk customers and leave you with all the high-risk customers so that you're going to have to put up your premiums.

Now, isn't it the general practice in the insurance business that customers are rated based on the risk? Could it be that you are just overcharging low-risk people and that's why you would lose them to the banks, who are able to take them?

Mr. Jim Ball: I'm not sure I understand. Would you repeat that question for me?

Mr. Ken Epp: For example, I have a house. I don't have a hydrant right in front of my yard, so I have to pay more than a guy a couple of blocks down who has a hydrant in front of his yard, because it's deemed that I am at a higher risk for a greater loss. So I pay more.

You're saying the banks are going to steal away from you all of the low-risk people who generally represent a greater proportion of profit for you, because even though their premiums are somewhat lower, their pay-outs are a great deal lower. All I'm asking is if you are perhaps inadequate in your segregation of your risks, so that you should actually be competing with the banks and saying “Okay, you guys are going to give that insurance for $400 bucks. So are we.” You should be able to do it if it's a low risk.

• 1725

Mr. Jim Ball: Well, you're right. We don't set the rates; the insurance companies do, and they do have rates based on what they view the risk to be, so that if you're a low-risk customer you pay less. But they also insure people with higher risks, and our job in our communities is to make sure that everybody gets well served, not just a few who are low risk.

Our argument is that the whole concept of insurance, as I mentioned earlier, is to spread and share risk. And that means the good risks are put into a pool with the bad risks. Now, the bad risks pay more money. But risk is a very funny thing. You can be considered to be a low-risk customer and end up having a huge claim. So it's a matter of spreading risk, having everybody assume a portion of good and bad rather than just accepting only good.

Mr. Ken Epp: Okay. But what I would say is if the insurance companies were to do their division of their risks more precisely, then people in the low-risk area would have a premium that would reflect that, and people in the high-risk area would have a premium that reflects that, notwithstanding that in the long run, statistically speaking, you're going to have claims in both groups. Okay?

Are you telling me, then, that basically insurance companies set things up in such a way that low-risk people actually end up subsidizing the high-risk ones?

Mr. Jim Ball: No, but as my colleague Mr. Frost pointed out, anybody who wants to enter a market has to have lower prices if they're going to get customers. So even if you lose money initially— Most business start-ups know they're going to lose money initially because they have to have prices that are better than everybody else's, but after they get their market share or after they get more premium, those prices rise. That is all we're saying, that those prices will go up even if they're low now. Eventually they're going to have to adjust.

If an insurance company has been in business—like the Dominion of Canada, one of my insurance companies—for 150 years, they have some idea of what risk is and how to apportion and charge for risk. Because they are so big now, they're not interested in cutting their premiums in order to attract more markets, although sometimes that happens. Our job as a broker is that when that happens and it's in your favour, we'll put you there. We'll get you that better price, and if we don't, we won't keep you as a customer.

Mr. Rick Frost: If I may, Mr. Chairman, the point we're trying to make is that type of client that you're referring to we already have specifically rated. In fact, the Canadian system now is so sophisticated that if you gave me your postal code I could come up with a rate in about two minutes. What happens is that there's a rate for that particular risk that makes sense. So let's say that's $100. Because the bank wants to go in and gain a market share, it's quite happy to go in, as we've seen in British Columbia, and have an expense ratio right now of about 230%.

So what they do is, if it's supposed to be $100, sell it for $50 until they have enough of the base and then slowly they'll move that back up into the centre of the market. In that type of circumstance, our concern is that a lot of the smaller insurance companies over the long term won't be able to compete with the deep pockets that the banks have. It's as simple as that.

Mr. Ken Epp: So you're saying that the banks simply have an advantage over everyone else because of their huge capital pool.

Mr. Rick Frost: Exactly.

Mr. Ken Epp: Okay. Thank you.

The Chairman: Thank you very much. On behalf of the committee, I'd like to express to you our sincerest gratitude for your interventions. They are quite helpful as we decide how to design Canada's future financial services sector.

We're going to suspend for five minutes and we'll be back.

• 1729

• 1739

The Chairman: I call the meeting to order. I'd like to welcome the representatives from l'Association des intermédiaires en assurance de personnes du Québec: the president, Alain Poirier and acting general director Anne-Marie Beaudoin. Also, from the Independent Life Insurance Brokers we have Jim Bullock, past president, and Pat Chamberlain, president. Welcome to you all.

We will begin with l'Association des intermédiaires en assurance de personnes du Québec. Welcome.

[Translation]

Mr. Alain Poirier (President, Association des intermédiaires en assurance de personnes du Québec): Ladies and gentlemen, the Association des intermédiaires en assurance de personnes du Québec represents 13,000 life and health insurance agents and brokers in Quebec. They are incorporated under the laws of Quebec to protect the public in its dealings with personal insurance brokers. We carry out our tasks by developing the professionalism of our members and by ensuring compliance with a strict code of ethics.

• 1740

I am pleased to give you our reactions to the Task Force report. I will limit my comments to the highlights of our response, in view of the time constraints and because we will submit a more complete document to you when you come to Montreal in three weeks.

We looked at the report from two points of view. First, we compared it with the brief that the AIAPQ submitted to the task force in the fall of 1997. Second, we assessed it in the context of the recent passage in Quebec of a bill on the distribution of financial products and services.

Our earlier brief referred only to the aspects of the Task Force's mandate that related to consumer protection. That is why we recommended maintaining the prohibition on bank branches selling insurance unless consumers received the same level of protection that they currently have, regardless of where they choose to buy insurance.

In Quebec, the final version of Bill 188, an Act on Distribution of Financial Products and Services, which contained a number of improvements on the original draft, specifically with regard to bancassurance, should ensure that freedom in the marketplace not diminish consumer protection, nor harm the brokers and agents.

Therefore, we remain cautious with respect to the main recommendation of the MacKay Report, which is that bank branches be allowed to sell insurance. The consumer protection mechanisms, which represent an essential complement to this new power being given to the banks, seems to us, at times, insufficient.

The report contains a number of recommendations which, were they clarified and strengthened, might partially meet our concerns.

For example, recommendation 19 would oblige employees in deposit-taking institutions who sell insurance to fulfil the same educational and licensing requirements, and to respect the same code of conduct as the agents and brokers operating in Quebec. Therefore consumers would benefit from the same protection; in our opinion, this is critical.

In so doing, the report shows some respect for provincial jurisdiction. However, our satisfaction is somewhat diminished when we read the passages dealing with provincial requirements that are ostensibly discriminatory, such as the provincial residency requirement. We will discuss this in greater detail in our brief.

Recommendation 65(c), which requires the explicit consent of clients to gather, use and disclose personal information is also a step in the right direction, even though it is less than we recommended.

Recommendation 67(a) prevents an employee of a financial institution from both selling insurance and granting loans at the same time; we think this is a particularly important protection.

The report contains a number of measures to prevent coercive tied selling, including the requirement that consumers be informed of this ban, and this is a provision that we recommended. However, the definition of coercion is vague. Therefore, it will make it possible for a financial institution to offer a mortgage with integrated mortgage insurance, so that the consumer does not have the choice of buying such insurance elsewhere. We believe this practice is coercive. This issue will have to be clarified.

As for the requirement to disclose fees, commissions, and other remuneration, we agree with the objective of transparency, but, in practice, we do not see how such a recommendation will be implemented.

As you will have understood from listening to our comments, we believe the MacKay report has some positive aspects for consumers. But we wish to point out that these positive points will depend largely on clarification and tightening up by the legislator.

In the coming weeks, the AIAPQ will continue to contribute to the discussions on this subject by taking the proposals to tighten the recommendations so that the approaches outlined in the report can be successfully implemented.

Thank you.

The Chairman: Thank you, Mr. Poirier.

[English]

Now we'll hear from the Independent Life Insurance Brokers of Canada. Who will begin? Pat Chamberlain, followed by Jim Bullock.

• 1745

Ms. Pat Chamberlain (President, Independent Life Insurance Brokers of Canada): I'd like to thank you for the opportunity to address this committee this afternoon.

Our association is a national association of independent—and I stress the word “independent”—life insurance brokers. One of the key issues of our association is that a broker must always act in the best interest of the consumer. He cannot be tied to representing any specific insurance company either by contract or by any other means.

We have a number of concerns with this report. I think most of them revolve around the same issues that our previous people spoke about this afternoon regarding banks and their selling.

At this point I'm going to turn it over to Jim.

Mr. Jim Bullock (Past President, Independent Life Insurance Brokers of Canada): Thank you.

Before I discuss our concern about banks, I'd like to explain that when we were invited here it was by telephone call and it was described as a round-table discussion with five other groups of like mind. There was no mention of standing committee participation. Three days ago I got a fax asking if we would be giving the standing committee any documentation in this meeting. That's when the penny dropped.

Are you coming to Toronto?

The Chairman: Yes.

Mr. Jim Bullock: We would love to be able to come prepared to talk to the standing committee. Unfortunately we're here to have a round-table discussion with our colleagues. Something has gone wrong in the invitation process. I don't know who was doing it or how they were doing i,t but there was no mention or understanding about the MacKay report or standing committee when we were invited.

Notwithstanding, having listened to what our colleagues were talking about, we believe we can add something to your discussion today.

The Chairman: We of course look forward to your comments. I must apologize for any inconvenience that may have created.

Mr. Jim Bullock: The marketplace for consumers works on competition based on service and price. I don't think there's a consumer out there who doesn't pay attention to price. The market is fairly effective in those terms. That's why certain organizations that come along with new marketing techniques that give better value or better service do well. That's why some that don't do that fail. That's the nature of the market. The one exception to how the market can work is when somebody can add coercion into the mix, and that's what we're worried about.

I'd like to share with you some of the information I receive in my job. I receive phone calls from brokers across Canada daily on a variety of issues, and I would estimate at least once a week some broker is calling to complain. The complaint goes something like this. His client has called him to apologize that he's going to move his RRSP, move his mutual funds, move his group insurance, or move his life insurance to a bank. The client is apologizing to the broker, and he tells him, “There's nothing wrong with your price; there's nothing wrong with your service. I don't want to get your nose out of joint, but I've got to do it because this is what the bank wants.” That's coercion, and it upsets the apple cart.

Occasionally we get documentation. Occasionally we get it in writing from a bank that the insurance must be bought with them. Usually the bankers are a little smarter than that and the pitch goes something like this. You are applying for a mortgage and the banker says “Well, of course you'll be insuring with us, right?” Very few consumers could say “No way”; they say “Of course”. That's a pre-emptive strike, and they get the business right off the bat.

The businessman goes in to talk about the line of credit for his business. Now, you're talking about a fairly large customer both corporately and personally. The line that I hear being quoted back to me through the customers is something like “I see your group insurance is with XYZ. You don't trust us?” Now, remember, he is in there to review his line of credit. What's he supposed to say? Or a consumer talking about a loan, maybe for a car or a house, will hear, “Well, maybe we would have more trust in you if you had more trust in us.” “What do you mean?” “Well, you don't trust us with your mutual fund business.”

• 1750

This is why our brokers are getting phone calls from consumers saying they are moving to the bank, not because they want to but because they have to.

Our concern with your proposed anti-tied-selling legislation, which is marvellous, is that a law against overt tied selling is fine, but it won't accomplish much because where we are seeing the pressure being applied is through coercion, not overt tied selling, and it has to do with the credit.

I sympathize with the bank that credit granting is a privilege. They shouldn't be forced to lend money to anybody under any circumstance. They should have the right to determine who qualifies and who doesn't in the normal course of events. The minute they start asking questions about where your RRSP is, where your mutual funds are, where did you buy your insurance, that sends a clear signal to the person applying for the loan: “Gee, I wish I'd bought it here.” That's coercion.

We have seen only two possible methods of preventing that kind of coercion. As legislators, perhaps you can figure out a way to word it. The two methods that occurred to us are, one, do not permit the selling of insurance of any kind at the retail branch level. If the bank wants to buy or create an insurance company and compete with the rest of us on price and service, fine. As independent brokers, we know darn well there is never going to be a bank teller who can compete with us in service. We are not worried about it.

The other way of preventing it is to have a rule that a bank can sell insurance or lend money to a customer but not both. That means that if I'm applying for a loan at the TD Bank and they think I need more insurance, they can recommend I need more insurance, but I'll have to go somewhere else for it. But the minute the man lending me money thinks I need more insurance and he's selling it, you know what is going to happen.

Thank you.

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

We will now have a question and answer session. We will begin with Mr. Epp.

Mr. Ken Epp: Thank you. I want to thank you both for your presentations.

I also want to begin with an apology. When I was a kid growing up in the west, I did not learn French because I loved math and science. I took every option I could in that area and I never learned French as a second language. There was no one for miles around who spoke the language. So my apologies for not knowing that language. I feel now that I'm much too old to start learning it, and I am totally dependent on the good work of our interpreters, whose work I appreciate immensely.

I would like to ask a question of our friend, Mr. Poirier. You indicated something about a requirement to have residence in a certain province. I didn't quite understand that. Is that something that you saw recommended in the MacKay commission, or is it something that is presently in legislation? What are the implications of that? What is your recommendation?

[Translation]

Ms. Anne-Marie Beaudoin (Acting Director General, Association des intermédiaires en assurance de personnes du Québec): It is a pleasure to answer your question. We read that the MacKay Report is questioning the need for institutions to be present to practice within a province. These residency requirements are described as being discriminatory. At the present time, the legislation on brokers and agents requires the business to be located in Quebec. When Bill 188 was passed, the same requirement was maintained. In our point of view, which is the point of view of market regulators or supervisors, this requirement is essential if we are to inspect and supervise the practice of people who are working in Quebec or in any other province.

• 1755

If the supervising agency, which is provincially constituted, does not have access to practitioners or their files, it will not be able to fulfil its function or to check on the quality of services being provided to the public. By the same token, if there is no agency in the province, the client will not be able to have access to their files.

We know that in the insurance field, client files are very important and contain confidential information. Furthermore, since insurance selling and privacy are matters of provincial jurisdiction, it is essential that the organization supervising compliance with the regulations and the quality of practice be able to check the agency files. Therefore we believe that the best way for us to fulfil our role is by having agencies within the province.

[English]

Mr. Ken Epp: What you are saying then is that you would not want to have virtual banks, those that operate without any brick and mortar, in your actual cities. You wouldn't want to have an insurance company operating in Quebec whose headquarters and whose sole offices were outside the province. Is that what you're saying?

[Translation]

Ms. Anne-Marie Beaudoin: It is the current laws in Quebec and not us that require an agency to be established in Quebec. It is important to understand that the head office is not required to be in Quebec, but merely that there be a place of business where files are kept. We do not view this as being discriminatory, but feel that it helps us to perform our role.

Mr. Alain Poirier: We have to make a distinction here. We are talking about distribution through an agent or a broker, that is, someone who sells an insurance product, an we presume that this person practises somewhere. If that's in the province, that's where they are. When we talk about a virtual bank or the direct marketing of insurance products, that's something else. It is no longer an individual distributing a product, but an insurance company or a financial institution that does direct marketing. In this case, different rules apply.

[English]

Mr. Ken Epp: This is quite far from your particular set of interests, but yesterday we had some presentations from foreign banks. I believe all of them were from the United States. For example, the Wells Fargo Bank operates entirely out of the States, and in fact is required to do so by Canadian regulation. They may only mail their statements from the States. They may not use the Canadian post office. They may not have people answering telephones who live in Canada. This seems to me rather bizarre, but that was what we were told was a requirement. I'm sure you would say absolutely no to that in your province. Am I correct in that?

[Translation]

Ms. Anne-Marie Beaudoin: It is not only the banks that would sell insurance. A bank always needs someone to conduct the transaction, to telephone and communicate with clients. We believe that the people who do this should be governed by an institution in Quebec. Regardless of the nature of the institution, be it a bank, an insurance company, a trust company or a securities broker, if someone decides to sell insurance, they must comply with the provincial regulations and there must be an agency that can intervene in cases of failure to comply.

[English]

Mr. Ken Epp: Okay. Thank you very much.

I'd like to shift my attention to the other witnesses, if I may.

It's very interesting that you drew such a strong conclusion with respect to banks selling insurance. I think you're probably the first witness who said you wouldn't mind having a bank sell insurance, as long as they were not permitted to sell it to the very same person to whom they're also extending credit or giving a loan. In other words, you would force them to totally avoid even a temptation of tied selling.

• 1800

I'm just going to ask you a question with respect to the consumer, because it seems to me that— Well, first of all, I want to say I agree with you that tied selling can be a problem.

I remember not long ago I had to buy a new vacuum pump for my Chevy Suburban diesel. The diaphragm was broken, which cost $2, but I was required by General Motors to do some tied buying. I had to buy the whole assembly, with the bearings and the gear at the bottom, for $150. To me that's coercive tied selling, which is not acceptable. But in most cases if you have a package deal, you get a better buy.

Again, I look at the example of buying a vehicle. If you buy all of the accessories individually, they come to $8,000, but if you buy accessory package 23, it comes in at $6,000. So by buying the whole package you get a better deal.

In this particular instance, if banks could also sell insurance—same set of books, no requirement to take another set of information from the client, so they can therefore do it more efficiently and it boils down to less cost for the consumer—is that not giving more choice and a more competitive price to the consumer? Wouldn't it be good for the consumer to have that?

Mr. Jim Bullock: If that could be done without using coercion to avoid having to give a better deal. What you're talking about is competition in the marketplace, and as I said, we're comfortable with competition in the marketplace.

Given your example of the possibility of saying to your bank that you can lend money or sell insurance but not both— I have a package with my bank, $17 a month, and this packages does everything except make coffee for me every morning. If they want to throw in a heck of a deal for my house and car insurance, God bless them. There's no credit involved in that package.

My problem is—and you are all obviously independently wealthy so you don't have these problems—when I sit down in front of my bank manager and he cocks the pistol and puts it to my head and says “Now, about your insurance”, I'm at a disadvantage.

I don't know how to say this politely, so I won't: I don't trust the banks, and the reason I don't trust the banks is from what I hear daily. In fact, one of the banks has obviously trained its bank managers in how to coerce insurance sales, because coast to coast the guys are calling me and complaining. They're quoting the same line the bank manager is reported to have used. That's no coincidence. They've been taught how to do it. The line the bank managers are using, by the way, is “We would trust you if you trusted us.” It has to do with the fact that the customer isn't trusting them with their mutual fund business.

Given the way they're playing the game, I don't trust them. Coercion is too easy. It's a subtlety, and how you legislate against subtlety, I don't know.

One of the previous witnesses said “I don't know how you legislate against perception.” He's right. That's your problem.

The only suggestion we can make is, with respect to a given customer, they can do everything except lend money or sell insurance, but not both.

Mr. Ken Epp: I guess it underlines the verse from the Scriptures that says the borrower is a slave to the lender. I guess anyone who is obligated to go to the banks in order to get money for whatever—most of us have mortgages on houses and things like that—as soon as that happens, that borrower, unfortunately, becomes a slave. I guess what you're saying is let's at least take one of the whips away.

Mr. Jim Bullock: The gentleman sitting here, who I assume is Mr. Brison, was talking about competition in the marketplace. The key word to remember here when it comes to borrowing money is that you “apply” for a loan. Most of us don't feel the bank is going to beat a path to our door to compete for our business. You also apply for insurance. It's a privilege.

