FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Friday, October 16, 1998

• 1728

[English]

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

We have the pleasure to have with us representatives from: The Co-operators Group; Fluke Transport Limited and Fox 40 International Inc.; the Hogan Group; the Toronto Small Business Support Organization and the Yonge Street Mall Business Association; and Trimark Investment Management Inc.

We will begin with The Co-operators Group and Mr. Frank Lowery, Vice-President.

Welcome.

Mr. Frank Lowery (Vice-President, General Counsel and Secretary, The Co-operators Group Limited): Thank you very much, Mr. Chairman.

Actually, I would like to call upon Dona Stewardson, who is one of our directors from Ontario. Maurice Campeau was going to make our presentation, but due to the committee's scheduling changes, he's still in transit from Calgary. We're hoping that at some point he comes into the room, but Dona is fully capable of making the presentation.

The Chairman: Thank you.

Ms. Dona Stewardson (Director, Ontario Region, The Co-operators Group of Companies): Thank you very much.

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We would like to begin by thanking the committee for taking the time to hear us. As you've already heard, Mr. Campeau is supposed to be doing this, but we're very flexible. I am on The Co-operators' board through the Ontario Federation of Agriculture and am a member of The Co-operators in the Ontario region.

From management, we are joined here today by Frank Lowery, our company's legal counsel and corporate secretary. Lorne Motton is also with us. He is the finance vice-president of our largest insurance company, Co-operators General Insurance Company. Laura Gregson, the manager of corporate relations for all of The Co-operators companies, is here too.

All of you, I hope, have received this blue book, which contains our response. Our submission of October 31, 1997, is also here, along with our statements on co-operative principles, the company structure and a list of all the member shareholders, which is at the back of the book.

The Co-operators chart, as we mentioned earlier, shows that there are really three separate groups of companies within the group of companies.

The first, of course, is the ultimate parent, The Co-operators Group Limited. This is a company that was continued under the Canada Cooperative Associations Act. It is a co-operative and is owned by some 31 members which include basically all of the credit unions across Canada as well as many other co-operatives and like-minded organizations such as the Saskatchewan Wheat Pool and the Co-operative Housing Federation of Canada. This membership varies, as our membership is open and voluntary, as it is with all co-operatives.

The second group of companies are those we are really representing here today, namely, the financial institutions. These are basically insurance companies and are sheltered a Canada Business Corporations Act company, Co-operators Financial Services Limited, which was continued under the CBCA around 1989 in preparation for the introduction of the new Insurance Companies Act of 1992.

It was intended at that time to be our “holding body corporate” for the purposes of that act. Co-operators General Insurance Company is our largest insurance company. It is a multi-line and multi-distribution company which ranks anywhere from number three to number five of all Canadian property and casualty insurance companies. It represents about 70% of all the business done within the entire group of Co-operators companies.

The third group of companies is smaller but not insignificant. These are related organizations, such as our investment portfolio managers, Co-operators Investment Counselling Limited, which are held directly by the parents. I will not be focusing my comments on these companies today.

Let me turn now to the MacKay task force report with our general comments.

We would like to begin by saying that we at The Co-operators are generally very pleased with the report and its recommendations. In fact, we are more than pleased. We are excited with the breadth, depth, vision and entrepreneurial bent of the recommendations.

Obviously, as active and significant participants in the co-operative sector, we support the recommendations relating to the ability of credit unions and credit union centrals across Canada to form co-operative banks. In fact, we intend to be much more than a passive observer should such a development take place. We want to be an active, dynamic and important contributor to the development of a “community bank” alternative for Canadians. This is an exciting initiative and should be supported.

The recommendations on reform of the regulatory process, centralizing same under OSFI, and the redefinition of OSFI's mandate are all consistent with positions we've taken in the past. Harmonization, always difficult in this federation, is also a key element in ensuring that all competitors are competing fairly.

The focus on community is key to our organization, and we look forward to community accountability. As a co-operative, we have always felt an obligation to community. This is evidenced by our many good works, which we may be able to get into later. But just as corporate governance has become of greater significance to regulators and organizations from a prudence and safety point of view, community accountability should have significance from a societal and public policy point of view. There is a much bigger environment out there other than just lakes and trees—people matter too.

The realization by the commission that there is value in having a strong Canadian ownership presence in certain sectors is also a key comment. We, as a wholly Canadian-owned company in the very competitive property and casualty insurance industry, which is dominated by non-Canadian companies, are very aware of this. We don't believe in special protections, but we do believe that there is a public policy purpose in ensuring a significant—if not majority—presence for Canadian-owned or Canadian-controlled firms in all sectors.

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And let us not forget technology. It has often been our perception as one of the regulated that the regulators are not keeping up with the developments in technology. Our system development over the last few years has been oriented to one-stop shopping, where, literally, a client speaking to an agent who is using his or her computer will be interviewed, underwritten, priced and sold on the spot. We are also interested in the Internet, but we realize its potential and we intend to be aggressively there as quickly as we can develop.

In our direct marketing and telephone response systems we have been a leader, even selling some of our know-how to one of the major Canadian chartered banks.

But enough of a general review. Let us talk for a moment about a few of the recommendations in the MacKay report which are of particular interest to us at The Co-operators.

In our written submission to the MacKay commission, dated October 31, 1997, a copy of which is attached to this submission, which we supported verbally when our president and chief executive officer, Terry Squire, met with the commission face to face, The Co-operators argued for a number of things.

Firstly, with respect to how people organize themselves in business, whether it be in financial services or otherwise, we argued that “co-operative organization should be a right”.

We argued that Canadians should be allowed to organize in business as they choose to be organized. That is to say, if people want to own or control a bank, an insurance company or a loan and trust company co-operatively, they should have this right.

Obviously, as we pointed out in our submission to the task force, such a company would be subject to all of the same prudential, corporate governance, solvency, and other regulatory controls as any other financial institution.

The only difference would be in who owned the company, how it was controlled—for example, democratically based on co-operative principles—how its profits were distributed, and the basis on which it conducted itself in the community—again, a basis such as co-operative principles.

Recommendations 22 and 23 of the MacKay report do just this. Number 22 recommends that:

Federal legislation should permit cooperative banks and other financial institutions to be chartered as new institutions, with ownership and governance based on cooperative principles.

Number 23 recommends that:

Federal and provincial governments should take such steps as may be available, and subject only to prudential constraints, to remove legislative and other regulatory barriers to the success and growth of the cooperative financial services sector.

We have been arguing this principle for many years now, at both the federal and provincial levels. Up until now, it often seemed to fall on deaf ears due to the fact that people were entitled to organize on a mutual basis, which of course is not totally dissimilar to a co-operative basis but does have significant differences.

The founders of the co-operatives actually considered forming our company as a mutual company, but consciously decided not to for fear that it would be controlled by management and not actually by the mutualist policyholders.

The recent moves of large Canadian mutuals to de-mutualize, irrespective of the merits in each case, seem to bear out this particular concern. And in the case of The Co-operators, I cannot stress enough that this particular initiative has been driven by the board of directors, itself democratically elected by the members of The Co-operators, our owners.

To summarize, we are thrilled to see our recommendation to allow Canadians to organize co-operatively in the financial sector supported, and we would strongly recommend that you, as legislators, support it as well.

Another issue of specific interest to us was the requirement in federal financial institutions legislation for a public holding of 35% once an entity reaches a certain size. The theory behind this seems to have been that the larger an institution becomes, public policy dictates that there should be some independence of ownership, control and directorship as well as increased transparency and disclosure.

In regard to co-operative financial institutions and the public holding requirement, we support these public policy objectives, but we also argued in our submission to the MacKay commission that co-operatives inherently and intrinsically meet the objectives of widely-held status, namely, the independence of directors from management and concern by the board for the interests of all members or shareholders. And as such, they should be exempted from the public holding requirements of legislation, irrespective of size.

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The task force has clearly accepted this argument and makes such a recommendation as recommendation 36. We urge you as legislators to support this particular recommendation.

As you can see, on the first two issues we addressed to the task force we were successful, but these issues are not the end of the story, as they were presented from us as a co-operative, from the co-operative perspective, as we know that virtually no other companies other than credit unions have this perspective. And the focus of the credit unions and centrals was on liberalizing their own legislation and on issues surrounding a community bank.

Let us turn for a moment, therefore, to a few of the other issues.

Having dealt in our submission with what The Co-operators felt were the two most significant co-operative issues, we went on to deal with other issues related to consumer protection: promoting competition; the retailing of insurance by banks; the use of confidential customer information in selling financial products; access of financial institutions to capital and capital liquidity; streamlining and harmonization of regulation; the excessive tax burden of the property and casualty insurance industry; and the need in secondary and post-secondary schools for better public education related to insurance.

Many of these issues have been addressed by the commission, and most of the commission's recommendations we not only support but applaud. In particular, we applaud the commission's focus on entrepreneurship and on encouraging new interests and competition in certain markets.

We also support the changes recommended to OSFI to make it more user-friendly and sensitive. OSFI should not merely be a focus for complaints or solvency measurements. It should balance competition and innovation considerations with its present responsibilities with respect to “safety and soundness”.

We also strongly agree with the commission's observations and recommendations with respect to taxation. In the property and casualty insurance industry, due to our taxation in different forms and at different levels, we have been taxed disproportionately for many years compared to other financial institutions. Given the variability and at times volatility of our marketplace and the crucial role we play in the case of catastrophic accident or significant risk, such as the ice storm in eastern Ontario and Quebec this year, it is not appropriate to put both our companies and our customers at risk due to inequitable and grossly unfair levels of taxation.

I have commented to this point on what we like in the MacKay report, but there are some recommendations which we think that you as legislators, acting in the public interest, should weigh very carefully. And even if you do agree to implement them legislatively, you need to do so with much reflection and care, ensuring that all competing and relevant interests and issues are addressed.

The following are recommendations requiring some reflection.

To us, the first of these issues is obviously the big one, that is, the retailing of insurance through bank branches and the use of confidential customer information collected from depositors for this purpose—cross-selling or tied selling, as the task force refers to it. The Insurance Bureau of Canada, our insurance trade association, has clearly come out against this recommendation. We support its position.

With respect to bank retailing of insurance in branches and the use of confidential customer information for selling insurance, the commission has recommended that subject to certain transitional rules both of these be allowed. Their argument appears to be that the consumer interest in access to different products and different suppliers outweighs other considerations.

In our view, at this point in time this is absolutely not so. It may be that some day banks will or should be allowed to sell insurance directly and, quite frankly, we at The Co-operators are not fundamentally predisposed against this. I know that may not sound like a popular thing for an insurance company to say, but we know we can compete—and we have competed—successfully with the bank-owned insurance companies, provided we are on a level playing field.

The executive committee of our board recently visited a number of institutions in Europe, including the Rabobank referred to in the commission report, which are directly engaged in bank insurance. In these instances it seems to work well and it seems to have significant customer acceptance.

We at The Co-operators have ourselves been involved for many years in a joint venture which involves our underwritten products being sold by credit unions, so we are familiar with distributing products in this manner.

However, the issue with the banks is not so much what they will do in the future but the advantages which they have been provided in the past and the effects that these advantages would have on the marketplace in terms of competition should they be given these powers. We have already seen what these advantages did for the banks in their takeovers of the loan and trust company sector and the securities dealer sector.

The task force tries to deal with this by requiring a more stringent regime on tied selling. It points out that it was surprised to find its polling suggesting that 16% of the public polled felt the sale of one financial product by a bank was linked to another.

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This of course does not surprise us. In fact, what surprises us is that the number is so low. It appears to be common at banks, for example, that when you refinance a mortgage the documentation you sign gives the bank the right to solicit you or to provide you with information on any product. We suspect that most consumers don't even realize what they are getting into by signing this—even if they read it.

I know for a fact that one of my management colleagues sitting with me today had exactly that experience when renewing a mortgage at one of the five big Canadian banks. When he asked to have the offending clause struck out he was told by the loans officer that no changes could be made to the form, that it had to be signed as is—that is, if he wanted the mortgage. As a person familiar with this area, he understood the significance of what was being said and done, but most consumers would not. And that might explain the low level of understanding of this issue among the public. They don't even know they are being cross-sold.

Banks in Canada have historically been protected in many ways. You in this committee and in Parliament have been told repeatedly about these advantages. These competitive and state-supported advantages have resulted in a very strong bank sector of very strong and strongly capitalized banks, with very significant leverage abilities compared to other financial institutions. Along the road, they have also collected personal information records on many Canadians; we have heard estimates that this is in the range of about 14 million Canadians.

In our view—and we know that we have no statistical basis for saying this—it would be surprising to us if virtually all adult Canadians weren't in a bank database through credit cards, student loans, mortgages, car payments or some other form of financing or lending. This is a significant source of information and marketing, which can be accessed by the banks easily and at low cost. Those of you in politics know more than we the value of a good list for membership, for fundraising and for other purposes. And these lists are very good lists indeed.

If banks are given the right to retail insurance in their branches and to use confidential customer information collected for other purposes for this purpose, we would recommend that you consider more than just tied-selling and coercive-selling restrictions. These need to be very carefully thought out and likely even piloted for effects before the banks are given any new powers.

For example, with respect to standard banking products such as ordinary loans or mortgages, perhaps at the time these loans are initiated or completed no tied selling whatsoever should be allowed, including tied promotions focused on tied selling—absolutely none at all!

Two weeks after the transaction in question is closed and the mortgage has been funded, let's say, the bank should then be allowed to write to the customer indicating the desire to cross-sell to the customer. In this communication, the bank could be required to give disclosure related to the interrelationships between the banks and other providers, as well as the compensation structure with respect to each of them. The customer then would have the opportunity, in an uncoercive environment, to actually make a free choice.

This is not our desired outcome, but if the banks are to be given these powers, more needs to be done to protect consumers and, of equal importance, to promote or maintain competitiveness and consumer choice in various sectors.

Enough said on that subject. Let's turn now briefly to one other recommendation which, in our view, should be reconsidered: the rationalization of deposit insurance and compensation systems and the recommendation to level the playing field with respect to the Canada deposit insurance system and the system for the compensation of policyholders of a life company in the case of the failure of life companies.

We support this recommendation, as for years the banks have had a significant state-sponsored and underwritten advantage in this area.

However, we note that no mention is made in this recommendation of the compensation system with respect to property and casualty insurance companies—PACIC.

We are not sure if this is by design or just by omission. However, we would urge you as legislators to review this recommendation carefully and to include PACIC in any reviews. Property and casualty insurance is distinct from other financial sectors. This has been recognized recently in Ottawa by the various bodies reviewing the financial services sector.

The MacKay task force itself notes in its report that:

Unlike the other components of this sector, the property and casualty insurance industry does not perform an intermediation function but instead plays the vital role of spreading and absorbing risk.

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What it does not note is that this industry, unlike all other financial services, spreads and absorbs risk which, in the absence of this industry, the government would most likely be obliged to absorb. One merely has to look south of the border to instances when government declares areas to be disaster zones so they can be eligible for additional federal funding. Again, the ice storms in Canada and the Winnipeg flood are examples of instances where government has had to intervene.

The property and casualty insurance system is the government's first line of defence in the case of catastrophic accidents. The government, in our respectful view, has a significant interest in ensuring that PACIC is able to meet its liabilities and that behind PACIC the property and casualty insurance industry in Canada is able to as well. Because clearly, if PACIC fails in the case of a truly significant catastrophe such as a Kobe-sized earthquake or a Hurricane Andrew type of event, many if not most property and casualty insurance companies will also fail. And in these extreme cases, it will be government that picks up the cost.

For these reasons, we believe that government, in considering the MacKay report recommendations, should include PACIC in any review of compensation plans.

At this point, we don't intend to say anything further. We could continue to deal point by point with particular recommendations, but that was not our purpose today. Our purpose was to support most of the recommendations of the MacKay report but to advise caution to your committee with respect to how you deal with several of them.

We have summarized these on the back page, which makes it very easy for you. We're not only one-stop shopping; we're a one-page list of recommendations!

As I mentioned at the very beginning, we are excited with this report, and we hope you legislators take its recommendations to heart. In particular, the community accountability recommendations are very exciting for us because they reflect many of the things which we as a co-operative do as a matter of personal and co-operative values.

If you have any questions, we would be pleased to answer them.

