FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, October 29, 1998

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[English]

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

As everyone knows, the finance committee is presently studying the report of the Task Force on the Future of the Canadian Financial Services Sector, and this morning we have the pleasure to have with us the chairman and CEO of the Bank of Nova Scotia, Mr. Peter Godsoe.

Mr. Godsoe, welcome. We look forward to your comments.

Mr. Peter Godsoe (Chairman and Chief Executive Officer, Bank of Nova Scotia): Thank you, Mr. Chairman. First, my apologies for being late. It was the pleasures of Toronto airport; I'll say no more.

I know you've had long and many hearings, so you've heard many of the same stories over again; nevertheless I think the opportunity and the challenges of studying the future direction of Canada's financial industry is not only extremely complex—and it is—but it's of profound importance, given its impact on the economy.

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So I think you're in a very important position, Mr. Chairman, to help define the best policy framework for our industry, for consumers—obviously it's consumer-driven—for small and large businesses, and for our communities from coast to coast, because we have a national impact, as well as for our employees and our shareholders.

Today I'd like to share with you very briefly some views on what the industry is and how it functions.

In terms of the MacKay report, I have some general comments, and they will be general because it's 124 recommendations. It's a good beginning, but it's very large and complex.

Then I'll have a brief word on mergers, boring as it might be. Why? Because the dominant industry is banking. At the heart and soul of the economy is commercial banking, lending into communities, the relationships with individuals and small and medium-sized businesses. Mergers, unfortunately, have pre-empted all constructive debate to date on the future of the financial system.

Finally, I'll share with you some very general thoughts on the future, because I know that's what you think the committee should focus on and where the mandate lies in setting the right public policy framework.

As background, then, our industry, the financial services industry, and specifically the banking industry—because I think when we look at it, we're talking about lending and availability of credit and core banking—is clearly a product of enlightened public policy through most of this century. As we look at it today, it's a winning system; nobody would debate that. It's highly efficient, very safe, very stable, and extremely competitive.

It is a national system anchored in five national banks that were a creation of public policy back in the 1920s, technologically very advanced, one of the most advanced in the world electronically, and we all compete aggressively for share. Notwithstanding some comments, it's absolutely thriving. With our domestic—core banking—profits at records, returns on equity in that business are 20% to 30%. This is not an industry that's under attack.

That said, I'm not arguing for the status quo, which tends to have become a rallying cry. We support change, but change that enhances competition and choice, and change that is defined in the interests of Canada and Canadians. We believe change should be implemented only after careful, comprehensive and transparent processes such as this, that look at maintaining the great strengths of the system, especially the core banking, while building and adjusting for the future.

I do not believe that Canadian banks face a crisis or that foreign competition is about to overrun us. To the contrary, it is global capital markets that are in disarray. There are deep concerns about the global economy and systemic risk. The good news is that Canada's domestic banking industry is safe, healthy, strong, competitive, and enjoying record profits.

So with that background, let me turn to the MacKay report, for MacKay is a good beginning and I congratulate Harold and his task force for a comprehensive report, as I said, 124 high-level and, in some cases, detailed recommendations.

We support the general thrust—how can you not?—of enhancing competition and competitiveness and centring in on consumer needs, empowering consumers through transparency and clarity of information.

We also support a number of MacKay report recommendations: many useful suggestions on how better to serve consumers and small business, better disclosure of information—plain language, for example—expanded reporting on small and medium-sized business statistics, and obviously we all have room to improve in these areas; and on the business side, increased flexibility for financial institutions, greater scope for holding companies, various forms of partnership, a more progressive regulatory system, accounting, tax, and so on, good in the right policy direction, at least for our industry.

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On the other hand, I think we need to fully understand the overall ramifications of the report. We need to consider, for example, recommendations that suggest how institutions should manage certain activities and what this means for banks, other financial institutions, the insurance industry, etc., and certainly for consumers and small business.

As a businessman, I have a fundamental wariness about a large step-up in regulation or legislation that can introduce new levels of rigidity and costs and can be very large barriers to entry, offsetting gains that would otherwise be achieved by increased competition. So we need to consider carefully how the principles of increased competition fit with the additional regulation and legislation.

At a higher level, we need to consider payment system recommendations and CDIC recommendations with truly professional input. These are very complex issues and have enormous impact upon the safety and soundness of the financial sector. I'm not arguing against them; I'm just saying they need to be really looked at in a detailed way by the practitioners. Because of this, we need to study the package of proposals put forward by MacKay carefully and debate the issues. Legislation, regulation and implementation are serious challenges—they're very rigid and not to be treated lightly. In addition, I think government needs to consider and identify the best balance across the various parts of MacKay, which is why I support viewing the report as an entity.

I worry about the natural propensity to cherry-pick from the report, dependent on our individual interests, without considering it a whole; to rush into popular legislation and regulation without understanding costs and implications; to avoid tough business choices based on effective and targeted lobby; or to accept whatever is proposed in return for speed and possible mergers.

While I support the idea of moving forward expeditiously, it's far more important to get the policy framework right than to get it done fast. Importantly, we should not consider the proposed mergers until we think through MacKay and get a clear sense of where we want to go as a country on the full financial services. I can't see irreversibly altering the system by allowing two bank mega-mergers and then sitting down to debate what the sector should look like.

On that note, I will give a brief word on mergers because they would represent the most dramatic and irreversible change in the banking industry in the past 75 years. Clearly, mergers represent a valid business strategy. I don't debate that for a minute. In-market mergers are not about the future, they're a classic response—from my days in business school—where companies wish to increase market share and reduce costs through elimination of duplication. That's a valid business strategy, and I have no problem with it in principle.

But Scotiabank's position is that the proposed bank mega-mergers must be analysed very thoroughly. From our viewpoint they represent bad public policy. They're obviously bad for competition and choice. I don't see how anybody can debate that. They're bad for consumers and small business and bad in terms of potential concentration of risk and power—concentration that is unhealthy in a country the size of Canada.

The proposed mergers would eliminate one-third of our banking system—that's non-debatable—as we know it. That's never been done in any other country. We'd be moving to levels of concentration not seen anywhere else in the world in terms of banking. The mergers would mean that 70% of virtually all our core banking activities—and that's really what this debate is about—would be in the hands of two institutions; 70% of everyday banking services that touch virtually every Canadian household: personal deposits, transaction accounts, loans, mortgages, lending to small business.

I agree globalization is a force in capital markets, although even there equity markets—basically the distribution of medium-sized business securities—remain tied to local investment banks, such as Scotia McLeod and the dealers of the other major banks. But globalization is not a factor in retail and commercial banking. Study upon study in the U.S. and Australia, and again in MacKay, have found that personal lending, personal deposit accounts and small business lending are very local. Sure, technology enables us to withdraw cash, use debit cards rather than cheques, and use PCs and telephones to pay bills and access our account balances, but the real relationship is still about people and communities, and it's intensely local. None of us is about to shut our branch systems down. That is basically where all our new sales come from.

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Do we Canadians want to create the single most concentrated domestic banking system in the world for the sake of creating two players with greater capital markets capacity and a greater ability to make bigger bets in global markets? We certainly don't need mega-banks in terms of capital in Canada. We Canadian banks have more than enough capital for all the risks here in our own country.

We're in a period of profound global unrest and uncertainty. We need to get our financial sector right to ensure that the necessary resources are available to Canadian consumers and businesses. Mega-mergers as an option are, in my opinion, very high risk. They're obviously irreversible and concentrate power and decision-making to unprecedented levels—levels other countries just would not tolerate.

I believe this must be examined most thoroughly, and under no circumstances should they be allowed to pre-empt the debate, to pre-empt the process we're going through, which unfortunately has been the case from absolutely day one.

Let me share a few thoughts about the future. Ultimately this process of what you're doing in establishing the future direction of the financial sector must be defined in terms of Canada and what's right for Canadians.

First, though, I have a cautionary note. In our rush to define the future and embrace globalization, let us not forget the lessons of the past. As I said earlier, we must build on the strong foundations we have in our banking, insurance and other systems—the strengths and safety of our Canadian system. It is one of the finest in the world. In particular, there must be a high degree of competition in core banking. That's what this debate is all about and that's the way it's defined in virtually every other country. It's also critical to maintain overall Canadian ownership of the industry.

Elaborating on that, one of the lessons we're learning from today's financial turmoil, which is probably the most serious financial crisis we've seen in the past 50 years, is that we must define financial sector policy in the interests of our country, Canada, to ensure Canadian consumers and businesses have access to credit and the resources they need to run their businesses.

If we look at Japan, the taxpayers will have to pay over a half a trillion U.S. dollars—far more than our total economy—to bail out the mega-banks and get them in shape to give credit to their country. Why? Because foreign banks didn't rush in to fill the void and haven't for the past five years.

The recent Federal Reserve interest rate cut was all about the United States; it wasn't to save the global system or help Canada. Americans were worried—I was at the IMF—about a domestic interest rate cut.

Last year, French taxpayers footed a bill of $22 billion U.S., or $35 billion Canadian, to bail out their flagship, a national champion called Crédit Lyonnais.

Of course, and I think we all know it, third world countries are on their own. They have to solve their own problems with the tender care of the IMF.

That is why the strength, safety and liquidity of the Canadian financial system and the level of competition in Canada is where this debate must centre. Scotiabank believes in strong domestic competition. It's the only way and the best way to drive innovation and create long-term advantage for Canadian financial institutions, and to ensure that those institutions serve Canadians well.

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We believe the strength and toughness that come from high levels of domestic competition at an institutional level translate into international competitiveness. The opposite approach—creating dominant domestic competitors—rarely has translated national champions, if you will, into international successes. That's why we're for policies generally that will increase international competitiveness, but without compromising competition here in Canada. We're clearly for open entry to foreign competition as long as we can compete fairly, as we have been doing for the past twenty years.

To meet the challenges of the fast-changing economy and world, banks and others—insurance companies, mutual funds, if you will—need organizational flexibility in order to meet the demands of customers, to have access to technology and skills, and to effectively manage their businesses. I think we need a policy framework that encourages flexibility without the excessive re-regulation that is a natural instinct to counterbalance anti-competition concerns, that would choke off gains from increased competition, and that would truly hurt consumers in small business in the end.

Ultimately, Mr. Chairman—and this is a very general comment—I think Canada must have a number of highly efficient, Canadian-owned national financial institutions to ensure satisfactory competition, satisfactory choice, satisfactory safety and liquidity. That number may be five or ten, but it's a lot more than two.

Mr. Chairman, there's one thing I'm sure is certain, mergers or no mergers, legislation or regulation notwithstanding. Scotiabank has been in business since 1832. That's a long time. We've been a national bank since 1901, from coast to coast. We intend to continue to be a national bank, serving our customers, providing good careers for our employees, achieving strong returns for our shareholders, and operating as part of Canadian communities from coast to coast. We're very confident of our capacity to compete, to innovate, to adjust, and to continue to play a key role as part of the Canadian economic fabric.

Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Godsoe.

We'll now proceed to the question and answer session, beginning with Mr. Ritz.

Mr. Gerry Ritz (Battlefords—Lloydminster, Ref.): Thank you, Mr. Chairman.

Thank you so much for your insightful comments, Mr. Godsoe.

There were a couple of points that I picked up out of your intervention. You're saying that MacKay is a beginning. Are there points in there that you feel are missing, on which he did not go far enough, or that he did not address at all?

Mr. Peter Godsoe: No, I think MacKay is very complex. Intellectually, the report is very well done with its 124 recommendations. They have something of everything for everybody.

You're trying to come up with a coherent policy to set a framework for a period of time, five or ten years, for the industry. I think you have to look to and get some input from the people who actually have to operate these things. For instance, Canadian banks and Canadian insurance companies haven't really been in here. The devil is in the details and in the implementation. I think there are a lot of conflicts in it. On the one hand, we're for lots of open competition. On the other hand, we feel we need more regulation and more legislation to protect people from the banks.

I'd like to see a fuller debate on self-regulation or where the problems are. I'd like to see some cost-benefits done on how much this is going to cost. I know the Canadian Bankers Association is in no position to make constructive comments on this, because it's obviously driven apart by the merger issue and can't comment on anything. That has to be done, so there's a lot of work left to be done here.

Mr. Gerry Ritz: So when you say in your report that we need to get our financial sector right, that's what you're inferring.

Mr. Peter Godsoe: Absolutely.

Mr. Gerry Ritz: Okay, great.

You also say that banking now is extremely competitive. As a bank consumer, I'm not sure I would agree with you. We see interest rates fixed. Everybody's within that narrow little margin. Where is the competitiveness that I, as a consumer, should be looking for?

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You're decrying the mergers as being bad for consumers because of less competition, yet the merging banks themselves—the ones that would like to merge, anyway—are saying they will lower the costs of their services and are going to be all things to small business. I do have a little bit of a problem with that second one. Where were they last year and the year before that? Anyway, where do we see this extreme competition coming in?

Mr. Peter Godsoe: I think the perception of a lack of competition speaks for itself. We see the same data you do. Your perception is shared by a broad base of Canadians.

If I look at the gross figures, the macro figures, our system is lower on cost than the American one. It delivers with service charges that are a third lower, and it delivers with interest spreads that are almost a percentage point lower if we just benchmark it against what is considered a very competitive system. We have the the lowest cost of any of the English-speaking systems. That doesn't change the fact that Canadian consumers and Canadian small businesses overwhelmingly want more competition, not less competition.

So I guess my point is that if you take one-third of the banking system out through mergers, that hardly is a great move towards more competition.

Mr. Gerry Ritz: One other point that you made was about increasing our international competitiveness. As you said, your bank has been chartered since 1832. You have always had a strong presence in the Bahamas, Latin America, places like that. That's your international presence. The other banks have not gone that route. Is that something in their portfolios that's missing but that they should have done?

Mr. Peter Godsoe: I don't think we did much on history in the MacKay report. Scotia started in 1832. We went into Boston and New York then. We were in Kingston, Jamaica, before we were in Toronto. I can say Commerce and the Bank of Montreal were in California in the 1860s, before the Bank of America was formed. Like us, the Royal Bank went down the coast.

We developed different strategies. We continued to expand internationally. We've been a multinational bank for many years. We're in 53 countries. We have 18,000 employees in Latin America whose first language is Spanish. I don't have to be as big as Citibank to do that. All my life, I've been competing with them. That doesn't define it. We're also fairly big in New York. We're a top-ten syndication bank there.