• 1805

Along the lines of why we don't trust the banks, here's another example of something that was done coast to coast. It has to do with the sale of mutual funds. The problem is analogous to the sale of insurance. This document lists the mutual funds of the bank and how they've done over the last few months. It lists some other well-known mutual funds. It shows that their bank has outperformed the Templeton Fund, the Trimark Fund, and the Fidelity Fund. That type of advertising is illegal in the securities industry. In the securities industry, if you want to say you did 15% and compare it to somebody, compare it to everybody. You don't show that you're number one, that you're ahead of 20 other people, and then show the 30 that are above you. That's called deceptive advertising. It's not allowed.

What this bank did coast to coast—because I got the complaints coast to coast—is they printed them up and put them on the teller's counter just inside the window. It wasn't in the public area. Customers standing at the teller's window, for whatever reason, would take them and read them and see that the Scotia Fund was doing better than these other funds. When the securities industry went against the bank and said, “Hey, this is illegal”, they said “That was an internal document. We never circulated them.” How did they show up coast to coast on those counters? It was no accident. If it happened at one branch, I would say some branch manager should be disciplined for what he did. He should know better. But it was national policy.

We don't trust the banks, sir.

Mr. Ken Epp: Thank you, Mr. Chairman.

The Chairman: Mr. Loubier.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Mr. Poirier or Ms. Beaudoin, I would like to get back to Mr. Epp's question, because I think it is important. I may have missed it in reading the MacKay Report, but if I have clearly understood the Quebec government's requirement, while upholding its jurisdiction—we are clearly the advocates of provincial jurisdiction—aims to ensure that consumers receive high-quality services, that professional services comply with a demanding code of ethics and that we can check whether consumers are being well served. This is the basis of the requirement.

Mr. Alain Poirier: There are two or three levels, according to the product. For example, in the case of direct marketing of a product or distribution without a representative, the companies and financial institutions will be obliged to prepare what we are calling a distribution guide, that will have to be approved, so that the consumer who wants to buy the product knows what is involved, and also to make sure that it is comprehensible. There are many other points.

As for the distribution by representatives, the powers invested in the Chambre de la sécurité financière, which are discipline, supervision and mandatory training of members, are intended to ensure that regardless of where a person sells an insurance product, he or she will be subject to the same rules as all other sellers. The consumer will not have to worry and wonder whether he is being protected when he makes a transaction. As soon as a person sells an insurance product, be it a representative of the Mouvement des caisses Desjardins or a bank, he or she will be subject to the same rules.

Mr. Yvan Loubier: Do you know whether the residency requirement exists in the other provinces?

Ms. Anne-Marie Beaudoin: I believe it exists in some jurisdictions, but I cannot name them. This requirement is not unique to Quebec. It is always necessary that there be a representative or an office where one can go and send investigators. You have to understand that our jurisdiction ends at our borders. We can only send investigators to offices in Quebec. As soon as someone crosses the provincial borders, we can no longer intervene.

Mr. Yvan Loubier: In the second paragraph of page 2 of your brief, one of your statements caught my attention. You say:

—market freedom cannot diminish consumer protection nor harm the brokers and agents.

• 1810

You are referring here to Bill 188. Since the beginning of our hearings on the MacKay Report, a number of witnesses, including some who supported bank insurance as proposed by MacKay, have referred to Quebec's Bill 188 and said that the Mouvement des caisses Desjardins could already provide that. This statement goes quite contrary to what we heard two or two and a half years ago concerning the advisability of Canadian banks selling insurance. Now, you seem to be relatively satisfied with the framework proposed by Bill 188 and the consequences for brokers.

Mr. Alain Poirier: Our point of view is expressed with caution. We know that the bill was passed on June 20, 1998, but the regulations have not yet been implemented. There is many a slip between cup and lip. We still do not know how this will work out. We are referring specifically to the Mouvement des caisses Desjardins, which is under the exclusive jurisdiction of Quebec. We will see how this works out in the deposit-taking institutions.

We are more pleased with the bill than we were with the first draft, which proposed eliminating any professional status for sellers and giving broad powers to deposit-taking institutions to sell these products. Consumers were somewhat left on their own in that scenario. However, at the present time, we are satisfied that the people who will be selling insurance products, regardless of the network they use, will be subject to the same jurisdiction and governed by the same rules. They will report to the same institution, and that is very important.

Mr. Yvan Loubier: If the regulations comply with the spirit and letter of the bill, you will be satisfied. Therefore, the promoters of bancassurance are on shaky ground, on the basis of what is proposed by the MacKay Report, when they argue that it would be good because it is already happening in Quebec. There is no possible comparison between the two.

Ms. Anne-Marie Beaudoin: But the bill is not in effect yet, and it will not be before the next 12 months.

Mr. Yvan Loubier: Yes, but Ms. Beaudoin, the guidelines that are on the table, following your very effective representations, will allow you to develop as insurance agents and brokers without sustaining too much harm—there will be reasonable, fair competition for all parties. That is what I understood from your presentation.

Ms. Anne-Marie Beaudoin: Bill 188 sets the same rules for everyone. That was one of the themes of our campaign, particularly in light of our public protection mandate, even though we represent 14,000 life and health insurance agents and brokers, our mandate was laid down by the National Assembly, and it is to provide a framework for public protection.

We are a quasi-professional order. We would fear liberalization if it were to result in a step backwards for the profession or harm to consumers, particularly as regards the protection of confidential information. In June, we presented a number of amendments designed to tighten up the practices of firms set up in the deposit-taking institutions in the future. Their objective was to try to provide better public protection in the areas of confidential information, tied selling and so on.

Mr. Yvan Loubier: On page 2 of your brief, you say that you remain "cautious with respect to key recommendations of the MacKay Report which would authorize the sale of insurance in bank branches". The term "cautious" is rather at odds with the virulence you demonstrated in the past.

If there are not more rules and regulations to ensure fairness and consumer protection as a result of the MacKay Report, will your caution be transformed into the type of virulent opposition we have seen from you in the past? Or will you be more moderate this time if the Minister of Finance decides to allow banks to sell insurance over the counter, as provided for in the initial bill three years ago?

Mr. Alain Poirier: It's the word "virulent" that is making me smile a little. We can be virulent at times.

• 1815

During the debate on the bill in Quebec, this product was referred to as “caissassurance” rather than “bancassurance”. We also used an expression very similar to “over the counter”. The fact that a deposit-taking institution, which was the Mouvement des caisses Desjardins at the time, can distribute insurance without any consumer protection rules—

Talking about personal information is always sensitive, but this is particularly true of medical information. It is easy to imagine how this information can be used by the people who have it. Take the example of an SME owner with a $200,000 line of credit. Let's assume that he applies for insurance, and that the deposit- taking institution sees that the gentleman is not in very good health and decides to withdraw his line of credit. Things like that could happen.

We have come quite a long way. The Quebec government has acknowledged that agents and brokers do a useful job and has decided that they provide some protection for consumers. The government has also introduced other consumer protection rules that apply to institutions. There are, as it were, two levels of consumer protection, depending on where the transaction takes place. Often, consumers can enjoy the benefits of the two levels of protection.

Ms. Anne-Marie Beaudoin: I would like to add that there is always an extra level of difficulty in the case of financial institutions that come under the federal government's jurisdiction because they might challenge the jurisdiction of an organization such as ours or a bill such as Bill 188. I would not want us to start investigating here whether that is good or not.

All I'm saying is that for the provincial legislator, there's certainly more security in overseeing a provincial institution that comes under provincial legislation, rather than a federal institution. There were challenges, particularly during the hearings that preceded Bill 188 at that time, the Canadian Bankers Association came and explained that its members complied with Bill 68 on the protection of personal information in the private sector as good corporate citizens, but that they did not feel bound by it.

With this type of introduction, you will really appreciate the fears that remain regarding a liberalization of insurance sale under federal legislation. There's also some fear about respect for provincial jurisdiction and the monitoring body. I should not be more critical of banks than of insurance companies because we do deal with the latter, but when we do business with insurance companies whose head office is in Canada, we still have to tell them who we are, what we do, what our role and duties are, and this is after nine years. It is not easy to get information for the surveys we do. So the banks are not the only ones at fault. As soon as we do business outside our province, we have more trouble getting recognition for our jurisdiction. This is always an additional factor that comes into play.

The Chairman: Thank you, Ms. Beaudoin.

[English]

Mrs. Redman.

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

I appreciate the fact that you weren't as aware as you could have been that you were coming to talk on the MacKay task force. However, it seems to me that we've had representatives from your sector earlier, talking about the fact that it seems quite a short, straight line with coercive tied selling—that is, if you keep the banks out of selling insurance, we will somehow address that situation. I think some of the MacKay recommendations do provide the kind of protection that I would like to see for the empowered, knowledgeable consumer to make choices.

So what I really would like you to address is the fact that it seems to me that insurance people feel it doesn't happen in their sector but it does happen in banks, and potentially could happen more often in banks if they're allowed to sell insurance.

We had hearings all last spring on tied selling, and there wasn't a witness who came before us who didn't acknowledge it was something that should not happen. We never heard one banker come forward and say it's good for the consumer; it's good for business.

It strikes me that some of the recommendations in the MacKay task force do deal with the fact that we would look at consumer protection on a very broad basis, looking at it as a financial consumer, whether it was a bank, or an insurance company, or a trust company. It seems to me that if I was in desperate need of getting insurance, if I had a medical problem, there could be the occasion when there was potential, because of my need, to get the insurance.

• 1820

We heard from property and casualty people earlier. I used to represent a downtown area in Kitchener that had a lot of fires. Consumers in this area were what was called red-circled, and it was impossible for them to get insurance. I know they searched high and low, and ended up paying really exorbitant prices.

So it seems to me, from the consumer's angle, that—whether or not it's exactly the same as the course of tied selling that we traditionally have been looking at in a bank—there are other areas in the financial sector where this can happen. It doesn't seem a short, straight line, as you're saying it is.

Ms. Pat Chamberlain: I'll address that issue briefly, and then I'll let Jim comment.

I'm not going to deal with property and casualty insurance, because that's not my specialty. I will deal with the subject of life insurance.

When a client makes an application for a life insurance policy, two things are taken into consideration: financial necessities for the contract; and the underwriting, his medical condition. If a client is a standard issue and there's no medical issue with his health at all, then there isn't an insurance company in Canada that won't underwrite him. If he has a medical condition, one of the jobs of the broker is to shop the marketplace for this client and find the insurance company that has the greatest expertise in underwriting this client's particular medical condition, which will allow them to offer a competitive price. There are companies that have developed expertise in particular areas, and there are companies that don't want to underwrite those because they don't have the expertise.

An insurance company is not in a position to have any power over any other transaction done by that client. They're not in the position to be granting them credit to run their business, or own a home, or stay viable. I don't see how they could have any course of power whatsoever, not based on my 28 years in this industry.

Mr. Jim Bullock: We insurance brokers are licensed. In order to get a license we must have a sole occupation in financial services. The law specifically prohibits us from having any kind of occupation that might give us a coercive opportunity, such as parole officer or police officer. There are a number of occupations where there's seen to be a built-in conflict of interest. So those occupations where we might have a coercive influence we're prohibited from by having a license. That's why it doesn't tend to be a problem in our industry.

You used a phrase that caused me to smile; you referred to the informed and empowered consumer. You alluded that during your hearings there weren't a heck of a lot of cases brought forward about abusive selling practices. I sit in a job where I get calls all the time from my brokers complaining about how they just lost another piece of business and the consumer complained, and my phrase is always the same: get it in writing. And the call comes back, “He won't say anything against his bank.” So much for our informed and empowered consumer.

Mrs. Karen Redman: Just to clarify, it's not that there wasn't anecdotal evidence. The witnesses, the bankers who were here, were agreeing that coercive tied selling is a bad thing and should not happen. So when I used the reference to witnesses, it was to people in the banking business who came forward.

Ms. Pat Chamberlain: We have lots of evidence that it is happening everyday.

Mrs. Karen Redman: The banks will tell us they only had four cases, and we dealt with one documented case. It may get back to what you're saying— But if we're looking at how we're going to shape financial services for the Canadian public in the future, wouldn't it be a good thing for the consumer to put in more protections in any sector of financial services?

Mr. Jim Bullock: Protection is good. The concern I have is that you're federal, you clearly are responsible for banks; and the sale of insurance is provincial. I'm concerned that something either could be or is getting lost here between the jurisdictions.

• 1825

I deal with provincial authorities coast to coast in the insurance regulation business. They certainly don't feel that they're in business to regulate the banks and what the banks are doing. When the bank manager is selling insurance within his branch right now—which he can, which is group insurance—that seems to be an example of something that falls between the cracks.

Since you're drafting banking legislation and coercive selling legislation, it's a chance to pick it up either by, for example, defining that banks can't sell insurance in the branches— That will solve that one. As a broker, I'm not concerned about some bank creating their own insurance company and selling insurance. Let them compete on price; let them compete on service. As a broker, I'm not particularly concerned about that. But the minute that bank gets hold of lending information, and lending gets mixed into the pot, I can't compete.

Mrs. Karen Redman: Thank you.

The Chairman: If I could take that to a sort of logical conclusion, you're referring just to insurance right now, right?

Mr. Jim Bullock: I'm sorry?

The Chairman: You're referring to insurance, in the sense that they should not be allowed to sell insurance because you think coercive tied selling may take place.

Mr. Jim Bullock: In the branch.

The Chairman: Does that apply to other products, then, that they may sell now? Should we be taking away their right to sell other products that may be part of tied selling packages?

Mr. Jim Bullock: Well, I'm showing you a document where I'm told by my colleagues in the securities industry that the advertising they're doing is clearly prohibited in the securities industry. In that case, that ad shows a willingness to get cute with the law.

I don't like generalities, but in dealing with my colleagues, I find they have a pretty good idea of what the rules are in the way they do business, and they haven't had enough confidence, probably, to figure out how to get cute to break the rules.

In watching what the banks do—and I realize that maybe this is going to be written down, so this won't translate—but if these are the rules, the banks seem to hire lawyers to figure how to do that, to get in past them. It's pretty hard to compete on that basis.

A number of the complaints I get from my members specifically talk about investments being switched to the bank as collateral for loans. What we always comment on is usually RSP money, which is specifically prohibited being taken as collateral, and the bank is saying, well, we'd be more comfortable if the money were here. That's coercive, flat-out coercive selling, and I wish I could get these consumers to come here and testify, but they won't take on a bank.

The Chairman: Thank you, Ms. Redman.

Ms. Bennett.

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

Could you explain to me the difference between the Canadian Association of Insurance and Financial Advisors, the Insurance Brokers Association of Canada, and your own group?

Mr. Jim Bullock: The previous organization that you mentioned, the other one, is very involved working with agents who represent a single company. We call them exclusive agents. The agent who represents Allstate, for example, represents Allstate and nobody else. Our members have to sign an agreement that they are not exclusive agents; they are brokers, they represent multi-companies. That's the single biggest difference.

Ms. Pat Chamberlain: And the difference between us and the Insurance Brokers Association is that they are a property and casualty association. We do not do property and casualty business. Most of our members do life insurance, mutual funds, securities.

Ms. Carolyn Bennett: Do the insurance brokers do life insurance as well?

Ms. Pat Chamberlain: No, they do not. Well, they may do it, but it doesn't fall under the control of that association. That association only deals with property and casualty issues.

One of the things that has become very obvious to us in the financial services industry is that many people hold more than one licence. If you attend one of our meetings, you will find that 95% of the people in the room carry more than one licence; they will have a life insurance licence, a mutual funds licence, and a property and casualty licence. But the Insurance Brokers Association of Canada only deals with property and casualty issues. Our association doesn't deal with property and casualty issues at all.

• 1830

Ms. Carolyn Bennett: Is there ever coercive selling among the three hats these people wear?

Ms. Pat Chamberlain: How can there be? I don't see how there can be, because of the way the market operates and because of the fact that they have no instrument to enable them to do any coercive selling. They don't have credit-granting privileges or anything that will empower them to say that if you want to do this, you must do this with me.

Ms. Carolyn Bennett: So you can't ask, if they were selling mutual funds, to bring those over to you in order for you to get life insurance?

Ms. Pat Chamberlain: We may ask for the business every day. As good financial professionals, that's our job. But we have no vehicle with which to insist they have to do it.

Ms. Carolyn Bennett: Okay.

Ms. Pat Chamberlain: Am I answering your question?

Ms. Carolyn Bennett: I think so. Can you deny the insurance? Life insurance is very important to people, right?

Ms. Pat Chamberlain: It is. But you have to understand, please, that we don't grant the insurance. We are brokers. We bring the risks to the various insurance companies. Yes, an insurance company can refuse to take a risk, but that risk is not dependent on any other form of risk a consumer may need to purchase.

Ms. Carolyn Bennett: Okay, thank you.

I would just like to ask about the experience in Quebec. I know you've already dealt with it a little bit in terms of the caisses populaires selling insurance. Could you describe whether you feel that's a good or bad thing, or what the impact on consumers has been?

[Translation]

Mr. Alain Poirier: There are two points to consider. The caisses populaires of Quebec are not selling life insurance at the moment, but rather property and casualty insurance, which they have been entitled to sell since 1989. Selling life insurance will come in the next stage, once the regulations set out in the legislation are in force. It is difficult for us to say whether this is a good or bad thing. Had I drafted the bill, I would probably be the only person selling insurance in my town, and I would tell you that it's a good bill, but unfortunately, that is not the case. Only time will tell whether the consumer protection rules introduced are working, and to what extent. In my view, they should go as far as possible in ensuring that consumers are not pressured and do not feel their rights are violated every time they go to make a transaction. That is somewhat difficult to achieve.

Earlier, your colleague was asking questions about tied selling and other similar matters. I've been working in insurance for 12 years, particularly in commercial insurance and insurance for partnerships, and I deal with business people, who are not among the least-informed consumers.

In 12 years, I have never insured any loan or line of credit provided by a bank. I have made many submissions and provided a lot of figures. It has now become almost a joke to talk about it. I laugh when I tell clients that I will offer them a rate 20% lower than the bank, but clients inevitably tell me that they feel somewhat obligated to their banker. I have not managed even once to sell such clients insurance. The day I do, I may have to retire, because I will be very old. There is no obvious business connection with these people. We have to put ourselves in their shoes. Take the example of the head of a company or an SME who needs a $200,000 line of credit to operate his or her business. Whether the insurance costs 10 or 15% or more, the bottom line is that these people do not need insurance—what they need is the money to run their business. So you will appreciate that it is not easy to determine how far we can go.

[English]

Ms. Carolyn Bennett: In the MacKay report they talk about how it shouldn't be the same personnel doing both things, the credit job and the insurance job, and how there would have to be provisions within each branch to make sure people didn't know those two things. Do you think that is working in the case of the caisses populaires? Do you think it is always two different people looking after these things, with total privacy and confidentiality on those issues?

• 1835

[Translation]

Mr. Alain Poirier: The objective of the Quebec legislation is to ensure that there are two different people dealing with the two types of transactions and the two types of information. We would not want medical information to turn up in a client's credit file, for example. We need a sort of wall between the two types of information. We have not yet achieved that, but that is how we assume it should work. The great challenge is to determine how to draft rules to prevent certain situations. It is not that easy.