Also, our colleague from Calgary has arrived. I would like to introduce Maurice Campeau to you at this time too.

The Chairman: Welcome. Ms. Stewardson read every word from the text you were supposed to deliver.

Mr. Maurice Campeau (Director, Alberta Region, and Second Vice-Chairperson, The Co-operators Group of Companies): Very well done.

The Chairman: We're going to move on to the next presentation from the Fluke transportation group and Fox 40 International Inc.

Mr. Ron Foxcroft, welcome.

Mr. Ron Foxcroft (President, Fox 40 International Inc., Fluke Transport Limited and Hamilton Terminals Incorporated): Thank you very much. I've provided all members of the committee with a Fox 40 whistle free of charge—

Some hon. members: Oh, oh.

Mr. Ron Foxcroft: —retail value $6, so feel free to blow it if I go over my allotted time.

Thank you for this opportunity to address the committee on the issue I want to talk to: the bank mergers.

I'm a business owner and entrepreneur based in Hamilton, Ontario. The dictionary describes an entrepreneur as a person who runs a business at his own financial risk. In today's economy, where companies like mine must compete in the global market, it is difficult to function as an entrepreneur. We need many services and resources at our disposal.

I have served as president of the Hamilton Chamber of Commerce and on several national and international organizations. The question asked of me most often is the following: how do you operate at the international level and what resources do you need?

I own and operate three companies. Fluke Transport is a 78-year-old trucking firm. Our slogan is, “If it's on time...it's a fluke.”

Some hon. members: Oh, oh.

Mr. Ron Foxcroft: You have to be very confident in your business to use that slogan.

I also own Hamilton Terminals, which has over 400,000 square feet of climate-controlled warehouse space.

These two companies serve a southern Ontario market and the northern U.S. states. The business is highly competitive, but not complicated from a banking standpoint. The Bank of Montreal, my bank, knows and understands my business and we have an excellent relationship.

My third business is Fox 40 International. We manufacture 40,000 whistles a day in 126 countries. Fox distributes the world's most advanced and best-selling pea-less whistle, a whistle that I invented.

Together, my three companies employ 200 employees and have 1,000 agents and distributors in 126 countries around the world.

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When I started in business, I banked with the Continental Bank of Canada, which later became Lloyds, which later sold its Canadian enterprise to the Hongkong Bank of Canada. I switched to the Bank of Montreal because they offered more services and had the resources I required. I've been with them for ten years. The Bank of Montreal helped me in growing and expanding my business.

My scenario is not different from that of most small Canadian companies: straightforward business and straightforward banking.

When I invented the Fox 40 whistle I was truly an entrepreneur. Last week I was the guest on CBC TV's Venture and explained to them that several years ago I invented my whistle in Canada and manufactured it in Canada but was forced to sell the product in the United States first because of delays in Canadian government processing.

I didn't have a great deal of support in the early years—and probably didn't deserve it. Support is what new companies need. The R and D and patent were important, but finding and securing the market was the key element. It was demand for the product and the pressure of competition that pressed me to survive. As I said, today we sell the Fox 40 in 126 countries. My lawyers, accountants and staff had to acquire the skills and resources to function in a global market. Should I expect less from my bank?

The Bank of Montreal came to the table with the experience and resources that I required to penetrate and capture the international market, but since we became an important international company we are now approached on a regular basis by foreign banks and institutions with greater size, more services and more global reach.

I've been more than satisfied with the service I've received from the Bank of Montreal, but they need the freedom to grow if we are both to compete together in the international market.

Let me address the issue at hand that I want to speak about: the bank mergers. If we as a nation are going to encourage and allow foreign banks an opportunity to offer their services in Canada, there should be no question that our Canadian banks should have the same opportunity to offer services that are competitive with these foreign banks and institutions. If there were another way of gaining the size and strength required to compete, I'm sure that Canadian banks would have already exercised those options.

The quickest way to achieve that goal is the merger of Canadian banks to create the overused term, “world-class status”. Once the issues of safety and soundness and competition and concentration have been reviewed by government agencies, I believe it is in the national interest to have a made-in-Canada bank serving us at home and abroad.

I can't hide my frustration with the time it takes to make decisions on these issues. Of course, I don't pretend to know the full scope of your task. I can only relate my own experience. In the trucking business, delivery on time is crucial. Companies can't afford to stop business while they're waiting for a truck.

I still referee NCAA basketball games in the United States; in fact, I worked Michael Jordan's first ever intercollegiate game and I refereed the gold medal Olympic final basketball game in 1976. In basketball, I must make decisions instinctively. When I blow my whistle, the play stops or the play ends, but the game goes on.

Canadian banks have to get in the game. In this game, the government has the whistle and can set the rules, but nothing is going to happen until the game starts. I urge you to blow the whistle to start the game.

In closing, I encourage and support the MacKay recommendations that call for more competition and increase the ability of foreign banks to enter the Canadian market. I'm even more delighted at the idea of the formation of new small financial institutions. These new, smaller banks should satisfy the individual bank customer that he or she is not going to get lost in the larger banks and will also offer them an alternative.

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The Bank of Montreal-Royal Bank proposal to establish a new bank for small business is indeed encouraging. The thought of 2,500 dedicated account managers to serve small and medium-sized enterprises is a step in the right direction.

With all due respect, I encourage this committee to make a decision as soon as possible in favour of Canadian bank mergers. Get the game started. Use your whistle to control the game, but by all means use a Canadian-made Fox 40 whistle.

Some hon. members: Oh, oh.

Mr. Ron Foxcroft: Thank you for your time.

The Chairman: Thank you for the whistle—

Voices: Oh, oh.

The Chairman: —and thank you very much for your presentation.

We'll now hear from the Hogan Group's president, Mr. Michael A. Hogan.

Welcome.

Mr. Michael A. Hogan (President, The Hogan Group): First of all, I must tell you who I am. I'm an international insurance consultant with 47 years in the business. I know my face doesn't show that—

Some hon. members: Oh, oh.

Mr. Michael Hogan: I spent most of those years as an international insurance broker working for international insurance brokerages. In a nutshell, that means that I've worked in most major centres around the world.

I have been involved with this task force from the day it was first a germ of an idea, in that Baillie happened to be my corporate lawyer at the time. And at the outset, the committee will know me—and so will Mr. MacKay—for my severe criticism of the composition of the task force, which showed that there were at least three or four directors of banks, later slimmed out as time went on.

From that, I gathered the impression that the scales were rather tilted in favour of the banks. Fair statement or unfair statement, the conclusion is that I, for one, am of the firm opinion that the banks will merge. And in fact, to be terribly facetious about things, and as an old consultant for Ottawa ministries and crown corporations, I have a feeling that it's a foregone conclusion. Don't take that as an insult to the committee.

Secondly, having read in great detail the report that was put out by the task force, it became obvious to me that I wasted a lot of my time in submitting a report of my own, because I wanted to take the task force in a direction that is away from all this “guffubble” about insurance companies and their right to exist without competition from the banks.

I have no problem with banks selling insurance. I saw it in England. I see it in France. It's going on virtually all over the world. If you're a tough enough competitor, you'll be able to withstand the onslaught of the banks.

I also had the somewhat dubious privilege of handling bank insurance programs for seven years, up to last year. We were handling all of the travel insurance programs. And if it's any consolation to members of The Co-operators, our biggest problem with those programs was the attempts of tellers to resolve travel insurance problems at the wicket. We were there to sort out the mess.

A major thrust that I took in my report by way of offering the banks an alternative to pushing into the insurance industry in total was that of recommending to the government that we follow the route taken by the Irish government about 10 years ago in forming an international financial centre in Dublin, where I had the privilege and still do have the privilege of working.

My contribution to that international financial centre was on the subject of captive insurance companies. I don't know if you gentlemen are familiar with a captive insurance company. I'll try to summarize it as well as I can. A captive insurance company is one that is formed by a major corporation, usually a major international corporation, which requires only that they provide minimal capital and surplus in order to charter that company. Most of these companies have been formed in offshore locations. The last captive I formed was in the Dutch Antilles.

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About seven or eight years ago, I went to the British Columbia government and gave them recommendations and a full story on how to bring forward a bill on captive insurance companies, which they did in 1987. Since then, about 20 captive insurance companies have been formed in British Columbia. They are now out flogging in the Pacific Rim to try to get companies to transfer from Singapore and other captive locations.

My theory, in which I'm a firm believer and have advanced to the mayor of Toronto—I can never remember his name—and to Premier Harris, is that Toronto should become a centre for the formation of captive insurance companies, but under federal legislation. I gave the committee a copy of the B.C. act and told them it was a starting point for them in bringing forward legislation to favour this possibility.

The advantage of the captive is very simple. Dublin was involved in the EU long before Britain got into it. They brought captives in. The first captive to form in Dublin was owned by the Volkswagen Corporation. Other European corporations followed, as well as American and Canadian corporations, and the offshoot was that once these corporations became familiar with the environment they also opened up manufacturing plants and other operations in Ireland, which today has one of the more solid economies in the whole European structure.

The other item which I drew to the attention of the task force was that of unlicensed insurance companies that underwrite Canadian risk. This fall, I'm an expert witness in two court cases, one involving a $12 million situation, the other involving a $100,000 situation, where unlicensed offshore chartered insurance companies underwrote the risks. The purpose of these companies is to sell insurance in Canada and, once the claim appears, to simply disappear from the room. There is no means of controlling them. There is no regulatory body that can check out their financial statements, which are usually false and very misleading for brokers.

The reason I said my report was probably ignored is that on page 92 of background paper 5, they refer to the Insurance Concordat and say:

No foreign insurance establishment should escape supervision.

All insurance establishments of international insurance groups and international insurers should be subject to effective supervision.

Consultation between the home and host supervisors should take place prior to the creation of a cross-border insurance establishment.

What the committee forgets is that in no way, shape or form can they reach out to these offshore insurance companies, which, in any event, are considered illegal by the different provinces. But the kicker is that any insurance broker can deal with them and place American risk with those companies without any intervention or supervision by federal or provincial regulators. I've had this out with provincial regulators now for 10 years, but that's somewhat like knocking one's head against a stone wall.

I must point out to you that when your organizer was trying to reach me, typically, I was travelling. They were calling me from Ottawa and I was working in Ottawa. They next called me just as I arrived from Dublin. I came here without really knowing why I'm here or what I was supposed to bring with me, so I'm really shooting from the hip here. I've dragged out a quick look at some documents of yours and my own.

I'm going to sum up now by just very quickly reading for you what a captive insurance situation is all about. It's a financial industry.

And my hat is off to Ron Foxcroft for being imaginative.

I must suggest to you, Mr. Foxcroft, that when you use the term “pea-less”, to a 72-year-old man at 3 o'clock in the morning that is an interesting possibility.

Some hon. members: Oh, oh.

• 1810

A captive insurance company is a financial industry, and I want to emphasize this word “industry”. I'll use Toronto as the example. To support the present Toronto economic base and the designation of the city of Toronto as a “financial centre, insurance”, acknowledging that the city already provides the necessary support facilities—we have numberless people with experience that could be fed into this industry who are already working on offshore captives—the transfer of captive insurance company money is to be treated as transfer to a safe haven, considering the extent of political and economic disruption in other areas of the globe.

And when I talk about it as an industry, I am not talking about a million-dollar industry: I am talking about a billion-dollar industry. For example, if a refinery out west burns down, it's paid for out of a captive that may have something in the order of $3 trillion or $5 trillion sitting in reserves in that captive. Why not have that money in Toronto in a Canadian bank?

The concept should be supported by federal legislation in order to avoid conflicting provincial insurance regulations, particularly with respect to Canadian captives. I'm of the view that provincial regulators should be drowned—

Some hon. members: Oh, oh.

Mr. Michael Hogan: —and federal legislators should regulate the whole process.

Deal firstly with the mechanics necessary to charter captives and ignore the automatic assumptions held by some Ottawa personnel—originally, Mr. Mazankowski, who couldn't get this through his head—that tax considerations are necessary. They are not necessary. The financial advantage to a captive results from the requirements of low capitalization and surplus, the elimination of commission and fees to others—brokers—and the ability to deal directly with international and domestic reinsurers and thus accrue initial commissions and contingent profit commissions on the reinsurance. That's where their money is made.

Consider only that a captive is another form of self-insurance, whereby the parent/owner corporation—every major corporation in Canada has a captive, such as Alcan, Edper, Brascan, blah, blah, blah—realizes the use of premiums ordinarily paid to conventional insurers. These same insurers in many instances can be brought back into the picture as reinsurers or as policy insurers. The insurance brokerage force does not suffer from the formation of captives, as this involves major corporations whose needs cannot be accommodated by the average broker. Your run-of-the-mill broker couldn't possibly set up a captive insurance company, nor would he ever be asked to.

Multinational corporations forming captives do so from a base of multi-millions in annual premiums. In fact, a good starting point is the corporation that pays a minimum of $5 million premiums. The international banking industry currently serves the needs of approximately 4,000 captives chartered in locales which fall short of the facilities and the security which would be offered by the city of Etobicoke.

Captives represent, at the moment when I wrote this report, $15 billions in premiums, without mentioning the reserves that are held behind these captives, which run into the trillions. And much of it is held as reserve against claims for property and products and environmental and natural disaster claims.

And why the city of Toronto? Why not?

I'd like to end with a rather cynical note on a point that was made in the previous meeting by a president of an insurance company with whom I am very familiar. He registered a quip with some member at the head table about somebody who wanted to form an insurance company in Calgary, I believe, and who had gone to the banks and could not get the money from the banks.

I was used as a consultant by one of the major banks—and I'm not talking small players here—to do a due diligence study on two individuals who had applied for a $20 million loan from the bank to form an insurance company. The business plan was perfect, put together by a major chartered insurance company. When I did my due diligence I recommended that the bank turn down the loan because one of these individuals had taken two insurance companies to the cleaners back in the sixties, so tit-for-tat.

• 1815

So I sympathize with banks. In fact, I am amazed at the due diligence that is done by banks where major loans are concerned.

In a closing letter to Mr. Cleghorn, I suggested that the presidents of all these banks have one thing in mind, and that is, what they personally will get out of it if the merger occurs. The president of my international brokerage, the one that I served most of my years with, sold the company to another and walked away with $63 million in his pocket. I walked away with $5,000 or something of that nature in 1970. That's an impression that I hold. And I ended my letter by saying that Flood, for one, will probably take his money and return it to the CIBC, his conscience bothering him because of all the bad loans he made to the Reichmanns.

I have no sympathy with the banks, but on the other hand, I sympathize with them where some people are concerned.

That's the end of my little treatise. If you want it in writing, my report went to Ottawa; it's all there. I've given you articles that I have written on the subject. I've given you articles that I have written in the areas where banks do not dare intrude. I think you'll find it a very comprehensive report. I'm rather dismayed at the naiveté—and please, I have no hesitation about using that word—that is displayed in certain sections of this task force report.

Thank you very much.

The Chairman: Thank you, Mr. Hogan.

We'll now hear from Ms. Susan Bellan from the Toronto Small Business Support Organization.

Welcome.

Ms. Susan Bellan (Member, Toronto Small Business Support Organization): Thank you.

I am a small-business owner in Toronto. I've owned a business, Frida Craft Stores, on Front Street for 20 years. I'm the former chair of banking issues for the Canadian Organization of Small Business and the author of a book called Small Business and Big Banks.

I'm just going to highlight some of the points I made about the MacKay task force. On the whole, I thought it was a pretty positive document, but we have some problems with it.

The Toronto Small Support Business Organization is a very grassroots organization of actual small-business owners. We're not lobbyists. We're in the trenches every day running our businesses. Our organization strongly opposes the mergers right now. I was always brought up to believe that a bird in the hand is worth two in the bush and, to me, all this stuff about competition is “in the bush” right now.

When Wells Fargo said it was coming to Canada, I repeatedly phoned them myself, trying to find out information. They said, “Next month, next month...we'll be launching our blitz.” Last December I contacted them and they said, “Yes, now we're going to start.” This was after six months of delays and it was in my Christmas season, so I couldn't get down to it at that point. I called in January and was told “Oh, no. We've stopped taking applications for the moment.” I said, “What?” They said, “Yes, we've taken 1,500 applications across Canada and that's it for the moment. We're going to just sort of let it settle and see what's up.” So to me, if that's the alternative, that ain't one.