When I lived there, I came out of it with a deep bias that we couldn't be big enough to define that as our strategy to go out. We'd been doing it for a long time. I think each of us will pick different strategies. What I think is wrong is to start to bet on one or two as a national champion. I think that's dangerous, and I think the price is always paid by the home country if somebody stumbles. I therefore don't think it's a valid public policy drive. I think we should let competition decide and let different strategies evolve.

Mr. Gerry Ritz: Teeing off on that competition and internationalness and so on, would you have the same concerns if the Royal was merging with an American bank?

Mr. Peter Godsoe: Not at all, nor would I have had concerns if Royal had merged with London Life. There is very little overlap competitively. I personally thought there would be very little job loss, because you're really adding an apple and an orange. I saw it as a good move from a Canadian perspective if it increased consumer competition in terms of the products. I had no objection at all.

Mr. Gerry Ritz: Thank you.

The Chairman: Thank you, Mr. Ritz.

[Translation]

Mr. Rocheleau.

Mr. Yves Rocheleau (Trois-Rivières, BQ): Good morning, Mr. Godsoe, and thank you for your testimony. I have two questions, Mr. Chairman.

The first one concerns your reference to Japan in your comments. Are we to conclude, then, that if the ground rules are not changed in Canada and mega-banks were to become a reality as a result of mergers, theoretically, we risk finding ourselves in the same situation as the Japanese?

My second question is this. What do you think of the suggestion made by your colleague, Mr. Rousseau, from the Laurentian Bank, who is advocating, as a means of countering the inevitable push to establish mega-banks, that we use the legislation and regulations to encourage new market entrants in the form of business combinations? For example, an insurance company could combine with a financing company and a bank such as yours, theoretically, as well as one or two other players. What do you think of that approach as a means of fostering greater competition?

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[English]

Mr. Peter Godsoe: Thank you, Mr. Rocheleau.

On Japan, my point is that if the financial institutions get into trouble— Let me turn it around. If a railroad or a department store gets into trouble, we deal with it and we resurrect it in another form after a bankruptcy. If financial institutions get into trouble, they stop lending, the country pays, and only the country will bail them out. The international community will have no sympathy. Japanese banks today are not lending. You have a major economic crisis in Japan not because the Japanese can't build ships or can't make computer chips, but because their banking system went down. That's why we should get it right.

This is a public policy element. This isn't about letting markets decide everything. It never has been. We're a product of public policy.

In terms of Mr. Rocheleau's suggestion, as I interpret it—and we've talked—he is basically saying to let the government adjust some of the medium-sized companies to provide competition before the banks go forward with a mega-merger. I'm saying roughly the same thing. I'm saying to study the idea very carefully. Don't pre-empt it. Don't do the mega-mergers and then say you've built your wonderful field of dreams to which all this wonderful competition's going to come to replace the one-third of the banking system that you've lost. That hasn't proven true anywhere else. That's why the Australians, who faced a remarkably similar decision, just said they were not going to allow mega-mergers until they saw the competition.

I think that's what he's arguing: take Laurentian, let them evolve, and if they become a strong competitor, that's fine. If Royal and Bank of Montreal then want to merge in two or three years because we have tonnes of large competitors, there's no risk to Canada. But there is a large risk in pre-empting it.

There is a fact that I can mention. In the last fifty years, the market shares in core banking among the top five national banks here have have not changed: Royal has been number one, Commerce number two, Bank of Montreal number three, Scotia number four, and TD number five. Obviously, we've had different styles of leadership. As brilliant as we've been at Scotia, we're still fourth, so that tells you that it's very hard to move these shares. If you pre-empt it and allow those mergers, you have absolutely no assurance that you'll get competition in here. I think that's what he's saying, and I think it's a valid comment and a very valid observation.

[Translation]

Mr. Yves Rocheleau: Thank you.

The Chairman: Thank you, Mr. Rocheleau.

[English]

Mr. Brison.

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

In principle, the MacKay task force supports allowing mergers provided that they jump through a series of hoops, including the Competition Bureau. Do you honestly think the Competition Bureau would not address the issues of concentration or the competitive issues, in an appropriate way and with recommendations. For instance, they may involve some level of divestiture or a restructuring of the industry. I know Canada Trust has made an interesting proposal to the Senate banking committee that I thought represented a potential break in the log-jam. I'd like to get your feedback on that, because if we do put in place a merger approval process, if you will, that does have, as part of good public policy, a series of hoops including the Competition Bureau and the public impact analysis process, wouldn't that address your concerns?

Mr. Peter Godsoe: It would certainly address part of them, and that's what I've been saying from day one. “Status quo is no option” became the buzzwords for “We have to move immediately, the future is now”. I said no, this is far too important; I personally believe the Competition Bureau is doing extremely thorough work. But bear in mind that this has never been done in another country. Using the U.S., where they divest branches, as a template doesn't work here. We've had these five banks with two of everything, everywhere.

As I look at Canada Trust—or I could use Hong Kong and Shanghai—they see a business opportunity to pick up some branches. Certainly, knowing Canada Trust's strategy, they're not a small business lender, they're a retail bank. Are they going to pick up small business lending in Ontario? Are they going to guarantee that they're going to enter this business? I don't know. It wasn't part of their testimony. Do they only want branches in Windsor and London, but not branches in small towns? I don't know. I think you have to push that one pretty far before you come to a conclusion that it's a solution.

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Mr. Scott Brison: What about some sort of restructuring that would allow, for instance, the banks or trust companies, outside of the four that are discussing the mergers now, to participate in a wider range of financial service provision in Canada? For instance, perhaps we could say no to the banks in the merger process for auto leasing and insurance brokerage, but we could say yes to the others, including the Bank of Nova Scotia potentially, for auto leasing and insurance brokerage, etc. Is this potentially another opportunity for compromise?

Mr. Peter Godsoe: It's a possibility. Certainly as a business strategy, saying no to them and yes to others has some appeal. I'm not really sure that's what defining the public policy is.

What you're doing now is distorting public policy to permit mergers that you think basically are anti-competitive and concentrating too much power. You're trying to tilt it to create an environment in which others can grow. You say, look, you've got some pretty good fundamental blocks here in this country. You've got the banking system and the insurance system. What you're trying to do is create an environment in which they compete with each other and internationally. Then the Canadian consumer and small business has much more choice. So we're getting a total tilt out of mergers. That's sort of part of the problem I think I have intellectually.

Mr. Scott Brison: Sure. There's a global trend, as you know, in mergers in the financial sector, be it UBS, Bank of America, or any of these huge global companies.

Consider one of the positions of some of the banks that are looking to merge. I think the MacKay position is that some of our Canadian financial institutions may be in a better position to purchase some of the banks that exist elsewhere—I assume the U.S. would be the primary market—and that we could actually repatriate more profits and jobs in Canada as opposed to having it the other way around.

Look at what has happened with Midland Walwyn recently, for instance, which was the last holdout. A few years ago when this whole brokerage industry and bank industry issue was so hot, there was fear, particularly among brokers, and Midland Walwyn was the holdout. Well, now those head office jobs are no longer in Toronto, a lot of them are in New York.

Isn't there a fear that if we're not careful, in the long term the 10% rule may not be sustainable? In fact, we can see a sort of a skeletal Canadian banking system that's run somewhere else, such as New York or a Geneva.

Mr. Peter Godsoe: I personally doubt it. I don't see it in the foreseeable future because there's no pressure under WTO. Quite frankly, I know of no country—people use New Zealand, but I think they're hardly comparable to Canada—that will allow the core of its commercial banking system to be owned elsewhere. Everybody has rules that over 10% has to have some sort of ministerial discretion or “fit and proper”. Look at the U.K. and the U.S.

I heard about Midland Walwyn. We forget that Merrill Lynch was here in retail in the 1980s. They sold out because they found the competition tough. They came back in and bought Midland Walwyn. We all looked. They paid us a super price for which they're very sorry right now. That's fine, that's part of competition. They are still dwarfed by the Canadian-owned investment dealers. I don't see that as a threat.

What I do see as a threat is defining our policies on the basis of mergers that are going on in the U.S. You say it's entirely different as they don't even have a national system, and they've got nine thousand banks. They had put a rule on such that you can't have more than 10% in insured deposits because they intuitively knew that too much concentration was wrong for their country.

Well, we're long past the 10%. We created a national system in the 1920s, so I don't think they're a very good template for us.

The Chairman: Mr. Brison.

Mr. Scott Brison: I would like to ask one last question, Mr. Chairman.

If there is an area where the Canadian banking system, in my opinion, may have fallen short over the years, it's the access to capital, particularly for small business. Look at when there's a credit crunch. When Canadian banks, be it the Bank of Nova Scotia or someone else, make mistakes in foreign lending, it's the small business guy who gets called in to the local manager's office. In the past that has been a problem. Arguably, one of the strengths of the U.S. system is the community banks and the number of banks. If you get turned down by the Bank of Snellville in Georgia, you can go to the Bank of Loganville, and in fact there are some advantages to that.

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One of the exciting parts to the MacKay task force recommendations is the provisions for new banks. Do you see the full access to the payment system, the softening of the ownership rule with things like the ten-year holiday for capital tax, as things that will work in actually creating the Bank of Antigonish or the Bank of Wolfville at some point in the future? What could we do to encourage that? I think there are some positives to that, as long as we strengthen OSFI sufficiently so that they handle the increased regulatory burden.

Mr. Peter Godsoe: I tend to agree with you. I cannot argue that we don't need a secondary system to increase competition. What I don't think we've done is gone back and examined why other attempts at creating secondary systems have not worked.

The Porter commission of the early 1960s had the same recommendation in 1966, so we had trust companies and we ended up buying them all. We've had other attempts. As you know, in Atlantic Canada, and Nova Scotia in particular, the banks absolutely dominate; they are the only game in town in Antigonish and Wolfville, etc. So we have to be very careful that we're not throwing good money after bad.

The principle is good, let's find out how to do it right. That's all I'm saying, and I think there are some big costs in it. CDIC basically has been involved with a couple of western banks and some trust companies. The tab was about $5 billion. Who pays for it? The Canadian chartered banks paid 80% of that, and guess what? That's passed to consumers, probably, because we're still making profits.

So $5 billion is quite a bit of money for an experiment at secondary banking. I think the principle's right. I think we have to go that way.

I would add one comment only, Mr. Chairman, that the credit crunch in the late 1980s in the United States—I spent a lot of time there, in places like Massachusetts and Texas—was far worse than it was in Canada. We forget that America had a major financial crisis in the late 1980s, the S and L crisis, and that some of its mega-banks, I won't bother naming them, were basically bankrupt at that time.

That's only eight years ago. We Canadians have not had a financial crisis, because we have a very safe, stable system. That part of it has worked very well in Canada's benefit, and very few countries can say that.

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

Mr. Szabo, followed by Mrs. Redman and then Mr. Gallaway.

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

Thank you, Mr. Godsoe. I must admit that one of the things we would all like to do is have the scorecards for a credibility index, and I think that you hit a 10 today. It's very important for us to hear from all sides of the argument, and I think that your presentation demonstrated the wisdom, and I think the experience and expertise, that Canadians probably would like to see more of in the banking sector. So congratulations for that.

You did make a statement in your intervention that made me think of the chicken and egg analogy, competition followed by mergers, followed by— etc. From what you said, I guess your assessment would be that increased regulation could constitute a barrier to entry into the banking segment. That would lead me to ask this question: if we have a proper balance in terms of regulatory burden, where is this new competition going to come from, in your opinion?

Mr. Peter Godsoe: I'm wary of saying it's going to come. That's what I'm saying, because history has proven over the last 50 years—and let's not discard it just overnight by saying change is going to be so dramatic in the next two years that it'll be more than in the last 50—competition has not come. That's why the Canadian chartered banks have the same market share of the total system today as we had 50 years ago. That's why our market shares amongst us are the same. And we've had mutual funds and pension funds and other things take Canadians' savings. I think we have to encourage it, but I'm not convinced it will come without good public policy.

• 0950

On the regulation, regulation is expensive to implement, and legislation. And it's very rigid, because we all know that once we get a piece of regulation or legislation, it takes a lot to get it changed—a lot. And with our computers and our cost base, we automatically are going to have a comparative advantage over a smaller company that's trying to do that if they have the same regulation. I don't know. There's no good answer to that, but it's very true in business history that a big telephone company with regulation has a comparative advantage over a small one with the same amount of regulation. That's all I'm saying.

Mr. Paul Szabo: Two days ago, the Governor of the Bank of Canada came before our committee, and I think for the first time someone came forward and actually said that increases in the competition within the sector, the banking sector specifically, raises the possibility of bank failures. And in your presentation, you gave the example of Crédit Lyonnais in France. And he also led us to believe that Canadians would be on the hook for those bank failures.

I have to ask you, if the banks are making 20 to 30% return on equity on domestic operations—you didn't mention anything about the fact that 45% of your return comes from offshore—it would seem that the banking sector presently has the ability to virtually insure itself or its sector against failures. So how do you feel about Canadians extending or protecting the position of our lead banks, but not having them on the hook for potential failures?

Mr. Peter Godsoe: I think we're on the hook. I think what history has done is said from the 1920s— We went through the Depression, the war years, the evolution of the fifties and sixties, the volatility of the seventies, the eighties, the technological explosion and today's global crisis—and it is one, although I think it's hopefully behind us—and Canadians didn't pay a price because we were anchored with good regulation, a good competitive system and enough major players. That's the key: enough major players. In the end we were self-funded. The $5 billion that CDIC put out, and that was only put in in 1967, in essence was then paid back by the banks.

I think what Governor Thiessen was alluding to is if something becomes so big that it's considered too big to fail, then management tends to get a little cavalier and says, somebody will bail me out—Japanese banks. Again, I think the lessons of history are that when banks go down, if they're taking the economy down, which they do by stopping lending back to small business or medium-sized business, then governments have to step in with public taxpayer money. That's why they are a public policy instrument.

Sure, we're publicly owned and shareholders have to be factored in here, but we're not totally a product of open markets. We're protected from takeover and we have a bit of a security blanket, because systemically you have to have us. Love us or hate us, you have to have us. And thank you for your kind comments.

Mr. Paul Szabo: By the way, Canadians may dislike the banking sector, but they love their own branch. I think everybody knows that.

Finally, some have suggested that if the proposed mergers were not to go forward it could and may very well result in substantial downsizing or cutbacks, etc. What's your view on that?

Mr. Peter Godsoe: For Scotia, that's absolutely not true. We're going to compete and adjust, compete and adjust, as we've been doing for 150 years. We don't see ourselves at a defining point where we're a failing institution if we're not allowed to merge, or if you don't let us do that we're going to have to change everything.