Ms. Anne-Marie Beaudoin: I would like to mention that at the moment property and casualty insurance transactions are done through an intermediary of a particular subsidiary, which is an insurance corporation. People who work in caisses populaires and sell insurance are not employers of these institutions, but rather duly qualified insurance agents, who come under the jurisdiction of certain organizations as do other insurance agents.

As Mr. Bullock was saying, the deposit-taking institution known as the Mouvement des caisses Desjardins has established a subsidiary that sells insurance and that subsidiary has agents. That is what is being done at the moment. The chairman of our association was speaking about the provisions set out in Bill 188.

[English]

Ms. Carolyn Bennett: You said your association is in the business of protecting the public. In the event of a problem with privacy or tied selling, what do you do, and what do you do if the agent moves to Ontario?

[Translation]

Ms. Anne-Marie Beaudoin: We've never had any complaints about this. Even if an agent works in Ontario, if he also works in Quebec, he must comply with the regulations in effect there. There's nothing to stop our members from working in any Canadian province if they wish, provided they meet the conditions of that province. It often happens that agents who live close to the border simply have two licences and two places of business.

[English]

Ms. Carolyn Bennett: Usually in order to protect the public, you have to have teeth or something. What do you feel you have as an association to be able to protect the public?

[Translation]

Mr. Alain Poirier: There are two systems in place. There is a compensation fund to which agents and brokers contribute to cover cases where consumers are aggrieved and compensation must be paid. There are also the penalties imposed by the disciplinary board, chaired by a lawyer and made up of members from the industry. This body hands down decisions that may range from significant fines to suspension, to removal from their position for life.

[English]

The Chairman: Sorry, we have to go to Mr. Gallaway, and then we'll come back to you.

Mr. Roger Gallaway (Sarnia—Lambton, Lib.): Mr. Bullock and Ms. Chamberlain, a couple of years ago it was decided here that banks would not be allowed to sell insurance from their branches, and of course now we've had this intervening process called the MacKay task force. What do you think has changed in that two-year-plus period that would justify the long-standing, without end request of the banks to sell, amongst other things, a financial service product—insurance—from branches? What's changed in two years?

Mr. Jim Bullock: The only change I see is that the suspicion I had has been proved. It's now clear they shouldn't sell it. The coercion they're using— What they have is the retail bank pumping business into their wholly owned life insurance subsidiary for example, or their P and C subsidiary, by using coercive tactics on their retail customers to buy insurance or investment services from other subsidiaries. The minute the person discussing a loan comments on the services of the other branches, the message is clear.

• 1840

Mr. Roger Gallaway: In terms of your agents, it's the old saw that if banks can sell it, they can sell it cheaper. What do you envision banks selling? Are they going to sell the range of insurance products you're going to sell, or are they going to go right down the middle of the road?

Mr. Jim Bullock: I'll use TD and CIBC as an example because they seem to be quite advanced in their marketing plans. They both own a wholly owned subsidiary that sells insurance. CIBC has two fairly simple products, and given the kind of marketing they would do, that would make sense from a marketing point of view. TD has set up what they call a brokerage operation, which will sell insurance for anybody, along with the TD's own insurance products. So the TD office would be a direct competitor to me. We have no problem with them being in the business and competing with us. It's almost amusing to watch them try.

The only thing I can't compete with is the branch manager who's coercing people to go to the guy who sells insurance. I'm not here to tell you that I'm worried about the competition. I'm here to say that consumer is being forced to buy other products, along with insurance and mutual funds, through the use of coercion, which is morally wrong.

Mr. Roger Gallaway: Mr. Poirier, in your brief you talked about consumer protection, which certainly is long overdue. Do you believe that if the banks were to merge and to be allowed to market all these things they want to sell and at the same time one-quarter of the report that deals with consumer protection were enacted in law, that would in some way create a situation where your industry would be able to compete with banks?

Maybe I should be posing this question to you, Mr. Bullock.

Mr. Jim Bullock: That's a big question. We live in a community, and we work with clients at a personal level. For the consumer who's applying for a mortgage or the businessman who wants a line of credit for his business, I don't think it matters whether they're dealing with a small bank or a big bank. Any way you slice it, it's David and Goliath. When the bank manager asks how come you don't have your employees insured under his group insurance plan, it doesn't matter if it's a big bank or a small bank saying it; the point is there's a hint being dropped.

I have concerns about the merger of the banks, but that's an entirely different issue.

[Translation]

Mr. Alain Poirier: I would like to make it clear that whatever the size of the bank or the financial institution, consumers who purchase insurance products should enjoy the same protection and not have to wonder what rules cover them or whether they would be better protected if they were to deal with a particular person. The rules must be standardized and ensure full consumer protection, regardless of the type of financial institution involved. That is the important point.

[English]

The Chairman: Thank you, Mr. Poirier.

Mr. Loubier.

[Translation]

Mr. Yvan Loubier: I would like to ask one final question, Mr. Chairman. I will wait until I get your more detailed brief in Montreal before asking my other questions.

The Quebec government has exclusive jurisdiction over insurance, as do the other Canadian provinces. That is why your association is entitled to provide consumer protection. Thus, the Quebec government has passed legislation, given its exclusive jurisdiction, to give you this mandate, which is clear. You were speaking earlier of the penalties you may impose on your members if they do not protect consumers or comply with your strict code of ethics. The penalties may include the suspension of a person's right to provide professional insurance services.

• 1845

If banks were allowed to sell insurance, that would have an impact on your mandate, because they do not come under provincial jurisdiction, under the jurisdiction of the Government of Quebec. This is somewhat similar to what you were saying a few moments ago: consumers must be guaranteed that there are clear, strict rules that will be enforced. If banks were to start selling insurance tomorrow morning and were to offer poor service—and this could happen, they could offer service that they did not comply with your code of ethics—you would have no authority to impose penalties on them. Since banks come under the federal Bank Act, they could challenge your right to impose penalties on them or suspend their licence to sell insurance. Am I mistaken about this? In that case, we would have anarchy in the insurance industry. People would not know which way to turn, and there would not necessarily be any guarantee that consumers would be protected.

Mr. Alain Poirier: I think the bill provides that the activity would come out of the jurisdiction of Quebec. Federally-chartered banks will have to get the federal government's authorization if they want to sell insurance.

The people who sell insurance products, even though they work for a deposit-taking institution, will be subject to provincial law, at the least. People selling insurance in a bank or a caisse populaire will therefore be required to belong to the Chambre de la sécurité financière and will be subject to the same rules. Obviously, we may assume that the banks will challenge this point, but I will not go into greater detail on this matter, because we are getting into the issue of the courts' jurisdiction and so on.

Mr. Yvan Loubier: But the possibility does exist. It is similar to the situation that occurred when there was talk of establishing a Canadian securities commission with very specific rules. Since the provincial commissions and the Quebec Security Commission have their own rules, people charged with fraud or other crimes could have challenged. I'm afraid the same problem may occur in the insurance industry.

Furthermore, we are not talking about Canadian banks only. Mr. Epp was talking about American banks, including Wells Fargo & others. Does it not complicate things when a foreign bank selling insurance is subject to both federal and American laws for some aspects of its activity? I think this would create anarchy in the system.

Mr. Alain Poirier: I would just repeat that we should impose the same rules on everyone. Regardless of who is selling the insurance products, regardless of whether they work for a financial institution or are independent brokers or otherwise, they must come under the same jurisdiction and be subject to the same rules, to the same code of ethics, to the same requirements for ongoing training and to the same standards of professionalism as everyone else. If there are four or five different sets of rules, then indeed there is a danger of anarchy.

Mr. Yvan Loubier: That means, Mr. Poirier, that there must be a legislated commitment, so that if some day banks are authorized to sell insurance—something we would not like to see and which I personally would not like to see—they would have to comply fully with the Quebec Insurance Act. Otherwise, we could see the sort of challenges I was describing.

Mr. Alain Poirier: The MacKay Report acknowledges that Quebec has certain powers in the area of distribution.

Mr. Yvan Loubier: However, it does not say that federal institutions must comply with provincial jurisdiction, but rather that the parties must try to agree. It even refers to some aspects of provincial jurisdiction as being—and you mentioned this yourself in your brief—obstacles or causes of discrimination based on residence. We must be very cautious in this regard.

• 1850

Ms. Anne-Marie Beaudoin: Of course, we wanted to find a way to ensure that banks would be subject to the same jurisdiction. There must be a single set of rules, because consumers should not have to wonder where they should turn for assistance if they bought their insurance in a bank or from an independent broker. The same set of rules must apply in both cases, practices must be same and their quality must be the same.

Mr. Yvan Loubier: As regards protection of your members and consumer protection as well, you are right and we are right to oppose the sale of insurance by banks in the current situation. That was not a question. That was a comment.

[English]

The Chairman: That was a comment.

Mr. McKay.

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

On that issue of the residency, doesn't that place a bit of a limitation on your members? It effectively means that they end up selling and distributing products in a much smaller pool than they would otherwise be able to do. The MacKay task force, whatever else it says, is basically saying that a financial instrument is a financial instrument is a financial instrument, and registering yourself in 10 different jurisdictions just in order to sell the same product seems basically a bit silly. So I'm surprised, then, to hear you being—I'm not sure how to put it—a little protective of the turf. Aren't you actually working against the best interests of your membership?

[Translation]

Mr. Alain Poirier: I could give you an example. I live 15 minutes away from the Ontario border, and I never felt limited in my work. I have colleagues who have their licence to work in Ontario, and to comply with the rules in Ontario. They also have their licences for Quebec, and they comply with the rules in Quebec. I have never heard them complain that they were disadvantaged.

I would not say that it is a personal question. I have a client who lives in Los Angeles. These things happen. When I insured him, he was living two houses away from me, and I am still providing him with insurance. If a problem occurs, if he feels his rights are violated in a transaction, he will be able to complain to the Quebec courts, because the transaction is subject to the rules in place in Quebec. So residency is not the most important thing.

[English]

Mr. John McKay: But if there are differences in, say, the provisions with respect to tied selling in Quebec as opposed to in Ontario on an identical product—in other words, I as an Ontario person could sell in Quebec and vice versa—doesn't it create a jurisdictional nightmare as to whether or not at any given time you are committing an offence if there isn't some federal presence on the issue?

[Translation]

Ms. Anne-Marie Beaudoin: I would like to start by answering your first question. You were talking about the injustice that could occur because people have to comply with the requirements of two provinces. At the moment, the rules regarding career access and academic requirements to work in our field are much more demanding than in the other provinces.

Thus, for the time being, we cannot implement reciprocity. It would be very appealing for neighbouring provinces to enjoy full reciprocity. Once rules become more standardized, it will still be possible for people to have licences to work in more than one province. You were also mentioning residency. We do not require that people live in a province, but rather that they work there, which is a different requirement.

On your second question—

Mr. Alain Poirier: That is a sort of a $64,000 question, and I would not want to get into another federal-provincial debate on it. At the moment, we come under provincial jurisdiction. We did not write the Constitution, and we don't want to get into a debate to determine whether it is better that this sector be regulated by the provinces or the federal government.

• 1855

What is the important point here? I come back to the issue we were discussing a few minutes ago. The important thing is that consumers be protected wherever they go. There may be some differences between Ontario, Quebec and Nova Scotia. Each region has its own differences. We need only respect that.

[English]

Mr. John McKay: Thank you very much, Mr. Chairman. You're such a generous chair.

Similarly, I don't want to start a federal-provincial war, but Mr. Loubier is right in the sense that this does need to be addressed, and as time goes on, and as globalization goes on, the issue of multiple jurisdictions becomes sillier and sillier.

Let me move to another question, which is, shall we say, post-MacKay. I'll give you an illustration of what I saw recently in Mississauga. I saw a demonstration by a mortgage originator in Mississauga who effectively brokered mortgages. He would throw the application up, a fairly straightforward application, and on his screen the icons gave 13 different choices. He would direct that particular application to a variety of institutions, a number of which were banks. He was doing $1.2 billion a year in mortgages, so I think he was getting a rather handsome return on his business.

So my question to you is, why couldn't that apply to life insurance origination and to, say, property and casualty? I appreciate you may not feel as comfortable responding on the second as on the first. Why is that not doable? If you had access to CIBC's insurance and were able to sell CIBC along with Prudential along with Great-West Life, etc., wouldn't quite a number of your other concerns go by the wayside at that point?

Mr. Jim Bullock: No.

Mr. John McKay: Why is that?

Mr. Jim Bullock: The problems that we are describing are not access to the market problems. As a broker, I'm told there are 150 life companies. I know I routinely get quotations on 60 of them. A couple more or less one way or the other has nothing to do with the problem I'm facing. The problem we're talking about is the problem the consumer faces when he's alone in the branch.

Now, the person who went to this broker is bypassing the coercive effect of the bank. He's going to a broker and asking the broker to give him a fair shot at the market. When he goes into the same branch and asks for a quote on his mortgage, he doesn't get the same treatment.

Mr. John McKay: In fact, this particular broker can do better than his branch.

Mr. Jim Bullock: Yes.

Mr. John McKay: From a consumer's standpoint, (a) you try to enhance choice and (b) you try to enhance the access to the lowest possible price. After that pretty well everything else becomes quite secondary.

I appreciate that your response is that there are 150 companies in the market, but my guess is that there are really, for most brokers, only eight or ten in the market. I don't know why you would not be interested in having a BMO icon or a CIBC icon or a TD icon and have them directly compete with the other icons.

Mr. Jim Bullock: Indeed, the quotation system that I have shows me the price of some of the bank products, but my quotation system shows me the quotations for a number of companies that won't accept business from me. Blue Cross, for example, won't accept it from me because they only do business in Atlantic Canada. London Life won't do it because they insist they deal with their own people, but they are still on my system. I suppose if I ever got to the point where the banks had better prices for my customers then it would become an issue. Right now it's not an issue.

You raised a good point, which we are aware of. If you go to a mortgage broker you will get a substantially better mortgage than you will if you go to the bank directly yourself. The banks do not go out of their way to offer a particularly good deal to the consumer. Why should they?

Mr. John McKay: That's just business.

• 1900

Mr. Jim Bullock: In our submission that we gave you some time ago, we mentioned a bank that owned their own insurance company, and they were selling insurance directly to the consumers. The policy they sell in Ontario wouldn't be legal in Quebec.

Mr. John McKay: Then we go back to the jurisdictional silliness that—

Mr. Jim Bullock: That's why I'm raising it. You mentioned jurisdictional silliness. If our provincial jurisdictions were doing a good job, it would be silly. Frankly, Quebec is the only one that seems to have done very much in the way of consumer protection. In the rest of Canada, the consumer is absolutely defenceless—

Mr. John McKay: We're not above stealing good ideas.

Mr. Jim Bullock: —and they're losing. This is why we're hoping maybe the federal government can do something, because the provinces, for a variety of reasons, have some serious problems.

In the rest of Canada, the company doesn't have to give the consumer the entire contract when they issue the policy. Some of the companies routinely—including this bank company—leave out the pages that spell out that the claim may not be honoured if certain conditions aren't met. They leave those pages out. They don't tell the consumer the pages are missing. Have you ever seen a contract in your life where the signature page was missing? This is what the bank's doing.

Mr. John McKay: Leasing companies, but that's another issue.

[Translation]

Mr. Alain Poirier: I have to laugh when I hear about mortgage insurance. There are two factors. The price is important. When people are sent this type of quotation, they ask for prices. Getting a price is one thing, getting protection is something else. In the case of mortgage insurance, when you are dealing with a bank or a deposit-taking institution—let's use this term—and you buy mortgage insurance, we only find out that you were insured once you die. When you die, the bank form is taken out and sent to the insurance company to certify that when you bought your mortgage insurance you were in good health.

A study on this in Quebec showed that 100 per cent of the time, people who thought they were insured, actually were not. many people were taken advantage of. The amounts involved were never huge: $25,000, $35,000 or $40,000. It is often the balance remaining on the mortgage. People who had bought the insurance were sure they were covered in case of death. However, that was not the case.

Because of the pressure that was applied, bill 188 provides that the insurer must confirm to people who buy insurance that they are in fact covered. That means that there is an exchange of information. In this way, people pay a premium and will be insured.

This affects the premium rate, because the risk is not the same. If 25 per cent of claims are not paid out because people were not insurable at that time, that reduces the premium rate. It is a good thing to get a price, but it is not everything. Consumers also need to know about the products they are buying. Is there a simpler product than mortgage insurance? The answer is no, but the subject is quite complicated. It is not simple.

When it comes to other more complex products, such as universal life insurance or permanent insurance, there is more involved than merely the protection offered for a particular price. Explanations must be provided; something more must be done. People cannot simply surf the Internet and choose an insurance product here or there. It is not as simple as that.

[English]

The Chairman: Thanks very much. On behalf of the committee, I would like to thank you. You certainly raised some interesting issues, particularly in relation to tied selling and competition in your business. You certainly helped us better understand how your business functions within the financial services sector, and of course we thank you for your input.

I'm going to suspend the meeting until 7.30 p.m. We will be back then with Power Financial Corporation and Credit Union Central of Canada. The meeting is suspended.

• 1904

• 1931

The Chairman: I'd like to call the meeting to order and welcome everyone here this evening. We have the pleasure to have with us, from Power Financial Corporation, Mr. Ted Johnson, vice-president, and Mr. James W. Burns, deputy chairman. Welcome.

You have, of course, appeared before the finance committee and you know how it operates. You have approximately 10 to 15 minutes to make your presentation, and thereafter we'll engage in a question and answer session.

For the members of the committee, the presentation will also include some charts, and we were given hard copies for us to follow the presentation.

Mr. Burns, welcome.

Mr. James Burns (Deputy Chairman, Power Financial Corporation): Thank you, Mr. Chairman, for allowing us the opportunity to appear. It is not the easiest thing in the world to summarize the 142 recommendations there and we just kind of picked up two. Even that, I think, requires some discussion. I'll do the best I can.

I think it might be appropriate to mention the involvement of Power Corporation and Power Financial Corporation, which is the successor company of Power. In the pages we handed out there's an organizational structure of Power Corporation.

Mr. Edward (Ted) Johnson (Vice-President, Power Financial Corporation): Yes, it's an appendix at the back.

Mr. James Burns: Power Corporation's first involvement with Canadian financial services goes back 30 years. This involved in the earlier times, 27 to 30 years ago, the acquisition of controlling interest of the Investors Group, then a very small certificate company based in Winnipeg. It's still based in Winnipeg but is now the largest mutual fund distributor in Canada. It is not a federally regulated company, but it is, in our terms, part of the financial group.

Great-West Life has existed for 28 years, since 1970. Great-West Life in the United States, which became an independent, pretty well free-standing company in the early 1980s, is now about 25% larger than the Canadian company. So we have a very significant interest in the United States in the insurance business as it is carried out in that country.

Then, as members might know, the Great-West Life bid against the Royal Bank a year and a half ago to acquire London Life, which came to be on the market. And in talking about Great-West, we of course also talk about London Life. The companies kept their independence—and in a moment I'll get to why that makes good business.