ING just takes consumer deposits, so as a small-business person I can't go to them for money. They talk about country-wide mortgages. Yes, they're huge in the United States, but they haven't made a peep in Canada yet.

As far as alternative banks go, I was delighted to hear from The Co-operators that they're planning to start one. I've been part of a group trying to start a women's bank and we've found it very difficult. We've tried to put in money—a group of us has put up $100,000—but there are so many hurdles to go through that it takes forever. Often, what we find is that the people with the money aren't interested in doing the small, grassroots, small-business lending. Those guys want to go for the big stuff. It's really the same old rubbish all over again.

So I would say that before we dismantle our existing system, those of us.... I'm here representing Main Street, not globalized business, which I appreciate is very important and all that, but I'm here representing the little guys who keep our street's livelihoods safe and all that, and we just see that....

The attrition argument doesn't impress me either. I'm against attrition in Canada. I don't know why we always say, “It doesn't matter if people get laid off; it's only attrition.” When my kids graduate from university I want them to have good jobs, and if there aren't jobs because people aren't retiring or retired people's jobs don't come up because of attrition, that doesn't help my kids and my friends' kids.

Also, it just means that there are going to be longer lineups and even more pressure on staff. I know that at a lot of the banks there was decentralization. A few of us were really pressuring like mad in the early 1990s, as Maurizio well knows. The banks said they were going to decentralize and they did, for a while. But I've been like an unofficial ombudsman for small business in Canada and have received phone calls from lots of small businesses having trouble. What's been happening is that the banks have been centralizing again. Stuff is getting bumped to head office.

• 1820

And if they get bigger, just imagine. It's bad enough with five banks and everything centralizing. Just imagine it if you have three banks and two humongous banks. We'll lose all the customer relationships.

As far as bank closures, I disagree with the report's contention that as long as a financial institution gives adequate warning it should permitted to close any branch it chooses and whatever numbers of branches it chooses.

For small business, this presents a big problem. Many small businesses that deal with the public, like my own, have to accept cash. Not accepting cash is illegal. I can't tell everybody to use bank cards. And I have to deposit that cash. When I first opened my store, I used to have a safe on the premises, but the store was broken into all the time because of the safe. I then started to do night deposits, which we do every day.

If we start having very few bank branches, it becomes a problem for the small-business owner. In a big city, for instance, you can't park right in front of a bank, so it means you're wasting your time, and then you have to go and lug all this money and in a way that becomes quite dangerous. You have people watching you knowing that you're lugging money. Otherwise, your money doesn't get into the bank and that means you can't use it. You either have to make frequent trips and that takes a long time, or else not make frequent trips but then your money is sitting there and it's risky for you when you make the trip. For people in rural areas it's a damn nuisance. They're expected to drive one or two hours; it's the same problem, even worse.

What I feel is okay, for the banks it's going to be more efficient, more cost-effective, but for me, it's as if 100 people are going to have to waste 10 hours a week or 10 hours a month to save their money. We're sort of subsidizing their cost reduction and their inefficiency. We're becoming inefficient and it costs us more now. I think that has to be weighed.

As far as an ombudsman goes, I applaud the decision of the task force to say that the ombudsman should come under the federal government. My original group, the Canadian Organization of Small Business, recommended that there be an ombudsman in the first place and our initial recommendation was that it would be through the government.

I have been studying the ombudsman issue for the last few years, and what I see, quite frankly, is that until we gave a kind of a boot in the rear end on CBC's Venture, basically, the ombudsmen were totally in the pockets of the banks. We totally embarrassed them.

Evidently it caused big flak at the banks. I found out from Venture afterwards that the banks sent senior vice-presidents down to Venture to protest, but then, funnily enough, a few weeks later, an entrepreneur from Montreal who'd been having a lot of problems with the Royal Bank called me up and said, “Well, I think your program must have worked, because finally this guy went out and did something for me and I'm getting somewhere.” But it's crazy if the system has to work this way.

When looking at the ombudsman's judgments what I found is that he judged mostly in favour of the consumer, but mostly against small business; 60% of the time it seemed to be against small business. I spoke to him and he said that one of the reasons was that these people knew it was a demand loan, they walked into it with their eyes open, and the bank demanded its money back, so that's it.

My problem is that it's like 100 years ago, when there was something called “the rule of thumb”; you were allowed to beat your wife and if you beat your wife and she complained, it was, “Sorry, that's the law, what do you expect?”

With respect to the demand loan right now, we don't have alternative sources of capital; we're small people and essentially the banks are the only game in town. The credit unions don't lend us money and the trust companies don't lend us money, so we have to go to the banks. In a way, it's like we're putting our heads in the noose by agreeing to this terrible condition. And I have to say that right now many of us are kind of concerned about the global slowdown; if these guys start demanding their money, we're going to have the recession-of-1992 thing coming on.

If we're not going to have a government regulation, we need an industry regulation, then, which says that if your loan is in good standing, if you're paying your interest on time, it cannot be called. If that happens, how many of the ombudsmen complaints for small business would even come about in the first place?

Secondly, we feel that if you're having problems paying your loan there should be a rescheduling mechanism that comes into place immediately.

Thirdly, we feel that for those people who are beyond hope—we understand that sometimes that's true—everything should be done to dispose of their business assets and their personal assets in the way that causes the least injury to the business owner; a business owner can't fall back on UIC, and often the stuff is sold for a nickel on the dollar when it doesn't need to be at all.

• 1825

We have another recommendation: right now I'd like to stop the unethical practice where large accounting firms act as the bank's consultant to evaluate a loan, recommend against it and then jump up and put on the other hat. So the trustee in bankruptcy for the same bank can then basically loot the company. It's completely unethical and I think it should be regulated.

In regard to taxation, we disagree with the task force's recommendation that the federal government and provincial governments shouldn't levy capital tax against the banks and should reduce taxes.

Funnily enough, in the early 1990s, we lobbied the provincial government to really hit the banks with a capital tax. We were having no luck with the feds so we thought, okay, we'll go to the province. We said, okay, nail these guys with capital tax. They said they couldn't do anything, that it was federal. We said no, that they had capital tax, that they could get these suckers with the capital tax and tie it to their small business lending. They said no, they couldn't. It was the typical “can't do” government—can't do anything.

Anyhow, to my amazement, the Harris government has actually done that—that is one good thing they've done—and immediately afterwards, all of a sudden, Canada Trust starts offering small business loans for the first time. If you have sales of up to $500,000, you can get a $50,000 small business loan. That's because of this capital tax.

I was at something at the city of Toronto where somebody from one of the big banks was grumbling about the capital taxes; that's because they're actually going to have to do something. It isn't voluntary anymore; they're going to be hit financially if they don't do something.

Anyhow, I think this shows that teeth work. I feel as though sometimes everything's a little too voluntary. I'd love to have voluntary income tax—

Voices: Oh, oh.

Ms. Susan Bellan: —but I don't know how much I'd pay.

My last point is about the regulatory framework, which, to me, was one of the big errors and omissions of the task force, because they said, “Well, this isn't really our purview.” Page 42 of the task force report shows how bank deposits have dropped dramatically in the last few years because so much money is going into managed funds like mutual funds; the task force says that close to 50% of Canadian savings are in mutual funds.

I find it interesting that our regulatory system was set up to protect depositors' money, but that now it appears half of depositors' money is really elsewhere.

They said they couldn't comment on this because it's regulated by the province. Well, the province isn't doing very much; that's my impression. I remember the head of the Ontario Securities Commission, I think it was—anyhow, whatever regulatory body it was—quitting in disgust last year because he didn't have enough resources or government backing. And if that's who is supposed to be protecting half the nation's savings, we're in big trouble.

You might say ask why I am interested in this stuff when it has nothing to do with small business. I am very interested because I think this rush that's putting all this money into RRSPs and mutual funds has dramatically hurt businesses like mine in the 1990s. Everybody is really concerned about their future and there's a huge campaign on, with people being told to save their money, to put their money away. On these investments you don't have to pay GST or PST; if you buy something from me or eat in a restaurant you have to pay GST and PST. They have an unfair advantage.

Anyhow, besides the recession, I think Main Street's businesses have been hammered by this change. There's very little disposable income right now and a lot of it's been going into this stuff. If it had been invested back into productive things that would help the community and create jobs, I'd be all for it, but the trouble is, it hasn't.

What we're proposing is something called “millennium bonds”, where 5% of RRSPs and pension funds—anything that gets a tax advantage—has to go into long-term investment into environmental projects, for instance, into assisted housing or art projects. I could go on, but basically, it would be creating net new wealth in the community. It would create jobs too, which would mean that the money gets recycled back to us.

We're not against the financial industry, but we feel that speculating on money markets or wildly overvaluing blue-chip stocks doesn't do anybody any good; meanwhile, everybody's crying out that there's stuff to do and the government says there's no money. There are tons of money: it's just being used in the wrong way.

I'll close with that. Thank you.

The Chairman: Thank you, Ms. Bellan.

Now we will hear from Mr. William Harker, of Trimark Investment Management Inc.—again.

Welcome. It's nice to see you again. Do you have season's tickets to this committee?

Mr. William Harker (Senior Vice-President, Trimark Investment Management Inc.): Yes indeed, it's a pleasure to be here again. I thank you for the opportunity to comment on behalf of Trimark Financial Corporation.

I should begin by explaining that there was confusion about when we were to be here. That's the problem and that's why you only received my paper today.

There's some consolation, though, in the fact that the paper was late: I believe my remarks will be more focused on subjects of interest to the committee than they otherwise would have been.

• 1830

Trimark Financial is a public corporation that owns 100% of Trimark Investment Management, a mutual fund management company, and also owns Trimark Trust, a federally regulated trust company. We are a large mutual fund manager, with assets of $23 billion, and a small trust company, with assets of $500 million.

Although Trimark might not be classified as a small financial services company, this is a recent event. Like the other participants in the industry, we have grown considerably in the past five years. We believe that the mutual fund and trust industries have contributed to much of the innovation and financial services in Canada over the past 20 years.

Examples that come to my mind include daily interest on deposit accounts, extended branch hours, and the wide range of registered savings plans and investment funds. I personally doubt that Canadians would have benefited as they have in the equity market growth over the past 20 years without an entrepreneurial mutual fund industry. Accordingly, we support the thrust of the task force's efforts to identify ways to encourage the growth of small financial institutions.

We do not have a formal position on every recommendation in the report. However, we are generally supportive of the report and we particularly support the recommendations related to access to the payment system.

Trimark has approximately 800 employees and a dozen locations in Canada. However, our primary product distribution channel is via 25,000 independent financial advisers associated with about 400 dealers and security brokers. These independent financial advisers are fiercely entrepreneurial and view the large networked financial companies as their competitors. To their dismay, they must send their clients to these competitors for any deposit, loan or trust services—and sometimes the client doesn't return. These independent advisers want to meet all of their clients' financial services needs and they're located in every Canadian community.

So if you were to ask me what my view is of financial services in the year 2000, one dimension of that response is that we will manufacture financial products for sale through independent financial advisers to clients who wish to buy financial services that way. The incredible potential of the Internet and Interac and electronic cash will be a partial delivery mechanism for the convenience and transaction needs of these products. And from my conversations with Trimark's competitors, I dare say their vision is virtually identical, only they wouldn't have the Trimark name on the vision.

And now to the point. Besides our human and capital limitations in Trimark, there are a few important barriers to this scenario which this committee could help resolve.

The first barrier is access to the payment system. Today, a mutual fund company wanting to provide chequing or electronic access to a client's account or to purchase more mutual funds with funds on deposit at another financial institution is literally forced to ask that other financial institution—usually a bank—to provide this access. It's not surprising that the bank is not highly responsive to this request.

Therefore, membership in the Canadian Payments Association and in Interac should be opened up to mutual funds directly. The rules of the Canadian Payments Association should be changed to allow a large number of direct clearers and to permit inter-institutional transfer from bank accounts to mutual fund accounts and the reverse.

Rules of Interac should be changed to allow mutual funds to issue ATM cards to their clients. Mutual funds should be represented on the boards of the CPA and Interac.

All national payments systems should be viewed as utilities and new participants should be able to benefit from unfettered access without incurring the costs of “stranded” liabilities.

That's the first important area that this committee could assist on.

The second is what I would call “regulation rationalization”. Trimark was forced in part to purchase a trust company to get around the access issue that I described before. However, this has placed us squarely into a quagmire of federal and provincial regulations and regulators. Our mutual funds are regulated by 10 securities commissions. The independent advisers are regulated by securities or insurance or mutual fund regulatory bodies. And this has been compounded by the fact that our trust company is also regulated by 10 different provincial bodies as well as OSFI.

• 1835

To illustrate just one unnecessary complication, the regulatory maze actually requires us to have a separate contract to distribute the product of one regulated firm to the sales force of a firm regulated by a different regulator.

This maze is very complicated, and I hesitate to even suggest an answer to this problem. However, I point out that the cost of compliance is punitive to all but the very largest financial institution.

If these two barriers could be removed—although we support the imposition of tied-selling prohibitions—the resolution of the regulatory and access issues will make the independent financial advisers much less dependent on the prohibitions to achieve the level playing field they search for.

As a separate issue, we endorse the committee's efforts and the report's recommendations to encourage the creation of new financial institutions such as community banks, and we believe that incentives such as capital tax holidays and small-business loan and government guarantees incentives will be necessary to jump-start this evolution.

However, we strongly recommend that any incentives not be restricted to new institutions or any single class of institution; rather, the size or the business function and/or the geographic location should be the determining factors.

Mr. Chairman, these are my summary views, and in view of the time, I'll conclude my remarks. I would be delighted, of course, to respond to any questions that may arise.

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

We will now proceed to the question-and-answer session.

We'll begin with Mr. Valeri.

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

I have a couple of questions for The Co-operators.

In your brief, you talk about:

a company subjected to all of the same prudential, corporate governance, solvency and other regulatory controls as any other financial institution.

You're talking about setting up your own community bank, I guess.

Mr. Frank Lowery: Actually, what that refers is to the fact that we have argued consistently, probably since around 1990, that you should be able to have an insurance company incorporated on a co-operative basis. All of our insurance companies are currently incorporated on a stock basis, but they're owned by a holding company which is a co-operative.

The reason they're incorporated on a stock basis? We had no choice. Under the Insurance Companies Act, the old Canadian-British act, you had one of three choices: one was a mutual and one was a stock company—and there were some peculiar institutions. It was the same under the provincial act. But none were co-operatives. Co-operativism is a form of organization. We were arguing for the ability to form co-operative insurance companies. That's what the reference is to.

Mr. Tony Valeri: Okay.

The other point—and I guess I'm looking for a clarification on this—has to do with the ability to sell insurance through branches. You say on page 12 that you support the position of the Insurance Bureau of Canada and then you go on to say, “And quite frankly, we at The Co-operators are not fundamentally predisposed against this.” Because in fact, you do sell your product through co-operatives. What is it that you're against in terms of retailing?

Mr. Frank Lowery: Firstly, let me address what it is that we do. For a number of years, we have had a joint-venture arrangement with a group of insurance companies in the co-operative sector. They're actually not incorporated as a co-operative. It's the CUMIS Group, which you might be familiar with—

Mr. Tony Valeri: Yes.

Mr. Frank Lowery: —in Burlington. There's effectively a joint venture, 50:50, between the two organizations, and the actual wording of the agreement is “to market insurance to and through credit unions to their members.” This was really an initiative driven by the credit union movement many years ago in order to try to have a sole insurance provider for individual credit union members, and that's what it does.

In terms of specifics, depending upon the nature of the products, what happens is that the products are either individually underwritten by The Co-operators or by CUMIS, but effectively the credit union member purchases the products, whatever they happen to be. That's what we do.

What are we against? I don't even like using the word “against”. We're in favour of doing things to ensure that the competitive advantages, particularly.... I'll give you a few examples.

• 1840

The capital base of the banks is no accident. The capital base of the banks is the result of a history of protected position. This is not necessarily bad, by the way. In the context of the Canadian banking system, I think, at the time the public policy decisions were made to do so, it was the right thing to do. But when you get to the deregulation of the various sectors....