We think part of what we've been doing, outsourcing payrolls—we sold our corporate trust business to Royal—has been going on in the United States forever. There's hardly an American bank that's in the payroll business. It isn't necessarily a fundamental part of banking. Our core businesses are in Antigonish and Wolfville and Nobleton and Sudbury. That has always been what it is about. That still is where 40% of our earnings are, and a very good return on equity. It's a very good business. It doesn't pollute; it employs lots of people. It's very tough to compete with us. We're not about to exit it.

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The Chairman: Thank you, Mr. Szabo.

I want to follow up on a point you made, Mr. Godsoe, in reference to the fact that, if I quote you correctly, you said the market share of the big Canadian banks has not changed much in 50 years, and you went on to say basically this is because it's such a stable, efficient system.

What if I were to tell you that it's maybe because the system is stagnant? It's not innovative enough and lacks entrepreneurial spirit, and that's why basically the players haven't changed.

Mr. Peter Godsoe: It's a contentious question, and I don't agree with it from the point of view that technologically we're considered one of the two best systems in the world, with only the very top of the Americans, not the total United States, far better than the Europeans or the Japanese. So we've changed that way.

We all do quite well internationally, notwithstanding a lot of the rhetoric that's going on. TD is the third largest discount in the world. We dominate in the Caribbean. When I started thirty years ago, we didn't. We were against Citibank, Chase, Barclays. We've bought some of them out. We've gone forward. So you're seeing a lot of change here. We're universal.

The change in the past ten years has been dramatic. We have insurance through the telephones and credit cards. You know, we still dominate credit cards in our country. These dreaded monolines are having a lot of difficulty competing with us, finding us much tougher than they did the British.

Are we entrepreneurial? Mr. Chairman, in your context, we're very large companies, and there's no question we have some inbred bureaucracy that interferes with how well we do our businesses. I think we're all conscious of that.

The Chairman: Mrs. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairman. I really enjoyed your presentation, and I picked up on one of the sentences on page 3. It seems to me your key point or a key point is: “it's far more important to get the policy framework right than it is to get it done fast.”

My sense is that you're dealing with the MacKay recommendations as a body, in its entirety. MacKay does not say mergers should go ahead. It says they should be examined as a legitimate business option for banking, and it does set out a process. So you seem to me to be referring to a different process and a different timing, and I wonder if you could flesh out that for us.

Mr. Peter Godsoe: I think MacKay says it's a valid business option, with which I totally agree. It's valid to merge, to take costs out and to eliminate duplication.

The public policy challenge is, does it create too much concentration—the Competition Bureau—and does it have an impact on how I see the financial services industry evolving and on the communities in Canada, which tends to be a political-level judgment?

I saw MacKay as putting part of that in. I'm not at all sure what he meant. Did he mean a web site? What does he mean by conditions? I personally am quite skeptical of conditions, not because people aren't honourable; it's just that history teaches us that conditions don't work very well. If a recession comes, somebody will say, well, I'm sorry, I have to change that for the health of the institution. It's very difficult to make conditions stick. They haven't worked, except very rarely.

So I see the thought of getting a system right. It's far too important to the Canadian economy, because credit is absolutely fundamental.

What we're in is a global credit crunch, whether we want to admit it or not, and it's teaching us that history hasn't been overwhelmed by globalization and technology in capital markets. If you can't get money, you can't expand your business. That's what's going on. We have countries who can't get capital. The third world is basically out of borrowings. I think that's why we have to think about it carefully. It's not about Bay Street; it's about the total of Canada.

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I think MacKay thoughtfully said it's a valid business option, but I think equally he said there are real concerns here, a yellow light. I think that's part of what this committee is about, making sure that it's not overwhelmed by mergers, that it's looking at the total.

Mrs. Karen Redman: If mergers are not going to be allowed, how should we adjust the regulatory regime proposed by MacKay?

Mr. Peter Godsoe: I think the consumer and small business focus is more than valid. I have no problem with that. I'm very wary about rushing into regulation and legislation without making sure we've looked at self-regulation and whether it is working. That's basically what I'm saying.

In terms of the two major industries here, banking and insurance, I think it's most valid that insurance worries about being overwhelmed by banking. I'm not talking about rights to distribute insurance or not; I'm just talking about the fundamental building blocks. Unfortunately, they're in a position where demutualization is critical so that they can raise more capital. The banking industry is in a position where mergers have overwhelmed everything else. So neither is focusing too much on what the cost impacts are on this and how we will evolve in the next five years, and it's important in the long run that we should.

I obviously favour mergers as long as they are not deemed to be not in the public interest, or they create overwhelming powers of concentration and decision-making. I personally can look at banking and say, at the core here is credit granting; it's not wealth management or mutual funds.

From your perspective, it is: Are we are going to continue to fund small businesses? Who's going to fill the void? Are we going to continue to give access to these core accounts? If we open the payment system, are a lot of people going to come in?

I'm wary. It's very expensive to build those things. Insurance companies have had trust company powers for a long time, but building it is hard, and you have to make sure you have lots of sources of credit—not less, more.

The Chairman: Mr. Gallaway is next, and then we'll go to Mr. Nystrom.

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

Mr. Godsoe, you've raised an extremely interesting point about foreign competition. My impression has been that those banks that wish to merge have stated that they must compete internationally. We know that. As a backwash to all of this is the spectre that there has been an invasion and no one has told us about it. These banks are here and are doing a significant amount of business. One of the witnesses from one of the major banks suggested a certain part of the country in which they're doing this business. I happen to come from that part of the country. I have been actively searching for people who are doing business with these spectre banks from the U.S., and I haven't been able to turn anyone up.

I want to ask you, under our present regime is there any way of measuring or quantifying who is here and how much business they are doing? If they are in fact doing business, are they competing or are they filling a niche that isn't in some way being filled by Canadian financial institutions?

Mr. Peter Godsoe: Taking the last question first, they're competing in niches where they think they can make money, in the same way as we compete in the United States in a niche in which we think we can make money, big lending. Scotiabank will pay income taxes in the United States that are in the hundred million dollar range, so we make more money there than any foreign bank dreams of making in Canada.

On those dreaded monolines, I'm kind of fond of saying that when I came out of school and came back and worked in the bank, I could have an American Express credit card. When I was a student and needed some money, I got a loan from Household Finance. I could get an auto loan from Ford, or General Motors, or Chrysler. I could get an asset-based loan from The Associates.

Monolines have been here forever. They're not new. They've been here for fifty years. Guess what? When the world economic forum looks at Canada and rates our financial system as being number one in safety and security, they rate us as being number 43 in terms of overall competitiveness. Why? Because foreign banks only have 8% market share in this country. They have 14% in the United States, including us.

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So I'm like you; I can go around everywhere and say where are they? Wells Fargo does $50 million in small business loans from a call centre in Denver or something. If we don't do $50 million in small business loans in a week, we're in trouble because we'll get that much being repaid. That's not a big issue.

I truly think it's all looking out in the future and trying to convince us you have to merge because we're not big enough to compete at home, and I frankly think that's nonsense.

Mr. Roger Gallaway: I'm told there's what I would characterize as a boiler room operation in Nepean operated by an American institution called MBNA. What would be the attraction for a Canadian to deal with the MBNA as opposed to BNS?

Mr. Peter Godsoe: MBNA is a first-class credit card company. They might give you a credit card that has a lower rate or better points. They are absolute experts in what's called affinity cards. They will go to a university or something and offer to brand a credit card with them and share the fees. That's fine. The Canadian banks still have about 90% of the credit card business. A little competition never hurt anybody. We can't say MBNA is going to drive us out of business because it won't. It will provide more alternatives to you, but that's what it is, only credit cards.

Mr. Roger Gallaway: You raised the issue of a large step-up in regulation. Are you referring to what I would characterize as the consumer protection provisions of the MacKay report, or are you referring to something else I've missed?

Mr. Peter Godsoe: No, I'm referring to the potential in the MacKay report. Basically, out of the five chapters, two dealt with this issue, one dealt with regulation and one with business powers. You say there is a potential here because it's politically much easier to look at regulation and legislation and counterbalance what's perceived as too much power already, as a solution.

I'm saying I hope that is discussed thoroughly, because each time we legislate, it will be there 20 years from now, whereas it is an industry that should be adjusting to meet consumer needs, recognizing there are very legitimate concerns out there. If we're not doing it on our own as industries—insurance, banking, etc.—then government is going to regulate or legislate, but I hope it's a last resort and not a first resort.

The Chairman: Thank you, Mr. Gallaway.

Mr. Nystrom.

Mr. Lorne Nystrom (Regina—Qu'Appelle, NDP): Thank you very much, Mr. Chairman. I want to welcome Mr. Godsoe here this morning. I've been following with a great deal of interest your comments publicly before the Senate committee. I was at your annual meeting in Ottawa at the Congress Centre last January. I want to commend you on the position you've taken, which is refreshingly different from that of some of your colleagues who are CEOs of certain other banks.

I want to ask you questions in two different areas. You are saying if these mega-mergers go ahead, 70% of the banking will be concentrated in two hands. It's without precedent anywhere in the world. The irony of this debate is that many countries wouldn't even entertain the debate on that degree of concentration. So I think your remarks are extremely refreshing.

I asked Mr. Thiessen a couple of days ago about the concept of “too big to fail” when he made the remarks you referred to. You've already cautioned us about Crédit Lyonnais in France with a $22 billion bailout and so on. What would happen in this country if Parliament approved these mega-banks and in a few years the unfortunate thing happened and one of them failed? What would that do to the rest of the financial service industry in the country?

Since they would be so big, the government would probably be forced to bail them out or make sure they didn't go under. Would that put the rest of you at an unfair competitive advantage? As consumers, Roger Gallaway and I know as well the bank would be so big that if it failed it would be a disaster. Therefore we'd probably be more secure with them than with the Scotiabank or a local credit union. Is that a fair assessment? I'd like to ask those two questions.

Mr. Peter Godsoe: It was fair until you said you would be safer with them than Scotiabank. I would have put it the reverse way.

If we look at risk to Canada, from a public policy point of view I'm arguing we want more nationally competitive and strong regionally competitive banks, not less. That then distributes the risk—for lack of a better word—of one getting in trouble. That distributes the risk that you have more choice back to Antigonish or wherever. Bulking up has never been an answer.

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Right now, if a bank got into trouble or if we had an insurance company that got into in trouble, we could work it out. If you lost one bank, you would at least still have four, and you would have the insurance companies evolving, along with some regionals like Laurentian that are coming up. But if you had basically two and one got in trouble—that's the core of your question—I don't know. MacKay says sort of cavalierly that maybe we could get a foreign buyer. Is that really what we want? Do we want to put 35% or 40% of our banking system in the hands of some foreigner? We'd have to subsidize it anyway, and that's why I think it's a very high-risk option for Canada. It's irreversible, and we don't have answers to that issue. All we can foresee is problems if it were to occur.

Mr. Lorne Nystrom: Yes, and Mr. MacKay did say maybe it could be a foreign buyer, while others said maybe it could be a humongous bailout by the taxpayers—but it all comes back to the taxpayers anyway.

I want to ask you this: hypothetically, what would be the effect on the rest of the financial sector if a mega-bank was approved, if a mega-bank did fail, and if there wasn't any massive bailout by Canadian taxpayers? I guess there wouldn't be an option. We'd have to bail it out.

Mr. Peter Godsoe: Yes, you've answered the question. There is absolutely no option. The vast majority of your small business lending— You can say small business lending is only 55% of the total credit to small business, but it's 75% of the core relationships. They have to have it. You will have your deposits and you will have thousands of branches in the communities of Canada. You can't shut them down, so the taxpayers would have to bail it out.

What Japan is proving, or what the global crisis is proving, is that each country looks to itself in terms of credit availability. That is the point I was trying to make. The Japanese banks aren't lending. Guess what has happened? Over the past five years, foreign banks, global banks or other people haven't moved in. Japan is caught in what's called a liquidity trap. Nobody's borrowing, nobody's lending. That would force us Canadians to bail out a mega-bank. We'd have no choice.

If somebody stumbles right now, we have enough strength in the rest of the system to try to portion it out and say one can manage this part and another can manage that part. We could collectively keep it going in the interests of Canada. That's my instinct, but I'm not an expert in that area.

Mr. Lorne Nystrom: And I guess nobody knows how many billions it would cost taxpayers to bail out the bank. It's like throwing a dart at a dart board.

Mr. Peter Godsoe: No, but what we do know is that it's over $500 billion U.S. in Japan. It was $35 billion Canadian for Crédit Lyonnais alone. So it would be large.

Mr. Lorne Nystrom: Over $500 billion U.S. dollars in Japan.

Mr. Peter Godsoe: That's what happening.

Mr. Lorne Nystrom: That's hard to—

Mr. Peter Godsoe: We know the S and L crisis was about a $250 million U.S. dollars.

Scotia is in Mexico. We own what I guess is the fifth largest bank there. We run it for the government, and it was a third of their GDP in Mexico. In Japan, it's a quarter of their GDP. This is money that isn't going to hospitals and schools, the many things that we Canadians can spend on. You don't want to spend it on a banking bailout, that's for sure. The chief executives will retire with pensions and the shareholders will recuperate, but the taxpayer will pay. That's the lesson of financial history.

Mr. Lorne Nystrom: I guess the question is how the taxpayer can even afford to pay a bill of that extent. We had pre-budget consultations across the country. We debated things like a few hundred million dollars for an emergency farm program or putting a bit more money into health or into medical research and so on, but here we're literally talking about tens and tens of billions of dollars. It's pretty frightening.

Mr. Peter Godsoe: I should be very clear that I see this as a very small possibility, because we Canadians have had one of the best systems anywhere. The British have had trouble, the French have had trouble, the Americans have had trouble, and the Japanese have had trouble. We have managed to work through all sorts of things: oil and real estate crises, third world crises, the Depression in the thirties, recessions. We've had a stable system. It's not perfect. It has gone through credit squeezes. But it hasn't cost taxpayers anything, so I'm not raising that spectre. I'm saying that before we change it dramatically with a third of the system gone or we bulk up, these issues should be debated.

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You're just raising them. They raised them with Governor Thiessen. I think it's right that they should be raised not out of fear, but out of looking forward. That's what we're trying to do.

Mr. Lorne Nystrom: I'm starting to get those questions now from ordinary people when I walk around in my riding in Regina or other parts of the country.

I wanted to ask you whether or not you think Matthew Barrett is bluffing when he says that if these mergers don't go ahead, they'll be closing branches and laying off people.

Mr. Peter Godsoe: I think Mr. Barrett runs a very good bank. He's been a terrific chief executive and tough competitor these past ten years. I've never known him not to say something that he didn't believe in entirely.