• 1935

We've also mentioned in starting up—and I think it's instructive—at one point, Power Corporation owned Montreal Trust, which was then one of the largest personal and corporate trust companies in Canada that had a distribution or a branch system. We concluded in 1989 that against the overwhelming power of the chartered banks, the company was not viable as a growth opportunity.

I mention that because in the MacKay report they suggest that there should be more start-ups for smaller companies in Canada, which is a very encouraging theory, but our experience was that size is of the essence to compete in this marketplace, particularly against the major chartered banks, and even though ours was not anywhere close, it was quite a large company.

Our vision of the future for that company was quite negative, and the company was sold. It has since been acquired by the Bank of Nova Scotia and effectively has disappeared into the Bank of Nova Scotia, along with all the rest of the trust companies.

Again, by way of a little bit of history, if you go back just a little more than 10 years, there were four very well-defined so-called pillars in the Canadian financial system: chartered banks, trust companies, investment dealers, and life insurance companies.

In 1987-88, investment dealers, as independent, stand-alone companies, essentially disappeared from Canada, acquired by the chartered banks. Within a further couple of years, the trust industry effectively disappeared from the national scene, either absorbed by the banks or simply disappeared, in some cases through bad management. In any event, they are no longer a factor or involved in the fabric of the Canadian marketplace.

We have a chart in your material that indicates that if you went back to pre-1987-88, there were four pillars. Of course, even then banks were very much larger than the others. But effectively, in 1996 the chartered banks in Canada had 86% of the chartered bank assets, 93% of the trust services, 67% of the brokerage revenue, and 3% of the life insurance. That's in 1996, and it supports the comment I had, that effectively the two pillars that did exist and did compete in the marketplace and did offer choice are gone.

You might look at chart 5, because I think it's pertinent in a summary form. This is what happened. Businesses are measured by their earnings, and it's really the fuel that fires the engine. “Earnings” still isn't a dirty word, Mr. Chairman, as far as I know in Canada. It's not? Good.

Here's the period 1985-89. These are the earnings of the Canadian chartered banks. Effectively, with the disappearance of those two pillars, plus their own potential, you can see what happened to the collective earnings of those banks.

• 1940

Now, it wasn't done because they built up their equity capital, which of course would be one way you could improve your earnings, by pumping a lot of money in there. The fact is it stayed constant. They didn't. So it was essentially driven by the improvement in their earnings from simply accepting the remainder of those two parts of the old pillars, which in fact was done by regulation.

As we move into the phase that this committee is looking at, i.e. the MacKay recommendations, I think the first and most important thing we have to say is this is all a very tricky business. Be careful what you look at and be careful what you change, because you may be disappointed at the end result and what happens. These are all very complicated, interrelated institutions and markets.

If we were going to leave one thought behind, we would say what's wrong with taking your time and making sure you really have thought through exactly what the implications are and the likely end result of change? We're certainly not opposed to change, but we think it would be very wise for policy makers and governments, those who produce the regulations and the laws, to be very careful as they proceed with it. So we kind of say, what's the rush?

Over our long history the Canadian financial system has been pretty largely the envy of the world. We've had fewer financial problems than any other country that I'm aware of. It's a clock that has worked. It's a clock that has to be changed. We're saying why not everybody take their time and, if you're going to change it, make sure you've got it right.

There are two things, Mr. Chairman, that I would really be focused on in these opening remarks. One is something I gather you've been hearing quite a bit about today from representations. That is the whole question of what's called retailing insurance in the branch. Our view is that retailing in the branch isn't the issue. To us, retailing in the branch is a cover word. What it really has to do with is access to the customer data bank that the bank owns.

Retailing in the branch is a non-starter. You do not sell insurance over a counter. I've been in the business 45 years. If we had to rely on the business that was walk-in, we would have died in Winnipeg and been buried a long time ago. That isn't the point at all.

What the 1992 regulations said to the banks was that you can buy an insurance company, you can start an insurance company. But you must do it in a subsidiary of the bank, and you cannot transfer customer information between the parent—i.e., the data bank of the bank—and the subsidiary. That's what it said in 1992. It didn't say you can't be in the insurance business. It didn't say that at all. It said you can be in it, but you can't transfer customer information.

Now, this wasn't very well accepted by chartered banks in particular, and there was a good deal of pressure. After 1992 there were new governments. In the budget speech in 1996 the Minister of Finance, then and today, announced that prohibition would continue. So the government at that time responded to the request by saying what was put in place in 1992 would continue.

The MacKay commission is now saying they think that prohibition should be gone. They refer to it as “retail in the branch”. We make a very strong point of saying retailing in the branch is not the issue. The issue is access to the data the bank has. Nobody—nobody—including the Department of National Revenue, knows as much about a customer as a chartered bank. National Revenue does not pay any attention to how you spend your money. It's interested in your income, your deductible expenses, and to some extent your assets. The bank not only knows what you buy but who you buy it from.

• 1945

The essence of our position on the prohibition in the so-called level playing field is built just around that point. There cannot possibly be a level playing field. How could you play a round of poker—not just one hand but a whole evening of poker—when one player knew where all the cards were all the time? I ask you, who would win? Somebody could win a hand because they get dealt the cards, but who is going to win over the course of the evening? It's perfectly obvious. Whoever knows where the cards are. There isn't a game any more. The game is over.

So our focus is companies, and we've seen these companies grow from relatively modest positions in the early 1970s until now, where Great-West is the largest life company in Canada and Investors Group is the largest mutual fund distributor in Canada.

Essentially what we learned very early on is that an insurance company or a mutual fund company isn't a building with a lot of salaried people in it. What the company really is, is a distribution system. A company is the people who represent it in the field. I've said many times—and I've been in the business for 45 years—that I could throw everybody in the head office out on Monday morning, but if I have my field organization, I'm back in business on Wednesday. If I lose the field organization, I have nothing.

The value of London Life is the field organization of London Life, not the big building in London. That's the value. And that has been our chosen market niche, the so-called with-advice sector. That's been our business. Under the proposed MacKay thing, we see that sector threatened in a very serious way, for the reasons I've given you.

Could you defend yourself against such a system? It's very difficult.

The group insurance field, for example, in particular—and here I'm not— Coercion isn't the point. I'm not saying they're going to beat him up. I just think it's a matter of moral suasion. A small-business man lives on his credit with the bank. I think it's in his best interests in the long term to have very good relations with the bank. It would be very difficult for him not to be very tempted to move his various employee coverages to a bank if that was— Did they coerce him into doing it? No, of course not. I'm not suggesting they would. They don't have to, because they know what he's doing.

If I may, Mr. Chairman, just jumping— The second thing in the MacKay task force, and I don't suppose you're going to get very many people other than us who are going to talk about this, has to do with ownership. In Canada, for as long as I've been around anyway, the government of whatever day has structured ownership of the chartered banks by saying a maximum of 10% would prevail. I think we all know why that was structured the way it is, and maybe I don't disagree with it either. The 10% effectively and continually would prevent a foreign takeover. I think that's why it's there and I think that's why it will stay there.

• 1950

Under NAFTA, the free trade agreement, and so on, anybody gets national treatment. You can't say, “Well, it's okay, we're going to have 25% for Canadians and 10% for foreigners.” You can't do that any more, period.

As much as we would desire— who wouldn't want to own a bank? But it is prohibited—that is, other than the 10% position.

Incidentally, that doesn't prevent foreigners from owning more than 50% of the banks. I don't know, but today those banks are listed in New York— They could easily be 55% or 60% foreign-owned today, but effectively they can't do anything about it because they can only vote 10% of the shares anyway.

The MacKay task force has taken that 10% regime and said what is good for the banks is good for the life companies. Coincidentally, they said we are grandfathered, because we're already there. But grandfathered for what? We're grandfathered where we are today. We're stopped from being a participant in the future. Under the proposed rules, as demonstrated in the MacKay report, the only prospective purchaser of a big Canadian company would be a chartered bank. We couldn't do it.

So if you want to write a prescription to further enhance concentration, you've got a combination of two things in there that we suggest will direct the future very definitely towards more concentration, not less. There can't be another player. Manufacturers Life or Sun Life could buy us under the MacKay rules, but we couldn't buy them. By their own admission, as they've been here, on day one when they demutualize we'll be foreign-owned.

As I suggest, Mr. Chairman, you turn over a lot of these stones and there are a lot of things that kind of pop up that you have to stop and reflect on.

Those are the elements that we feel, in summary, we want to bring forward and have on the record with this committee. I believe these issues are important. They will define the future of our financial institutions. They will define the future of consumer choice. They will define whether there are going to be independent providers out there or not. We think there should be strong, independent, competitive vehicles out there other than simply the chartered banks.

Mr. Chairman, how long was I? I was probably 20 minutes yakking away.

The Chairman: You're probably running out of your time limit. We are going to end at 10.30 this evening. Just kidding.

Mr. James Burns: I told you I have a cold.

The Chairman: Before I move to the question and answer session, can I just get a clarification on your chart 5? I figure since you brought all these charts you might as well get some use out of them.

Mr. James Burns: Thank you.

The Chairman: This is a five-year period that you're looking at, right?

Mr. James Burns: Yes.

The Chairman: I guess everything here is more pronounced because of the five years.

Go ahead.

Mr. Ted Johnson: The five years was an effort to smooth it, to take the peaks and valleys and the skewing out of it. By doing it on a rolling five-year basis it reduces some of the wild fluctuations. For example, there was a year there in the early 1990s when bank profits were more than 100% of TSE earnings. That was simply because resource companies were losing money.

• 1955

The Chairman: Explain something to me. You said that banks begin acquiring brokers and trust companies here. Is that right?

Mr. James Burns: Yes.

The Chairman: Are you saying that this is the cause of these great profits? It can't be the only thing.

Mr. Ted Johnson: No. We're saying there's an interesting correlation with a significant increase in the rents of the franchise, the profits of the franchise, subsequent to that period. It's not the only cause of increased profits, but there is an interesting and direct correlation. We have some other charts that show part of the reason that happened.

The Chairman: Can you describe to me the state of these trust companies when they were purchased? Were these major profitable organizations, which were well run?

Mr. James Burns: With regard to Royal Trust, when we sold the company in 1989, the net after tax was about $85 million or $90 million worth of earnings. It wasn't small. As I said, it was the biggest personal trust company in Canada. You understand what I mean by “personal trust”. They handle wills and that sort of thing.

The Chairman: Yes, I do.

Mr. James Burns: Incidentally, the trust officer has disappeared. I don't know who looks after widows and orphans any more. It's lawyers, I guess. God help the widows and orphans!

Some hon. members: Oh, oh!

Mr. James Burns: Are there any lawyers on the committee? Yes, there are.

The Chairman: Royal, Standard, and Guaranty—what were they doing? Were they doing really well?

Mr. James Burns: The banks did not take the damaged part of Royal Trust. The Royal Bank took the corporate trust and the good assets. They took it over because they were in trouble. The Central Guaranty went under, and bits and pieces were picked up by the banks.

National Trust was just acquired this year by Nova Scotia. We sold Montreal Trust to BCE, Bell Canada Enterprises. At the time, they asked us, “Why are you selling this thing? What's the matter with it?” We said, “It's not big enough.” They asked, “Why don't you make it bigger?” We said it was because we didn't want to commit that much money to a business that was so dominated by the big banks. Our suggestion to them was, “If you are going to acquire it, you had better buy a whole bunch of them and put them together, because they're too small.”

The Chairman: Mr. Burns, the only reason I asked that question is because any time a witness highlights something, we need to ask the fundamental question of why this particular supposed cause and not others. I personally can't believe that it's only because they started buying trust companies that their profits went that high. That's just not the case.

Mr. James Burns: They acquired investment dealers. In the last five years, during which the markets have gone crazy, investment dealers have become enormously profitable. That would be a big chunk of that improvement. I think we can demonstrate that with the disappearance of the trust companies, the bank spreads improved, which would of course increase the profitability. There was no competition out there. There have never been four years in a row as good for the financial services business as the last four years have been—never. So their earnings have been boosted. So have those of others.

You could take another cut at the thing. We've carried out very extensive studies in the last couple of years, which are public knowledge. We've presented them to the MacKay task force. The banks' pure profitability against the profitability of all Canadian companies—i.e., the TSE 300—has of course increased a great deal in this last 10-year period.

• 2000

I think your questions are very good, but if you were going to study the thing, you couldn't do it over a cup of tea or in two minutes at this meeting. There's a whole array of data to look at. The simple fact is that the Canadian banks, the chartered banks, have become richer and more powerful as the concentration improved. That's almost inescapable.

The Chairman: So you're making a case for more competition.

Mr. James Burns: Absolutely.

The Chairman: Okay, thank you.

Mr. Epp.

Mr. Ken Epp: Thank you for your presentation. I notice that you have been in this business for 45 years. That means you started when you were 12, right? Take that as a compliment, sir.

Mr. James Burns: I believe you come from Saskatchewan.

Mr. Ken Epp: Originally, yes.

Mr. James Burns: Well, I come from Winnipeg and I can smell Saskatchewan in a comment like that.

Mr. Ken Epp: I'm very curious about your thesis. You say in your report that you shouldn't have a restriction of a 10% rule on insurance companies, and yet you seem to approve of it for banks. You would like to limit the size of the growth of banks. You talk in your report about the bad effects of having more and more of the services all concentrated in two or three ever-increasing-in-size banks.

Is the same argument not true for insurance companies? Why would we not have the same rule for them and for organizations like Power Corp.? I mean, they're a huge player in the marketplace and there are no rules limiting their growth and they can take over anybody they want.

Mr. James Burns: Not so. They can't take over anybody they want. I think there are two factors at play. If you just take Canadian assets and skip the international—of which we would be one—the top ten life companies together do not add up to the same assets as the Royal Bank alone. So sheer size and economic muscle and power is a factor.

As I indicated, the 10% rule really exists, because the banking system—and we've got a very good one—has to remain in Canadian hands. This has been determined and I think is supported by most Canadians. They don't want it to disappear into foreign hands. There are a lot of reasons and arguments for a 10% rule for banks because of their importance in the fabric of the whole financial network of the nation.

Insurance companies don't even come close to having that significance or importance in the fabric of the nation. There's no restriction on ownership of mutual funds, which is the fastest-growing sector—none. The MacKay report very singly and significantly draws up a 10% regime for demutualized life companies. Recognize that apart from us there isn't another big stock company; we're it. The rest of them are all mutuals or were mutuals and now they all want to demutualize, i.e., they want to become stock companies. They're saying that's okay, you guys can be over there and we've got a regime for you, and when you demutualize we're going to have a regime for you.

Now it's not impossible if you're talking about the future that there could be further rationalization. Let's face it, the bigger are getting bigger and the small are disappearing. If there's a future rationalization—maybe there won't be, but if there is, we definitely would want to be prospectively a participant. I'm not saying we would; I'm saying we'd want to be there. We don't understand why the Government of Canada would decide that you're okay and you're not. If we had just arrived yesterday afternoon they might be careful, but we've been around a long time. If you want to put a word to it, we find it rather offensive. What are we, second class?

• 2005

Mr. Ken Epp: But MacKay does recommend grandfathering you, so you're okay.

Mr. James Burns: Only to acquire a little guy. We couldn't be a participant in anything larger, which would be Manulife or Sun. They said it can only be done with a ten percenter.

Mr. Ken Epp: And you don't like that arbitrary government control on your growth.

Mr. James Burns: No. I'll guarantee you that if Manulife or Sun decide they want to do something, the only thing they can do and stay Canadian is sell to the bank. They can't sell to us. They can sell to a bank. If you want further concentration, that's how you're going to get it. That's what I'm trying to say.

Mr. Ken Epp: Yes, I understand.

Mr. James Burns: It inevitably will drive it into the maw of the people who have the most money and the most persuasive market influence.

Mr. Ken Epp: Either the banks or foreigners.

Mr. James Burns: Yes. Well, foreigners can't play above the $5 billion. They can play lower.

But let me say a word about foreigners.

The Chairman: May I just ask you a question to follow up on Mr. Epp's—

Mr. James Burns: I'm just finishing a point.

The Chairman: Oh, absolutely. Go ahead.

Mr. James Burns: To talk about foreigners, I think it's a passing notice that the two largest American life companies—giants—Metropolitan Life and the Prudential, have gone home. What does that tell you? It tells you that you have a very competitive marketplace here. It wasn't particularly comfortable for them, and they've sold out and gone home. If they have sold out and gone home, can you possibly imagine why anybody down there would be interested in coming back here? The biggest guys in the game have left.

Mr. Ken Epp: Did they leave because they were regulated out of growth? Do you think they left because of lack of profits?

Mr. James Burns: I would think lack of growth and lack of profit, low return. I would say it's the best argument you can make that we have a very competitive life insurance industry. When the biggest guy goes home— If it was non-competitive, I'll tell you, he would still be here. Why not?

The Chairman: Given what MacKay says, you can buy Canada Life. Right?

Mr. Ted Johnson: If I may explain, our understanding of how the proposals in the recommendations and in book two would work is that we could not acquire anything with shareholders equity in excess of $5 billion. Only a ten percenter could acquire above the line. Above the line in the insurance business are Sun and Manufacturers at the present time. That chart on page 35 or 38—

The Chairman: That's what I'm looking at.

Mr. Ted Johnson: —shows that those two are above the line and already out of touch. Any combination of the next in line will push them over the line and then they become out of touch, and progressively, as time goes on, the whole industry gets out of touch for a 65-35 company like us, a shareholder-controlled company like us.

The Chairman: But the $5 billion limit you are talking about is per transaction, right? It's not cumulative.

Mr. Ted Johnson: Yes, it is cumulative. The $5 billion is determined by adding the shareholders equity of all of the entities in a group.

The Chairman: Then you could not buy Canada Life and Mutual Life.

Mr. Ted Johnson: No. Exactly. That's precisely the point.

The Chairman: Okay.

Mr. James Burns: Or if they merge they immediately go up to the top category and they are in a 10% rule.

• 2010

Mr. Ted Johnson: I'm sorry, no. Excuse me. With regard to your question, we could buy one and then the other. We couldn't buy a merged Canada Life and Mutual Life, but we could buy one. I misunderstood your question. We're grandfathered, and if we stay where we are, we could buy any individual company that was below the $5 billion line, and individually that's where Canada Life is today and where Mutual Life is today.

The Chairman: And you could buy the National Bank if they converted, right?

Mr. Ted Johnson: Right.

The Chairman: So you could buy quite a few things.

Mr. Ted Johnson: Right. We can buy certain things, but then there are certain things we can't touch.

I should say that the grandfathered status we're given in this report has certain advantages to it, and we freely admit that. We just think that the regime that's being set up is wrong. Even though we're grandfathered under it, we think it's wrong. It will inevitably, over the long pull, drive everything into the hands of the chartered banks. It may take a generation to do it, or it may happen much more quickly than that, as we saw in other industries.

The Chairman: Thank you.

Thank you, Mr. Epp.

Mr. Ken Epp: Mr. Burns, if I'm reading you correctly, I think that your philosophy is to buy controlling shares in successful companies and to continue to control them so that you can manage them and make money with them. Is that true?