And of course I was interested in the MacKay commission and this one thing that I think we disagree a little with. He made the observation that all financial institutions had the right to move into the loan and trust company sector and to move into the securities dealer sector and that only the banks did so—or at least they're the primary ones who did. Well, there's a good reason for that. They had a lot of capital.

In our company, we basically do well just in terms of internally-generated capital to generate enough capital on an ongoing basis to sustain future growth in our premiums. And of course we have a basis that is different from the banks'; the banks have a much greater leverage rate than we do. So in the first place, there are a number of differences between the financial institutions, and there are certain competitive advantages the banks have had.

We floated one trial argument with the MacKay commission. It was just a trial. You are familiar with these. Politicians provide a lot of trial balloons on a regular basis—

Mr. Tony Valeri: Sometimes they're referred to as “lead balloons”.

Some hon. members: Oh, oh.

Mr. Frank Lowery: Sometimes. For our trial balloon, we said that we didn't oppose a strong banking sector in Canada. We said that we supported a strong banking sector in Canada. But the independent securities dealers made one observation before the Senate banking committee which was a valid observation: the moment the banks got control of securities dealers, liquidity for the non-bank-owned security dealers suddenly became a problem.

So our trial balloon was this: why don't we move in the other direction and say that within Canada the banks are restricted to banking, but that they are allowed to do whatever they want to do commercially outside Canada? Not to have commercial links within Canada: that was a trial balloon. It's not reflected in the report.

But those are the types of things we're for. We're for a strong banking sector, but we're for competition in all of the other areas as well.

Mr. Tony Valeri: Okay. That's fine, but my question was really this: since you are retailing your product—and CUMIS is as well—through the credit unions, do you have any reservations about allowing a bank to retail an insurance product through their branches?

Mr. Frank Lowery: We clearly have reservations about that.

Mr. Tony Valeri: Why?

Mr. Frank Lowery: The reservations are based on the arguments put forward by the Insurance Bureau of Canada as well as the ones that we've identified. In their brief, which I'm sure you're familiar with, they've identified jobs. Our feeling is that competition is really—

Mr. Tony Valeri: But are you not, through retailing the product through credit unions, perhaps knocking some brokers out of their market?

Mr. Frank Lowery: We're in a very dynamic marketplace. If you look at the marketplace and you look at The Co-operators in all lines of insurance, one of the things that we're been doing—and doing quite successfully—is recognizing that at the end of the day we want to serve whatever the consumer's interest is.

And the consumer's interest today appears to be served in a wide range of markets, so, for example, we're very active in the direct marketing area. In that area, we've sold technology on our call centre to the Royal Bank of Canada. We did that. We did that in discussions with the credit union movement, but we have actually sold technology to the Royal Bank of Canada.

We don't have a problem with competing with the banks, but we recognize the number of different distribution systems that customers want to be served in. We're doing much of what you're suggesting and we don't have a problem with it. We certainly don't have the banks being involved with it, but our issue with the banks is as follows. When we were discussing it internally, I made an analogy. You have two people. You starve one person for a year and you feed one person for a year and then you put them in the ring and say, “Okay, may the best man win.” That's the situation between the banks and other competitors at the moment. That's the problem.

Mr. Tony Valeri: So when we compare, your basic position is that your retailing of a bank product through the credit unions will not impact the independent broker distribution system as much as, perhaps, if the banks went in. If the banks went in, you essentially would see a complete collapse of that distribution system. Is that what you're saying?

Mr. Frank Lowery: I don't think I'm expert enough to say that you'd see a complete collapse of that system.

Mr. Tony Valeri: You did say you'd see a loss of jobs.

Mr. Frank Lowery: Yes, the—

Mr. Tony Valeri: The issue is not so much.... The banks can sell insurance today. They could since 1992.

Mr. Frank Lowery: Absolutely.

Mr. Tony Valeri: The issue becomes delivery of the product. And the argument that's being put forward is that if you allow banks to retail insurance, you're going to have a lot of job displacement in that other delivery system.

You, in fact, are delivering an insurance product through the credit union, and you feel that's okay, but yet you have difficulty with the banks doing it. I'm just trying to understand the difference—

• 1845

Mr. Frank Lowery: Okay. I think you may not have actually.... In my reference to the Insurance Bureau of Canada, I said that the Insurance Bureau of Canada has taken the position that there is a loss of jobs and that's the reason you shouldn't be allowing direct sales through branches. I've told you as well that from our perspective that isn't the biggest issue. That is an issue and I think the Insurance Bureau of Canada has some support for it, but from our perspective that is not a significant issue.

Look at any industry. We have a dynamic economy. Across the range of our economy, we will be suffering a lot of job losses over time. That's reality. That's not anything that we as an insurance company can stop or you as legislators can stop. That is going to happen as the dynamic changes. I think that we—as a socially responsible organization—and the government clearly have a role to play in trying to protect people with respect to those transitions, but those things are going to happen and we can't stop them.

What we can do is prevent a situation where you have a competitor who is not really a competitor; they're starting halfway down the 100-yard line and the fact is, that is the problem.

I was listening to Trimark's presentation and was very impressed with it. I think that we at The Co-operators would have very little difficulty accepting most of those comments. We support the idea of encouraging smaller Canadian financial institutions. We support the idea of encouraging competition.

If we had a bank sector in this country similar to the bank sector in the United States where you have a much higher degree of competition, I think many of the arguments you were hearing today from the insurance industry wouldn't be there—but that is not the case.

Mr. Tony Valeri: So the issue is that they're too big to compete with right now.

Mr. Frank Lowery: It wouldn't be fair competition.

Mr. Tony Valeri: Okay. There's another point I want to make here. On page 16, the recommendation reads:

to level the playing field with respect to the Canada Deposit Insurance system and the system for the compensation of policyholders of a life company in the case of the failure of life companies.

We support this recommendation, as for years the banks have had a significant and state-sponsored unwritten advantage in this area. However, there is no mention made in this recommendation of the compensation system with respect to property and casualty insurance companies—PACIC.

Are you suggesting that there be a form of some type of compensation system like CDIC with respect to property and casualty, that when there is a disaster there would be sort of a pool?

Mr. Frank Lowery: There is. It's underwritten by the industry. That's what PACIC is. PACIC is basically the property and casualty version of CompCorp, as it's called. So basically, there is a system that's underwritten by the industry. The problem you have.... Well, we'll talk about PACIC first, but I want to get back to what's discussed in the task force.

With respect to PACIC, there's a basic problem. If there's a failure, everybody pays for the failure. We have a prescribed method for paying, very similar to CompCorp's, but there's nothing there to control how responsible companies are in terms of the sale of products.

And I'll give you one example—earthquakes. You can have one company, like our company, that has bent over backwards to try to ensure that this risk is taken care of. At the end of the day, if you have a significant earthquake, we're prepared to to deal with it. There are other companies who are doing the opposite. They are selling product that they clearly cannot cover, and at the end of the day, if there's an earthquake, someone's going to cover it.

Mr. Tony Valeri: But you do know that OSFI is attempting to deal with that.

Mr. Frank Lowrey: That's right. That's one problem.

But I want to go back to the comment about CompCorp and CDIC. If you look at the MacKay system recommendations, what they're really recommending is that rather than having a government-guaranteed fund, which has historically been there for CDIC—that's the competitive advantage the banks have had—you move more to this free-floating entity where it's self-insured. We support that. We don't have a problem with that whatsoever.

Our issue is, if you're going to start talking about compensation it would be very peculiar to be talking about compensation for asset-based products in life companies and for deposits—all of which are important—and not talk about a system whereby at the end of the day if it doesn't exist it means the government is going to come to the rescue.

Do you truly believe if there's a massive disaster in Vancouver that at the end of the day it won't be the provincial and federal governments that are going to pay for it if the industry can't do it? That's all we're saying. Let us be at the table.

Mr. Tony Valeri: And you are certainly aware that in the last budget there was some tax expenditure there in order to support that type of a disaster, so the government is doing something in terms of—

Mr. Frank Lowery: The government is heading in the right direction.

Mr. Tony Valeri: Okay.

Mr. Frank Lowery: All I'm saying is that if you're going to have a discussion on those issues, the property and casualty insurance industry should be there as well.

Mr. Michael Hogan: Could I say something about banks before you get off this topic?

Mr. Tony Valeri: Sure. I was going to go to you anyway.

Mr. Michael Hogan: You guys—pardon the expression—have not boned up on captives.

• 1850

Mr. Tony Valeri: No. And I was going to you on captives, actually.

Mr. Michael Hogan: Banks have been selling insurance for donkey's years. When you go in and buy credit life insurance from a bank, it will be in the name of Manulife, Mutual Life, whatever the hell, but Manulife—and I can't say that these names are going to be carved in stone—will retain a percentage of the risk and the bank will put the remainder of that risk where there is no risk—into a captive in Bermuda or Barbados.

I put together a program for a major trust company, using Lloyds of London for P and C products, where Lloyds of London held 10% of the risk and 90% of the risk was going into a captive in Barbados. If you dig deeper and deeper into that history of financial institutions, you will find out that way in the background there is a captive. My problem with all of that is that I'd rather see them putting it into a captive in Toronto than taking it off to Cape Verde.

But I think you guys have to bone up on that subject.

Mr. Tony Valeri: Yes, I would certainly agree with that. I guess my comment to you was that, really, as we're talking about the future of the financial services sector in Canada, your message essentially is that Canada needs to be part of this captive insurance type of sector.

Mr. Michael Hogan: Yes. I'm going to leave you my report, by the way.

Mr. Tony Valeri: That's great. Because you are quite right: in terms of understanding it and being boned up on it, we're probably not.

Mr. Michael Hogan: Let me sum it up very quickly for you, okay? Alcan Aluminum: have you any idea how much premium they would have had to pay initially to conventional P and C insurance companies? Taking in their excess liabilities, their products' liabilities, their environmental impairment liability insurance and various other forms of insurance that no bank is ever going to touch with a ten-foot pole, they would be paying somewhere in the order of $25 million premium to conventional insurance companies with a good loss ratio. So they say, “To hell with that. We'll put the $25 million into a captive in Bermuda.”

Where do you think MacMillan Bloedel will pay its claims from if it burns down a forest? They'll be paid out of a captive that we put into the Guernsey islands in the 1960s, which is currently being moved over to Jersey, where there is a better environment for captives.

So as this committee goes on, this is a thing that has been sorely missed in this report. But not to be too critical.... While the banks are crying the blues on one hand, they're screwing you on the other hand. Pardon the expression, but I've heard it popularly used.

Mr. Tony Valeri: Yes, and I get the point.

Voices: Oh, oh.

Mr. Michael Hogan: They talk about taking over the insurance market when they've been bleeding the insurance market for decades, but these guys were not witness to it because they don't go around broadcasting it.

I'm going to leave you this report. I've covered the subject of captives in there and I wish you would bone up on it and keep it in mind, and for politicians, let it be a subject that—I'm selling now—Toronto area MPs advocate as a good thing for Toronto.

Mr. Tony Valeri: And Hamilton—and Stoney Creek in particular.

I wanted to ask you a question with respect to a potential structuring; it's really a question on whether you would be able to take advantage of this. MacKay talks about the holding company structure. Is that something that a company like yours would be able to benefit from?

Mr. Michael Hogan: Are you speaking to me?

Mr. Tony Valeri: No, to Mr. Harker.

Mr. Michael Hogan: I get fees.

Voices: Oh, oh.

Mr. Tony Valeri: Somehow I knew that. That's why I was referring to Mr. Harker.

Mr. William Harker: I'll answer for free.

The structure we're already in is something of a holding company. Trimark Financial is a public company that's listed, which owns 100% of two other companies, one a trust company and one an investment management firm. So in a sense, it already exists.

• 1855

The question then becomes: if they buy an aluminum company and that's the third subsidiary, is the regulator going to allow intermingling of financial and non-financial subsidiaries within the one holding company? Or is the regulator going to require that if you're going to do that you'd better have two separate holding companies so you can keep those problems separate? And if you do have just a financial holding company with financial subsidiaries, do you then require each of the subsidiaries to be monitored, managed and risk-managed on its own, with its own capital and its own sort of environment? Or do you look at the whole thing together?

There are two different arguments, two different ways. It causes problems for the regulator if you bundle it altogether, because the huge banks of the world get to be so complicated that even the regulator can't figure it out. But on the other hand, it's an efficient way of managing a reasonably-sized financial institution.

So my answer is, the holding company approach is quite appropriate for Trimark and we're kind of in that environment already. And just hypothesizing—it's not in our plans—if we were to buy an insurance company, we would set it up as yet another subsidiary of that holding company.

Mr. Tony Valeri: Mr. Chairman, my last question is essentially one that kind of wraps it up. We've heard a number of different perspectives on what the future of the financial services sector should be, but as a summary point, perhaps, Mr. Foxcroft, you could encapsulate this for me: what do you see as the future of the financial services sector in Canada? What is it in your mind?

Mr. Ron Foxcroft: Good question. I sympathize with you, being in small business. I can reiterate: being a small-business owner is a very lonely life. The very first loan you get, even if it's $25,000, is the toughest loan you get, and that's why, in my report, I made reference to two things.

I see increased competition as positive: more banks and more banks with less capitalization to challenge the bigger banks that have said, “We're going to start up a business specific to satisfying small and medium-sized businesses.” Very simply, your very first loan is your toughest and you need more options.

When I was starting the whistle company, quite frankly I was so poor the bank.... First of all, I went in to borrow money for a pea-less whistle and he looked at me like I should be in a mental hospital.

Voices: Oh, oh.

Mr. Ron Foxcroft: I was so poor and my car was so old it had licence plates in Roman numerals.

Voices: Oh, oh.

Mr. Ron Foxcroft: Small business needs more options and competition is good.

We talk about what makes us good as entrepreneurs and it's very simple: it's competition and customer demand. And the other thing is that since we've gotten bigger.... I used to be in a small business and I know how tough it was and how lonely. And your first loan shouldn't be really easy to get because then anybody in business could get it, and not anybody should be in business, not anybody should be an entrepreneur, because you need to have guts and grit and so on. I've gone off track here and I want to get back on track.

Here's how I see it. Small business is the fabric of this country—and us small businesses, we grow! Fox 40 is an example. It's grown. Now we're global and now we're hot. We have every bank from here to Pittsburg coming at us because we're a hot item. But here's the fact: I want my Canadian bank to be competitive. I honestly want them to be competitive, because although we're a hot item and we have options, I want to deal in Canada. I'll give you an example.

Every single whistle we've made since we've been in business, for 11 years now, 40,000 a day, has been made in Canada by Canadians. And I'm very proud of that. All my employees are Canadians and we've made every whistle.

And everybody says, “Why don't you make it cheaper offshore?” No. Canadians are darn good. The quality of the moulds that are made by Canadians is second to none in the world. And we need to keep supporting Canadians. We have a rule: if quality, service and price are equal, we want to deal with a Canadian supplier.

And we want that option with the banks.

• 1900

I'll finish by saying this. We used to buy our brass rings here. They're non-corrosive. We supply all the lifeguards, skin divers, scuba divers and so on in the world. The rings have to be anti-corrosive. Canadian quality, service and price were not equal. We had to buy them in Switzerland.

Or when there's a delivery problem and you can't get your million anti-corrosive rings because your supplier is in Switzerland, it's not as easy as calling Fluke Transport and going to Switzerland to get them. You need a Canadian alternative. And what spurred my Canadian supplier on was competition. They boned up and they got better because they were driven by competition. Canadian quality, service and price became equal to Switzerland's. Now, I'm delighted to say, we're allowed to deal with the Canadian supplier.

That's basically the way I see it. Yes, foreign banks should come in. Yes, other banks should come in. We need other banks that can start up with less capitalization so we can give the entrepreneurs the opportunity to get started. But once they get started, they do become bigger and start employing bigger numbers of people. They become hot items, and their bank, Canadian-made, needs to be able to follow them around the world.

Mr. Tony Valeri: Thank you.

The Chairman: Mr. Szabo.

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

I want to ask the credit union representatives about their role in maybe filling some of the competitive vacancy, as it were. If mergers of banks should go forward there likely would be closures of branches. As a matter of fact, I think all of the proponents have indicated there are going to be closures of branches anyway. Can you give me an idea of whether or not the credit union movement across Canada has any appetite whatsoever to grow or to seek a broader mandate outside of the niche areas that it presently serves?