Having said that, if he closes and shrinks back, I anticipate, with great pleasure, filling the void. We will be going a different way.

Mr. Lorne Nystrom: So maybe he's bluffing. I know that some of us see it as a bit of a threat. He's sort of saying to me to approve these mergers or else.

Anyway, that's probably an unfair question to ask you.

You did make a comment here that these banks want to merge so they can make bigger bets in the global markets. Those are pretty strong words. I wonder if you can just elaborate a little more on that.

Some people have said that the reason they want to merge is not about globalization, but about domestic market share. They want to be bigger to crowd you and other players out of it. It's all about domestic market share. You get these two big banks, and more and more people will go to them, and so on.

Mr. Peter Godsoe: I should clarify that, because I said it too facilely.

In terms of looking at other people, the Swiss are often held up. Well, the reason they merged was that they had all the cantonal banks. Switzerland, a very small country, likes national champions—there's the pharmaceutical industry and Nestlé—so they do it with their two banks. Their two banks in the last quarter are both going to lose about $1 billion, probably after tax, in their capital markets divisions. That's what I meant by the big debts. Supposedly they weren't supposed to do this, but they have, so their mergers had nothing to do with domestic—

I truly believe these mergers are all about Canada. The total impact is in Canada. The total outcomes are in Canada. All the thoughts of going out in whatever strategies they might have to expand in the U.S. by buying banks or expanding elsewhere are in the future. The present and the next five years will be here. They will be about larger market shares, the rationalization of costs, and losing one-third of our banking system. I should be clear on that.

I don't know what the strategies will be down the road, because I think we all change. Less than a year ago, globalization was tossed out as the total rationale here. Today, globalization isn't really quite as well accepted as it might be, because we've had global capital markets, and we're in great debates at the IMF, the World Bank, and elsewhere about whether global capital markets are actually that healthy. We need some regulation, and we have to look at them. That's really what I should say. I see the future not as clearly as some of my peers do.

Mr. Lorne Nystrom: So it's all about Canada, domestic competition, and a greater market share in this country. We're really being sold a bill of goods, I suppose, from Mr. Cleghorn and Mr. Barrett when they talk about the need to get bigger.

You do very well, for example, outside our country. I think your bank is better than the others in terms of the share of the income that comes from outside of our borders. If I recall, the majority of your income comes from outside our borders, so I wonder about the argument by Cleghorn and Barrett that you have to get bigger to be more competitive. They're still going to be number 19 or 20 in the world, so if they put on a few more pounds and become a bit weightier, does that make them better? You're saying no.

Mr. Peter Godsoe: Let me be clear. I think they honestly believe their arguments. They run good banks and they believe in their strategies.

I happen to agree with you. It's a fact that if you put in all the Canadian banks, before their demutualized insurance companies, and throw in Power Corp. to boot, we're still smaller than the new B of A or new Citicorp. So we can't do it on size. I think that's an oxymoron. Bigness is not a strategy, it's a word, an adjective.

Mr. Lorne Nystrom: Thank you very much.

The Chairman: Thank you, Mr. Nystrom.

I'd like the members to kind of merge their questions into one so we can get more in.

Mr. Epp.

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Mr. Ken Epp (Elk Island, Ref.): Thank you very, Mr. Chairman, and thank you, Mr. Godsoe for being here.

I would have a lot of things to discuss with you, but we've pretty well run out of time. So I'm going to concentrate on one quick question, and then another one where I wanted a little longer answer.

This is the quick question: in your report and statement you have not addressed at all the question of whether or not you want to diversify the products that you're offering to people in Canada. Specifically, do you want to be able to sell car insurance and life insurance across your counters? Do you want to get into the car rental business, and run a used-car lot in your backyard? I want to know whether you want to do those things. That's the first thing; you could pretty well answer it with a yes or no. Perhaps some other time I would hear your more philosophical statements regarding that.

But there is one I want you to expand on a little more. You're in favour of competition; at least you say so. Yet, you are one of the players in the payment system where the banks have pretty well excluded anybody else who wanted to get into some real competition in things like payroll systems. I'd like you to enlarge a little more on that part of my question.

Thank you.

Mr. Peter Godsoe: I'll take the last first. I made a speech to our annual general meeting in 1994 saying, open the payment system, and it was clearly on record. The only caveat I have is that there is a safety and security issue. I don't want to get into the complexities of that, but I think it's very important that we Canadians retain coast-to-coast, same-day-in-effect clearance of payments. The Americans don't have it. Very few countries have it.

It's a very complicated area. Using it as a barrier to entry long ago— I think with Internet and a whole bunch of things it's silly to try to wall that off, so I'm for opening it up. I'm just for looking at it carefully in terms of the safety aspects.

If I turn to insurance distribution in car leasing, take the easiest first. In car leasing 80% is the gigantic U.S. companies. In fairness, though, a fairly large car leaser today is Scotiabank. We have 1,100 dealers, and we have $750 million in car leasing. We designed a product four years ago, and it's now taking off. In effect, it left the capital cost allowance with the dealer, and we do the car leasing.

We take the used car risk— Look, I have trouble enough driving a car, let alone selling one—

Voices: Oh, oh!

Mr. Peter Godsoe: —and we reinsure it with Liberty Mutual in the U.S.A. And it's very successful. As I said, $750 million is not a small leasing portfolio, so we're into it. We just designed a product because we were excluded.

On the insurance, yes, I'd love to be able to distribute insurance through our branches, because Canada is one of the very few countries that doesn't allow it. Do I have sympathy for the life and P and C industry when they look at the employment and their agents? Do I understand the politics of it? Of course. These agents are small businessmen in their communities. They look at their livelihood and say the banks are going to come and take it.

I kind of view it differently. I think that by the time it gets in our branches it will be the lower end of that, not the value-added. But having said it, I see it as a political debate that probably will go on for some time. I don't see it happening overnight, and I'm not going to set the Bank of Nova Scotia's plans on the basis that we're going to get it tomorrow.

Mr. Ken Epp: Thank you, sir.

The Chairman: Thank you, Mr. Epp.

Mr. Discepola.

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Thank you, Chair. I have two quick questions.

Mr. Godsoe, I couldn't agree with you more on an awful lot of things you've said, but more on the comment that this is a Canadian issue and it has nothing to do with global competition. As I see the argument unfold, I'm more and more convinced that we have to be careful on our decision as it affects Canadians.

You've said several things I would like you to comment on. I guess one of the significant challenges I see in our committee is to try to envisage and look out beyond the five-year horizon term that you've mentioned. We should also make appropriate recommendations that would allow us to still have a worldwide competitive system ten years down the road.

So this is my first question. In your comments you say that we should take the MacKay report in its entirety. Other testimony has led us to believe that maybe we could take the recommendations and phase them in. Since this is an irreversible process maybe we'll take x recommendations, phase them in over several years, and then decide if we go to the next step or not. So I'd like your first comments on that, whether we should be able to phase it in, and whether we should look beyond the five- to ten-year timeframe.

• 1025

Maybe I'll ask my second question. This has to do with how the larger banks are saying they have tremendous competition coming in and they have to be able to be merged to be able to compete. Several examples they choose are the MBNA and Wells Fargo. Yet you, with the back of the hand, slight Wells Fargo. Fifty-two million? Hell, you do that in one week. And if you don't do it in one week, you have serious problems. And the other example is MBNA; they're very aggressive. But I think in both cases we're still very strong as Canadians because, as you said, in the credit card industry you still have 90% market share. But is it possible that the reasons these competitors are able to come in is because the banks have not addressed those niche markets and now view that as a way— I don't know, my bottom line is that I'm not convinced that the competition is going to come from anywhere.

And you even say that you'd like to see more competition, but where is it going to come from? True competition.

Mr. Peter Godsoe: I'll take the last first and then turn to the longer run.

I've said from day one it's about core banking. It's not about credit cards, mutual funds and wealth management. These are all part of what we're doing because we're universal banks. That's fine. There are over 1,000 mutual funds in the country. Is there anything wrong that two of the top fifteen happen to be non-Canadian? The other thirteen are Canadian. Of those two, one of them has been here since 1954, Templeton. You see, I don't find that terribly threatening. I say that's part of what it's about. I compete in the U.S. and in 53 other countries. It seems to me somebody should be allowed to compete here.

I've heard payrolls, credit cards— we all knew, but we let National say it, when they were saying Citibank won the government credit card, that National Bank won the MasterCard thing and they're hardly the biggest bank in Canada—or Banque Nationale.

So I find these arguments maybe didn't have as much substance as they might have, and that the argument had to be on who was going to compete for small business loans. Who was going to compete in towns, cities and in rural areas? Who was going to compete in outlying areas? Who was going to run branches? Anybody can come in electronically. Do you really believe electronic banks are going to drive branches out? Nobody else does in the world. Why are Americans buying each other? Because they're trying to create a national banking system from branches. Otherwise, why would they ever merge? They would just buy electronic companies and mutual fund companies. That's all I'm saying.

Our debate is about that. I do not for one moment believe competition is going to come in and supplant it when we lose a third of our banking system. I think that's irreversible, and I think if we get it wrong, what's going to happen is that you're going to be forced to re-regulate us in five years because you'll say, this is so dominant; what's already viewed as being too large now is so super large that I'm going to have to come in and create competition through government banks or through regulation. And as Scotia, I don't want that.

We've been competing since 1832 without a lot of that and I don't think we've been unsuccessful, so I'm very wary of it. This is my answer to that one. I quite agree. It's about Canada.

On the longer-term view, maybe it's because I'm a business man and I say, look, when I go out three, four or five years, I'm very wary about getting a strategy that's too set in stone, because I know technology is changing and I know consumer habits are changing so I must adjust to that market. I think you're in a unique template of looking across it and saying you don't want to tilt it too much one way or the other. I'm very wary of pre-emptive strikes, whether they're in battle or they're in business, because if they're wrong the public pays. If it's just a minor one, that's fine, the company pays, and indeed they should.

In this case, I think you have to look at a broader view. Sure, I see technology. We spend $600 million on technology, and I spent all yesterday on technology. But technology is not my primary business. Customers are. And most major banks in the world are outsourcing. Citicorp often is. They spend more than the four merged banks would anyway. They're outsourcing. Why? Because they say they have to access the top technology; second, they have to spend their time more on what they do best.

• 1030

So we joint venture. We're going to have to. Where are we going to get our standards? They're going to be Netscape, they're going to be Java, they're going to be Microsoft, they're not going to be invented in a Canadian bank. The fact we have more money won't make us smarter. I'm very wary of this argument because I know of no major company in banking that's going that route. We're all going to outsourcing.

So I say, in looking at 10 years, I think you want to look at the fundamentals of how the Canadian economy works, how access to credit works, how core banking works and how access to core account works, which is back to the payments and opening up. You say, fine, open them up. But you had better make sure the competition is there before you make a dramatic change on the other way because of the vision of one chief executive, or a couple of chief executives, because, believe it or not, we're quite human and we make a lot of mistakes through the years. At least I have.

Mr. Nick Discepola: On the report, is it all or none, or can we phase it in?

Mr. Peter Godsoe: No, I think you can phase parts of it. What I'm wary of is cherry-picking. All of us have an agenda, so X comes with this agenda and Y comes with that agenda and you can get quite a tilt coming out of here, which will lead to distortions where it's supposed to be looked at as a whole. I personally found MacKay had something for everybody, and anything that has something for everybody isn't as clear a vision as saying it's going to be exactly there, so I think you're in a position to counterbalance it and make sure it doesn't. This agenda gets done and that agenda doesn't get done, and then we wake up five or ten years from now and we haven't had a vision, we've had a political battle.

Mr. Nick Discepola: Thank you very much.

The Chairman: A final question, Mr. Rocheleau.

[Translation]

Mr. Yves Rocheleau: Mr. Godsoe, you say on page 4 of your brief that the recent federal reserve cut in the US was not aimed at helping other countries or the global economy, but rather, avoiding a domestic credit crunch. Could you quickly give us an idea of what the current status of domestic credit is in the United States and Canada? Assuming that Canada's situation is favourable, in reviewing the banking system, what in your view must be maintained in order for that favourable situation to remain?

[English]

Mr. Peter Godsoe: I think right now in Canada to raise credit you basically have to go to the Canadian banks. I think you'd have a great deal of difficulty raising credit from international banks, and that was my main point. I think you're in a position with strong players to influence us through moral suasion to keep lending. I think you're in no position to influence the international community to lend. That's the lesson of Japan. The Federal Reserve lesson to me was that they were very worried.

I was at the IMF and I think you were at the IMF, and their concerns had shifted. As long as it was a global problem, they'd say that's Indonesia's problem or Thailand's problem; we're fine. The minute they started to think there was a credit crunch coming in the United States, which they did—and I was at a meeting where they said that absolutely, the chairman of the New York fed—then they moved. If there was a credit crunch or a major problem in Canada, I don't think they'd move their interest rates. I think they move because of what's good for the United States.

What I'm really saying again and again is this is about Canada. This is about made-in-Canada and this is about making sure we get it right for Canadians. It's not about globalization. It's not about the international strategy. We're tough and strong enough to compete. We've proven that for 50 years and I don't see it changing next year or the year after. If it's changed five years out, you can adjust policy. I think it's very wrong to rush this one. I think it's very important that we remain maîtres chez nous, that we are masters of our own house in terms of credit granting, because I think that lesson is very clear today, that you have to do it.

Credit still is fundamental to the functioning of your economy. It hasn't been overrun by capital markets by any stretch of the imagination, and the lower you go down, for medium-sized businesses and small businesses it's the only game in town. It's crucial.

[Translation]

The Chairman: Thank you. Mr. Rocheleau.

Mr. Yves Rocheleau: You refer to a domestic credit crunch. How is the situation in the US any worse or anymore dramatic than the one in Canada? There is quite a high level of debt in Canada as well.

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[English]

Mr. Peter Godsoe: No, interestingly, it didn't happen in the medium and small sizes. I think what they sensed was a tightening in large credit because your capital markets closed. You couldn't issue stock and you couldn't issue bonds, so you needed banks. Banks were becoming reluctant. They had trading losses and certain things were happening. They operate on the same psychology as an individual buying a refrigerator. They say “Oh my heavens, I have some troubles, I'll stop lending.” So they were worried about it and that's why they reduced interest rates. They were trying to open up capital markets.

Constructively speaking, I think the Canadian banks, from the Bank Nationale through to the big five, didn't feel those pressures. We were looking for business. We're out there lending. We had some hiccups in the commercial paper markets that were broadcast in the press and we stood and created the liquidity, so I think our system stood this well. I don't think there's a credit crunch here at all.