Mr. James Burns: Buy, yes; control, yes; invest and hold for the long term, yes; add value, yes. That's right.

Mr. Ken Epp: Is there a danger in that you end up concentrating a lot of the industry in one organization? Heaven forbid you should ever run into trouble, because the fall would be mighty.

Mr. James Burns: I think anybody can fall. Widely held companies fail. The biggest collapse in the insurance history in Canada was a mutual company, Confederation Life, which got into trouble.

Mr. Ken Epp: To what do you attribute this?

Mr. James Burns: Our business is to make sure they don't get into trouble. We're very careful.

Mr. Ken Epp: That's the obvious goal, but how do you arrange that? In your view, what is it that constitutes a safe, long-term, viable, successful investment business or life insurance company?

Mr. James Burns: I think the first thing is that you pay a heck of a lot of attention to what's going on. Second, as the principal owner, you put in place the best possible managers you can get, and you let them manage. You put managers in place who believe the financial institution is effectively an institution that looks after other people's money. So you sure in hell look after it, because it's not yours, it's theirs. You watch it like a hawk, and you don't let anybody do dumb things.

Mr. Ken Epp: That sounds like—

Mr. James Burns: Let me tell you, if you were a shareholder, you wouldn't have made sovereign loans and you wouldn't have made handshake loans in the oil patch at $1 billion a pop on the expectation that oil was going to go to $90 a barrel, and two years later it was at $18. That's what you don't allow anybody to do. You have great respect— you conduct the business in accordance with protecting other people's interests, and don't try to make money yourself off their money. The business itself can be very profitable if you run it right.

Mr. Ken Epp: It's interesting—

Mr. James Burns: It's like getting rich. Once you're rich, for god's sake don't do anything that gets you poor. Don't keep trying to get rich. You're already rich. Just don't get poor.

Mr. Ken Epp: All of the principles you've just outlined, everything from remembering you're in charge of other people's money and being prudent, sound to me like a very good set of principles for government to adopt. I applaud you for that.

I'm going to pass to others for a while, and maybe we'll come back.

The Chairman: Thank you, Mr. Epp.

Mr. James Burns: I thought the present government did follow those. Am I not correct?

• 2015

Mr. Ken Epp: We wish they would.

The Chairman: Mr. Szabo.

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

Gentlemen, it's been a unique presentation. I assume Power Financial Corporation would be desirous of having a curve like the one in chart 5.

Mr. James Burns: I think we have had it, but on a much smaller scale.

Mr. Paul Szabo: On a smaller scale, but in terms of return on equity?

Mr. James Burns: Yes.

Mr. Paul Szabo: Very good. It's been excellent for the financial services segment, actually, so this isn't necessarily just a reflection of banks. It happens to be reflective of the segment perhaps, the sector of—

Mr. James Burns: I think we mentioned that the segment has never enjoyed four or five better years than the last four or five. I keep going back to the fact that the big difference is in dimension. We don't make $1.8 billion. I wish we did, but we don't.

Mr. Ted Johnson: Can I add a point on that? We haven't eliminated our competitors. We haven't taken two other pillars out of the game, nor have the regulators done so on our behalf or to our benefit.

Mr. Paul Szabo: I would really appreciate it if you could briefly tell us what the life insurance industry has done or has changed in terms of the nature of its business over, say, the past decade. How has it responded to the marketplace, to consumer needs? What are you doing?

Mr. James Burns: That's a good question, and I'd be happy to answer it. In fact, I'm very pleased that you asked it, because it was one of the things I was going to talk about.

You asked about the last decade. In my opinion, the industry has done a tremendous job in the growth of its business in what we call group insurance or the employee benefit field. It's very low cost, it's very efficient, and it's within reach of every company in the country, from three employees and up. These are all new, these are innovative.

It used to be that groups had to have fifty employees or we wouldn't touch it, but we've developed ways of bundling. We're now able to reach right down and can provide benefit to the point that a good deal more than half the life insurance at risk or in force, as we call it, is group. We pushed that over a long period of time. Particularly in the last fifteen to twenty years, most are what we call “small group”.

“Small group” means 25 lives or less—small companies. These companies have developed very efficient systems to control and service things like computer systems and so on. We have developed specialists in that field, and have put them in place right across the country. A lot of this stuff is too much to expect an average agent or a financial adviser to know the details of. You have to have somebody there who is an expert, so we've covered the country with experts who work out of the offices on behalf of the brokers and the agents.

The biggest change within the last decade is the very fast response, certainly in our companies, to segregated funds. You follow the financial industry, so you are well aware that the public taste shifted very fast from fixed instruments, as interest rates went down, to mutual funds. The industry responded, I think very effectively, to the point that we have very substantial segregated fund business. That's what they call mutual funds in the life companies, because they have life-insurance-related features.

Mr. Paul Szabo: Would it be fair to characterize the life business as basically looking for niches in the group side, while basically sticking to its knitting and doing a good job at what it does best?

Mr. James Burns: It's certainly what we've tried to do. I think the companies have spent an enormous amount of money on training, so that the day of the foot-in-the-door salesman has long gone. What you have out in the field now are people who are, we feel, very qualified financial planners. That's what they do. They help people with their taxes. They work with the people.

• 2020

Mr. Paul Szabo: Let me go to my assessment of what I think your position is, then. I'd be interested in your comments—and we've heard it from others too.

Those who are still independent are afraid of the elephant. It's the elephant and the mouse. It's just very difficult to figure out how we're going to deal with this thing. We feel pretty confident that we do a very good job. But if you get into a competition for market share, when you have the leverage that the banks have, you guys could get blown out of the water.

On top of that, though, is what I find really interesting, and that is that everybody continues to go back to coercive tied selling. That's what they're saying is going to kill them, but we all know it's illegal. There should be significant consequences for dealing with it, regardless of how all of this stuff falls out. But I would think the best way to deal with it is with consumers.

Consumers are not fools. If somebody is holding a gun to my head, I don't want to do business with you. I shouldn't have to. As long as I have an alternative, and as long as I have the knowledge that what you have tried to do to me is wrong and there's a consequence to it, there is another way to deal with the whole issue of coercive tied selling.

The whole thing involves public education, and it also involves a regulatory regime that deals very firmly with it. But for me, I think it really gets down to the fact that the banks have a different vision of the consumer's needs in the longer term than possibly the life business. I heard it from Mr. Cleghorn. He referred to the face-to-face with the customer as an expensive duplication given the technology they've put in place, because people now are starting to like to bank 24 hours a day. I want to be able to buy my stocks and bonds. I want to be able to do my financial thing there.

Mr. James Burns: You don't believe that for a minute, do you?

Mr. Paul Szabo: But that is their vision, and they're prepared to put on the record that the consumer of tomorrow doesn't want the teller; they want the convenience because time is important. You don't agree with that, and I know you don't. You said right here before us that the people in the field are everything, and the people in head office are nothing.

Mr. James Burns: No, they're not “nothing”, but we could live without them. We could replace them.

I have some of them sitting here. I don't want to—

Mr. Paul Szabo: I know. I've been watching the reactions back there. These are your people.

Mr. James Burns: I have a habit of overstating things.

Mr. Paul Szabo: Well, I've been watching their reactions, and they've been actually quite favourable except for one. I won't tell which one. You can talk to them afterwards.

Could it be that this is the gamble that everybody is playing? If I'm going to peg generation X and post-baby boomers, these are people who say their time is too important to them to worry about sitting down for a couple of hours with a life agent or someone like that.

Tell me something. If the banks were to get into the life business in a big way, are you in fact legitimately afraid you would get knocked out of the box because they would cherry-pick the essential life services that the consumer wants, leaving you with the lower-margin activity that eventually, if it continues to spiral, is going to put somebody out of business and is going to cost Canada a lot of jobs?

Mr. James Burns: Am I worried about that? You better believe I'm worried about it. I would be worried about it in the same way as we were worried about the trust company in 1986 and 1987. Let me tell you, we wouldn't sit around and wait for it to happen. When she goes, she'll go very fast, let me tell you. It won't be a long period of time.

Mr. Paul Szabo: Let me ask just one last question. You've been around a long time, so I think you have some words of wisdom to share with us here.

We're very slowly getting into hybrid organizations within the financial services sector. We have people doing banking, insurance, and, by the way, how about throwing in a little bit of auto leasing? That will zap those automobile dealers, etc., too. What's happening here is really mixing up the whole pot.

• 2025

We have to respond to this task force report. We're not responding to two proposed bank mergers. We're responding to sectoral reform, part of which is that mergers should be a legitimate strategy. I think everybody agrees that, quite frankly, in the long term mergers are probably a legitimate strategy within an appropriate regulatory framework, with the proper terms and conditions so that everybody knows what the rules of the game are, including non-banks.

My question to you is this: in terms of the future of the financial services sector, do you see that before we make any major changes, or before we put up any yellow lights to make them green lights, the first thing we have to do is get our regulatory environment, federal and provincial, harmonized, consolidated, simplified and in place before the light turns green?

Mr. James Burns: I think that's very well stated, and we would support it. I just didn't express it as well as you have.

I say we have to take our time here and think it out. These are theoretical proposals made by theoretical people. I think you'd want to take quite a bit of time to calculate exactly what is the implication of this happening this way, what the end result of it will be.

When they lifted the prohibition on banks owning dealers, nobody I know of—and I was around then—ever imagined it would all be gone in two years. They thought what they were in the business of was providing capital for dealers who were undercapitalized and couldn't play internationally. They said to the banks, okay, you put the capital in there and you keep them. Now the independent dealers are gone. Are they big players internationally? Not one is. In terms of policy consideration, if you were back there and you looked ahead and saw that as the end result, you probably wouldn't have done it, or you would have done it differently.

I think it's very important and very tough for legislators such as you, who haven't been in the business. You observe what's going on because you're consumers and you've had varying degrees of experience in the field. But these aren't easy issues. It's a very complicated world out there.

If I can pick up on one thing that you said, we call it the with-advice sector. What we have observed—and not just in the insurance companies because, as I said, the day of the agent with his foot in the door is long gone—is that these people are very much in the business of helping ordinary people with their financial plans, their long-term types of plans. That's what they do.

You made the comment that you don't have the time to spend a long time talking with a life insurance agent. As I understand your background, you probably don't need to because you already know most of what he does anyway.

Even the background papers in the MacKay report—they chose not to mention it in the main report, I notice—said 56% of Canadians in their survey worry about the amount of information that a bank has on them. They don't like it. And somewhere in there it also said that something in the order of 60%, or at least a very high ratio of over 50%, would prefer the assistance of a financial counsellor.

It's as complicated as hell out there today. With the array of products and funds, there are a lot of voices clambering for attention out in the marketplace, not the least of which is the tax system, which is complicated. It's crazy. Asking ordinary people to cope with all of it is asking quite a bit. If they have someone who comes around and whom they trust, they'll stay with him because he tells them what to do. If they ask whether they should do this or that, he'll say they can do whatever they want, but he will also tell them he thought they had a plan to save money and keep it safe, that he thought their plan was to invest in a fund and stay with it.

• 2030

You know, people save money in what we call Christmas funds. They save diligently all year and blow it all at Christmas time. Then the next year they save all year and blow it all. Part of our job is to try to get them to keep it saved.

Mr. Paul Szabo: I'd like to spend another couple of hours with you, for sure.

Thank you, Mr. Chairman.

The Chairman: Thanks. Can you do it another night?

Mr. Paul Szabo: Yes, we can get together over a cup of coffee.

The Chairman: Mr. Burns, if I may, something that has come up over and over again in this debate is the issue of moving slowly and carefully with thorough consideration of this issue, and all sorts of issues. We're dealing with them as if they are brand-new issues because of this report, but they're not brand-new. A lot of these issues have been debated ad nauseam for years, and we've moved on some and not moved on others. So we can get some perspective on this debate, is it fair for me to say that some of these issues have been debated already, that we more or less know the strengths and weaknesses of the arguments?

Mr. James Burns: Thank you. Have they ever been debated before, starting in 1985 with a blue paper, then a green paper, then a brown paper, then a white paper and then some other paper. Finally, in 1992, after seven years, including we appeared at House finance committees on a number of occasions and Senate finance committees and other committees, with all of them debating it, it resulted in legislation in 1992—a new Bank Act, a new insurance act and so on.

So has this been debated before? You'd better believe it has been debated before.

After all this argument they finally structured something called, for example, 65-35. They said between a commercially linked company—i.e. a Power Corporation—and a financial institution, 35% had to be widely held; that was protection for the institution. You could tinker around there if you owned 100% of it. There was always somebody with effectively 35% between the owner and the institution. That was debated ad nauseam and it was resolved. It never came up again until it popped up here in the MacKay thing. I wish they had been around between 1985 and 1992, because here we go again.

Similarly, as I mentioned on the business of retailing, which we don't think has anything to do with retailing but it has to do with data, it was fought and argued like you wouldn't believe for six years up to 1992. They started again right after 1992. They pushed and shoved until the minister had to stand up at the budget speech in 1996 and say no. We're back at it again two years later. I have to hand them a gold medal for persistence. If somebody had said no to us that often, I think we would have found something else to do. The world is full of things to do if you want to look around.

The Chairman: The point I was making is that the danger we run into as a committee is that because we have a new report, people may think these are brand-new issues. Many of them are repackaged and reintroduced in the MacKay report, but they've been part of the debate, and people like you have dealt with the industry for decades.

Having said that, I'm going to move to Ms. Bennett.

Ms. Carolyn Bennett: Thank you.

There seems to be some consensus that the four pillars are now boring. When I look at your submission in terms of this with-advice sector, would it be correct to say you would have preferred that the with-advice stayed separate? As you say, the banks are to absorb dealers and those sorts of things, and all of a sudden they got over into with-advice. So can we go back—that isn't what MacKay is saying?—or is it time for you to become a bank? What would it take, or would you want to do that?

• 2035

Mr. James Burns: In the first place, I don't think the opportunity would present itself in Canada. It's the same reason we don't feel, as the report suggests, we can open up for foreign banks to come in here. That's a bit of wishful thinking, in our view, because there's no room. Canadian chartered banks have an overwhelming presence in the Canadian marketplace.

Would even a big guy like a Citibank or one of the big European banks, a Deutsch Bank, look at Canada and see it as a contestable market where they could come in and do anything? No. Would a Canadian bank get one inch in Holland or Germany? Forget it. It's blanketed; there's no room here.

There's lots of room, and I think the bank submissions keep indicating that niche players are coming in here and bothering them. There's the big credit card outfit, MBNA. Fidelity, a without-advice marketer, is huge and is coming in big time. For the current year, the biggest seller of mutual funds in Canada is Fidelity. It's very tough.

Would we spend much time worrying about Fidelity coming in here, although we're in that business? Not a minute. Why would we be scared of them? We would be scared if they owned a bank; that would make the difference. They have all the cards.

Ms. Carolyn Bennett: So you're saying this has been kicked around for a long time, but you're also saying to go slowly, which maybe we should read as meaning make sure you do the right thing, in terms of impact analysis.

Mr. James Burns: Yes.

Ms. Carolyn Bennett: The MacKay report is a big package. Are there a couple of things that you think might be safe to go forward on, or should we make sure that a balanced package goes forward? Do you think the government should just say no to the merger?

Mr. James Burns: It's not our business to tell government what to do and what not to do. We certainly don't hesitate to tell them what we think they should do. They do what they have to do. We don't think the merger is the issue. The issue is the concentration that exists already. We have that level of concentration and prospectively even more, as we've been telling you here. It wouldn't seem to make a lot of difference to me whether there were six or four.

Ms. Carolyn Bennett: There aren't enough.

Mr. James Burns: Well, it wouldn't matter. If it's concentrated at six, it's still concentrated at four. The banks compete, but our studies have indicated the banks compete on everything but price. Show me where they compete on price. They don't, because they have an oligopoly. Why would they compete on price? They wouldn't.

They don't compete on price when there are six. They won't compete on price if there are four. A very good example is mutual funds. Fidelity's MER, as they call it, management expense ratio, is 120 basis points. They're without-advice, very streamlined and very low cost. Banks have funds of their own that are essentially without-advice funds. They have the same MER as the with-advice companies. You would wonder, if they were going to come into the business on a without-advice basis, why wouldn't they come in at 1% instead of 2.25%? In the United States, there is a very clear differentiation. Without-advice companies are roughly at 100 to 120 basis points, or 1% to 1.75%. The with-advice are about the same as ours in Canada, at 2.25%.

• 2040

Ms. Carolyn Bennett: Thank you.

The Chairman: Ms. Redman.

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

You've made a really interesting presentation, and I'd like to thank you. There's a question that I haven't heard you broach yet, though, and I think it's one of the real underpinnings of the MacKay task force. How do we best protect the consumer? That's my question to you. In your opinion, how do we do that?

Mr. James Burns: I'll begin just by saying that under the current regime as it exists right across the piece, the consumer is, generally speaking, pretty well protected. Could you ever devise regulations or a system for 100% protection? No, you couldn't. There were rascals around 5,000 years ago, there'll be rascals around 5,000 years from now, and they sure as hell are around today. Can you protect everybody from that? No.

I just noticed in the paper today a story about that guy they got hold of in England who scoured up all the people in southern Ontario. I can't think of his name, but he's the one who murdered his pal when he threw him off the boat or something like that. Is there any law in the world that would protect us from guys like that getting loose? You know, sooner or later they get caught. I guess he just smelled it getting pretty close, because he took off, but people can get away with it for awhile.

In regard to protecting everybody all the time from everything, have people sold life insurance policies on the basis that they weren't careful enough in explaining that the dividends on the policy were subject to interest rates? Yes, sure they have.

Mrs. Karen Redman: My question really isn't predicated on how we can make sure nobody ever buys a product they don't want or don't need, or pays more than perhaps they could have. My question is centred around the idea that the Canadian public looks at the financial sector as being regulated by the government.

You've made the point already that we are legislators. If we're going to bring in legislation, I think we have a duty to the Canadian public, especially because this is a major piece. Although you and Maurizio have already mentioned the fact that some of these issues have been around a long time, in a lot of ways this is a defining moment for what the financial sector will look like as we move forward, and we may not be able to backtrack. Having said that, what is the filter, or what are the right questions to ask as we view this huge, massive issue?

Mr. James Burns: Well, you have a lot of complications out there. First of all, the financial instrument of choice of today is not regulated by the federal government. Five or six years ago, mutual funds in Canada were at something like $70 billion. They're at $340 billion today. There has never been anything that has grown as fast in the history of Canada as that industry, and it's not federally regulated.

If you're looking at consumer protection as members of Parliament, of a federal institution, there's a lot you don't have anything to say about—nothing. It's provincial. Might it be a good idea to do everything you can to persuade a rationalization of the fund industry whereby there was coordinated consumer protection?

The industry isn't sitting around. They have set up their own equivalent of committees and provisions, and they have a structure of voluntary requirements for all the participants. One of the difficulties they have, though, is that some of the big suppliers have opted out of the industry. They got out of IFIC. They won't belong to it, so they're not subject to any of this fair advertising and so on.

• 2045

What was the name of the lady in Toronto who did the big report, the Toronto Stock Exchange lady? She did a yeoman's job and wrote a report as a model, a blueprint for behaviour. With a few exceptions, industry has adopted it—fair advertising, disclosure of costs, all the things that you ought to be doing anyway. The industry bought into it. But the difficulty is, because there's no regulation, some of the people who didn't like it opted out of it.