Mr. Frank Lowery: Just to clarify one thing, The Co-operators ownership structure is two-thirds co-operative, non-credit union, and approximately one-third Credit Union Central, so we're not actually here as representatives of the credit union movement. If anything, we're here as representatives of the co-operative movement, and the co-operative movement in Canada, outside the financial sector, is huge, as you know, like Sask Pool, for example. So we're actually here from that perspective.

With respect to the credit union sector and our involvement in it, we make some significant comments related to that initiative from two perspectives, I guess. One is that we support the credit union movement, because it is, by definition, co-operative.

But the second is that the nature of our organization is such that we have two advantages we would like to bring to the table with respect to the co-operative community bank alternative. First, the weakness of the credit union sector across Canada is basically in Ontario and the Atlantic region; the strength of The Co-operators is in Ontario and the Atlantic region.

If you look at the credit unions in Ontario, even in terms of their asset size, their branch network, etc., compared to the west's they're significantly smaller. In the MacKay commission, I think some analysis of asset and product line is done, and you'll find that in places like Saskatchewan something like 30% of the market is served by the credit union sector, significantly less in Ontario. The Co-operators has had a direct distribution system—unlike a lot of insurance companies—for many years and we've had in the range of about 300 service offices across the country, half of which are in the province of Ontario.

So down the road, as this initiative unfolds, one of the discussions that we hope we would be having with the credit union movement is with respect to how we can help facilitate, particularly for branches in small communities. The Co-operators has historically been agriculturally based. That's why our two directors here today are in fact both farmers. But if you look at The Co-operators across Canada, we are normally either number one or number two in each agricultural market in every province of Canada. We are very rurally based. In fact, our head office is in Guelph, not in the city of Toronto like most other insurance companies. Our focus has been on the rural community. We think we bring a complementary element to the credit union structure.

How will they survive in that marketplace? My feeling is that this is a huge opportunity for them. The credit union movement has been somewhat fractured in the last number of years. I think there's been a recognition that there needs to be a consolidation, just from an economies-of-scale viewpoint. Its very difficult to compete with the banks when you have a five-branch or ten-branch network.

• 1905

And when I, as a credit union customer—and I am a credit union customer—go into Toronto, I pay an extra fee every time I access an ABM because I'm a member of a credit union and they don't have local branches in the city of Toronto.

There are a lot of disadvantages they have because they don't have economies of scale. I think this is a huge opportunity for them. I know that in this sector they're working like heck to take care of this opportunity and we, as one of the co-operative financial institutions, are trying to support it as best we can sort of on the side.

We're not really a participant in the discussions at the moment. We've just offered support in research. We offered a quarter of a million dollars, I think, to the group working on this, basically to help them with their research, to try to put together something which is saleable to the policy-makers. We're very supportive, very keen, and we will be there in the Atlantic and in Ontario, and I think we will help to complement what you're describing, which is their branch network need.

Mr. Paul Szabo: I've certainly detected your enthusiasm for the MacKay report on a macro basis, but there is this one angle about the marketing of insurance through branches. It's been of concern to a number of sectors.

The Co-operators does have the opportunity to work with the credit union network to offer services through that branch network. Does that mean that you have access to customer lists?

Mr. Frank Lowery: No, not at all. Actually, we are basically much like a back-office operation providing a product. They sell the product, those are their lists, and we get no access whatsoever to the lists.

Mr. Paul Szabo: So it's held at arm's-length.

Mr. Frank Lowery: Exactly.

Mr. Paul Szabo: So it's ostensibly to the same conditions under which the banks currently market insurance through a subsidiary.

Mr. Frank Lowery: Yes.

Can I just make one comment about something you said about our enthusiasm? I think the reason we are so enthusiastic about this report is that the co-operative sector is a self-help sector and there's a real orientation in the co-op sector towards trying new things. We've developed worker co-ops. We've developed alternative housing for Canadians. There's a wide range of things.

We're very oriented towards self-help and entrepreneurship and I think that's why we're enthusiastic about it. It talks about things that we truly didn't expect out of this report. When it was first commissioned, we expected this report to say that banks should sell insurance. And it does say that. That's fine. We'll deal with it. If the banks are there we'll compete with them and beat them. We beat them on the direct marketing thing—at least, we're fighting well with them on the direct marketing thing—and we will fight well with them on the insurance. But all the other things they've talked about, like community accountability, those things are exciting for us.

Look at our organization. We've been putting $500,000 a year—at the moment—into a community economic development foundation. We have set up co-operative chairs across the country. We've even provided funding for co-operative insurance companies in other countries as part of international development. We are excited about doing those things and we're excited to see a public policy document actually talking about some of those things in the context of government thinking those are relevant.

Mr. Paul Szabo: I'm still trying to understand the enthusiasm, though, because obviously the brokerage community has basically told us they're going to be wiped out. We've had Great-West Life basically saying, “We're not ashamed to say it, but we're going to go out of business if they can market insurance directly.” But you're not afraid of that. You have no reservations. You've said you think you can compete nose-to-nose with the banks as long as they don't do it through the branches—

Mr. Frank Lowery: And the use of confidential information—that's the biggest problem.

Mr. Paul Szabo: Sure. Absolutely. Restricted to the current arrangement.

In terms of all of your business, do you have any idea of how much of it is basically provided by credit union and co-op members?

Mr. Frank Lowery: Less than 10%, so 90% of our business is done with the public—

Mr. Paul Szabo: So you don't have a captive marketplace that nobody else can get into.

You really feel comfortable that you're going to be able to compete with the banks?

Mr. Frank Lowery: There are no guarantees in any business. We wouldn't be in the insurance business, a “risk” business, if we thought there were guarantees that we were going to succeed. We are constantly watching the marketplace. We're constantly watching for changes. And we do things such as expense reduction. A number of years ago we went through a significant expense reduction exercise, reducing staff and a number of other things. That was a difficult thing to do, but you need to do things like that to be competitive. We're prepared to do whatever is necessary to be competitive.

• 1910

Mr. Paul Szabo: My last point—and maybe there are others on the panel who would like to throw in their comments—is that one of the biggest themes of the MacKay report has to do with the impact on the public interest. There has been all kinds of discussion about what constitutes public interest; for instance, is shareholder interest part of the public interest? Some would argue that it's not.

Whenever you get rationalization—and MacKay has said it very clearly—for those who aren't prepared to step into the new technological global marketplace that we're dealing in, it's like this: be prepared to adapt or pay the consequences. It's almost like a threat. Things are going to happen and you have to move.

So that means there's going to be some rationalization. Even if there are no mergers, there's going to be a rationalization of the financial services sector. People will ultimately lose jobs.

Mr. Ron Foxcroft: May I comment?

Mr. Paul Szabo: I want to know if people on the panel have assessed that or have given some thought to how we deal with these kinds of changes. If our reasonable expectation is that there is going to be some rationalization, whether it be of infrastructure and/or of people and locales, etc., are there some sort of transitional provisions that have to be put in there?

And in the meantime, is there an order in which things have to happen? For instance, do we have to establish a broader competitive marketplace? And that means, first of all, that we have to establish a good, sound regulatory environment in which that new competition can flourish, and then consider the add-ons like insurance or other services that anybody else can get into.

Is there a logical order in which this takes place?

Mr. Frank Lowery: Before that, I just want to finish off in response. I think that change is a fact, and I think our organization recognizes that change is a fact. This is not something like “maybe if policymakers make a decision or legislatures change the law”; the reality is that we're dealing with a changing world, like the Internet, technology, the ability to get across borders. You're even changing to a different regulatory world. The reality is that it's very difficult to regulate entities that can literally move around at the speed of light. That's a fact and we all have to deal with that.

I agree with your basic assumption that we're all going to be dealing with a different world. We've recognized that for many years and we intend to deal with it.

On the job side, we're also very interested in jobs, so what is our answer to jobs in the context of The Co-operators? It is: better qualifications of our management, our staff and our frontline people, and better training supported by the company.

I can't remember whether it was the Federal Court or another court that came out with a decision that tried to make a course provided to an employee a taxable benefit. We wrote and we lobbied to try to make sure that didn't happen. We support education.

We, as an organization, are doing the types of things that we believe a socially responsible organization should be doing. We're setting up a community economic development fund. We provide university chairs. We have supported this unity conference on an annual basis. And now we are also providing grants to young kids—that was coming out of the unity conference—who are maintaining contacts within their communities and trying to promote the discussion at issue. We think a socially responsible organization does those sorts of things. That's our role.

I think your role is something different. I'm certainly not one to surmise exactly what it is or how you discharge it, but I think a socially responsible organization has an obligation there. We feel we're doing that. We love the community accountability stuff in the report because we feel that's where we've been at for many years.

Mr. Maurice Campeau: May I just add to that?

Coming from the rural community, I applaud the MacKay report because I'm a farmer and, more or less, like small business, we're in the same shoes. We have problems with the big banks, with our first loans, and you have to produce ten times your cash flow or something to borrow.

I'm very pleased now that either community banks or credit unions will be allowed to flourish in some kind of way to more or less give us those kinds of services in the communities and in the rural areas especially. I'm very pleased with the MacKay report.

The Chairman: Thank you.

Ms. Bellan, and then Mr. Foxcroft.

Ms. Susan Bellan: I meant to say this in my presentation. This afternoon I spoke to somebody who is with the American Community Reinvestment Coalition. The MacKay report recommended against having a formal community reinvestment act, and I should have said that was something I was disappointed in. I think we really should have something formal.

• 1915

Just to give you an idea, he told me that because of Community Reinvestment Act in the States, in 1996 the financial institutions actually collectively invested in community development lending—$17.7 billion worth. That was in 1996. In 1997, it went up again. It went up to $19 billion invested into community development lending. They wouldn't have done this had they not been required to under the Community Reinvestment Act.

He also told me that financial institutions in the U.S.—and not just banks either, I don't know if insurance companies are involved, but I do know it's savings and loans as well—have signed a trillion dollars worth of pledges for community development and small business loans. It's not just for one year. It's like a five-year plan or whatever, where they undertake that they're going to invest in these sectors. He said they have tracked it. In banks that pledge—it's actually a formal pledge—you can see the improvements in their lending to small business or for certain types of housing.

Once again, I guess, I'm very concerned about saying, “Well, let's just let it happen.” In the States, I've gotten to know the community reinvestment officer for the Key Bank of Cincinnati, the tenth biggest bank in the United States. She told me that they have to run after community groups and ask them what they want or need, whereas, without the act, she says, it would have been a sort of “drop dead, I'm busy” kind of thing. She said that it's been a tremendous help for the banks, that now it's actually good for business. But they kind of had a bad attitude until they were forced into it.

The Chairman: Ms. Bellan, would you prefer that Canadian bankers go around chasing people to give them money?

Ms. Susan Bellan: I don't know about chasing money, but I would say they should go to community groups.

A week ago, I was at a meeting at the University of Toronto, at University College, about homelessness. It was amazing. Eighty people showed up, totally non-partisan, from different political parties, because everybody is really appalled about what's happening in our city. I mentioned to them that in the United States financial institutions have to come up with money for low-cost housing. They're just expected to do that. When I spoke to this guy today I said, “Is that happening?” He said, “Yes, right on.” Nobody does that here.

So the bank would have to go out to a community. Under a community reinvestment act, the bank would have to go out to a community like Toronto and ask, “What do you need?” For instance, Toronto or Guelph, in whatever form it takes—the mayor's office or community groups—would say, “We have a real problem with affordable housing around here. Developers don't want to build it because there's no money in it, etc. We need long-term, low-interest loans so we can build this stuff.” And in the States, they invest hundreds of millions of dollars in this kind of stuff.

The Chairman: Mr. Hogan.

Mr. Michael Hogan: Just very quickly, one thing that has been completely forgotten about in this exercise is that the four banks under review are themselves the product of mergers. The Bank of Montreal merged with Molson Bank. Toronto-Dominion was Toronto Bank and Dominion Bank. So this is just the end of the road as far as mergers are concerned. And at the end of that road, we're going to have two or three large Canadian banks.

Mr. Frank Lowery: Mr. Chairman, before we leave the subject, I think Laura wanted to talk to the housing issues.

Ms. Laura Gregson (Manager, Corporate Relations, The Co-operators Group Limited): Yes, if I may.

The Chairman: Yes, of course. We were going to get back to you.

Ms. Laura Gregson: I'd like to comment on this lady's comments about getting to some of the marginalized people and some of the people on the fringes.

Earlier, Mr. Lowery referenced the community economic development fund that our board of directors actually set up and implemented on the advice of our members. We have $2 million in that fund over and above philanthropic donations. We do not see them as the same. Our donations budget was kept the same. This fund is there to help some of the groups that this lady is talking about.

I myself am working with 15 single parents in Cambridge who are living below the poverty line. It's a pilot project in Canada. We seek these groups out. These people need some help. And when you talk about community responsibility, it goes far beyond a donated dollar and what you gave in donations; it's actually being an integral part of the community.

So I think what this lady is talking about is absolutely right on. We have to get looking after some of these people and get them more engaged in the community. I'm very proud to say we've been doing this for a number of years because, as Frank says, it's self-help, so for us it's just part of our culture. And I think it's absolutely critical.

• 1920

The Chairman: So, Ms. Bellan, you'd like us to use the CRA model?

Ms. Susan Bellan: Yes. I realize that the thing about the banks is that they've been fighting it tooth and nail. They say we're not like the United States, that we don't have ghettos. And yes, I realize we're not like the United States, that it's a different situation. Our communities are in transition and I recognize that.

But to me the critical aspect is not to fight the change, but to really ensure that some people don't get left behind because, once again, operating on Main Street, Toronto, it's all well and good about these guys laying everybody off and moving ahead with globalization, but the thing is, I get the residuals panhandling in front of my store. These guys don't vaporize because somebody kicked them out of a job. I'm not trying to put these people down, but they end up becoming a real problem for society, and it's terrible for them, and that's why I was saying that we have to use our financial resources to recycle these people. We can do it either through a community reinvestment act or it through something like the millennium bonds.

I'm not saying, “Go make bad loans.” But I have to tell you this. In my book, I actually even did an analysis of making bad loans. And once again, I'm not saying to make bad loans. I did an analysis of a bank lending $50,000 to an entrepreneur who hires something like five people. His company survived for two years. And at the end of the day, because he took those people off welfare or UIC and turned them into taxpayers, after two years the government—I'm suggesting that there should be a government guarantee for working capital—was $75,000 ahead, even if the company failed. That's how crazy it was.

So I guess what I'm saying is that we have to take more risks. With my company, for instance, we've gone through heavy slogging in the recession. I remember introducing 20 new products in the early 1990s. I didn't know which was going to win. Some were complete losers, some were so-so, and some were winners, but I had to try all 20 to know which ones were the six. But the thing is, we have this crazy strategy that unless we know the six are going to succeed, we're not going to lend to anybody. And you'll never know that.

We shouldn't even be afraid of losing loans. I'm not saying to do stupid things, but we should try, especially in worthwhile areas, like environmental stuff, for instance. We know we have to do something there, so we really should try. Failure sometimes means experience; you goofed the first time, but next time round, you know what you're doing.

Mr. Ron Foxcroft: May I comment on that?

I agree. There's no such thing as a perfect world, and an entrepreneur has to take that risk. That's why I support the bank merger but also support other banks coming in with less capitalization for a niche market for us small businesses.

And I don't think that government can just look at this thing and say that there's never going to be a bad loan, there's never going to be a bad bank. There is. And that's a fact of life. We're entrepreneurs and we make mistakes and you learn from a referee's point of view in the big time. The real mistake is not admitting your mistake, picking yourself up brushing off and fixing it!

There was another comment from this side of the table and it was reiterated here. Change is a reality. I'll just talk for another minute. In manufacturing, we had to realize ten years ago that change was a reality in manufacturing. You used to be able to manufacture in Canada to sell in Canada. Now you can't. You have to go big. You have to automate and make such-and-such a quantity in order to make your product cheaper than anybody can make it in the world so that you're competitive and you can always ensure a profit.

Mr. Hogan made a profound statement. I don't have the exact words, but he said that if you're good you will survive.