The Chairman: Mr. Godsoe, on behalf of the committee, I'd like to thank you very much for providing us with your perspective on this issue. It does, of course, give us a different view from some of the other people who have appeared in front of the committee. Nevertheless, it's an important view for us to reflect upon as we attempt to give wise counsel to the Minister of Finance on the future of the financial services sector.

Your focus on the issue of the future, in the sense that we can't really look to 10 or 15 years down the road, is something I reflect upon. As you correctly stated, in the last few months there's been a whole shift in the discussion, for example, related to globalization. People may be changing their views on that particular issue, or maybe those individuals just like the good things about globalization and can't put up with the heat when it appears. So that's also something we need to reflect upon.

Thank you very much. We're going to suspend for approximately two minutes.

Mr. Peter Godsoe: Thank you, Mr. Chairman.

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• 1048

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

We now have the pleasure to have with us representatives from the Canadian Life and Health Insurance Association Inc. The chairman is Mr. Chris McElvaine, president and CEO of Empire Life. Mr. Mark Daniels is organization president, and Mr. Greg Traversy is executive vice-president for policy development.

Welcome, and we look forward to your comments.

Mr. Chris McElvaine (President and Chief Executive Officer, Empire Life; Chairman, Canadian Life and Health Insurance Association Inc.): Thank you very much, Mr. Chairman.

Mr. Chairman, honourable members, thank you for the opportunity to address this committee today on behalf of the Canadian Life and Health Insurance Association. Our organization represents 84 member companies, accounting for over 90% of the life and health insurance business transacted in Canada, and protecting more than 20 million Canadians and over 10 million other policyholders around the world.

With me are CLHIA president Mark Daniels and Mr. Greg Traversy, executive vice-president.

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Under any circumstances, it is always a privilege to contribute to Canada's democratic parliamentary processes. From our industry's perspective, it is a special pleasure to testify before the House of Commons Standing Committee on Finance. Our industry has appreciated this committee's many past contributions to public policy, such as the tax measure expanding the access of the unincorporated self-employed to supplementary health and dental protection, which was recommended last year by this committee and introduced by the finance minister in the 1998 budget.

Mr. Chairman, in preparing for today's discussion with your committee, we have been mindful that you and your colleagues will be playing a pivotal role over the months ahead in advising the minister on whether, when and how the task force's recommendations should be implemented. The submission we have put before the committee—along with our testimony today—is intended to contribute constructively to your deliberations. At the outset, however, let me make it clear that subsequent to this morning's discussion, we will also be pleased to provide any further information that the committee decides would be useful.

My remarks today will provide a brief overview of this submission, which is based on an extensive process of dialogue among our industry leaders on the task force's report. During the industry's own assessment of the report, and in preparing this submission, we have been mindful that you and your fellow parliamentarians are seeking to discover what course of action will best serve the public interest, and we have attempted to focus our submission accordingly.

Before I get into the specifics of our responses to the task force report, as embodied in the submission to the committee, I want to state something very clearly. The task force report, which we appreciate was produced on time and probably on budget, makes an excellent contribution to the complex and continuing process of reshaping the legislative and regulatory framework for our financial services sector. While the industry may not agree with every single recommendation in the report, we believe it provides a useful platform and valuable background information for the policy development and legislative processes that lie ahead. It is a valuable road map for assuring the future strength and competitiveness of the sector in Canada, as well as the sector's responsiveness to consumers.

Mr. Chairman, when industry representatives appeared before this committee in mid-September during the pre-task force preparations, you indicated that you wanted to hear from witnesses about vision, as well as about specific issues, once the report had been tabled. Of course, the task force has set out a vision of a desirable financial services sector with three key dimensions—namely, what consumers should expect; what an appropriate institutional structure should be; and what kind of regulatory framework would be most effective to support those expectations and structure. The task force has concluded that Canada's current financial services sector fulfils much of that vision. By the same token, the task force has also determined that there is room for improvement in many areas, and its recommendations address these.

As this committee is aware, last fall our industry provided the task force with five submissions that profile the industry and its public policy framework—and a brief overview of these documents is included as annex 2 of the submission that we have prepared for this committee. Those submissions to the task force also embodied a broad vision. Although there are some exceptions, in many instances the industry's perspectives on what should be done to fulfil the vision coincide with those of the task force.

Mr. Chairman, we share two particularly important elements of the task force vision. For the record, I would like to express these in the words chosen by the task force for its report. The first key element of that shared vision is as follows:

Our markets now are highly concentrated and one of the greatest public policy challenges is to encourage vibrant, alternative institutions that can compete head-to-head with the large banks across the country.

And that is on page 185 of the report.

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The second key element of the task force vision that our industry shares is expressed in the report as follows:

[I]nsurance companies, with their strong domestic base and long-standing international focus, will become even more important and visible members of the Canadian financial services sector in the years ahead. It is very important for Canada, and its evolving economy and needs, that they succeed in this regard.

That passage is found on page 58 of the report.

Turning now to specifics, Mr. Chairman, one important dimension of the task force's vision is—and again I am quoting here—“an open and accessible payments system that continues to be efficient and prudentially sound”. To that end, the task force has recommended that access to the payment system be expanded and the governance of the system be improved.

As members of this committee are aware, our industry has sought these access and governance changes for several years now, including the issuing of payment cards to policyholders. Our industry pays out almost $100 million a day to or on behalf of individual Canadians. Making these payments as efficiently and as conveniently as possible, and in the way that consumers prefer, is vitally important to our industry's continuing capacity to meet customer needs and to remain competitive.

Our industry concurs with the task force's conclusion that customer convenience, competition and competitiveness could be improved significantly by initiatives in the payment system area. Correspondingly, we are urging the committee to endorse the task force recommendations relating to the payment system, and to reinforce the task force's suggestion that action be undertaken as soon as possible.

Another important dimension of the task force's vision is consumer confidence in and support for their financial system. In this regard, consumer compensation arrangements have an important role to play in achieving the task force's vision. As this committee is aware, there is a significant anomaly in the current structure of consumer compensation arrangements, arising from the fact that the CDIC has access to crown financial resources and CompCorp does not. The task force has recognized this anomaly in its succinct conclusion, stating that—and I am quoting here, Mr. Chairman—“it is important and timely to address this competitive inequity”. The task force then goes on to say that “the time has come to put CDIC and CompCorp on a common footing”.

The task force proposes this initiative in the interest of two important public policy objectives: first, fairness between depositors and policyholders; and second, enhanced competition and competitiveness. Our industry strongly agrees with the task force. We therefore urge this committee to recommend that the government move forward promptly to develop and to adopt a specific approach for putting the plans on the same footing.

Mr. Chairman, you and your committee are no doubt aware that your parliamentary predecessors have included special provisions governing insurance activities in the Bank Act since 1923. This testifies to the fact that important dimensions of the public interest are affected by the nature of the framework for these activities. The task force's recommendations in this area identify four dimensions of the public interest that would be affected by changes to the framework for insurance retailing by deposit takers. These are: competition and competitiveness, freedom from coercive sales practices, protection of personal information, and the appropriate competence of intermediaries.

We agree that these are the four relevant considerations of the public interest that must be taken into account. However, we believe these public interest objectives would be best served by a different approach than that suggested by the task force. We differ most particularly with respect to how competition and competitiveness would best be served.

The task force, of course, recognizes that there are a number of policy and legislative inequities that provide competitive advantages to deposit takers over life and health insurance. It recommends correcting a number of these inequities. However, we believe the task force did not sufficiently recognize that it will take considerable time to achieve the intended positive impacts on competition and competitiveness of initiatives, such as opening up the payment system and putting CDIC and CompCorp on the same footing.

• 1100

We also believe the task force overestimated the need to expand the insurance distribution activities of deposit takers in the interests of heightened competition. The current framework already provides extensive scope for insurance distribution by deposit takers, and competition within our own industry among the more than 130 competitors is already extremely intense. Standard & Poor's in fact has called it tooth and nail competition, in a recent report on the industry. The task force report itself notes that consumers are well served by this intense industry competition, citing the low life insurance premiums paid by Canadians—the second lowest among a group of eight industrial countries that the task force surveyed.

Our industry therefore urges this committee to recommend that enactment and implementation of effective action relating to the payment system and consumer compensation arrangements should precede any change whatsoever in the current legislative and regulatory framework for insurance distribution by deposit takers.

With respect to freedom from coercive tied selling, protection of personal information and appropriate competence of intermediaries, the industry agrees with the task force that new legislative safeguards must be in place fully before any changes whatsoever are made to the current framework for insurance distribution by deposit takers.

Finally, with respect to the task force recommendation that the current ban on the use of customer information by deposit takers for marketing insurance should be removed, this committee will likely be very interested in the results of a major national survey, which we have included as annex 3 in our submission to the committee. The results of that Compas study were quite clear: “Canadians are massively and uniformly opposed to the use of personal, financial information by banks to market life insurance products.” Moreover, there is virtually no support for allowing any of these practices. Only 3% to 6% of respondents believe government should allow such practices.

Taxation is another area of public policy interest that the task force report deals with extensively, and our industry highlights in the submission to this committee. According to a recent Statistics Canada study, our industry had the highest average growth rate of income taxes and capital taxes of any industry between 1988 and 1994. Overall taxes quadrupled to more than $1.8 billion over a 10-year period from 1987 to 1997.

Obviously these represent serious business challenges, but their implications go far beyond this. The task force has concluded that the level and the structure of taxation for our industry, and for the sector more broadly, have significant negative consequences for the public interest. Specifically, the report notes: “the level of taxation of Canadian financial institutions is damaging to the competitive position of Canadian companies.”

It also notes that “capital taxes— create incentives that are inconsistent with sound prudential management”. It concludes that “the level of taxation of Canadian financial institutions is— increasing costs to Canadian users of financial services”.

The industry concurs with the task force assessment that the public interest is damaged by the current tax situation, and we urge this committee to call on federal and provincial governments to implement the task force's recommendations.

The final chapter of our submission, as you and your colleagues will note, deals with recommendations in 14 other areas that could affect the industry's capacity to fulfil the vision set out by the task force. In the interest of brevity I will only touch on two of these.

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The task force recommends the establishment through legislation of a federal ombudsman. Our industry has a long-standing commitment to assisting consumers through our consumer assistance centre, which goes back 25 years and has always offered an effective complaints resolution service. Effective September 1 of this year, we added an OmbudService to provide an additional conciliation facility for the resolution of more difficult cases. The centre has member company offices responsible for complaints resolution that are already working effectively with provincial authorities such as the Ontario insurance ombudsman.

Given all of these initiatives, the industry does not believe there is any urgent necessity to introduce additional redress mechanisms in our own industry. However, should this committee decide that the task force's recommended ombudsman approach is required, our industry is ready to provide constructive input based on our extensive experience. In particular, it would be important to ensure that this new system could work effectively with the industry's existing consumer redress mechanisms.

Finally, I would like to address the task force's recommendations for the significant change to OSFI's mandate and governance. In particular, it is proposed that the mandate would be modified to focus on competition and innovation as well as safety and soundness. Our industry has some serious concerns about this direction. The additional roles in promoting competition and innovation and enforcement of consumer protection could significantly divert OSFI's attention from the essential task of ensuring safety and soundness. OSFI's mandate would become more difficult and be subject to greater ambiguity because of the inherent tensions between safety and soundness and promotion of innovation.

Therefore, our industry proposes that this committee recommend that such major changes to OSFI's role and mandate must be given extensive further study before any action whatsoever can be prudently taken.

In conclusion, Mr. Chairman, our industry is pleased to have this opportunity to provide input to the committee. You and your colleagues are to be commended for the energy and patience with which you are seeking out views of interested Canadians in all parts of the country, including a considerable number of life and health insurers. We look forward to working with the committee over the months and years ahead as the legislative and regulatory framework evolves. More immediately, I look forward to answering any questions the committee members have, based on what I have just said or on the more detailed content of our submission.

Thank you, Mr. Chairman.

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

Now we'll go to Mr. Ritz for questions.

Mr. Gerry Ritz: Thank you, Mr. Chairman.

Thank you, gentlemen, for your presentation today. That's a pretty glossy folder. You must be doing better than the banks. Theirs weren't that impressive.

The one point that struck me in your presentation is that you make protection of personal information very much a priority. If we go to more deposit takers, does that not become more difficult? How do we maintain that personal privacy regime?

Mr. Chris McElvaine: May I ask for clarification when you say “if we go to more deposit takers”?

Mr. Gerry Ritz: Well, one of your recommendations is for more people to have access to deposit taking, as we see the financial sector changing and so on—payments, if you will.

Mr. Chris McElvaine: Our life insurance companies are not desirous of becoming deposit takers. The need to get access to the payment system is for the distribution of our benefit payments, which as I mentioned amount to $100 million a day in payment of life insurance, annuity proceeds, health claims and dental claims. It's the distribution mechanism. We seek to use the payment system or have access to the payment system and its governance to facilitate that distribution mechanism.

Mr. Gerry Ritz: Okay, so you keep that in-house rather than farming it out. Your point is taken.

Another point you were making was the competence of intermediaries. There's a lot of training and licensing required for the sales people who work in your organization now. Does that vary from province to province? How do we set federal regulations in this type of situation that will be acceptable across the country?

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Mr. Chris McElvaine: Mr. Chairman, the insurance industry is somewhat unique in the sense that our distributors, as indicated, are provincially licensed and regulated. Generally, the provisions across the country, from province to province, vary, but they do have some element of harmonization. Naturally, we would like to see much greater harmonizations so that the differences between provincial jurisdictions were minor.

So our suggestion or recommendation here is that if the idea is that deposit-taking institutions are to essentially be allowed to retail insurance through their branch distribution network, then the intermediaries who are providing that kind of advice and guidance should essentially be subject to the same kind of regulatory framework, licensing, training, and education. I would hesitate to determine whether that should be a federal or provincial issue, because we're getting into constitutional issues there.

Mr. Gerry Ritz: Thank you.

[Translation]

The Chairman: Ms. Gagnon, do you have a question?

Ms. Christiane Gagnon (Québec, BQ): Yes, I have a brief question regarding access to the payment system via Interac.

A number of consumers have been complaining that services are being cut in the banks as a result of this system. Do you not think it could have an impact on the quality of customer service? For example, some people frequently require very specific information. Has the advent of the Interac system meant that some services are being cut back because fewer people are using them? It's similar to what's happening in the banking system nowadays: banks are closing and customer service is declining.