What can the Parliament of Canada do about that? At the moment, I guess not very much—nothing. Yet that's a very important part of the fabric of the financial services. If all the life companies instituted independently the equivalent arrangements: ombudsmen, 800 numbers, response team— They've all done that. So have the banks, I think. If you don't like what they're doing, you have a number; you have a guy there, a woman, a lady, or somebody you can phone and they'll take your call.

I think a review of what's in place, presenting a general standard of behaviour for anybody who is in the marketplace as a distributor or a supplier— There are two parts: there are people who manufacture the stuff, and there are the people who distribute it. They're quite separate. A large part of financial services is done by independents. We call them brokers. Nobody owns them. They're independent. You could set up a standard for them that would be a model for licensing, for example, and I couldn't see anything but good coming out of establishing such a model of behaviour on the part of not just manufacturers but distributors. Why not? Then it would be kind of interesting to see who opts out. There's no model there; there's no suasion. I would think that's a good place to start. I think a consumer has to be protected from undue influence.

The government acted as of today, on coercion, putting it into law, didn't they? Was it today, September 30? They said coercive tied selling is illegal now. But we've always felt that coercion wasn't really the point; it's suasion.

You'd be interested in this. One of the biggest insurance carriers and promoters in the country is the banks themselves, because they offer credit, life insurance. If you take out a mortgage at the bank, they control the market. I don't know whether you have charts here, but they control the mortgage market in the country, 80% or something. If you take out a mortgage, they ask you if you want life insurance on the mortgage, as if you're an idiot if you say no. Does anybody ever ask them whether it's a good rate? Of course not. The mortgage payment is $1,200 a month and the insurance is $9, so who is going to quibble about $9?

The profitability on their credit insurance is the highest, vastly higher than anything we offer to the public. They control us there. They can't be the carrier, but they sure control the price.

The Chairman: Thank you, Mrs. Redman.

Mr. Burns, I think you and I have a similar concern. Just as you are, I'm concerned about concentration, and I picked up on the comment you made about the oligopoly, that you think the banks are basically—

Let's talk about your industry. For example, the share held by the five largest life insurance companies—life insurance premiums, I'm talking about—is around 59.3%. Then when you look at the share percentage-wise held by the five largest banks of personal deposits in all deposit-taking institutions, it's 58.1%. So you're at 59.3% and they're at 58.1%, talking about the top five banks and the top five life insurance companies. What constitutes an oligopoly? Are you an oligopoly as well in your business?

• 2050

Mr. James Burns: No. I wish we were. Life would be much simpler.

The Chairman: Are you talking about life or life insurance?

Mr. James Burns: I'm talking about life insurance, or life in general, as Ted says.

There are probably 120 manufacturers of life insurance in Canada—companies that offer life products, term annuities, or whatever. They're not the big distributors but they're in the marketplace on pricing all the time and they're very competitive. We continually run charts on pricing in the industry. The pricing is all over the place. Are we the lowest on the chart? We aren't frequently, for example, for term insurance. Big American companies come in, such as Transamerica Occidental.

The Chairman: But the five largest life insurance companies still have 59.3%. Don't you think that's pretty high?

Mr. James Burns: Do you mean for the Canadian market?

The Chairman: That's in life insurance premiums. That's very high. I'm just making that comment because of the comment you made about oligopoly. I'm just wondering what constitutes an oligopoly, according to you. If the banks have 58.1% and they're considered an oligopoly, what are you at 59.3%?

Mr. James Burns: The question is, how can you tell an oligopoly if you see one? I would think if they all have the same price, it's probably a pretty good indication. If there's nobody in there cracking the pricing, then you're looking at an oligopoly. I would say we sure as hell don't have oligopoly practices in the insurance industry. Everything is for bid all the time—the group business and everything. They compete like crazy on price and service.

The Chairman: Fair enough.

Mr. James Burns: I went to university so long ago I can't remember, but I think we studied oligopolies way back then, and if my memory serves me, one of the ways you could tell one was if there was no competition on price.

The Chairman: They sent me this report, and I see the top five largest insurance companies are at 59.3%. You called 58.1% an oligopoly when it comes to banks and I asked the question.

Mr. James Burns: I think it's a very good question.

When it comes to market and choice— I'm not sure. You're looking at a chart on premiums, I believe.

The Chairman: Insurance premiums.

Mr. James Burns: Are you sure that's total premium—

The Chairman: Yes.

Mr. James Burns: —or just life? Does it include health and disability?

The Chairman: No, it's just life.

Mr. James Burns: Are you sure?

The Chairman: That's what it says.

Mr. James Burns: You get up pretty high, because quite a few of the companies don't do everything. We do everything. We do disability, individual group, pensions, group health, dental and vision care. We do all that, but a lot of the companies don't do any of that.

The Chairman: Mr. Burns, I don't want to belabour the point. I'll check to see if there was a typo or not.

Mr. James Burns: If you read it, it must be correct. But I'm troubled a little bit about the 59%, because the marketplace doesn't seem to know that. We're not big enough to have that much influence, and I think there's enough competing pricing going on out there that you wouldn't see the practice. I'm sure of it.

The Chairman: All right.

Mr. Ted Johnson: Thursday's Globe and Mail shows the mortgage rates and the deposit interest rates at the chartered banks. If you go down the list, you'll find they're within one-quarter or one-eighth of a point of each other.

The Chairman: Maybe you can—not necessarily tonight—look at this chart on page 114.

Mr. James Burns: We will.

Mr. Ted Johnson: Which book is it in?

The Chairman: It's in the MacKay report. I just want to see what it all means. Forgive me, maybe I don't understand.

• 2055

Mr. James Burns: Mr. Chairman, we didn't have a whole bunch of time. This thing just popped out, what, ten days ago or so—two weeks ago.

The Chairman: It feels a lot different for us.

Mr. Epp.

Mr. Ken Epp: Thank you. I have just a few more questions.

You complain about the banks taking over the world—at least taking over the country. One area in which life insurance companies used to have a really good share of the action was in mortgages, particularly personal mortgages for families. They've pretty well bought out of that right now and banks are taking over. Why?

Mr. James Burns: That's a good question. Great-West hasn't been in home mortgages as long as I've been there, and that's 45 years. We never did them. London Life at one time was very active in residential mortgages. I don't believe quite so much so now. I think they still have a field operation to service residential mortgages. Investors Group has a very big residential mortgage operation, and it really operates to supply the mortgage fund, to develop product for the fund.

Mr. Ken Epp: Just in general, would the insurance companies have gotten out of this because it was no longer profitable, too much book work for the amount of return, or too insecure? Was it just strictly that the banks sort of overwhelmed them and took over?

Mr. James Burns: I would say, from Great-West's perspective anyway, that residential mortgages have a very high administrative cost connected with them. Net, they're not as profitable as commercial mortgages. It was easier to lend a guy $1 million to build a building than it was to lend 50 people $20,000. So our focus historically, both in Canada and the United States, was on the commercial mortgage rather than the residential mortgage.

I think if you are a bank and you have the infrastructure in place, which is all the people out there to inspect mortgages, to renew them, and to generally manage it—it's already there; you have a flow of activity—it's probably a very good business. I think it would be very difficult to start one.

Mr. Ken Epp: I seems to me, though, that in the last 30 years, in my adult lifetime, the banks have moved into mortgages and the life insurance companies have moved out. Yet we see the banks with their record profits. I just wondered whether that contributed to their profits. I was really surprised, because I don't know whether you felt edged out or whether you moved out.

Mr. James Burns: We were never in.

Mr. Ken Epp: No, your particular company wasn't in it. Maybe I shouldn't ask you, since your own company wasn't involved in this.

Mr. James Burns: I understand Mr. McFeetors will be appearing at this committee tomorrow morning. He's kind of an expert on investment—well, he's not kind of an expert, he is an expert on investment. That would be a very good question for him.

Mr. Ken Epp: I have another question with respect to competitiveness. Do you feel that the competitiveness regime right now within the life insurance industry is fair?

Mr. James Burns: Is there fair competition in life insurance? I think there is.

Mr. Ken Epp: Okay. Am I also correct in assuming that you sell pretty well 100% of your product in Canada?

Mr. James Burns: Oh, no. I mentioned at the beginning that a 100% subsidiary of Great-West Canada is in the United States, which is quite a bit bigger company than Great-West Canada—quite a bit bigger—which we note with some pride.

You have to realize that Canadian life companies have been vastly better exporters of services than the banks, including us. Manulife say they're going to demutualize, but in giving away the stock to the policy owners they're ending up with effectively more owners outside Canada than in, and the same is true with Sun.

• 2100

Mr. Ken Epp: The reason I'm asking this—I'm building up to this question. Do you find the regulatory and taxation regime in Canada competitive with respect to the United States?

Mr. James Burns: It's different.

Mr. Ken Epp: It's different, but is it competitive? Where is it easier to grow the money?

Mr. James Burns: That's a very good question, and it's also very tough, because to do business in the United States you learn it is so big and so vast that really what you do in the United States, if you're careful, is you pick a niche, and the niche you pick is bigger than all of Canada. So you can grow forever and never stray outside your niche.

We are now the fourth largest carrier in the United States for state and government employees voluntary savings systems. You'd say, well, that's not a very big deal. Believe me, it's a big deal. In the city of New York, for example, we have 65,000 employees; in the city of Los Angeles, 40,000 employees; in the state of Carolina—South Carolina is not big but in North Carolina we have 40,000-odd people. These are voluntary savings plans.

In the United States, it's their equivalent of an RRSP, but it's only for employees of non-profit institutions. They've got a special advantage in the United States tax system for employees of what they call tax-exempt institutions, which would be state and local governments, school districts, teachers, and all kinds of not-for-profit people, like employees of the Red Cross. Any institution with employees that's not taxable fits in this category. It's gigantic.

So we've grown a huge business just in that one category, and we could go on for 20 years growing at 15% to 20% a year and we still wouldn't control it.

What's the difference between Canada and the United States? It's a different world. The tax regime I don't think is terribly dissimilar. I think they extract about the same amount. They do it differently.

Mr. Ken Epp: In Canada, are you content and happy with the taxation of, say, the premiums and so on? Are there any problems in that area? I noticed that MacKay did address that question as well.

Mr. James Burns: We think capital tax is a very funny way to tax anybody. If you're going to tax anything, tax earnings. You might have the capital and be paying a tax on it and not have any earnings. That doesn't strike me as being a very fair way to do things.

They have the premium tax, which of course the provinces collect—2%.

Mr. Ken Epp: Do your clients not also pay GST on premiums on life insurance, though?

Mr. James Burns: On premiums, yes, but not individual—

A voice: We pay investment taxes.

Mr. Ken Epp: Are you happy with those taxes?

Mr. James Burns: No, I'm not usually happy with any taxes.

Mr. Ken Epp: I just want to give you the opportunity to say you're not.

It's the first time we've had a witness, Mr. Chairman, that I have to cajole to say he doesn't like the taxes.

A voice: So he's a happy taxpayer.

Mr. Ken Epp: Yes, he's a happy taxpayer. Good.

The Chairman: He's generally happy.

Mr. Ken Epp: Yes, I think so.

The Chairman: Thank you, Mr. Epp.

Mr. Gallaway, final question.

Mr. Roger Gallaway: Thanks, Mr. Chairman.

I was going to ask Mr. Epp's next question: do you approve of apple pie and motherhood? In any event—

Your parent corporation owns Great-West; you own London Life. Why would you allow them to be separate? Why wouldn't you merge them?

Mr. James Burns: That's a very good question. I never anticipated that at all. We have merged parts of the business.

It's a good question for Mr. McFeetors tomorrow because he's going to talk about it and he's running the place. So I'll be very short on it. You could ask him the question and I'm sure he'd like to talk to it.

• 2105

We merged the group operation. Great-West was by far the bigger group company of the two. So the group business has been merged at Great-West. London Life was five times bigger than we were on individual business. Our individual administration operation has gone to London, because it's the most efficient way to do it.

The field organizations have not been integrated or changed at all. So Great-West Life sells Great-West policies, and there is a London system that sells London Life policies. The cultures and the systems are different, so there is no point in merging them. They were not unsuccessful, so as I said earlier about something else, if the clock works, don't fix it.

Mr. Roger Gallaway: I want to follow up on that. For example, when Canadian National bought Illinois Central, I believe it was, they didn't merge the two. They both exist. One reason, one would assume, would have to do with identity. The name CN sells better in Canada then Illinois Central, but I'm not certain if there are other reasons for that. But in any event, I'll follow this up with Mr. McFeetors.

Mr. James Burns: Yes, I'd prefer that. He's the guy who is in charge of putting the whole thing together.

Mr. Roger Gallaway: I very much enjoyed your analogy of the poker game: that in the advice sector information is the crucial factor, obviously, and that in 1992, according to what you said, there was a prohibition placed in one of those four pieces of federal legislation to stop the transfer of customer information from a bank to a related corporation, I assume. To your knowledge, is that still true?

Mr. James Burns: Absolutely.

Mr. Roger Gallaway: Is that possible, then, with the consent of the customer?

Mr. James Burns: No, there is a prohibition. The 1992 act and the regulations pertaining to it said two things. They said to the banks, you can go into the insurance business starting today. You can buy an insurance company or you can start one, but you must do the business of insurance in a subsidiary. You can't do it in the bank.

There are a lot of reasons for that. One is that they didn't think it was a good idea to mix the assets and liabilities of an insurance company with those of a bank, which are quite different, and it would be very dangerous to do so. So they said, you have to do that in a subsidiary, and you cannot transfer customer information between the parent company and the subsidiary, i.e. the insurance subsidiary cannot have access to the customer information of the bank. That was in the act.

It came up again in 1996, and it was dealt with by the minister in his budget of 1996. He said that the 1992 act and regulations stand. Now here it is again. How many times are we going to go through this?

Mr. Roger Gallaway: The reason I ask, Mr. Burns, is that in the summer of 1997 the Toronto Dominion Bank sent to their customers a flyer entitled “You and Your Privacy”. It was enclosed with their Visa bill and things of that nature, In the flyer it said, we're going to share the information we have with our subsidiaries provided you do not forbid us to do that. So in other words, they sought in a sideways fashion permission to do it.

Mr. James Burns: They could not do that with insurance.

Mr. Roger Gallaway: That's my point.

Mr. James Burns: Under the present law they couldn't do it. But an investment dealer could. Was it the TD Bank you were referring to?

Mr. Roger Gallaway: Yes.

Mr. James Burns: Green Line could have access to TD's customer bank database and vice versa. Using that database they could sell mutual funds. What they cannot do under the present law is use the database to market insurance.

• 2110

Mr. Ted Johnson: I should add, if I may, Mr. Chairman, other than certain narrowly defined types of information.

Mr. James Burns: Okay, yes, travel— and stuff like that. They've always been permitted to be carriers for group credit flights, as I mentioned.

So they do have insurance operations, and I think the Commerce has started some kind of an insurance operation—P and C, I believe. In some ways they really haven't done very much, and we find it passing strange that they've been allowed to be there since 1992 and they haven't done anything.

But we know why they haven't done anything; it's because they want access to the database. If they can't have that, they don't want it.

Effectively, the government of the day then said, if you want to get into the insurance business, be our guest; go on in, but you have to go in on the same basis as everybody else. Well, that doesn't seem satisfying.

Mr. Roger Gallaway: I have one other question, then.

You've brought these graphs, and I find them quite helpful and quite interesting. It has been suggested to me that in the period of some time around—I can't name you the month—1990 to 1991, it was a well-known fact in this country at that time that a new Bank Act was being drafted, which was enacted some time in 1991 and came into effect on, I believe, January 1, 1992.

During that period, if one compares the increase in value of bank shares of the big five and the increase therein, relative to the average increase on the TSE 300 during that same time period, bank shares outperformed the TSE 300 average by— I don't know the number, but it's such an incredible factor. It could be 150%. It's an enormous number. Yet, at the same time, the banks were being battered by some rather substantial losses. Canary Wharf is one example, where there was $8 million or whatever. Real estate was in the dumps.

It begs the question, why would bank shares be increasing in value at this absolutely tremendous unprecedented rate when in fact everything would tell you that the business of the banks wasn't going well?

I think the answer is that some people understood that the 1992 act was a great deal for the bankers. It didn't reflect what was happening then, but it reflected what is happening in this period after; it was an anticipation of earnings, and in fact, that anticipation is being realized even as we speak.

Mr. James Burns: Yes, that's right.

Mr. Roger Gallaway: So that same person who has studied this has told me—and I'm really coming to a leading question here—what is happening now in terms of proposals that the banks would hope would be enacted in legislation in terms of what one would refer to as full implementation of the MacKay report will only accomplish the same. In other words, 1992 was a reflection of a review of where they wanted to go, and in a period of about five and a half years, they want to keep going. They want to keep gobbling. They're hungry.

What do you say to that theory? Is this a theory of paranoia or conspiracies?

Mr. James Burns: It's an observation about the reality. We don't make this up; it happens. Why the Canadian bank shares are actually a very good consumer buy— it's a very valuable franchise. It's the best franchise in the world.

I have to hand it to them. They're insatiable; they want more, and they want more on this round, and they continually want more, and eventually they get their way. I've tried to demonstrate that in 10 years they've been getting their way an awful lot. In 1986, for discount brokerage—this is the banks—it was zero; in 1996, 95%. For full service brokerage in 1986 it was zero; in 1996, 76%. For trust and loan, personal trust services, it was 0% to 93%. For term deposits it was 40% to 68%. For residential mortgages it was 31% to 60%—that's because the trust companies disappeared. For investment products, mutual fund distribution, it was 5% in 1986 and 61% in 1996. For RRSPs it was 37% in 1986 and 68% in 1996. That's a growth business, let me tell you.

• 2115

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

Mr. Burns, Mr. Johnson, as you can tell, we certainly enjoyed your presentation. You gave us great insight into some of the issues that are of concern. Mr. Burns, I have noted your advice to move carefully, slowly, and with thorough consideration. That's very important.

Mr. James Burns: I would have expected that of you, Mr. Chairman.

The Chairman: Thank you. That opinion may not be shared by my colleagues.

Thanks very much. We're going to suspend for approximately five minutes. Then we'll be back with Credit Union Central of Canada.

• 2117

• 2124

The Chairman: I call this meeting to order. I would like to welcome, from Credit Union Central of Canada, Mr. Bobby McVeigh, and William Knight, president and chief executive officer.

Mr. Bobby McVeigh (Chairman of the Board, Credit Union Central of Canada): Mr. Chairperson, members of the finance committee, on behalf of the credit union system of Canada, I want to thank the committee for giving us the opportunity to set how we can contribute to a more balanced playing field for the financial services sector.

The main thrust of the MacKay report is the enhancement of competition, a theme that resonates well with the credit union system as we position ourselves as a domestic alternative to the big banks.

Mr. Chairperson, members of the committee, I would like to take this opportunity to give you some background on our credit union system.