In regard to the bank merger, the big banks have promised a division to service small and medium-sized business. I say, let's support the recommendation to allow other banks to come in and challenge them. If they get better, they'll survive.

The Chairman: Mr. Foxcroft, your enthusiasm is contagious. However, many people that appear in front of our committee would ask what happens with the merger if they don't do as well as they once thought or if they fail. Could you imagine?

Mr. Ron Foxcroft: If they would fail to keep the promise that I referred to in dealing with small and medium-sized business? That's why I suggest we must allow other banks, other competitors, to come in and spur their creative and innovative juices.

• 1925

I don't know whether the existing banks welcome that competition, but I'll tell you something: when a competitor came out last year and counterfeited my whistle, it spurred me on to more creativity and more innovation and I went out and made a better whistle—with a ball in it—than they make. We're now the world's biggest supplier-manufacturer of ball whistles as well as pea-less whistles, and that just came from competition and customer demand.

Mr. Michael Hogan: I went through the Commercial and Northland disasters. I had sold both of them directors' and officers' liability insurance. They were examples of two banks that had gone nose-to-nose with the major banks and got nowhere.

In reading the MacKay report, interestingly, just to show you how fast things happen.... And as we're sitting here, the banks are getting that much closer to merger—be sure of it. In the report they cite the experience of an old account of mine called Newcourt Credit, which was one of Confederation Leasing's. I don't know whether you are aware of that. I set up their insurance program when they first came on board in 1984. The report was published and makes glowing reports about Newcourt Credit. If you've been reading the paper for the last three or four days, you know that Newcourt Credit is going down the tubes. I hope it doesn't come to that, but there's every evidence they're headed in that direction. Maybe I'm wishing it on them.

The Chairman: That's not what they say, though. They actually—

Mr. Michael Hogan: I know them, okay?

Voices: Oh, oh.

Mr. Michael Hogan: I worked with them, the front office.

The Chairman: By the sound of things, you worked with everybody.

Mr. Michael Hogan: Just about. I get around.

But I make this point to you. In the financial circle—and the Trimark gentleman will bear this out—things happen very rapidly. From one day to the other we don't know where the hell we're going with banks, mutual funds, Tom, Dick and Harry.

I suppose I should take old René Lévesque's advice and suggest to everybody that we just sit back and take a Valium.

Voices: Oh, oh.

The Chairman: You worked with René Lévesque?

Voices: Oh, oh.

Mr. Michael Hogan: No, I worked for the Union Nationale.

Voices: Oh, oh.

The Chairman: Oh, okay. I just wanted to make sure.

Just for the record, he did not work with René Lévesque.

[Translation]

Mr. Michael Hogan: Yes, indeed, I am bilingual.

[English]

But it's something to reflect upon.

The Chairman: Something to reflect...could you wait for a second, please?

Mr. Michael Hogan: We were listening to it—

A voice: And you just woke the translator up, by the way.

Voices: Oh, oh.

[Translation]

Mr. Michael Hogan: I absolutely murder the French language.

[English]

The Chairman: Thank you. This has been a very interesting panel. We've had all the whistles and everything that we needed.

You've really given us a great insight on some of the challenges we face in this committee. I hope you also have a greater appreciation of the fact that whenever you're dealing with major issues like this, there are many choices and trade-offs you have to make. This is really the challenge my colleagues and I face as we deal with this particular issue and as we deal with some of the choices we have to make for the upcoming federal budget.

Once again, thank you very much.

We're going to take just a one-minute break and we'll be right back.

• 1929

• 1934

The Chairman: I'd like to call the meeting back to order.

I have the great pleasure this evening to have with us Mr. Michael Mackenzie, professor at York University and former superintendent of financial institutions.

Welcome. We look forward to your presentation.

Mr. Michael Mackenzie (Executive-in-Residence, Schulich School of Business, York University): Thank you, Mr. Chairman. I should say that it's obviously a great joy for me to be back in the tender hands of this committee. I had many appearances before this committee some years ago when one of your predecessors, Mr. Blenkarn, used to have a lot of fun with me.

• 1935

I have prepared a short written statement, which summarizes the highlights of what I'd like to say. Perhaps I could run through it very quickly and then open it up for questions.

In the presentation, I will make some general comments about the report, mostly favourable. I will talk about two major concerns I have. I'll talk a little about the big bank merger proposals, and then I'll outline the various areas where I feel competent to answer questions and, I hope, be of some assistance to you.

First of all, I think this is a good piece of work. It's based on a thorough and comprehensive review of the financial sector of Canada, following a process involving both wide consultations with interested parties across the country and the commissioning of a number of research studies. In fact, I think it compares favourably with the famous Royal Commission on Banking and Finance, the Porter commission of 1964.

The report is professional, balanced and serious. It's obviously calling for a great many changes and, as they describe the changes, they are all in a sense part of a piece. They're recommending a panoply of changes. And in their contention, these more or less fit together. The task force stresses, as you know, the urgency of dealing with these.

Just a few minutes ago, I heard somebody talking about change. The world is changing, as I'll come to in a few minutes, but I hope this report does not gather dust. I think it should be acted on quickly. In particular, I hope the government does not just act on those recommendations deemed to be non-controversial and defer dealing with those that are contentious.

It is certain that you and the government will have a number of parties who will not like various segments of the report and who will lobby, I suppose, against a number of the recommendations.

In my judgment, these should generally not be taken too seriously unless they can demonstrate that the task force has clearly overlooked important information. Virtually all affected parties in Canada had the chance to make submissions to the task force, and I note that the report does include significant transition periods so that affected parties can have time to adjust.

I hope a lot of people read this report. In particular, leaving aside academics, politicians and journalists and so forth, I really hope that it becomes mandatory reading for every member of a board of directors of a financial institution in this country.

I am indeed encouraged by the fact that you are holding hearings as promptly as you are and that this will be followed by the Senate's committee on banking. They also have asked me to appear before them next month.

The report starts by talking about turbulence and change, and in the covering letter to the minister, it is said that “reliance on the status quo is no option”. I do not disagree with that proposition.

The most important characteristic of change, of course, is that it is by definition unpredictable. There is a great danger that people think of change in terms of extrapolating from the past and the present. And to some degree, I think the focus of the report on markets becoming more competitive, on competition being global, on the breakdown of old separations of financial functions, and on the dynamic and ubiquitous impact of technology may to some degree be read in this context.

I have a feeling, however, that the possibility of a significant drop in the level of general confidence in financial systems, particularly in the securities market, was not much factored in. And I think I can state this fairly as a criticism, since for over a year now many people have been seriously worried about the combination of overblown securities markets financed to a degree by bank lending and the meltdown of the Asian economies leading to widespread trouble. We hear repeated talks these days about financial crises in various parts of the world.

And in this context, one needs to understand that financial intermediaries—banks and life insurance companies—operate with extremely high leverage. High leverage is also a principal characteristic of many securities markets, including particularly the derivatives business.

• 1940

It is important in this context to reflect on the enormous institutional incentives to grow in highly competitive markets, coupled with the staggering increases in the volumes of securities, foreign exchange and wholesale market transactions. If these characteristics are factored into the globally competitive, technology-driven business described in the report, it becomes evident that errors, even small ones, can have huge consequences.

I believe there would have been some differences if the report had been drafted today, when financial markets in Canada and around the world are in turmoil, rather than many months ago, when things seemed, if strenuous, relatively calm. I think the report might have been different in at least two ways.

One, I think there would have been a stronger concern about the need for a financially powerful and demonstrably safe system. I think the task force was a little complacent in this regard. It is now very clear that one cannot take the safety and soundness of banks for granted, even the largest and most profitable.

It is no accident that when markets are in disarray they sharply reduce the value of bank stocks. This has happened in Canada, the U.S., Europe and most other markets. In this regard, I think the task force has underplayed the critical linkage between banking profitability and financial stability.

I also question the suggestion in the report that the mandate of the OSFI, my old office, be altered to:

...make it clear that OSFI has the responsibility to balance competition and innovation considerations with its present statutory obligations in respect of safety and soundness.

I am not sure I know what this means in practice, and I am a little concerned about it.

Second, there are many references in the report to the interrelationships between commercial banking and the securities market, but the implications of this for safety and soundness and not dealt with. The report describes at length many of the institutions functioning in the market—what they do, what their roles are, what their history has been—but it seems almost to exclude securities dealers and investment banks. This, I suspect, reflects the fact that banking and insurance regulation is federal in Canada while securities regulation is provincial. This situation, in my judgment, is an element of the status quo that may pose in due course a real threat to our system.

In recent weeks, the American banking and securities regulators have been able to take decisive, if controversial, actions affecting both commercial banks and investment houses with respect to the near failure of Long Term Capital corporation, the big hedge fund in New York. I doubt if such co-ordination would be possible in Canada under comparable circumstances.

I go further. It is likely that the OSFI may not fully understand the exposures of the banking industry to securities market volatility as a result of its exclusion from securities regulation. I know the OSFI has entered into memoranda of understandings, MOUs, with the provincial securities commissions covering exchanges of information. The report does not examine whether these MOUs are adequate under conditions of market volatility.

The failure of the report to deal with issues related to the prudential regulation of security firms, including particularly those owned by banks, and the relations between banking and security supervision is unfortunate. In this context, I note that some severe problems have arisen recently in the United States and in Europe with bank exposures to the securities business. I'm talking about at least two of the biggest banks in the world, Bank America and Union Bank of Switzerland, UBS.

Having made these critical comments, I don't think they take too much away from the value of the report, but I am suggesting that, when the recommendations are considered for implementation, the inherent fragility of financial institutions under conditions where market confidence is shaky be taken into account.

Now, it's quite obvious to you by now that I speak as a former bank supervisor, and most of my remarks focus on aspects of safety and soundness and related prudential matters.

• 1945

I come back to the fact that I think this is basically a good report. In general, if all our recommendations are implemented, in the end, we should have a stronger, safer and more stable system than we have today. In good part, this view is based on my observation that only those institutions that are profitable under truly competitive conditions are secure.

But I am making a big assumption, that there is indeed a wide acceptance of the importance of prudential institutional governance, coupled with appropriate regulation and supervision. And such acceptance, in my experience, is part of the culture of the system and cannot really be legislated.

I am assuming at this point that you want me to comment on the issue of big bank mergers. First of all, I like what the reports suggests, including, most particularly, the public interest review process, which includes a requirement that merger proponents set out in writing detailed public interest impact assessments, and make them public.

I believe it is essential that such documents cover a number of things.

One, how will the merged bank be financially stronger than the two predecessor banks? For example, will it have greater capacity to increase its capital base compared with that of the two existing banks taken separately? Will its increased profitability and stability truly increase shareholder values over the longer term and enable the merged bank to obtain very good, if not excellent, credit ratings?

Two, how will the merger affect the functioning of Toronto as a major financial centre with international standing? In my view, this is an important issue for the Canadian system, as around the world, in fact, more and more financial activities become concentrated in a smaller number of financial centres.

Three, how can there be assurance that the enormous task of integrating two already large institutions, which will take a number of years, will not so divert management attention that day-to-day operations will suffer and that safety will be compromised? The documents, for example, should describe how the banks will manage the integration of information systems on a timely basis and at the same time ensure compliance with the year 2000 requirements.

Four, the banks' proposed or actual executive and management compensation programs should be disclosed to assure us that they are not so aggressive that safety considerations will be overridden by growth incentives. One of my concerns is that the increased focus on the need to be big, which mergers will involve, will lead bank management to push hard on salary and bonus incentives that reward growth as the primary objective. This has often led to trouble in the past. In this context, there should be some assurance that boards of directors' governance processes will be strong enough to counter this danger.

At this point, Mr. Chairman, I'd make a recommendation to you that it might be interesting for you to ask to appear before you the chairmen of audit and risk-management committees of the banks considering merger, and to have them tell you how they believe their processes will in fact be adequate to contain and manage the kinds of risks I'm talking about.

Now, I note with some interest that the report of McKinsey and Company, commissioned by the task force, suggests that the benefits of big-scale mergers are not obvious and are frequently not obtained. You might find it useful in fact to talk to the authors of that report on this subject.

Certainly my own experience tells me that some mergers work well and some do not. Big ones are always difficult to manage. Successful ones almost always involve significant reductions in personnel as efficiencies are realized, and I find it difficult to believe that the mergers of two big banks will not involve large staff lay-offs. The markets, in fact, will judge them harshly if they do not, and I wonder whether enforceable conditionalities in this regard are possible.

I don't want to disappoint you, but I'm obviously having some difficulty coming to my own view on this question. Like many people, I feel I need more information, and I await the results of the public interest review process, including the OSFI opinion and the Competition Bureau findings, with great interest.

• 1950

Having said this, if you are to recommend to the minister that he turn down the mergers, I believe the public interest reasons should be spelled out quite specifically. I think it important that the international financial markets read any turndown of the merger proposals as driven by a sound and logical analysis of the facts and not by political agendas.

Finally, Mr. Chairman, I identify a number of areas where I think I might be able to help you, and about which you may want to direct some questions to me, in the following areas: broadening and enhancing of the OSFI mandate and governance processes; corporate governance; ownership rules; foreign competition; the issue of financial holding companies; payment and settlement systems; and the Canada Deposit Insurance Corporation and CompCorp.

On the whole, I'm in agreement with the report's recommendations in these areas.

I feel I have no particular expertise in such areas as consumer protection; bank and small business lending; banks and small communities in Canada; banking powers to enter insurance and vehicle leasing markets; licensing intermediaries; and so forth. I have, however, no particular arguments with the report's recommendations in these areas.

Mr. Chairman, I invite your questions.

The Chairman: Thank you very much, Mr. Mackenzie. That was an excellent presentation. I'm sure we have many questions to ask.

We will begin with Ms. Bennett.

Ms. Carolyn Bennett (St. Paul's, Lib.): Thank you very much.

We were, as you know, very much looking forward to your presentation. It was truly wonderful and comprehensive—and it makes us want to bring back Mr. MacKay. We'll have to ask the chair if we can now bring him back with our new questions.

I guess the thing we keep looking at with the report—and you've warned that we shouldn't just take bits that we like, because it is a balanced report—is whether you feel it really has to be taken all or nothing. Which parts must be there in order to maintain the balance, and what would be the disadvantage of taking some of the things? Are there some things you would put on a sort of timeframe, and phase in over a longer period of time, or do you need to implement it all at once?

So it's really two things—the parts and then the timing.

Mr. Michael Mackenzie: First of all, I've not made a columnar analysis of all the recommendations in all the categories. It's obviously silly to say that you should take them all 100%, but I guess I was trying to say that if you decide to make some selections, don't take the easy ones and toss out the tough ones. That's the first one.

The second is that I think you should examine it in the context of the framework that is outlined at the beginning of his report. He does make a comprehensive description of the whole system. I'll tell you, I learned a lot about our system by reading it, and I think, to a high degree, his recommendations are internally consistent.

Now, there are some areas I'm concerned about. The first I've already mentioned, this recommendation that the OSFI mandate be explicit to include openings to take into account innovation and competitive factors and so forth, as well as safety and soundness. First of all, I don't know what it means. Secondly, I don't think it's a big departure from what has been happening, certainly under my regime.

I'm a little concerned that if that is taken too seriously...and always remember, nobody, including myself, wants to be supervised. So if I'm coming in with a request or a ruling or an interpretation, or I want to do this or that or the other thing, and I have in front of me these words, I will use them against the superintendent if I can, because I want life to be as easy for me as possible. So I'm a little concerned.

• 1955

I'm also concerned with the general thrust of this, that we can be quite relaxed. But there's a tone I read in this report, all the way through, about critical issues of safety and soundness. It's a reflection of the fact in good part that it's been some years since we've had a significant failure in Canada, and the United States system seems to be functioning very well without failures, and ditto in England and most of Europe.

People's memories are quite short, you know. I am significantly concerned that we should be very careful not to introduce wordings into mandates and missions and so forth that could compromise the focus of supervision on real issues of safety and soundness, which is, after all, fundamental to the maintenance of market confidence. And market confidence is everything.

I've listened to many descriptions, including some from my predecessors at the table, about wishing banks to make loans and investments in communities and so forth. I live in a small community now, and I can share some of these feelings and so forth, but everyone needs to think that 93¢ out of every dollar the bank lends is our money, the depositor's money; it's not their own. It works wonderfully when everything goes well, but it punishes the daylights out of you when things turn against you.