[English]

Mr. Chris McElvaine: Mr. Chairman, I think the life insurance industry, as I said, is very interested, because we have such a frequent contact with our clientele through the distribution mechanism. Our intentions for access to the payment system were to facilitate and enhance our ability to distribute those policy claim payments to our policyholders. It was not to become the only and exclusive methodology of distribution, but rather to enhance the normal and other mechanisms that we use for distribution.

If I understand your question, madame, I think the other facilities will always be there. It's not a question of exclusively using that as the only vehicle to make that distribution.

The Chairman: We'll now hear Mr. Daniels.

Mr. Mark Daniels (President, Canadian Life and Health Insurance Association): Mr. Chairman, I would like to provide a supplementary comment on the payment system. In a sense, it really responds, Mr. Chairman, to your own focus on the future. There is a great deal that could be done through the payment system in simplifying and smoothing our industry's transactions and making them more convenient for consumers through access to the payment system.

But to a very real extent, this question about access to the payment system is about the future. It's about the fact that technology is exploding through smart cards and all manner of devices. At the moment, the Canadian Payments Association controls not only the clearing system but also the planning of the electronic funds transfer and the evolution of that system. If the insurers aren't part of that, then they're not going to be able to use that system for the kind of leverage inherent in it. So it's really through that as well that we emphasize these payment system questions so much.

[Translation]

Ms. Christiane Gagnon: I asked that question because I know that some people don't use those kind of services and may never use them, since they prefer traditional services. It's possible that by introducing them too quickly, consumers have come to feel quite far removed from the services they should be receiving. When you look at your bank statement at the end of the month, you often notice a large amount of fees for the use of the Interac system. It can be quite a shock. People tend to think that it isn't costing them anything when they use their card at a banking machine. It's only at the end of the month that they actually see how much it's costing them. But a lot of consumers don't have a bank account and don't use the Interac service. I'm just wondering whether you are also concerned about meeting the needs of that specific client group that doesn't use Interac. Thank you.

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[English]

Mr. Chris McElvaine: Yes, Mr. Chairman, I think this focus is particularly on the nature of the distribution mechanism used primarily by insurance companies, and the nature of that distribution system predominately deals with intermediaries, individuals as opposed to physical branch locations. We are dealing with agents who reside right across the country, in the smallest communities from one side of Canada to the other. There are independent distributors who provide that kind of service, deliver those kinds of cheque payments, and provide that kind of contact with clientele.

If I can take my association hat off and put my Empire Life hat on, Mr. Chairman, that is something that I personally think is an issue we pride ourselves on, that methodology of the distribution of our products and ensuring we have the facility, the access, and the advice of competent, well-trained, and available individuals who can provide that kind of relationship with the client.

The Chairman: Any further questions? Thank you.

I just want to follow up on an issue related to the whole notion of building a future for the financial services sector. Prior to your presentation, we had Mr. Godsoe talking about the fact that the market share for the big Canadian banks has not changed very much in the past 50 years. There are, of course, two schools of thought on that. One basically states it's because it's a stable, safe, competitive environment. There's also another school of thought that says, quite frankly, maybe it's because the system is stagnant, maybe there is nothing dynamic occurring. It could be because it lacks innovation, and indeed, the entrepreneurial spirit may be lacking in that particular sector of the financial services sector.

One of the key issues we're concerned about is the issue of competition, and enhancing competition and competitiveness. That's extremely important. On the other hand, we're also concerned about the issue of concentration.

Many of the criticisms levelled at the banks deal with the issue of concentration—and I'm now talking about market share. You have the five largest banks in Canada, on personal deposits in all deposit-taking institutions in 1997, representing approximately 58.1%. When I look at the percentage share on life insurance premiums held by the five largest life insurance companies, it's 59.3%.

Looking to the future, are we going to get more movement in the life insurance field? Is it going to become more entrepreneurial? Is it going to speak to Mr. MacKay's vision of being a little more open and accessible to entrepreneurs in your industry?

Mr. Chris McElvaine: Mr. Chairman, I will attempt to give you a couple of perspectives.

First, the nature of the life insurance industry is very different from the nature of the deposit-taking institutions in the sense that we have a huge diversity in types of companies—foreign, domestic, mutual, or essentially shareholder-owned companies—and in size. So I think the distribution of concentration or ownership tends to be more varied.

When you're looking at the major chartered banks, you're dealing with a somewhat exclusive group, in my view, Mr. Chairman, in that they are all domestic, they are all shareholder-owned, they are all widely held kinds of organizations, and there has been very little access until now of foreign players and smaller banks. They haven't had the same kind of diversity of competition as we have in the insurance business.

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Again, I'll put my Empire Life perspective on this. Empire Life is a mid-sized player in the life insurance business. By ranking, we would probably end up somewhere about 10th, 11th, or 12th, depending on what side of the mechanism you use to measure that. We are a majority shareholder-owned company. We have been an acquisitor—we have been very active in the acquisition business. The vast majority of the acquisitions we have made have been foreign-owned companies.

So here is a mid-sized Canadian player that has been an active acquisitor, and I believe a profitable and valid competitor to the larger companies. The larger companies are all very much in the process of demutualization, with one exception tending to be the mutual companies in that area. One of their reasons, as I understand it, and I don't want to speak for them in that context, is certainly the issue of access to capital—the ability to be able to make acquisitions.

Without responding too long to your question, Mr. Chairman, returning to that question of percentages, I think the other thing we need to bear in mind is that if we take together all the domestic assets of all the life insurance companies in Canada, we would still have a lesser asset value than the domestic assets of the Royal Bank. So I think the concentration issues are of a very different scale in the life and health insurance business from those in the banking sector.

The Chairman: But nevertheless, in your business it is concentrated.

Mr. Chris McElvaine: There has been a tendency for some consolidation to take place, and most of that consolidation has been because of a withdrawal of foreign owners as opposed to being essentially an entirely domestic consolidation.

The Chairman: Okay. Thank you.

Ms. Leung.

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

Thank you for your very informative presentation. I want to follow up on the chair's question on the entrepreneurial spirit. I notice your industries are well established, since 1894, and you have over 20 million policyholders. Have you started to venture into foreign competition, areas that have not been touched by Canadians?

Mr. Chris McElvaine: Mr. Chairman, I think proportionately, Canadian life insurance companies in a global context have been extremely successful international competitors. Some of our major companies are extensively involved in international operations in many parts of the world. Indeed, you could take a country, whether it's the U.K. or the U.S.A., and find there are Canadian-owned or Canadian-based companies that are very active, vigorous, and well-known competitors in all of those markets. I believe our Canadian industry has been very successful and very international in that sense.

Ms. Sophia Leung: Thank you. Conversely, I believe there are also foreign competitors in Canada. For instance, Cathay Pacific Airlines came in and took over quite a lot from Canadian Airlines. There are many other examples. Do you face that kind of competition?

Mr. Chris McElvaine: We face competition, Mr. Chairman, from foreign players. Certainly, I don't think there is any concern or any feeling we have to be protected in any way from foreign competition. The life and health insurance industry has been much more open. There are very active and very successful large foreign-owned companies that have been competitors in Canada for a long time. More recently, some of those have chosen to withdraw, and I wouldn't like to try to speak for the reasons they have chosen to withdraw.

It seems there has been more of an exodus of foreign players in the life insurance business than there has been new entrants. But there are certainly no barriers to entry of a foreign player in the life and health insurance business.

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Ms. Sophia Leung: So you are very successful in competition. If you believe in giving the consumer the choice and having free competition, then why are you so concerned about competition with the banks?

Mr. Chris McElvaine: That is a very good question. I don't think the issue is that we are concerned about the competition; the issue is that we are concerned about—and I use an overused term—whether or not you have a level playing field.

There are some fundamental issues that the MacKay task force has recommended: the issue of access to the payment system, the issue of consumer protection, the lack of equality between CDIC and CompCorp, and the issue of ensuring that you have competent intermediaries providing advice to the client. Those are the issues that we believe need to be established before the deposit-taking institutions are given additional access to the insurance marketplace. I stress “additional” because the deposit-taking institutions are already very evident in the insurance business. So it's not as if they have been frozen out from access to that market.

Ms. Sophia Leung: But assuming your industry's focus on life and health really requires highly skilful agents to give the consumer information, you're pretty safe in that way.

I have one more question. You introduced the idea of having an independent ombudsman. It's very interesting. How would you see the role that this kind of a figure would play, the structure in the system?

Mr. Chris McElvaine: As we say in our submission, the association has actively had this consumer information centre that has provided that access to information through 1-800 lines to knowledgeable individuals who would counsel. They have acted as intermediaries in trying to resolve issues of that nature, and we feel we have a fair amount of experience in that kind of process because, as I mentioned earlier, we are subject to a lot of provincial regulation in the consumer interest, in the protection of the consumer. That information centre relates very well with provincial insurance commissioners who deal with those kinds of—

So we perceive that we have an active, well-managed and experienced intermediary process to deal with individual client concerns and complaints. We suggest maybe enhancing that, as opposed to necessarily going to some kind of national— Nevertheless, if the committee and the regulators believe in a national kind of organization, then we're more than happy to help or assist in that kind of direction.

Ms. Sophia Leung: Thank you.

Thank you, Mr. Chairman.

The Chairman: Mr. Discepola.

Mr. Nick Discepola: Thank you, Chairman.

One of the most startling recommendations I found from the MacKay task force was the use of private information for target marketing areas. The more I look at it, the more I say I don't know how we, as legislators, are going to possibly legislate its misuse, notwithstanding the MacKay report's recommendation on severe penalties.

I take a look at an incredible survey that you've done, and you say 73% of Canadians, no matter the demographics, no matter where they are throughout the country— well, even 89% believe they should “probably forbid” to “definitely forbid”.

I wonder why MacKay then shuffled the deck, really, so to speak, and recommended that the banks be allowed to use that. Do you have any idea why he would even recommend that? Yet he didn't go to the other extreme— or not extreme, but he didn't cross the line and say, well then, the banks should be allowed to merge. He said, well, here's an orange flag. Why didn't he say well, here's a red flag for the misuse or potential misuse of information?

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Mr. Chris McElvaine: I think all institutions that have access to the personal information of any individual are essentially endowed with a trust. We can well understand the concerns about consumers and about the proper use, as opposed to what might be deemed to be the improper use, of that personal information.

You can put up all kinds of regulatory barriers and things of that kind, but ultimately, it really is going to come down to the question of what information is being used, how it's being used, how it's being regulated, and how it's being administered.

Obviously I can't comment as to why the MacKay task force has made that kind of recommendation. Again, I would emphasize the fact that there are some fairly stringent provincial regulations with regard to the utilization of that information and privacy that the insurance companies are subject to because they exist. We have to comply with those provincial regulations.

The utilization of confidential information or target marketing kinds of issues is something that happens in many industries. I'm sure that you receive all kinds of junk mail, as do I, and you have to wonder what source or what access was used for that junk mail to be produced.

So I think we all need to be concerned. Organizations, institutions, regulators, and legislators need to be very concerned about the use of that information.

Mr. Nick Discepola: Are there any strict criteria, even through legislation, that we could put in place that would alleviate your concerns of the misuse of it?

Mr. Chris McElvaine: I'm sure there are ways it could be done, Mr. Chairman, but it would be a very complicated process. Offhand, I don't have any suggestions, but I would be more than happy to ask whether any of my colleagues can assist with the mechanisms we might use.

Mr. Mark Daniels: Mr. Chairman, we don't have a magic formula. I think Mr. Discepola has hit exactly on the issue. We're not sure how you would regulate the use of private information in such a way as to leave room for what we understand the banks want to do.

The prohibition now is really on two things, and two things only. Banks can own insurance companies. They can sell the stuff, and they do. The first prohibition is on selling in branches. More particularly, I think you've already heard from witnesses who say that with respect to branch sales, that's not a major issue.

The real issue is the use of personal information for target marketing. Taking that and linking it with the concern that MacKay signals on coercive tied selling is precisely the issue.

We don't know how you can tighten it down enough. If you can tighten it down enough, the problem can be theoretically made to disappear, but it is a major, major issue. The reason we went ahead with that Compas work was to try to get a sense of whether this was playing as big as we thought it would. Of course, as you see for that work, it just bears out your own characterization of the issue.

Mr. Nick Discepola: I'm not convinced it can be patrolled sufficiently.

On the area of consumer compensation arrangements, your industry seems to be supportive of the merger of these arrangements both for deposit-taking institutions and life insurers. Mr. MacKay, in his recommendations, outlined two models, the crown corporation type of model and the private sector model. I'd be interested to hear your viewpoints on how you would see the premium rates being set under each of the models, how the institutions should be governed, and under what criteria they should fall.

Mr. Chris McElvaine: Thank you, Mr. Chairman. I think that's a very relevant and critical question.

A number of different models have been proposed. Indeed, the two that have been mentioned in the MacKay task force are not necessarily the only models. I think our issue is to not essentially say that this the only way it can be done. I think our particular issue is how can we make the two systems equivalent from the point of view of the protection of the consumer so that a policyholder and a depositor at a banking institution feels equivalently protected against failure of either one of the institutions.

• 1135

It raises many questions of perceived or real cross-subsidization between the deposit-taking sector and the insurance sector, so the separate structures issue is not necessarily unworkable; the issue is that the governance of those two sectors and the non-access to crown funds in either case should be equivalent. That is our issue.

Mr. Nick Discepola: Thank you.

The Chairman: Thank you, Mr. Discepola.

Mr. Pillitteri.

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

Good day, gentlemen. I'm sorry I wasn't here earlier to hear your presentation, but I might have heard it earlier.

Let me ask you a question. I probably asked this question before, but now it becomes more evident because of the MacKay task force. Since 1992 you've had the opportunity to be deposit takers, to open up banks per se, and you have not taken this up. Yet here in the task force they're saying more competition could come in through the formation of a bank with as low as $10 million, and it could be more competitive. Do you honestly believe— You have not entered that field today, but under this task force now, would you be willing to enter this, and if not, why not?

Mr. Chris McElvaine: That's a very complex question, Mr. Chairman. Let me try to address again the issues as I see them.

Insurance companies do not have the ability to take on deposits. There is some provision, and I don't know too much about it. As I understand it there was some provision brought in in 1992 that, theoretically, an insurance company, if it was widely held, could own a bank that is widely held. I contrast that with the fact that a bank can own an insurance company. There's no prohibition against a bank having an insurance company.

I'm not challenging your question, sir, but if the issue is if the banks can own insurance companies, why do they want greater access— If the insurance companies can own a bank, then we're in a somewhat equivalent position. Yet it is the banks that are asking for more access to something they can already do—they can own insurance companies.