The credit union system in Canada comprises over 850 independent financial co-operatives operating from more than 1,800 locations across the country. In over 300 communities in rural Canada we are the only financial institution providing services. Collectively the credit union system has combined assets of $48 billion, which represents 7% of the financial services market in Canada. We are especially strong in the residential mortgage and personal loans markets.

• 2125

British Columbia credit unions hold 16.5% of the market share, Saskatchewan, 20%, and Manitoba, 17.5% of the residential mortgage markets in their respective provinces.

Credit unions operate on the basis of one member, one vote, and value their democratic governance and commitment to the communities they operate in. There are over 4.5 million members in the credit union system. Add to this the 5.6 million members who belong to the 1,300 caisses populaires Desjardins, which essentially runs parallel to our organization in French-speaking Canada, and we come up with nearly 10 million Canadians who are members of a financial services co-operative.

Responding to their member needs, credit unions have been innovators in the financial services sector. We were the first to offer daily interest savings accounts, MasterCard debit/payment cards, weekly payment mortgages, consolidated member statements, and financial planning services. The credit union system was also the first to provide a publicly accessible ATM.

As an organization, the credit union system has three tiers: the local level, where credit unions serve their members; the second tier of nine provincial centrals that provide support to local credit unions in areas such as technology, training, and asset liability management; and the third tier, the Credit Union Central of Canada, which is the national financial facility and trade association. It is a direct clearer of the Canadian Payments Association for the credit union system, a member of the Interac Association, and an equity partner in Mondex Canada. Along with a majority of the provincial centrals, Canadian Central is regulated federally under the Co-operative Credit Associations Act.

As the MacKay report has documented, and as all Canadians know, the financial services industry has undergone tremendous changes in the last 10 to 15 years. The financial institution reforms of the early 1990s crumbled the four pillars of financial institution regulation, allowing for an intermingling of businesses and a renewed dynamism in the financial services sector. However, we have also seen, as a result of these changes, greater consolidation and concentration.

Mr. MacKay's response—and he is to be lauded for this—is to make the enhancement of competition across the entire range of financial products and services the number one public policy objective. MacKay goes on to propose many different ways of achieving this policy objective, such as encouraging new domestic entrants, opening up to foreign banks, allowing institutions to broaden the range of their offerings, and engineering public policy outcomes through regulatory intervention.

But we are here this evening to speak to you about an alternative that has been around for nearly 100 years and that has a proven track record in serving the personal, small business, and community financial needs of Canadians. Of course, ladies and gentlemen, I speak about credit unions.

I would now ask our president and chief executive officer, Mr. Bill Knight, to speak directly to the MacKay report.

Mr. Bill Knight (President and CEO, Credit Union Central of Canada): Thank you, Mr. Chairman. I'm going to take you through a number of references to the committee, and our response to those references, and outline for you some of our views as they relate to the report, relating to the credit union system in particular.

Chapter 5 in the background paper, number 2, of the report recognizes the credit union alternative. It presents a clear description of the financial co-operative sector in Canada. In fact, I would say of all the reports in the last 15 to 20 years it's the clearest description. I invite you as committee members and the people who assist you in research to take a very good look at that chapter.

But it recognizes a strategic position we occupy. As the bricks and mortar of financial institutions is used less to house traditional transaction functions, such as deposits and withdrawals, and is used more for relationship-based functions, such as small business lending and wealth management, the credit union alternative, based on a strong customer relationship, should adapt well to this environment, as outlined in the MacKay report.

• 2130

The report, on page 118 of background paper 2, states:

Local relationships and community responsiveness position credit unions and caisses populaires to grow and prosper as other financial institutions consolidate or change their business focus. In the future, branches will be used less for traditional transaction functions, such as deposits and withdrawals, and more for relationship-based functions such as small business lending and wealth management. The credit union philosophy, business orientation and practice, founded as they are in strong customer relationships, should adapt well to this new environment.

Many of you may be aware that in the National Quality Institute reports on customer satisfaction, credit unions get one of the highest ratings of all institutions in terms of retail business, not just financial, far beyond those of the banks. We believe the MacKay report will allow us to build on that strength.

The MacKay report has set out two legislative vehicles to help us take advantage of the present circumstances and thus provide greater competition in the sector.

First, the portfolio endorses what we put forward to them in our submission with regard to desirable changes to our own federal act, the Co-operative Credit Associations Act. At present, if centrals wish to provide services to other financial entities or wish to provide retail financial services, they must do it through a subsidiary they own. I list a number of examples where this is the case. This is extremely costly in terms of the establishment of these subsidiaries.

In addition, the Co-operative Credit Associations Act restricts the ability of the centrals to enter into financial joint ventures among themselves and with credit unions, to provide efficient harmonization in the delivery of financial services. Such legislative changes would enhance the centrals' capacity to provide a broad range of support services within the credit union system. These changes would only be enabling changes in that they would also require OSFI's approval in each particular case.

A second legislative option outlined in the MacKay report would consist of the creation of one or more co-operative banks under the Bank Act. Under this option, and with the permission of its provincial regulator, a credit union or a group of credit unions could apply for continuance as a federally chartered co-operative bank.

Alternatively, the centrals could become co-operative banks whose only business would be to provide services to local credit unions, which otherwise might not be able to afford the necessary investment in systems. At the moment, a number of our credit unions are exploring the option of moving under the Bank Act, in accordance with MacKay's new entrance strategy. They're working on the business, legislative and regulatory implications of such a move.

Recommendations number 23 and 115 of the report are addressed to both provincial and federal governments. The former states:

Federal and provincial governments should take such steps as may be available, within their respective jurisdictions and subject only to prudential constraints, to remove legislative and other regulatory barriers to the success and growth of the co-operative financial services sector, including in particular credit unions and caisses populaires.

It would in essence drive the regulators to look at bringing some synergies and less duplication into their regulatory regimes.

The credit union system was pleased that the MacKay report took a phased-in approach to the acquisition of expanded business powers, subject to appropriate privacy and tied selling regimes. For example, as enunciated in terms of tied selling and the banks today—what was proclaimed—it makes sense to let those deposit-taking institutions with less than $5 billion in shareholders' equity retail insurance and lease light vehicles. I could stop there for a moment to say that we've had leasing powers for a very long time.

• 2135

The idea of the new entrants being able to enter the market before the big players is a creative and innovative way of allowing that market to be tested as to the impact of a deposit-taking institution in the insurance business, as an example, all of this being constrained in terms of the larger institutions until 2002. Again, we commend the report in terms of its suggestions and recommendations.

At the end of the chapter on the co-operative sector, the report proposes that credit unions, regulators and policy makers work together to develop a new regulatory framework for co-operative credit associations. I am pleased to inform the committee that this is exactly what has been going on in terms of the regulatory regimes at the federal level, and a number of the provincial deposit insurance corporations. We hope this fall, after broad consultations with our membership, to be able to announce the specific features of a credit union system restructured to take advantage of the need for greater opportunities and choice in the financial services sector.

I want to add that, in coming before you today, we are excited about opportunities the MacKay report has put forward for new entrants to respond to consumer needs. In terms of that opportunity, the last major round of financial institution reform was very industry-based, including ours. We have an opportunity here in 1998 to begin to have a very consumer-oriented review of requirements and opportunities for consumers in services and choices.

I believe the MacKay report opens the door for a very healthy discussion in the House committee, and in other places in Ottawa, to review the opportunity for new entrants and to help create a more competitive market, rather than the traditional arrival at your door to tell you what we said in 1985. We're very pleased to have this opportunity and will be happy to answer a number of questions. We believe the report is very effective in giving us an outline and defining co-operatives—because they are widely held—in a manner that we could take advantage of federal legislation.

Thank you.

The Chairman: Thank you very much, Mr. Knight and Mr. McVeigh.

We'll now move to the question and answer session.

Mr. Epp.

Mr. Ken Epp: Thank you, Mr. Chairman, and thank you, gentlemen, for arriving here this evening and enlightening us with your observations on the report. I know we're probably supposed to remain neutral in this committee, receive witnesses' reports, thank them for them and go back and mull them all over, but I might as well be honest with you and confess right at the beginning a bias strongly in favour of credit unions. I guess one of the reasons is that I've been a member of a credit union for 30 years, after saying good-bye to an unhappy relationship with the banks. But that's aside from my questions to you.

I really appreciate your positive approach to what's happening, and I know that in the particular credit union I belong to in Edmonton things are really looking good compared to what they were about 15 years ago or so when we were in deep trouble there.

I'd like to ask you about your membership and the services you provide. Strictly speaking, the credit union provides everything banks currently provide. Is that correct?

Mr. Bill Knight: Yes. The range of services that are provided is not necessarily consistent across the country, but in essence we provide a full-service package.

Mr. Ken Epp: One thing that interests me is you give no indication in your statements here that you are at all intimidated or concerned about the growth of the banks. I see nothing in here that says we should try to restrict the growth of banks and maybe not favour mergers and things like that. You're silent on the banks. Why did you choose to do that?

• 2140

Mr. Bill Knight: I'm not sure that strategically in the marketplace five or three banks make much difference to us, frankly. We find, by and large, that if we had given up in the marketplace because they were big, we'd have given up fifty years ago. In terms of our position in the market, our contention is that in this environment we have an opportunity to give Canadians an alternative, to add to our services and make sure they're consistent across the country, to ensure our name and brand is out there in a better way and a more efficient way than we've done in the past. We can consolidate some of our back-office operations to make sure our investments are going into maximizing our community-based credit unions in terms of what they do for member customers.

Frankly, our experience with retailing insurance, for instance, is we have not been hung up on the retailing of insurance in the 1990s because the fact of the matter is that all channels of distribution are going to be used to sell a full range of products. And the strength of the credit union is the relationship with our members and our integrity to deal with those member customers and to do it from the advice point of view. So it is not the traditional—

I would frankly tell you I'm not sure what a bank is any more. What you have is a financial services entity offering a full range of services, and the channels of distribution become key. If you try in the 1990s to build your book of business strictly on what were the 1960s or 1970s routes of distribution, you're in tremendous difficulty, in my view.

Therefore, in our industry the credit union financial group has provided that full range, from brokerage to third party to funds, etc. And all channels of distribution are going to be maximizing a range of products, if you take the general thrust of the MacKay report, the old traditional approach.

Even sitting here, Mr. Chairman, to give you an example, I would normally, in the context of previous study of the industry, not be inclined to see the insurance industry get into the deposit-taking aspect, as recommended by MacKay. But if you see the package for new entrants, it may well be that the time has come that the CPA— that there's open access and that you allow insurance, mutual fund companies, etc., into the CPA. And I'm saying that as a member shareholder, even though I might not get invited to the next meeting.

The truth of the matter is the industry has radically changed in the last decade, and it has changed in its competitive nature. Therefore new entrants, insurance companies, may need new powers in order to function in this competitive market. Therefore, for us it's not just a simple question of whether there are five or three banks.

Mr. Ken Epp: The credit unions have for some time enjoyed full participation in the payment system, right? Do you feel in any way intimidated by your partners in that association, since they're relatively large compared to you?

Mr. Bill Knight: No. As you'll be aware, Canadian Central is the group clearer for the entire credit union system, as Desjardins is the group clearer for the Desjardins movement, and we haven't felt any intimidation in terms of the general operations of CPA or Interac.

As you know, there's a paper being done by the Department of Finance on access. The MacKay report suggested opening up access, and I believe that's the general direction. But the challenge for us all is the public policy issue of the package of changes and where the trade-offs are.

• 2145

Mr. Ken Epp: Okay. I want to shift gears, then, so to speak. You mentioned—and this surprised me—that you have had within your purview the ability to lease vehicles for a long time. I didn't know that. I've never heard of a credit union pushing that they lease vehicles. Do you keep it a secret deliberately, or is that accidental?

Mr. Bill Knight: Well, first of all, the market has been quite cornered, as you know, by the major players in the auto industry. So let's have no fooling ourselves about this stuff.

Secondly, we do have, in different parts of the country, leasing operations. We have an operation, a small one, working out of Canadian Central, No Curves Leasing, and we have a number of credit unions on the west coast that have been in leasing and a number around Metro Toronto. We're actually looking at prioritizing that and growing that business, but it's an extremely competitive market. In the leasing we are into Agri-Finance leasing, I should mention. I apologize for that fact, because that's a major company of ours, and the chairman could comment about that. It's coast to coast.

Mr. Ken Epp: How does it work?

Mr. Bill Knight: Well, we do leasing of farm implement equipment for farmers through the implement dealers. It's called Agri-Finance. One of our centrals in the prairies has CU Lease, which provides a similar function. We've been doing it a long time.

The fact of the matter is that the banks have been pretty effective on leasing through some of their subsidiaries and I think would just continue to expand some of their role in that business. What we need to do is put more capital behind the leasing companies we're developing. The changes in the act would allow our Canadian Central or one of our provincial centrals to build and to capitalize the leasing companies and they'd be therefore then much higher profile in the marketplace.

Mr. Ken Epp: Now, I'm sure that you do your homework before you get into these things, but I would think that on things like farm machinery, leasing would be a fairly high-risk operation, would it not?

Mr. Bobby McVeigh: It can be, but this Agri-Finance has been one of our most successful wholly owned subsidiary operations. We've done a very good job and are very knowledgeable in the market and we have some expert management who have served us very, very well.

Just to follow up, I guess probably what we are saying and we've been saying to ourselves in the last two years is that the credit union movement is probably one of the best-kept secrets in Canada. To tag on to some of the things that we've probably explored here tonight, we didn't specifically address the bank mergers because we feel—and I have to say this—that we were looking inward towards ourselves before these mergers were announced. We've always felt that we've been very innovative, that we do have full-service financial institutions. With the bank mergers, we feel that there's another opportunity here to expand the marketplace and give the consumers an alternative and to really not be the best-kept secret in the financial sector.

Mr. Ken Epp: So I suppose what you're doing is anticipating that if there are a certain number of Canadians who feel that the big merged banks have gotten too big and impersonal for them, then they'll come storming to your door. Is that the thinking?

Mr. Bobby McVeigh: Well, that would be nice if they come storming. We can assure you that we will do everything in our power to ensure that they have an alternative, and we want to be that alternative.

Mr. Ken Epp: What about deposit insurance? How do you fit into the grand scheme of things in the country on that?

Mr. Bill Knight: We're covered by provincial legislation on deposit insurance. Your credit union would be covered by provincial deposit insurance in the province of Alberta. That's quite consistent right across the country.

Mr. Ken Epp: It is consistent? I'm aware of that in Alberta, but—

Mr. Bill Knight: It's consistent in the sense that there's deposit insurance across the country. In British Columbia the deposit insurance is $100,000, in Ontario it's $60,000, and in some of the prairie provinces it's fully insured.

Mr. Bobby McVeigh: The minimum across the country is $60,000, going from $60,000 to no limit. We cover the range.

• 2150

Mr. Ken Epp: Okay. The last thing I want to ask in this round is to do with the legislation.

You're supportive of the MacKay suggestion that you could become banks. I was just wondering, why would you want to? Because it seems to me from our conversation so far that you have all of the access and all of the abilities to do everything the banks do, plus you do it in a more personal way. What would be the advantage to you to actually go under the Bank Act?

Mr. Bobby McVeigh: Some of our larger credit unions believe that it's to their advantage and their members' advantage to come under the federal Bank Act, so that they can serve their members across the country, from province to province.

To be specific, Vancouver's VanCity Credit Union, which is in the proximity of $7 billion, sees advantage for their members to broaden their market share, broaden the base, and have the opportunity to deal in other provinces, other than just British Columbia. By changes to the Bank Act, this would be permitted.

Mr. Bill Knight: Secondly, Mr. Chairman, it's in the wholesale side. Traditionally, the centrals were narrowly defined on the wholesale side. What we're finding is that you need to pool large amounts of cash, frankly, to do a certain level of commercial lending for small and medium-sized business. So the enhancing of retail powers with the centrals backs up those credit unions. You're still going to see the credit union and the local, but you can see the use of banking power. In that sense, on the wholesale side, we need enhanced power, as is outlined in the report.

Mr. Ken Epp: So you would look at that then as an opportunity to give more and better service to small business?

Mr. Bill Knight: Yes.

Mr. Ken Epp: Which is something that certainly we in this committee would be highly supportive of, I think.

I'm going to defer, Mr. Chairman, and maybe later you'll come back to me, if there's time.

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

Ms Redman.

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

You mentioned something, Mr. Knight, that I found interesting. Mr. Epp has already commented on it, but I'd like to pursue it further. It is on the ability of credit unions to lease cars.

One of the objections we heard from automobile leasing people was that the lender becomes the owner, because obviously the lessee is simply making a financial arrangement. Can you flesh out for us how this works in your sector? Do credit unions own the cars?

Mr. Bill Knight: Yes, I think the answer is yes.

Mrs. Karen Redman: And the market share that you've been able to corner, has that been because you have an economic source of money and you have competitive rates with the big organizations that do most of the leasing south of the border?

Mr. Bill Knight: Yes. Where we've had success, which is minimal—as I've said, it's very competitive—we've had competitive rates. Some of it is service, the relationship to the particular customer, where it's an advantage at that point in time to be in a lease.

We could probably try to break that out for you. I'm not involved directly in this, but I believe we've tried to examine whether we could go say three to five years on leases. We try to keep it very flexible.

It's a marginal return to the credit union itself, but it's an effective service as part of the package of services.

Mrs. Karen Redman: As well, when you bring those statistics, if you don't know it off the top of your head, I would be interested to know how you dispose of those cars. If the credit union sells them, do you sell them to the person who was the lessee, or do you sell them at an auction or something like that?

One of the red flags the automotive leasing industry put up was the fact that people who want to end their lease may be talked into continuing to lease it because of the problem of disposing of the vehicle for the bank, which was sort of the scenario we were discussing at that point in time, how they would dispose of that vehicle.

Mr. Bobby McVeigh: As Mr. Knight has said, we'll flesh that out for you and give you the details. In essence, the credit unions who are involved in it, and there are only a few, do so more as a service to their members. But it is a competitive lease, because they will shop around. When you tell them the vehicle you want, they will shop around to get the best price they can. The lease is a buy-back option that the individual has first choice on, and the buyout or payout at the end.

• 2155

Mr. Bill Knight: One of the issues here—and it's similar to the retailing of insurance through a deposit-taking institution—is, number one, you're not going to risk your relationship to those member customers over a car lease. You'd have to be completely mad, versus having the mortgage business and the wealth management in the long term.

Financial institutions now are going to be judged by their channels of distribution and their capacity to work with their member customers, in our case, or their customers in the case of other people, working with them on the management of their assets, not just taking a deposit or making a loan. That's “oldspeak”; that's the 1980 reforms.

In our case, fundamental is the relationship. Whenever somebody who has a hold on part of the service to consumers says, “Those other people will behave badly to that individual”, it's not in the interest, for example, of institutions like ours to ruin that relationship over a car lease or a bit of property and casualty insurance.

We do insurance in British Columbia. Our colleagues in Quebec, as you know, do insurance. You just couldn't possibly risk that relationship over one item like that. In my view, it's very bad business.

Mrs. Karen Redman: If I could ask just one additional question, adding to what you've just said, do your customer members feel there's any abuse of insider information? One of the large fears that we hear over and over again about letting banks get into the auto leasing as well as the insurance sales is the fact that they will have privileged information. How do you handle that as credit unions?