Going back to your general question, I think you could find some things that are not critical to the whole, and that you could safely leave out, but I'll come back to my original caution, that I hope you don't take the easy one and then leave the other ones to be sorted out over time.

Finally, if you make a mistake, and some of these things get in and then don't work out, after three or four years go by, you can reverse it. I see nothing irreversible about most of these recommendations, in that sense.

Ms. Carolyn Bennett: You commented in terms of this now exposure, because of the securities business in the banks, that gives you some concern, particularly in this recent turmoil. You alluded to the federal-provincial problem, and perhaps the experience of the feds not really understanding the securities regulation business maybe being a detriment to actually being able to do the job properly.

Would you think that we should embark on that task of trying to get a federally regulated securities industry again? Should we try that again?

Mr. Michael Mackenzie: Well, we've never had it.

Ms. Carolyn Bennett: Yet—but try to go for it?

Mr. Michael Mackenzie: Obviously you bump squarely into the Constitution—I recognize that—and it may not be possible to have in place a national securities commission. Frankly, I think we may pay some prices if we don't have one, but there may be other ways of getting at the problem. That's why I was disappointed that he did not get into the issue. There are these MOUs, and I think they should be examined in today's volatile markets to see whether they're adequate.

Let me put it this way. The regulation and supervision of banks is, in many ways, very different from that of the securities markets. I'm not talking about investor protection issues as much as I'm talking about the straight prudential issues. The securities business is inherently more volatile, and all kinds of things happen. Too often I have the concern that banks themselves—bank internal audit departments, bank systems people, bank management, bank boards of directors, bank regulators—get taken by surprise by what happens in the securities business.

In fact, I think the management of Bank America got taken by surprise, UBS got taken by surprise, and the other ones with the long-term credit management, or credit corporation, whatever. Long Term Capital corporation got taken by surprise. You need real expertise in that field to understand and read what's happening.

Ms. Carolyn Bennett: Do you think we should bring in all the bank directors and ask them to explain derivatives to us? Because we're having a little trouble with this. We're wondering whether the bank directors know what derivatives are as well.

• 2000

Mr. Michael Mackenzie: To their credit, the banking system has developed, in all the banks, risk management committees, and I'm sure these people on the boards have had endless presentations by the guys, or the women, or whoever's in charge of the securities, derivatives, bond trading, foreign exchange desks.

Let me give you an analogy about actuaries—and I'm too stupid to be an actuary. Every time an actuary talks to me, I think I understand what he's saying. Ten minutes later, after he's left the room, I say, “Now, what was that all about?” A director is very much in this position.

But my suggestion is serious; I think you can go to the annual reports, identify these people, and ask if they'd be willing to come and talk to you.

Ms. Carolyn Bennett: The risk management committee chair from each of the banks.

Mr. Michael Mackenzie: Or the audit committee, or both.

Ms. Carolyn Bennett: Okay.

Mr. Michael Mackenzie: Ask them what they do to try to contain risks inherent in banking these days, risks inherent in growth—I'll come back to this in a second—and risks inherent in the derivatives business, and the foreign exchange business.

Why can't Bank America lend, on an unsecured basis, $1.2 billion to a hedge fund? Where were the fellows on the board at that point? You might find it interesting.

I have long felt, as you may know, going back to 1987, when I took the job, that working through bank boards and giving bank boards the push, the prods, and the help they needed to do their job well was part of my job, and this continues. But I'd like to know what they'd have to say to you on the subject.

I just want to come back to one thing I said. Somebody told me the other day, at a lower level in one of the major banks—and I won't identify it—the degree to which at branch levels and at regional levels and at head office levels people's pay is driven by growth. Put more business on the books, put more business on the books, put more business on the books—that's what rewards them. And that scares me.

Ms. Carolyn Bennett: Do you also have a quick word about how you would see the timing of this unfold?

Mr. Michael Mackenzie: The other thing I like about what the MacKay report said is that they said to get on with it, don't wait around. The review process they're recommending here, they're writing as though it could be implemented pretty quickly.

Ms. Carolyn Bennett: Do you think there are some things that should be done quickly, but some things that could wait until later?

Mr. Michael Mackenzie: Wait a minute. Are you talking about the mergers or....?

Ms. Carolyn Bennett: No, just the implementation of the recommendations of the report.

Mr. Michael Mackenzie: I haven't categorized them by urgency.

The Chairman: But you agree with the general thrust, though.

Mr. Michael Mackenzie: I agree with the general thrust.

The Chairman: Which means that to achieve the ultimate goal, you have to move.

Mr. Michael Mackenzie: Yes.

You know, on the whole I think you should try to treat it as a package and move with it. I don't think that's going to get us in a lot of trouble. I think the risk of doing that in terms of safety and soundness are not great.

The thrust to more competition, I like. I like these things about more opportunity for foreigners to come into the market, and smaller players. I've had some experience in actually dealing with credit unions and credit union systems across the country, and I think there's a potential there for some good community banking.

Ms. Carolyn Bennett: You've said that a lot of the things could be reversed, but even in the securities business, it would be pretty difficult to take the banks out of the securities business now. I guess one of the really plaintive deputations we've been having concerns banks being able to sell insurance in their branches, and car leasing.

I mean, should we wait on that for a while, or tell them right away they're not going to get to do that, and do you think we could ever take it back if—

Mr. Michael Mackenzie: No. Well, you could; banks were allowed to lease cars earlier, and it got taken back, and so forth. But I guess what I'm saying is that I don't think these recommendations should be blocked unless the people in these industries can demonstrate that there is a body of information that either wasn't presented to MacKay or he ignored.

• 2005

Ms. Carolyn Bennett: Thank you.

The Chairman: Mr. Szabo.

Mr. Paul Szabo: I wanted to follow up on this. I have a couple of quickies here.

You threw in the Y2K issue. It has more significance because, in your experience, the risks we're talking about could be enormous if something went wrong, and Y2K itself probably presents one of the more formidable risks that our whole system, or the integration of our system, is going to face.

If there is this possibility, whatever the risk percent might be, that Y2K could cause a problem, would you think it would be prudent to deal with this after we know that answer?

Mr. Michael Mackenzie: First of all, I'm not a computer expert, and I can't get my head totally around the Y2K problem to know how serious it is. I'm on the board of two institutions where, as a board member, I'm trying to satisfy myself that the institutions are working appropriately to deal with the issue, and spending a lot of bucks doing it. I do know, not from my own knowledge but as hearsay, that as we sit here, each of the banks has probably spent millions and millions of dollars on that problem. I think they're well aware of it, as I think are life insurance companies and other institutions.

Coming back to your question, if you're going to merge two banks of the size of the CIBC and the TD on the one side, and the Royal and the Montreal on the other, the first thing they have to do, or one of the first things they have to do, is integrate their systems. You cannot operate successfully on a large scale, in the banking business in particular, with two different technologies. They have to come together, and they have to come together without too much delay.

Now, each of these banks will have their own programs to deal with the Y2K issue, and there may be some variations between them, but they have to integrate those programs along with all the other operating systems, applications and so forth and so on. All I'm saying is that I think it's an enormous problem. I'm not saying they're incapable of meeting it. All I'm suggesting here is that the public interest impact assessment they put forward should tell us what they're doing.

Mr. Paul Szabo: Okay.

I wanted to get your opinion on two other things I've given in advance. One is what you suggest be included in the public impact assessment, and the other is corporate governance and the directors and so on.

Your points here, it seems to me, in themselves don't have a great deal to do with the public's perception of what public interest would be. We're talking about shareholders' value having to be increased and stable, etc., and Toronto as the financial hub in Canada having to be stable. These aren't the kinds of things that I would have really thought of.

Why are you packaging this in a public interest impact assessment as opposed to criteria or objects of which any future proposal for a merger would have to follow or to meet?

Mr. Michael Mackenzie: First of all, sir, I think the report itself identified many of the public interest considerations and factors. I put these in this report because these are things that I didn't see coming from anyone else.

Mr. Paul Szabo: Okay. I'll accept that.

Mr. Michael Mackenzie: I say “amongst other things”. There all kind of other things in the public interest, but I'll defend them, because I think the government should be satisfied, and my successor should be satisfied, that the resulting bank is, in fact, very strong, and probably stronger financially, with a greater capacity to raise capital, than the two predecessor banks taken separately.

• 2010

I threw in Toronto as a major financial centre because I think it is an evolution that's happened over the past decade that in the operations of our system, Toronto has become more and more central. Whether or not that's going to continue, I don't know, but I think it's obviously in the interests of people who live in this community and in the country in terms of employment, in terms of where decisions are made and everything else, that Toronto as a financial site would be strengthened. It may be that two big merged banks, for example, operating in the Toronto market may strengthen that.

After all, let's look at it. What's the alternative to Toronto as a financial centre? It ain't Montreal or Vancouver; it's New York, or Chicago.

Finally, the last point in here—and we dealt with the systems issues and so forth—is in here because I think, you know, how big is too big? How big is big enough? And if these banks are to realize the economies of scale, and in particular, they are going to make their economies and so forth without laying off an awful lot of people or closing many branches and so forth, they have to grow. So I think the incentives and the drive for growth will increase as a result of the mergers, and they're already big enough.

So I think there are some dangers in that.

Mr. Paul Szabo: Okay.

My last question is really of significant interest. I even had a bill in the House of Commons on issues related to directors' liability and the quality of boards we're getting. Because of the significant risks taken on by a director, you would think it would become more and more difficult to find directors who are prepared to take on that level of risk and that exposure, and yet time and time again we've seen marquee directors with 20, 30, 40 directorships, some of them, albeit, in subs in their own chains, etc., but still, so thinly spread out that you couldn't possibly discharge all of the responsibilities of a director in terms of at least attending the majority of meetings and serving on a committee or discharging that. Therefore, even though you have this big board, the number of people really doing the job, in my view, is actually much smaller.

So I raise it with you that if we are getting into a whole new dimension—not just in two dimensions, but now we're moving in three dimensions—when you start talking about the size of organizations and the breadth of their impact on the total Canadian economy, then special governance rules related towards the banks should also be considered to ensure that stability and security, so that when we start moving towards this growth process, through mergers and acquisition, all of a sudden that board-in-making isn't giving million-dollar golden handshakes as part of the process, which the shareholders never know about until after the fact, and of course it's buried deep inside some of the documents.

During this process a lot of things are going to happen, and I know there are a lot of bank vice-presidents and senior management people within the bank community looking for the big handshake—because I'm going to retire at age 50, because I've got it.

So if you are concerned about shareholder value and public interest, should we also be concerned, then, about what happens on behalf of those shareholders, and the combined shareholders in the making, as part of this process, and is that board in place with the kind of governance rules of the game that make sure we're not going to have the majority of the board of directors being marquee directors who in fact have absolutely no active interest or participation in board activities?

Mr. Michael Mackenzie: I should just go back to my own experience in this matter.

First of all, in the decade from 1987 to roughly today, you will see a number of things that have happened. One is that the number of directors of each bank has gone down to more manageable levels.

Second, the committee work has greatly expanded.

• 2015

Third, there is now a direct link between the board of directors and what they do and the supervisor, the OSFI. The OSFI makes a report to the bank manager and the boards—and I don't know what whether you're familiar with the CAMEL format, the acronym for “capital assets management earnings liquidity”—and the boards of directors in fact have to sign on back on the implementation of the findings.

So all this is in place. There are risk management committees now, and there are CDIC standards of sound and safe business and financial practice, which boards have to sign onto, quite specifically, every year.

I have looked at the record the secretary of one of the major banks gave me of a list of all the regulatory compliance matters a board of director at his bank had to deal with in a year. It's astounding compared to what it was ten years ago. So a lot of progress has been made.

My concern is that notwithstanding all that, if you get a very strong CEO and you get a very strong investment-oriented, gung-ho group of people in the derivatives markets, and the foreign exchange markets, and bond markets and other securitized markets, and perhaps some other credit markets as well, it's very difficult, even with all these procedures, for the directors to deal with them and stand up to them. That's why I think you would find it interesting to have some of these directors sitting where I am tonight, and to have a chance to talk with them.

The Economist magazine in its current issue describes the fiasco with UBS. It talks about—I think this is the word they used—“miserable” risk management processes. UBS is the biggest bank in the world. And you keep saying, “Well, who are the directors?”

I'm concerned right now that we could have securities exposures. And I don't have any knowledge about this with the Canadian banks. They don't appear to be exposed...as the hedge fund and so on and so forth. But I really don't know how adequately a director, or a group of directors, can say to the CEO, hey, hold a minute; stop, this doesn't make any sense; I don't understand what we're doing; get the OSFI in or get somebody in to tell me, or whatever.

The mechanics are there to do it. It's tough work, with all the goodwill in the world.

The Chairman: Mr. Mackenzie, you said something really interesting just now in reference to getting OSFI to come in and do whatever, to find out if in fact there's safety and soundness in the system of whatever institution you may be referring to. But with change happening as quickly and as rapidly as it is now—things happen fairly fast; I mean, capital flows back and forth at a very fast pace—does that mean that every time there's a little doubt you call in OSFI or you call in any other regulators to check everything out? At the speed with which things are going now, it could be a daily practice. In that sense, I think that's what's frightening many Canadians, that they see these things happening so quickly.

Mr. Michael Mackenzie: That's true, but that's part of life these days, as everyone is saying and so forth. The whole thrust of regulation in our country, in the United States, the U.K., Europe—and as I mentioned, I'm now an ongoing part-time consultant to the World Bank, so I have a look at what's going on in various other parts of the developing world and so forth—and the whole emphasis in supervision now is risk management systems. I think that's the way you have to deal with it.

If, as a regulator or supervisor or auditor or whatever, you come in and the transaction is done—the horse is out of the barn, and he's running around the field—you have a chance, if you get the focus on the systems, to manage risk. Increasingly, I think, you will find supervisors—and this doesn't have to be every day; it can be once a year, as far as that goes, or maybe more often if you have a bank that's having more difficulty—pounding away at the table about risk management.

• 2020

I think the analysts and the rating agencies do a good job here, by the way. I am a great believer in the backup support, the supervision we get from Standard and Poor's and Moody's. I think they're very sophisticated, I think they think in terms of risk management, and I think they're maintaining constant pressure. One of the real drives for a bank is that if a Canadian bank loses the double-A rating, it's out of the derivatives market. And that's a pretty powerful incentive.

The Chairman: I want to go back to a phrase I think the report has in it, if I'm not mistaken, that “to delay is to deny”. In other words, get on with this project, because there isn't really as much time as you think.

This is, I think, right in the report, and yet the challenge we face, I think, as a committee is that public education on this particular issue is seriously lacking. Sometimes we find that people are against certain changes because they're either protecting their turfs or they lack the knowledge. I think that's been quite evident in a number of meetings that I personally have held, in town hall meetings or wherever.

It's not an issue that is generally well understood. It's a complicated issue. There is a sense of fear of the unknown, and the Canadian public is very much in that state right now.

How do you think you overcome that?

Mr. Michael Mackenzie: I'm not sure you ever can completely, obviously. One thing I like about this document is that I think it presents such a comprehensive analysis and description of the system that it itself is a good educational tool. How it's used by people is another matter.

I think from your point of view—and I'll come back to where I started my presentation to you—it gives you a conceptual descriptive base into which to make your own judgments about various aspects of the system.

On how you can educate the public, I'm not sure. I don't even know how uneducated the public is. I do know, because I share it, that the public has, and particularly these days, a real fear of exposure, of risk, of things going wrong, of people playing games, and so on and so forth, and yet my own experience has been that the Canadian public, all of us—and you, obviously, know much more than I do on this subject—has a kind of love-hate relationship with these guys. Because we're all—and we really know it—getting pretty good service. If you compare what we get in Canada with what they get in the United States, for the average person it's very much better.

But on how you can convince a skeptical public, I don't know. I think the public has great difficulty understanding the linkage I put in my presentation between profitability and safety. I guess the average member of the Canadian public thinks the banks are making exorbitant profits, are ripping us all off—

Voices: Hear, hear.

Mr. Michael Mackenzie: —and there they are—and that they deserve to be pulled in and curtailed and so on and so forth.