To come back to your question on the issue of why more insurance companies have not created banks, that takes a lot of capital. There are some very difficult restrictions about ownership issues to be addressed. Coming from a medium-sized, not widely held life insurance company, it is certainly not an avenue I'm familiar with, or that would even be an option for the Empire Life Insurance Company.

Mr. Mark Daniels: Mr. Chairman, I should point out that you are hearing from Mr. D'Alessandro in a little while today, and Mr. D'Alessandro does have a bank. So you may want to talk to Manulife because they do operate a small bank.

The Chairman: Mr. Pillitteri.

Mr. Gary Pillitteri: The reason I asked the question is there's a perception that by the opening up of all these recommendations there would be so much competition out there. And yet we heard earlier from Mr. Godsoe that realistically competition will not come because you'll be too small and you would be swallowed up.

Rather than opening it up to this competition that could be followed up, as I say, I just wonder if not following a pattern like that south of the border, where so many banks are created every year and so many banks go under every year— What are your thoughts on buyer beware? What guarantee would the Canadian consumer or taxpayer have under those conditions?

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Mr. Chris McElvaine: I listened to some of Mr. Godsoe's evidence earlier. He was focusing on this whole question of concentration as opposed to a certain amount of diversity, and there was some discussion and some debate on it. If I understand what he was saying, he was focusing on the issue that if you have too much concentration and you have too large an organization, you get into that realm where you're too big to fail and it ends up being the public purse that protects that organization.

At the other extreme, if you have thousands of banks and thousands of life insurance companies around, then you do suddenly get into the realm of the consumer not knowing quite which way to turn. I'm not quite sure what the happy medium is between ensuring that you have sound management, that you have active competition, that you provide choice to the consumer, which in essence is the real issue here— The consumer must have access, the consumer must have choice, and the consumer must have the confidence that the system, the structure, the regulatory process is going to prevent him from making a major mistake, if I can call it that.

We cannot insulate everybody against every possibility. The consumer must exercise a certain amount of prudent judgment on which institution he or she goes to and what mechanism they use to access that institution. If I can use an extreme, Mr. Chairman, they cannot provide the opportunity to be exceedingly greedy. They hear these unrealistic things that are too good to be true, yet they still go and access that particular system. Then when something goes wrong, the government or the public purse now has to come and bail them out.

My feeling, after working in the insurance sector in Canada for forty years, is that we fundamentally have had a very good, sound, well-managed system across the financial services industry. We should be proud of it. There are many structures and organizations in foreign countries that look to the Canadian regulatory system as a model. So we need to be careful, and again, Mr. Godsoe was saying this. Let us make sure we don't revolutionize the process, but let us carefully and with a considerable amount of thought and debate improve it where it needs to be improved.

Mr. Chairman, I'm going on at length.

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

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

We're going to have two final questions, one by Dr. Bennett, and then we'll go to Mr. Brison.

Ms. Carolyn Bennett (St. Paul's, Lib.): On the ownership recommendation of MacKay, he's proposing a consistent ownership regime for all federal financial institutions based on size, not institutional type. Did any of your members have any concern about this in terms of the $1 billion, $5 billion equity thresholds and the grandfathering provisions? Are your members comfortable with that?

Mr. Chris McElvaine: Mr. Chairman, that is one issue where there is a diversity of views within the members of the association. There is no consistent feeling that this model or that model is better, and therefore we as the association are not putting forward a view on that particular issue.

You have given me the opportunity again to take my association hat off and put on my Empire Life hat. As I said earlier, the Empire Life is a stock company with a majority owner. We have been through lots of perceived models or recommendations on whether one ownership structure is better or safer for the consumer than another ownership structure. And I don't think history shows any particular pattern. There have been widely held institutions that have gone under, there have been sole-ownership institutions that have gone under, and there have been large and small institutions that have gone under.

• 1145

So the issue of ownership is a very difficult one. Still wearing my Empire Life hat, I would urge you to be cautious about assuming that any single ownership structure is a panacea that is going to prevent difficulties or that organization getting into difficulty.

Ms. Carolyn Bennett: Thank you.

The Chairman: Thank you, Ms. Bennett.

Mr. Brison.

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

The life insurance debate is fundamentally different from the debate over P and C insurance and auto leasing in a lot of ways. Most people agree that life insurance is more of a financial instrument than would be, say, P and C insurance. The banks argue that they're now providing mutual funds through their branches, and RRSPs, and that in fact it's inconsistent with the desire that they be able to provide, in a holistic way, a wide range of financial instruments to Canadians.

With the easing of ownership rules and the provisions for new banks, with the changes in holding company provisions, with all these things and the full access to the payment system that you would have, your members can effectively be banks. I'm a little confused as to why there is still such a reticence to banks being able to broker life insurance if in fact you would have access to the payment system at an unprecedented level under the MacKay recommendations.

I'd like to hear your feedback on that.

Mr. Chris McElvaine: Again, in our view, the issue is essentially the equality of the system. Let me attempt to postulate.

If the idea is that tomorrow the banks are essentially allowed to retail insurance through their bank branch network, that they are able to do that while they also have access to the payment system, while they also are not subject to the provincial regulation about distribution, they have an advantage on their CDIC protection mechanism. That's where the discontinuity is, Mr. Brison.

Our view is not that the banks should not be allowed to be given access. What we feel is that the mechanism should be levelled before that kind of access is brought. We believe the environment within the life and health insurance business is already extremely competitive, so we don't see that there is a great enhancement to the public through getting access to insurance through the retail branches of the banks.

Again, does that answer the question?

Mr. Mark Daniels: Mr. Chairman, may I take a shot at that, too, for clarification?

In a very broad sense right now the legislative framework, passed in 1992, says of banks, trust companies and insurers, you can all be in one another's business; do anything in-house except for three basic things. There are a couple of other exceptions, but these are the three basic things: one, insurers cannot take commercial deposits, which is to say they aren't banks; two, deposit takers can't network insurance, which is to say they can't sell it in their branches using customer information for target marketing; and three, some trust activities are the sole province of the trust companies. Leasing and a couple of other things are in there, but by and large, that's it. Otherwise, in this brave new world of financial services everybody can do everything everybody else does in-house.

Our argument about the payment system has nothing to do with commercial deposits. We haven't asked to take commercial deposits. I don't know of any insurers who want to take commercial deposits. What we do want to do, however, is take advantage of powers we got in 1992—for example, to issue debit and credit cards. At the moment we can't do that, because we can't use them, not being members of the payment system. So getting into the payment system is basically, as Mr. McElvaine said, to get into the level playing field.

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I would be very surprised if you were to hear insurers around these tables asking for deposit-taking powers. We're not banks, and we don't want to be banks.

Mr. Scott Brison: One last question.

On the whole bank branch argument that is used, isn't this largely going to be considered a moot point in a fairly short period of time as Canadians buy more and more products via the Internet or telephone? We're seeing the death of distance as a determinant in the cost of telecommunications, and that's revolutionizing almost everything. Some time in the future, we're going to have to explain to a new generation that there was a time when people used to go to a bank branch to purchase a service, and they'll say “Well, what's a bank branch?”

Isn't it really a bit of a moot point that we're focusing on the realities as they exist now, that we're really beyond regulatory burdens, beyond almost anything we do here as legislators? Will not telecommunications and information technology transform this much more than what we're discussing here?

Mr. Chris McElvaine: I think that is an excellent question, Mr. Brison.

The issue is distribution. I don't think there is anything in our suggestion that is attempting to limit distribution, and that's really where the competition is. Some people will choose to distribute through the Internet, and some people will choose to distribute through intermediaries.

The issue is not that the banks would just be distributing their product through the bricks and mortar of the branch. I think the issue is that the institution of the bank that was offering those services should be subject to advantages, disadvantages, restrictions, regulations and access that are equivalent to those of the insurance companies. It's not the mechanism of that distribution, it's just the fundamentals of the distribution of the product.

If I might make just one final comment, Mr. Chairman, I think you very rightly pointed out the difference between the property and casualty companies and the life insurance companies. In my capacity as president of Empire Life, I am also a director of a property and casualty company. I know that in terms of addressing the MacKay task force issues, my colleagues in the property and casualty industry are very much concentrated in that retailing-of-insurance issue, because that's the big item to them. I just want to differentiate the fact that the life insurance industry has many more issues involved in the MacKay task force, whereas I fully appreciate and understand that the property and casualty industry is much more impacted and affected by that retailing issue.

Mr. Scott Brison: Thank you.

The Chairman: Thank you, Mr. Brison.

I'd just like to get some clarification from you. Generally speaking, are you saying that we should move very cautiously on MacKay? Is that your message?

Mr. Chris McElvaine: I think there are some issues that we believe you should move cautiously on, yes, and there should be a full debate and recognition. In comparison to that, there are other issues we certainly think you should put on your fast track.

As I understand it, the committee's approach is to essentially attempt to differentiate between fast-track issues, if I can use that expression, and those issues that may need a little more thought, debate and study. I think that's our view, too. I think we concur with that view. Naturally, we have our own particular opinion as to which should be the fast-track items and which should be the slower items, and I think we have attempted to identify those in our submission.

The Chairman: By the way, this was a very thorough submission to the committee, and we certainly appreciate your contribution to this process. You certainly have given us great insight into the concerns and perspective of your industry, and for that we're very grateful.

On behalf of the committee, thank you.

Mr. Chris McElvaine: Thank you, Mr. Chairman.

The Chairman: We're going to take a two-minute break, and we'll be right back.

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• 1205

The Chairman: I'd like to call the meeting back to order and take this opportunity to welcome Monsieur Léon Courville and Madame Dominique Vachon, both from the National Bank of Canada.

As you know, you have around ten to fifteen minutes to make your presentation. Thereafter, we'll engage in a question and answer session.

Mr. Léon Courville (President, Personal and Commercial Bank, and Chief Operating Officer, National Bank of Canada): Thank you very much.

[Translation]

Thank you for this opportunity to appear before you. For my opening statement, I will begin in French and continue in English.

I will begin by presenting the National Bank's views on the changing financial services industry and our reaction to the report of the Task Force on the Canadian Financial Services Sector.

It's important to point out that we are the smallest of the major banks, ranking sixth in Canada. We represent approximately 7 per cent of the Canadian banking system. Sixty per cent of our assets are concentrated in Quebec, while the rest are held outside of Quebec, primarily in Ontario, Western Canada and particularly the United States. We are pleased to announce that we have not been hit by the Asian crisis, having succeeded in folding up our operations there before the problem arose.

It is important to note a particular characteristic of the National Bank: even though we only represent 7 per cent of the Canadian banking system, our market share for commercial loans is between 13 and 14 per cent. Thus there is an overweighting of business loans in our balance sheet, primarily small business loans. We operate mainly in Quebec, and the vast majority of our assets are invested there. So, we can truly say that we are mainly a commercial bank. That is our vocation. Our strategy focuses on that particular business line and to a great extent, our organizational structure and way of operating flow from that fundamental strategy. We can certainly say that we compete in the market as essentially a banking institution for small- and medium- sized businesses and that this line is part of our strategic thrust.

Our regional structure is a perfect example of how we have adjusted to the needs of that market. We believe that small business loans are first and foremost a banking service. A number of banking activities, including loans to large corporations, consumer loans and mortgage loans, are now carried out by a variety of institutions, and banks offer only modest value-added compared to other institutions. We have practically no competitors in that particular area, however, and practically no other market activity focuses on small business loans. The Canadian banking system has a high dependence on that business line, which is truly its own, and that is where bankers really count on the added value of their services, compared to other financial institutions with which they compete in a variety of markets.

So, commercial loans continue to be a market occupied almost exclusively by the banks. Our regional structure has been adjusted on that basis. Making loans to small- and medium-sized businesses means being able to gather information about our clients, provide them with follow-up, and give them both direction and advice. This is all accomplished within a regional, decentralized structure, since the decision-making very often has a cultural dimension to it, and it's important to really know your clients.

I should add that as a market player, and a particularly prominent one in Quebec, we are used to competition. We compete not only with the banks, but with the Mouvement des Caisses Desjardins, which represents about 40 per cent of the Quebec financial system and competes with all the banks, including the National Bank. So, the recommendations of the MacKay Report with respect to fostering the entry of new players do not scare us. We have been used to that kind of competition for quite some time.

As a commercial bank, we have also succeeded in developing an international network which is mainly dependent on our commercial activities. For a long time, we were active in Asia, because import-export activity between Canada and that region of the world was quite significant. That led us to Korea, China and Europe, where we have formed alliances with other banks, since our presence in these highly competitive environments would have added nothing. Through those alliances, however, we are able to better serve our clients when they arrive in Europe or when European clients come here to do business with Canadian clients.

I would also like to touch on the issue of technology, as it plays an important role in bank mergers and the development of the financial services industry. Although we are the smallest of the major banks, we have succeeded in maintaining some significant technological advances in certain areas. We were the first to provide automatic debit services to our customers. Before debit cards emerged in Canada, we had already carried out an experiment with debit cards in a grocery chain. We were also the first to offer electronic services via personal computers. We have actively participated in electronic commerce and now have a thorough understanding of the payment and electronic invoicing system. The initiatives we have taken to that end mean we now lead all other financial institutions in Canada in those service areas.

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[English]

With respect to mergers, the National Bank has voiced its position against them. I will therefore not go through all the arguments, and I don't want to pretend to be comprehensive about it.

There will be a period of adjustment that may benefit the National Bank, because one plus one doesn't equal two when you merge. You therefore pick up some clients, and you also pick up some employees who have to be dismissed from other banks and therefore have good input.

We think these mergers will bring additional regulations to the financial institutions in Canada in the long run, and they will also bring additional concentration. Concentration is bad because it breeds inefficiency and doesn't provide the consumer with good opportunities. It eventually makes for a stale system. Also, we don't think more regulations are the way to go. I think consumers are best served by very active competition in the market.

There is also the question of risk. I'm sure you heard about it before. As you concentrate the institutions, you have fewer strategies competing, and that brings about additional risk in the system.

Unfortunately, banking is not like any other industry. A food store can go bankrupt and others will take over, but banks are intertwined. We're kind of like a can of worms. We're dependent on each other. If one bank has a problem, all of the banking system in Canada has a problem in view of the world, and even in view of the financial system in Canada. So we have to be very careful.

Markets have a good way of sustaining an industry when there are competing strategies. If one fails, at least another one will win, and people will therefore adapt. But if you're more concentrated, fewer participants will bring forth fewer strategies and thus increase the business risk—and the industry risk in the case of banking.