Mr. Bill Knight: We actually pioneered some of the privacy codes that also affected Interac or CPA and standards we set within our credit unions on privacy.

Second, I try to remain very objective about this, but if you have a hold on a product in your channels of distribution traditionally, to keep a hold on that product you paint the worst-case scenario. Yet the Government of Canada today announced probably the most stringent rules ever seen on tied selling. I would have difficulty believing that institutions that are deposit taking in nature would risk their charter or their existence in the marketplace by coercive sales in that manner.

So I think there are mechanisms to ensure protection and integrity on those kinds of products. My point is that insurance companies are going to get into banking. Credit unions get powers that enhance bringing competition in the marketplace in the MacKay report. Banks may well be handling a number of those products.

Big isn't always better. The banks, since the 1990 powers, went around and either acquired or set up subsidiaries of insurance companies. Insurance companies are now in fact moving to provide services out there to sell their product by massive telephone campaigns and direct connects—and I'm saying this stuff positively. So consumers are given a range of choices.

I'm hoping that from a public policy view—and maybe it's a peculiar way for an industry person to take an approach—that that's what's looked at. “Oldthink” about channels of distribution, “oldthink” that people are either savers or depositors, period, in this environment doesn't fit.

This report is a good road map to debate and come to terms with a package of issues to give consumers some of those choices.

Privacy rights of consumers will be consistent and need to be protected no matter the channel of distribution and no matter the supplier. I think those things, like the charter, since 1982 in the country, should be part of the key fundamental code of behaviour for anybody who comes to this table in these hearings.

• 2200

Mr. Bobby McVeigh: Particularly with the credit union system, you have to remember that it's locally owned and controlled. The board of directors of that individual credit union is tied very closely to the community, so the ethical aspect of the business operation will be monitored very closely.

The Chairman: Ms. Bennett.

Ms. Carolyn Bennett: I have just a quick question. On the percentage of residential mortgage markets, on page 3 of your brief, you mention British Columbia, Saskatchewan, and Manitoba. I guess I'm just curious as to what's the matter with Alberta. What's the issue in Alberta that has you not list a percentage there?

Mr. Bobby McVeigh: The only reason—

Ms. Carolyn Bennett: They keep their money under a mattress?

Mr. Bill Knight: Oh, no. They keep it in the credit union.

Mr. Bobby McVeigh: We simply selected probably the three top areas rather than list the whole nine provinces. But there is a substantial market share. We can provide you with the details of each province.

Ms. Carolyn Bennett: Okay.

There's some talk that the credit unions would be able to pick up small business. If indeed concentration was a problem and small business felt they wouldn't be well looked after post-merger, is there a capacity for credit unions to pick up small business loans?

Mr. Bobby McVeigh: As a matter of fact, before the mergers were even announced, we were working— As I indicated, we are looking inward to see in which ways we can be more innovative and better serve the consumer and increase our market share.

One of the areas we are concentrating on in our strategy is small and medium-sized businesses, and it will be part of the overall package that we hope to announce in the latter part of the fall, as we go out to consultations with our movement, which are slated for the next five to six weeks. The priority is to concentrate on the aspect of small and medium-sized business.

Mr. Bill Knight: Mr. Chairman, I would add that at the present time there is a variation on where we do commercial loans. In the prairies we're very involved in commercial loans with smaller businesses and farmers, as an example. The last figures I saw, we were the largest providers of operating loans to farmers in the province of Manitoba.

But our difficulty is nationwide; it's spotty. What we're doing is looking again, as I said, using some of the recommendations here, at our wholesale operations to be able to be consistent coast to coast in terms of providing that, and it may well be through joint ventures, etc.

The Chairman: Thank you, Ms. Bennett.

Mr. Szabo.

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

I used to be the treasurer of United Cooperatives of Ontario. I think you probably know that, Bill. When I think back to what happened at UCO with Albert Plant, Bob Bethune, George May, and Gord Cunningham, and how it evolved, it made me think of the people there. Even the people at UCO were of the credit union mould. It was friendly, it was close. We have the credit committee, where people are elected at our own annual meeting. When I had a house mortgage coming due, I knew there was going to be some money to roll over, and things like this. But there were certain things, obviously, that the credit union couldn't do at the time. We couldn't pay our bills for utilities, and all of that. Of course that's evolved a little bit.

By and large, the credit union is niche banking; it's near banking. It's not full banking yet. Therefore, the credit union movement really, because it has a good agricultural foundation and a foundation with the unions, with municipalities, police forces, and fire fighters—we're talking about almost group banking with a personal touch, and it's kind of an interesting model. Obviously, the large banks are in quite a different mode.

The MacKay task force really doesn't deal very significantly with what you do today and what you're prepared to do. I think you're going to do as much as you can, but I doubt that you're going to get into corporate financing, because your local credit committee is not capable of doing that.

• 2205

So all said and done, I fully expect that you really don't have big problems with the MacKay task force from a credit union perspective. But your members are still a big part of the public at large who need those other services. They have to go to the life insurance companies, and they have to go to the automobile leasing. Many of them are insurance brokers. We've had people here tonight saying, do you know what? We're really afraid of going out of business, and we're afraid of losing our jobs.

So maybe my question to you really is—and I think I clearly understand from a credit union perspective and from your members and that there might some opportunities here for you to grow—what about your assessment of the public interest? Do we in fact need to change the financial services sector in a way that will be better responsive to the public interest as you see it? Are there some elements of the MacKay recommendations, maybe specifically permitting bank mergers, that you see might be a risk in the greater scheme of things?

You're players, and I think you probably have some thoughts on it.

Mr. Bill Knight: I have a couple of thoughts.

First of all, Paul, respectfully, we'll get you our system update, because I know in parts of Ontario our history was to come out of parishes, or sort of credit unions—IBM Credit Union, which is now the GTA Credit Union—and we are community based. If you get into the west, almost all credit unions are now community based.

Secondly, we have built from life insurance companies to trust companies to full-brokerage wealth management companies, to service the system in a manner that allows for that full range. We're now, in terms of this marketplace, looking to build on that and to grow the business.

In terms of the public interest, I think within the MacKay report is a whole range of protective devices that need to be looked at seriously. Frankly, we're still looking at it in terms of review mechanisms. There well be a series of conditions related to any kinds of mergers that may need to be spelled out in terms of behaviour. But from our vantage point, the real difficulty is, if we focus strictly on structure of entities versus the services available to consumers, I'm not certain that we'll resolve anything.

As I said, we were there when there were more than five banks, and then there five, and then they were into brokerage. We're now into brokerage in spite of all that. They're into wealth management. Mutual fund companies will start opening bank subsidiaries, right?

I'm just inviting a serious look at the new-entrant strategy, as outlined here, to drive how you respond to these major players who have always been very big and very powerful. Five or three, they'll be that way. In fact, recently the market may have some impact on the mergers in terms of the drop in values between the spring and now and other factors.

Mr. Paul Szabo: I have one other little quick question here.

Everybody doesn't live in downtown Toronto with all kinds of options. Rural communities are facing a dilemma where, if I have two banks there and they happen to be merging entities, all of a sudden I don't have an alternative. In those cases and since the credit union movement itself has a strong agricultural foundation and history, is it possible that the credit unions would seek to fill in those gaps and seek them out where there's a competitive opportunity or marketplace you may be able to service?

Mr. Bill Knight: I'm going to allow a Cape Bretoner to go first.

Mr. Bobby McVeigh: There's no question about it. As I mentioned in the initial part of my report, there are over 300 communities now in rural Canada where we are the only financial institution. As we develop a strategy for the credit union system in the next six months to a year, this is one area we will look to address.

• 2210

We do know that in Atlantic Canada and Ontario there are places where consumers don't have choices or may have only one choice now and possibly may lose that choice if that financial institution closes. I'm not talking about a credit union closing.

So we are cognizant of the fact that although we exist in 300 rural communities where there are no other financial institutions, we also have to develop a strategy to serve areas that may not be served in the future or where there is a shortfall now. So it is part of the development strategy we are working on.

Mr. Bill Knight: In the province of Manitoba where banks have actually pulled out of communities with the support of those communities, credit unions have moved in to provide the services. So we do have precedents of taking action where there's an interest by the community and where we can effectively try to provide those services.

The Chairman: Wherever there is a void, usually somebody fills it. Isn't that usually the way the market works?

Mr. Bill Knight: I think what is happening is that with the kind of technology out there now, there is a range of possibilities to fill that void. For example—and I commend them for it—there is an arrangement between BMO and the post offices in a range of northern communities. We have services in northern communities that lie within provinces. We've looked at doing it in the NWT and areas like that with Arctic co-operatives that already have a distribution system on the retail side.

The Chairman: There is a certain flow in the marketplace where people exit and enter. I wouldn't go so far as to call it the invisible hand, but there is a certain flow, isn't there?

Mr. Bill Knight: Yes, there's a certain flow, but I'm not going to get into invisible hands.

The Chairman: Okay.

Mr. Nystrom.

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

I want to welcome our two guests here this evening. To me it's very interesting to see Bill Knight as a witness. Some people here may not know that he served as a very distinguished parliamentarian from the good province of Saskatchewan back in the 1970s and that he was in this committee room many times asking questions of witnesses from this end of the table.

Mr. Bill Knight: I was only three years old.

Some hon. members: Oh, oh!

Mr. Lorne Nystrom: I said the 1970s, not the 1950s.

I noticed that one thing you talked an awful lot about tonight was the consumer's interest and that things must be consumer oriented. I wonder if you would like to elaborate a bit more on that. You seem to be stressing that an awful lot. We heard that more from you than from Mr. Cleghorn and some of the chartered banks. Are you a little bit more consumer-oriented than Mr. Cleghorn?

Mr. Bill Knight: I think from the standpoint of the nature of our structure and our strategy to be very much into relationship banking, we feel that the opportunity here is to put the consumer first, to look at the range of services, to see who could provide them and how, and to back away from the industry taking protective positions as they arrive here, as they have done for 25 or 30 years, including ourselves. So let's take the opportunity this report provides to put the consumer first.

Frankly, I believe the public may have responded better to proposed mergers if they knew what was in it for them, and I'm not saying anything to this committee that I haven't said to the banks.

Mr. Lorne Nystrom: You raised the question of the bank mergers. As I travel around the country, I sense a great deal of opposition and apprehension regarding the merger from ordinary citizens in the Estevans of the world, for example.

I notice that tonight your comments have been very cautious. I've also met with some of your centrals in places such as Manitoba, Saskatchewan and Ontario back in May, and the impression I got from them is that the bank mergers may offer to the credit unions some short-term gain as some people leave the banks. I know of examples in Regina. People have left the banks already to go to a credit union, including one very esteemed reporter in the city of Regina.

• 2215

On the other hand, there is also some concern about the long term in regard to having fewer and bigger players in the marketplace. Your assets are $45 billion or $47 billion. The caisse is what, $60 billion roughly? Compare that to the megabank Royal Bank/Bank of Montreal and so on. If they really want to flex those muscles, it might become a little bit more difficult down the road for a credit union when you are so much smaller.

So you're going from five to three, and you get fewer players in the marketplace. That's a concern I've picked up from some of the credit union members as I've travelled around the country, Mr. Chair. Is that an accurate reflection, or am I just meeting people who are a bit more apprehensive in places like Estevan and so on?

Mr. Bobby McVeigh: No, I think it's an accurate reflection. I also think the task force addresses the concern that consumer protection must be there.

As I indicated, the credit union system is looking inward in order to address how we can best meet the needs of our own members now and those of the consumer as we move forward in the next five, ten and fifteen years. Of course, this was being done before the bank mergers were announced.

Having said that, our surveys are showing the same thing. There is a genuine concern by the consumer, where as many as 50% to 60% would think about switching financial institutions because of these mergers. Obviously, there is a concern there.

We are not naive. In the financial services industry we also look at this as an opportunity. The opportunities that are presented by the MacKay task force, along with the protectionism that we believe is there, provide a challenge for us to fill this niche or expand our marketplace. That's what we want to look at in developing our strategies for the next six to eight months.

Mr. Lorne Nystrom: I wanted to ask you a question about the insurance industry. Earlier tonight we heard from Power Corp., a big player. Power Corp. expressed concern about the banks getting into auto leasing. You mentioned that the credit unions are already into auto leasing. More importantly, as members of Parliament, we're now starting to hear from the small insurance brokers around the country.

I wanted to ask you how you would respond to that question, and I'll give you an example. A constituent of mine, a guy named Frank Buck, has an insurance agency in the city of Regina. He's concerned about the banks getting into the auto leasing business. If that happens, he's also concerned about the level playing field of the credit unions getting into the same business. How do you respond to a person like Frank Buck, who has maybe eight or nine employees in the city of Regina? How do you appease his fears that this will not harm him and his business? That's just to give you a real case.

Mr. Bill Knight: Mr. Chair, since I've known him for years, I'd probably be able to sit up with Frank Buck and argue this all night, but I don't think you can alleviate his fears, frankly. Just as we know the market is going to be incredibly competitive when there are three major players, our responsibility to our members is to seek to ensure that we have all the services there.

I have a lot of confidence that there's a significant portion of the consumer market that does not have adequate insurance products, and would in fact not necessarily use their deposit-taking institution for insurance but would shop around in terms of using their brokers. I think this is particularly true on specialty insurance products and life insurance. For other insurances, it may also be true.

The reality is that for all of us, collectively, whether it's the credit union in Regina or whether it's Frank Buck Agencies—maybe I shouldn't confess this, but I've actually used Frank Buck Agencies for my insurance—

Mr. Bobby McVeigh: We have group coverage.

Mr. Lorne Nystrom: Mr. Chairman, I must confess that I also use Frank Buck Agencies for my insurance.

Mr. Bill Knight: That's right, declare your interests.

The fact of the matter is that this market and its channels of distribution are going to change. You can be sitting in Estevan, Saskatchewan, population 10,000, and can build a relationship, a banking business, with small and medium-sized business in that town on a direct relationship basis, and be wanting to provide operating lines of credit. In three weeks, you can have Wells Fargo work its way through that business community, offering lines of credit based on filling out a form. The form goes into a huge database, a neural data-mining base, and if you meet the criteria, you have the line of credit.

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We look at that reality, and we're prepared to meet that challenge. We may need some legislative change for it, so in that kind of a sense we're not different from Frank. There is just no way of trying to hold back the dike; rather, we should look for public policy to ensure there are new entrants and you have a competitive market.

Mr. Lorne Nystrom: I have one last question.

As you know, I certainly do what I can to facilitate credit unions and help and support credit unions across the country.

Mr. Bill Knight: Is it because we have 54% penetration in Saskatchewan?

Mr. Lorne Nystrom: It's probably 64% in my riding.

I wonder what your vision is about ten years down the road, Mr. Knight, if indeed this committee persuades the Minister of Finance and Parliament to implement Mr. MacKay's recommendations vis-à-vis credit unions and the possibility of credit unions becoming banks and going under the Bank Act.

You mentioned VanCity Credit Union in Vancouver. What is your vision of what may be out there in five or ten years?

Mr. Bobby McVeigh: The vision we have is that we want to be a full-service entity and meet the demands of not only our members now, but the consumers in general, from coast to coast. We want to do this on a competitive basis in the financial services sector, so that when you go to a credit union in Dominion, Cape Breton, or in Estevan, Saskatchewan, or in Vancouver, or Metro Credit Union in Toronto, you can go in there and you know you're going to get the same services, whether it's insurance or whether it's deposit-taking, or whether it's mutual funds. We want to get standard services across the country, standard brands. We want to make sure we penetrate the market as best we can and expand our market niche.

The Chairman: Thank you very much.

Mr. Knight, I was quite interested in your comment about the fact that change is on its way, regardless, and that in fact the landscape is going to look quite different three, four, or five years down the road.

In this public debate, one of the issues that is evident is the fact that— Well, there are really two debates. One debate is advanced by individuals like you who realize that change is inevitable; and then there are others who think somehow they're going to hold it back.

We've witnessed some of our presenters basically trying to keep what they have, and everybody comes here and says it's not really about power and we have a great vision about the future, but then the reality is they're here to basically protect their interests. They have a good thing happening in the economy now, and they want to keep it. That's fair enough, but it doesn't advance the debate very much, nor does it paint the future we're looking for.

You've followed this debate. You're an interested observer, of course. Have you seen that happen? Have you seen the hardening of positions and, perhaps because of this large issue of the merger, the fact that public opinion has been focused so much on that particular issue that the public policy issue is suffering as a result?

Mr. Bill Knight: Yes, I think the public policy issues and the framework to them is the fundamental issue and why you need to look.

It is a very readable report, for which I commend them. As you can imagine, most reports on the financial services industry can put you to sleep in five minutes. I think this one is a very readable report, and readable by a broad range of interested parties within the country. Therefore, around this should require the coming of a public policy debate.

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We were going to have a competitive market in any number of ways in the 1990 reforms. No one could foresee entirely where the market would go, and we went through a process where you could leap over the barriers and be in everybody else's business by using your capital base.

So it was very industry oriented. It reflected some of the Estey commission reports in terms of the regulatory regime, and we've had a number of years of that. We thought all of those changes quite frankly weren't going to deal with any of this for a long time, and here we are. The reason we're here is the technology, the rapid change in the market. Through the FTA, NAFTA, and WTO we've created an open environment, and therefore it's crucial to review this from a broad public policy basis as it relates to the individual Canadian, and not just the industry, and not just in terms of old assumptions on how financial services are delivered.

The Chairman: One of the things I have found interesting when representatives of banks have appeared in front of us—I think because of the fact that these two proposed mergers are being looked at—is there's a willingness on behalf of the banks to say yes to practically anything and everything that is thrown their way. I wonder whether that advances the debate at all.

If you look at MacKay and you just look at the regulations that will be imposed on financial institutions, they're quite numerous. For banks to get on the record as saying, “Oh yes, we agree; we will do all these things and anything else you'd like us to do”— I'm having a little bit of a problem in looking at the issue of whether or not we're really debating the public policy issues that we should be debating. If this is posturing by banks, if they're accepting these conditions only because of the conditions they face with a merger, then I don't think the debate is being well served.

Mr. Bill Knight: But I do think in that whole area—and quite frankly, I haven't got into the detail of that report—I note that OSFI is going to take a major portion of CDIC under its wing in terms of regulatory regime. I wasn't clear on the entire meaning of that. I think it's around some of the solvency issues.

Maybe this is for another day, but the report only went so far in the substantive regulatory regime around OSFI and enhancing it. You have the Australian model and the model in Great Britain pulling together all of their regulatory regime into one entity. I don't know if you do that. I don't know if MacKay was edging that way, but I think it needs more discussion.

Secondly, from my vantage point, I think we need to have more thought go into the public policy area around regulation. It could get cumbersome if you have all these hoops rather than a good, solid OSFI-based regulatory—yes, you can, or no, you can't—regime.

The Chairman: A light regulatory environment is in keeping with an entrepreneurial system, is it not?

Mr. Bill Knight: Yes.

The Chairman: By the way, Mr. Knight, I must remind you that you're on a plane at 11 p.m. So on behalf of the committee, thank you very much for your input.

The meeting is adjourned.