Well, I'm not unhappy about the profits the banks are making, and they won't be as big this year as they were last year, by any shot.

I don't know; I don't know that I can help you an awful lot with that question.

The Chairman: I was also interested in a last comment you made here:

I suspect that it is important that the international financial markets read any turn-down as driven by sound logical analysis of the facts and not by political agendas.

Well, I think one of the things that's happened in this debate, quite frankly, is that in the appearances that banks have made in front of this committee, they are agreeing to things that they normally don't agree to. And when people start doing that, people become extremely suspicious.

• 2025

For example, you have the banks accepting a regulatory burden that they wouldn't under normal circumstances. You have some bankers saying, for example, we'll accept a sort of CAR—things I know in the past they never would have accepted, and the same thing with the ombudsman—and how all of a sudden we'll create this small business bank.

That feeds the cynicism of the entire process, and it puts this committee in a quandary, because all of a sudden we don't know whether people are saying things because of the circumstances they find themselves in or because it's a sound business case.

So I submit to you that what is happening is that banks are very much in the business now of making a political case rather than a business case. The point you raised about how important it is that banks are profitable to the safety and soundness of the system, well, these are things they may even forget to say sometimes.

Mr. Michael Mackenzie: I don't know what the banks have been telling you, but I share your reaction, in a way.

That, in a sense, is why I think the recommendation Mr. MacKay has made over what they should say, as the first step in this process—the public interest impact assessment—is to make them, in a formal way, go on the record publicly and pick up on the areas I've talked about, and pick up on all the other areas of public interest, and be held accountable to those, as part of the process.

Maybe you can say, well, they're only doing this because they want something from us, and they want that stamp of approval, and then away we go, boys, but—

The Chairman: I'm not going that far, but I do feel that when they come here and they say there's not going to be any job losses and everything is going to be dealt with under attrition, well, when you look at the expense sheets of the banks and you find out what proportion goes to their payroll, I don't think you're going to be achieving a more efficient system if you don't lay people off.

Mr. Michael Mackenzie: My own view is that the successful mergers in almost any industry, including banking, have been accompanied by significant job losses. Sure, they've done a pretty good job on severance pay, and probably bend over backwards to be generous to people and so forth and early retirements and however else they want to do it, but my own feeling is that they tell you there are going to be very few job losses. At the same time, they're telling you they need to grow, because the only way they're going to get these cost ratios down, if they don't let people go, is to vastly increase their volume of business.

Every time I see somebody grow very fast, I get a little nervous and a bit edgy, because I wonder whether they're not outgrowing the capacity of their risk management systems to manage the growth.

The Chairman: Mr. Valeri.

Mr. Tony Valeri: Thank you, Mr. Chairman.

I have a couple of questions. In your presentation you questioned the one suggestion about OSFI and the mandate being altered. There were some other recommendations with respect to OSFI. Am I to take it that you're not questioning the others, and it's just this particular one that you're not sure about?

Mr. Michael Mackenzie: Have you any ones there in particular?

Mr. Tony Valeri: The other ones talk about strengthening the governance structure by adding a board of directors, moving CDIC to OSFI and amending CDIC's mandate accordingly. Those are the other recommendations MacKay was making.

Mr. Michael Mackenzie: First of all, it's interesting, as a matter of history, that when I was interviewed for the job back in late 1986, early 1987, I asked if we couldn't set up a board of banking supervision, modelled on the one in the Bank of England. I was told “no”. So I'm very interested to see this recommendation.

I support it in general, but I have two caveats. The first—and I don't know how to put this and still be polite—is that I hope that people are selected here because of their knowledge and interests and so forth and not necessarily because of their politics. These will be paying positions of one kind or another, I suspect, although not vast amounts of money, for directors' fees and whatever. You want to get people...if you pay them something.

• 2030

Assuming that they're good, competent, and honest people, dedicated to the mission and mandate of the OSFI, I think the policy concepts and the support a superintendent can get from a board, and having to justify what he's doing in terms of the general thrust of what he does, is fine. I don't think you'll be successful at keeping them from wondering, or asking questions, about the resolution of individual bank situations that are in trouble. I just don't think it's realistic to expect that they'll be able to stay away from that. That may be all right. So that's my reaction to that.

The other question is that I think what they're proposing on the CDIC makes a lot of sense, frankly. I think a lot of unnecessary conflict has been going on for some years now, and I think the distinction between an insurer, or a guarantor, which CDIC is, and a regulator, or the supervisor, is the right one.

Having said that, obviously CDIC does not want to be caught with any surprises, and therefore there has to be very good communications and so forth between the two institutions. The CDIC itself will have its hands full if this proposed merger with CompCorp takes place.

There are some other suggestions about consumer protection issues and so forth that the OSFI should undertake that I'm not in love with, but I accept. I mean, that's part of the reality of the environment. If the OFSI is the place to put them, then so be it, but I don't want those to interfere with the primary function of market confidence, safety and soundness and the prudential issues.

Mr. Tony Valeri: I don't think that's the intention of MacKay's recommendation.

Mr. Michael Mackenzie: No, I know it isn't.

Mr. Tony Valeri: The other area would have to do with the ownership structure. MacKay's talking about a three-tiered ownership structure under $1 billion, closely held between $1 billion and $5 billion, up to 65%, and beyond that, 10%, then possibly expanding to 20%. You talked about safety and soundness in the context of your concern about the overexposure and the perhaps not being aware of the overexposure, potentially, to securities and that, but what are some of the other things we should look for in terms of trying to balance the safety and soundness with this increased competition that this type of ownership structure would provide?

Mr. Michael Mackenzie: First off, I quite like the way Mr. MacKay and his colleagues came out on the ownership issue. I've been a very strong proponent of the large banks with the 10% rule. He's made some modifications to it that make some sense; I don't know. From a safety and soundness point of view, in the banking system, I do not like close ownership. I've just seen it cause too much trouble in my work with the World Bank. Looking at systems around the world, I see it causing trouble, particularly if controlling owners have other business interests, commercial or other financial interests or whatever. So I like this. I like the separation of finance and commerce.

Therefore, when he makes a distinction between large and middle-sized and small, which he does, okay. As a practical matter, I guess that's all right, but just think of the number of small trust companies in this country who have run into difficulties since 1967, and they've all been closely owned. I'm not saying the CCB and the Northland Bank fell into that category, but think about it.

I don't like people with commercial interests, particularly within the real estate business, having the power to control an institution that takes money from the public in the form of deposits and insurance premiums. It makes me uneasy. You can write all the rules you like about related-party transactions and so forth; rules are fine, but they won't deal completely with the risks.

• 2035

By the way, I was very much in favour of what he said about the concept of financial holding companies and the financial holding company act. I have been arguing for many years that we need such an act, and he had business reasons why this form of structure will make some sense and add some flexibility and so forth. But we've always stumbled historically in this country on the issue about whether these holding companies should be regulated or supervised. And I think what MacKay has to say about that is very appropriate.

So I'm not uncomfortable with what he's saying in terms of the ownership rules and safety and soundness considerations.

Mr. Tony Valeri: Two final points. One, you mentioned that you know the difficulties in merging information systems of the large banks, and the failure to integrate the different information systems contributed, to some extent, to the failure of Central Guaranty Trust back then.

Is there any downside risk we should be really concerned about in terms of the failure to integrate information systems for the merging banks?

As well, a question I've often thought about is do you believe the Canadian banks right now are too big to fail, the government wouldn't allow them to fail, and that, to some extent, banks are kind of exploiting the belief? I mean, depositors put money into Canadian banks and are pretty comfortable about it; the government's not going to let them fail.

How do you feel about that?

Mr. Michael Mackenzie: I think this is the “too big to fail” doctrine, or the “too big to be allowed to fail” doctrine. I'll tell you, I believe it, and I believe in it, and I believe it should never be written down. There should always be some doubt about whether you are in fact too big to be allowed to fail.

I'll tell you, it could be a real issue. I'm not giving any secrets away by saying that in my history, we were concerned about this with respect to the Royal Trust and we were concerned about this with respect to Central Guaranty Trust and Confederation Life, to name three. But I do think there will not be a government of this country, of whatever political stripe, that will ever allow the Bank of Montreal to fail. This is true in the United States and this is true in the U.K. I mean, it's just true that big banks that take large amounts of deposits from the public will never be allowed to fail in one way or another.

Look at Sweden in 1990 and 1991; the whole system collapsed, and the government moved all kinds of things to make sure there were no—quote unquote—“outright failures” in order to rebuild a financial system.

Remember also, the big banks are at the heart of the payment system. If you let one of these big banks fail, you throw into jeopardy the whole payment system.

So I don't know whether that answers your question, but as a regulator, or former regulator, I would never get up and say, uh-huh...you're not too big to be allowed to fail.

I was surprised, by the way—and this is another subject—that MacKay didn't get into at all failure resolution issues. And there are a lot of them. I think it's unfortunate.

Mr. Tony Valeri: Thank you.

The Chairman: They just don't talk about failure.

Mr. Gallaway.

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

Mr. Mackenzie, I want to follow up on something that the chair raised. It has to do with fact versus politics, what's real and what isn't. You raised in your brief the issue of job losses, because that's something a number of groups and individuals have raised before this committee.

I want to be fair in my recollection of what was said at previous meetings, but it seems to me Mr. Cleghorn and Mr. Barrett, between the two of them, the respective banks, acknowledged if there was in fact a merger, there would be losses somewhere in the neighbourhood of 18,500 jobs. Then they talked about normal attrition and that sort of thing. Yet there have been other groups, not only before this committee but also in the press, who have estimated job losses will be at least twice that number.

Having noted that, you made reference to the fact that there would be these public interest impact assessment statements. It's fine for the banks to make those types of statements, but what I want to know, from a regulatory point of view, is whether OSFI in fact would monitor those statements.

• 2040

I know there's a transition committee or team in place, working towards a merger if it were to be given a green light. The question is, how do you judge the veracity of those numbers from the impact point of view? Is that done by the regulator, or should a parliamentary committee haul these people before them and say, “Show us the goods; show us your data”?

Mr. Michael Mackenzie: Well, sir, we're getting into new territory, and there aren't any precedents. I've never known a situation where a merger was put together or a takeover or anything happened under my regime where a follow-up of that nature was required. The processes could be written into the merger documents, or into the documents the minister used to give them the permission. Of course OSFI could be mandated to monitor it, and I think maybe they would be the best people to do so.

I'd go back to the beginning of your question, though. You are the political people, so you're the people to judge political values and political risks and political reasons. All I'm talking about is market perception. I think markets will understand if the government of the day says, look, we gave Mr. MacKay or his predecessor a mandate and a task force, and right up front is the impact on employment in Canada, direct and indirect, and it seems, based on the facts, you can conclude that at this point in time, it's not in the public interest to lose so many jobs.

I think you would be stronger in a rationalization before international financial markets to talk about concentration issues and the degree of bank concentration in Canada compared with most other countries. I mean, it's already high, and it obviously will be a lot higher.

Far be it from me to tell you how to do this, but this is what I meant, I think, in terms of analysis based on the facts and so forth that you see.

I guess one other thing I should say—and I don't want to overstay my welcome—is that I did not deal with systems spending, and this is a big one that they will have to put in their statements. The report makes it very clear that Citibank and Chase spend multiples more every year on systems and systems development than our banks do. I think the systems argument is, and can be, a good one—speaking on the other side for a moment—because I think systems development and systems expenditure is so vital.

Without giving away proprietary information, I think they could be asked to say, “Well, what are you going to be spending all this money on systems for, anyway?”, in not the wide generality of it but to give all of us some idea of why they need to spend this money, what difference it makes whether they spend this money and Chase spends twice that much money. I find that the woods are full of rhetoric on this subject, and yet I think it's a good subject. They probably do have a good case.

Mr. Roger Gallaway: You raise, under the heading of “Other areas”, foreign competition. I just want to read you a couple of lines from one of the sections in background paper 1.

Talking about competition, it says:

Where the subsidiary of a foreign bank does not engage in activities which give rise to prudential concerns, the Task Force believes that the lightest, or indeed no, regulation should apply....The Task Force is not troubled by any potential competitive anomalies between foreign and domestic banks created by such a regime.

In other words, they're saying that the regulation will be greater for at-home banks as opposed to foreign banks.

I just wondered what your reaction to that would be.

• 2045

Mr. Michael Mackenzie: First of all, like institutions doing like things should be supervised and regulated in a like manner, whether they're domestic or foreign, big or small. This means that if a foreign bank operates in Canada and takes deposits from the Canadian public, including the commercial public, not just the family public, if I can use that phrase, then it should be regulated and supervised just as if it were a Canadian institution doing that.

If, however, it does not obtain its funds from Canadian depositors but on wholesale money markets, or by issuing securities into the markets and so forth, and it falls under a securities commission regime or a supervisory regime, I'm not so sure how excited OSFI should get about that.

For example, GE Capital operates in Canada and around the world. It's become one of the major banks around the world, but it doesn't take a deposit from anybody. It operates on the market. It has to meet the SEC standards, the OSE standards, or whatever other standards in terms of that. This angers banks and other people who've had to compete with them, but I don't see any particular problem with that.

This is one reason that I think MacKay came to the view that maybe a holding company structure, which would permit a part of this, and part of competing head to head with GE Capital or Newcourt, is an appropriate thing to do. They do also say, though, that there ought to be some capacity to make sure there's transparency, which I believe in, and ring fencing so that if it does get into trouble, it's the market, the investor, who takes the hit and not the bank depositor, or insurance company policy holder, or whatever.

Mr. Roger Gallaway: I have one final question.

You said in your presentation that:

...when markets are in disarray, they sharply reduce the value of bank stocks....the Task Force has underplayed the critical linkage between banking profitability and financial stability.

I certainly don't disagree. At the same time, there's an academic who has suggested that if one examines the period of some point in 1990 to 1992, when the current Bank Act was being conceived and written, during that period of time the banks took a number of critical hits. Large sums of moneys were lost—big chunks of large, large sums, in the billions—yet those publicly known losses had no effect on share prices for banks.

I'm assuming that his observation is correct. He does study this issue.

I wonder how you can explain that in light of the observation you've made here—although I know it's not identical.

Mr. Michael Mackenzie: On that historical record, first of all, everybody on the street knew that all these banks were facing enormous real estate problems. When they were convinced that the banks were not denying those problems but were dealing with them, the value of their stocks, on the whole, went up, not down, even though they were hitting their earnings very hard. I think it was a question of confidence that they were dealing with the situation.

As well, remember at that time that bank stocks—and I'm not a bank stock analyst, particularly—were probably undervalued in the market. Nowadays, six months ago, a lot of the people in the market, investors, were very concerned about a bubble in the market anyway, and bank stocks, having had this terrific run-up, were perhaps overvalued.

Then comes along this: the stock market breaks and a whole lot of other things happen, the Asian, the exposures, and suddenly people get concerned that maybe they don't really know what's going on with those exposures; we don't know. I mean, they knew about the real estate, and they could see the banks dealing with them, so they rewarded them. But I don't think any of us really know about exposures in the Far East or Brazil or other countries, and I don't think anybody really understands, as I said earlier, the exposures through hedge funds and securities markets, derivative markets. The market is just much more nervous right now.

• 2050

I don't know whether or not that's a good answer for you.

Mr. Roger Gallaway: No, that's fine.

Mr. Michael Mackenzie: But it's singular. I mean, look at American bank stocks, Canadian bank stocks, British bank stocks, German bank stocks, Swiss bank stocks—they've all taken a pounding over the summer and into the fall.

Mr. Roger Gallaway: Thank you.

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

Mr. Mackenzie, thank you so much for an excellent presentation. We have a greater appreciation of the issues as a result of this intervention, and we're very grateful.

Mr. Michael Mackenzie: My only post-script—and I come back to what I said earlier—is please don't totally duck this securities banking regulatory, supervisory issue we have. I know it's a constitutional issue in many ways, but I think we're almost dealing with a report that says, “We're describing the whole financial industry of Canada—oh, but we're not touching the investment houses”.

I don't know; it bothers me. And I don't know how you do it, but....

The Chairman: We'll find a way, if there is one.

Mr. Michael Mackenzie: Good.

The Chairman: The meeting is adjourned.