With respect to the arguments proposed for the mergers, I'd like to turn them around. You've been told that the Government of Canada put out a tender and had to give its business cards and its payments system to foreign competitors like Citibank and American Express. Well, first I must say that we won a bid with the federal government on credit cards for small-amount purchasing by federal employees. We have issued 25,000 cards, which is much more than American Express. We're in that business, we won it, and we don't lose money on it in spite of the fact that we're smallest.

Also, with respect to mutual funds, we're told that Fidelity is just so big. Well, that's their business. They've been at it much longer than banks have been at it. When we hear these things, that these are strong competitors, I'd like to propose to you that to react by merging is to react more out of protectionism and not out of an interest in opening up competition.

I want to make the point that if you want to compete across the world, you have to be able to compete within your own country. If you're not able to meet head-on those who are competing with you, that's because you're inefficient, so shape up. The mergers are not a way to shape up. They're just a way to postpone the inevitable shaping up that you have to do.

Finally, I think the Canadian system is a system in which scope economies have played a much bigger role than scale economies. By “scope”, I mean we're universal banks. We do a lot of things with the same clients, and we can sell many products. But knowing the clients of the clients, the employees of the clients, also brings about scope, a range of activities that is the forte of the Canadian system and has been its fundamental characteristic. Unfortunately, I don't think you can have scope and scale at the same time. You cannot be good at everything if you benefit from scope economies by being a universal entity. I think we have forgotten the genesis of the banking system in Canada and what has made it a very efficient system.

With respect to the MacKay report, I think it is quite comprehensive. There's a lot in it, and the National Bank of Canada especially welcomes the ability to sell insurance, because our main competitor in Quebec is selling insurance. It has power both in life insurance and the P and C business.

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I think it's the duty of the federal government to harmonize legislation governing financial institutions. If there's a problem with one institution being a federally incorporated institution in one province, I think we have to do something about it. We cannot let it go. I think this is an impediment that we face, and it is serious. And while we would like to do insurance not necessarily by owning it but by distributing it, I think having that ability in order to meet our major competitor, who has these powers in Quebec, is something that we welcome.

With respect to taxation, I think the MacKay commission also said that the capital tax was a bad tax. We certainly adhere to that point of view, but we would again like to make the point that there is a discrepancy here in our own treatment. The Mouvement des caisses Desjardins in Quebec pays very little in capital taxes, and we pay a lot. They start the beginning of the year with $100 million less in taxes than we do. This is a big gift on January 1. When you're a top manager of a bank, it's quite comforting to be able to be $100 million ahead of your competitors every January 1. Again, I think the MacKay report gives you the opportunity to comment on the capital tax, and it may also give you the opportunity to have a more harmonized fiscal structure for financial institutions, whether they're cooperatives or banks.

The MacKay report also gives institutions like the National Bank more flexibility both in terms of new powers and in terms of ownership. The National Bank doesn't want to review the strategy at this point, because I think a big question is being asked about whether somebody can own up to 65% of the National Bank of Canada. But it certainly brings forth flexibility, and it's a decision we'll have to make in time. It also certainly provides us with opportunities for alliances that were not there before. At this point, though, there is no definite answer to that question from our point of view.

Finally, the MacKay report gives a lot of discretionary powers to the minister, and it opens up the field to additional regulations. I'm not sure this is the way to go.

I might note a small inconsistency in the MacKay report. It kind of views the banking system as being efficient. If it is, then don't fix what ain't broke.

Finally, I'll just mention one point that is crucial to you—and to us as well, by the way—and it is a difficult issue. It has to do with the evolution of financial services and the way in which we now provide multiple entry points for the consumer—the traditional branches, the ATMs, the debit system, phone banking, Internet banking, PC banking. We all offer all of these, but we have different strategies about how to do it.

Some banks really exclude clients, other banks raise tariffs. What we like to do is propose to our clients a menu of services from which they can choose, but we will price accordingly. This is a user-pay principle, and it is what we use as strategy.

I want to make a point here. Over time, we will probably get more used to these systems. In fact, telephone banking is probably the least costly way to approach things, and the most convenient for consumers. Why walk up to the ATM or walk up to the branch to pay a telephone bill or electricity bill? You can do it by phone much more efficiently. You don't have to go out, and you can do it any time of the day.

While there has been some reluctance on the part of some consumers, we have done some experiments—even with old-aged people—and when they taste telephone banking they like it a lot. The problem is the transition, and this is what we're in the midst of today. But because we're a commercial bank and a strongly oriented bank, we believe firmly that personal contact is the ultimate way to get access to a bank service.

When somebody has a problem—and that doesn't mean paying a telephone bill is a problem—or wants counsel, we open up the machine. We want to make sure the clients are able to meet a person, to speak to somebody. This is probably an ancillary aspect to our commercial banking strategy. When you do commercial banking, you have to know your clients all the way through. They want you, the bank, to know about them. They want to know your story. This is why they sometimes complain about account managers moving around. They feel they have to tell them their story. Somebody who has been known by somebody else has confidence in that person, and he doesn't want to lose that.

So we'll see over time if we're wrong, but we're making a lot of efforts to make sure the transactional aspect will be shifted to a more convenient way, so as to make room for counsel and the direct approach when it's needed.

That concludes my comments, Mr. Chairman.

• 1220

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

I'll now proceed to a question and answer session, with five-minute rounds. Mr. Ritz.

Mr. Gerry Ritz: Thank you for your presentation here today.

The MacKay task force has been talked about as being a beginning in changes to the financial sector. From your experience, is there a tremendous sense of urgency that tremendous changes are needed? There are 124 recommendations in MacKay. Has he gone too far or has he not gone far enough? Are there things that are missing? Are there things that you would like to have seen addressed?

Mr. Léon Courville: No. I think the MacKay report really covered the ground rather comprehensively. In fact, in a way, I must say that all people who will come before you will find something in it that has addressed their own problems. This is one of the good qualities of the MacKay report.

I'm not sure you can do all these things at once. In fact, to answer your question bluntly, I would say that the urgency is probably where anything that enhances competition ought to be implemented rather quickly. This is overdue in Canada. I repeat, from my past background as an economist, I think that if you're efficient at home, you're going to make it everywhere in the world, and to be efficient at home, you have to face competition.

I must admit that competition has been a tough problem in Canada. We've had the trust companies and life insurance companies getting into the intermediation business, but with not much success. In the case of the trusts, they've all disappeared. It's a problem in Canada. It's not a problem in Quebec because the caisses populaires are so overwhelming, but it is a problem overall in Canada, and this ought to be addressed rather quickly.

I think anything that fosters a new interest, an ability for potential entrants to come in, and additional powers that make a level playing field for all financial institutions, be they banks or life insurance companies, is quite welcome and should be addressed rather quickly.

Mr. Gerry Ritz: Thank you.

Do you think the merger mania that has come on actually since MacKay was struck has in any way deflected a lot of what MacKay was aiming toward? Has it kind of taken things off target a little bit, if you will?

Mr. Léon Courville: You're asking me for an observation about the process. I think, unfortunately, that with the five-year timetable given by the government for a comprehensive re-examination of the financial industry in Canada, the merger issue became so overwhelming and paramount in the public press that it seems to be difficult to handle any change in the composition, legislation, and regulation of the financial industry without keeping in mind what's going to happen to mergers.

In a way, this is a bit unfortunate at this time. I think the structure of regulation and financial legislation should be made without respect to the mergers. Mergers have to be handled as a competitive issue. They ought to be addressed from that point of view. To try to make up legislation because mergers are looming is certainly not forward-looking.

Mr. Gerry Ritz: Thank you.

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

Madame Gagnon.

[Translation]

Ms. Christiane Gagnon: I understood from your comments that you are opposed to bank mergers. A number of stakeholders have told us that in reviewing the bank merger proposals, we must bear in mind that other changes have become necessary, that the industry is evolving quickly and that we need to be able to react to international trade liberalization. You seem to be well equipped to face what is to come; you say you have both feet in the market and that things are going well. But a number of other banking institutions have told us they need to be bigger and stronger and that significant capital consolidation is required to compete effectively with foreign giants. Other than the status quo as far as bank mergers are concerned, what exactly are you proposing? Everyone agrees that regardless of whether the mergers occur, we will have to adjust to new realities, given that we are affected by globalization and trade liberalization.

Mr. Léon Courville: First of all, I'd like to make a comment about globalization. This word has almost become an argument. People talk about "globalization" as though it was all over. Internationally, the percentage of GDP that we export has not increased in 40 years, although in other countries it has risen considerably. In the financial sector, like elsewhere, globalization is not new, just as large international concerns are not new. So, we should not be particularly worried about it.

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Secondly, over the years, and recently in particular, the American banking system has undergone some consolidation and is seeing profits rise again, after being hit by a disaster of almost the same magnitude as the one in Japan, although it was dealt with much more expeditiously. This is what American financial institutions were going through barely 10 or 12 years ago.

But the United States has seen considerable growth. Here in Canada, extricating ourselves from the recession was not easy. We have not experienced the kind of growth the Americans have. There is no doubt that American banks are a lot more profitable than Canadian ones. There is a strong correlation between economic activity and bank revenues. But comparisons of Canadian and American bank profits do not tell the real story, because we forget that American institutions were granted certain powers in order to restructure their financial system, and that the US has experienced stronger growth.

Thirdly, in the United States, there has not yet been any consolidation; there are currently some 11,000 banks, and 200 new ones are established every year. Consolidation here in Canada occurred along time ago; we are ahead of them. That's why I said earlier: If it ain't broke, don't fix it. Our system needs some adjustments and more competition. We only have six banks, and if they are smaller now than they were before, it's not because our banks are too small, but because this country is too small. In relation to the rest of the world, the percentage of Canadian GDP has dropped, and it's perfectly natural that the banks have suffered the consequences of that drop, which doesn't mean that they are smaller.

Finally, Ms. Gagnon, you could count the real international banks on the fingers of one hand: they are Citibank, two Dutch banks and Hong Kong & Shanghai. And you still have your baby finger for one more, if it actually exists, but I don't think so. There aren't any large international banks. What there are, however, are banks in niche markets.

Ten years ago, when things were going badly in the US, we acquired an institution or niche market, asset-based lending, in order to provide loans to small- and medium-sized businesses. That acquisition allows us to foster closer links between SMEs located on both sides of the borders. Why are the banks suddenly waking up and talking about investing in the US, when ten years ago, it cost practically nothing? Why didn't they do it back then? Why did they wait, when the time to do it was 10 years ago? That's my answer to your question.

Ms. Christiane Gagnon: Are you in favour of holding companies and capital consolidation so that banks can be stronger financially?

Mr. Léon Courville: In my view, the banks are already strong enough financially. The holding company structure is indeed ideal for two reasons. First of all, it allows you to expand your business activities through a subsidiary, and thus not subject those commercial or financial activities to comprehensive banking rules which really have nothing to do with the traditional banking function. It also makes for greater equity in terms of the treatment of financial institutions, whether they are involved in one kind of business or another. Finally, I think we could certainly regulate the banks as banks and ensure that they don't fail; and if by some chance a bank did have problems, it would be the holding company, rather than the bank, that would have to deal with them. If the holding company has a problem and the bank is properly regulated, as banks are currently, the bank would not have to face the consequences. The holding company could go bankrupt. And who cares, really, since it's the shareholders who will have to pay. But the bank, because of the integrity of the banking system, could continue to operate as a bank and pursue its business. The holding structure offers flexibility with no increased risk. So, my answer to your question would be yes.

Ms. Christiane Gagnon: Before I leave, I want to put one last question to you. You said you were interested in selling insurance. Would you be in favour of compliance with the provisions of Bill 188, passed by the National Assembly, if your wish were to be granted and the regulations were to change?

Mr. Léon Courville: Are you asking me whether we comply with the legislation?

Ms. Christiane Gagnon: No, no. Are you in favour of the provisions of that legislation?

Mr. Léon Courville: Yes, absolutely. There were a few snags last year. Indeed, I wanted to point out that there is some duplication as far as the regulation of insurance is concerned in Canada. In my view, the federal government has never really assumed its responsibilities in terms of insuring harmonization in that area.

In Rome, do as the Romans do. Maybe we should change the system so that insurance comes under federal government control. Obviously we comply with provincial legislation, just as we have in a number of other areas, such as consumer protection.

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The current legislation is satisfactory, as far as we're concerned, but we would like to propose some amendments. In a way, it is tailor-made for one of our competitors. But it's progress at least.

Ms. Christiane Gagnon: Thank you.

[English]

The Chairman: Mr. Pillitteri.

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

Mr. Courville, it's nice to see you here making a presentation today.

It's been said that the MacKay task force makes banking recommendations, but the banks that have come before us want to merge in order to be larger, to be very competitive on the world stage. By their own admission, some of them have anywhere from 30% to 40% or 45% of their total assets coming from outside.

You've stated you have only 7% of the total banking business here in Canada, but you have 13% to 14% of the commercial loans. How is it that you have 13% to 14% of the total commercial loans while, with their scope and size, none of the other five banks have that? Is it something you provided, something you put in your portfolio because you wanted to concentrate on commercial loans, unlike the other banks? Is it because these loans to SMEs are guaranteed by the government?

Mr. Léon Courville: No. It's certainly not because the loans are guaranteed by the government. I think it has been a definite strategy of the National Bank of Canada to be a commercial bank. We are commercial bankers. This is a long-standing strategy of ours. It was a strategy of the two forming banks, the Provincial Bank of Canada and the Bank Canadian National. We believe this is where we have value added.

Today after two or three years of really jazzy profits coming out of capital markets, traditional banking is becoming more involved. You'll see the National Bank ranking promoted against the other banks in Canada because we're now turning back to traditional banking activities.

This has been a strategy of ours in all our organizational structures. I spoke about decentralization. We still have a decentralized loan system for small and medium-sized businesses. It has created some problems for us. We're fine-tuning it, but we don't want to centralize credit.

Our international development has been designed by our commercial involvement. This is why we're first in Asia. This is why we went to the United States to buy a unit of the Bank of New England for small and medium-sized business lending. We are associated with a caisse populaire in France because they were the strongest in medium-sized business lending. It was the same thing in Italy. We are involved in Latin America in the same way.

Even though it's still small, we have a definite strategy of trying to be a commercial banker. This is what we want to do. This is what we believe banks are best equipped to do. Sometimes it has cost us some money. When business failures are increasing—and bigger companies don't fail as often as small companies—we get hurt. In Quebec the business failures have been higher than those in the rest of Canada. We know that. But at one point I think this will pay off for us. This is a niche that will eventually be the privy of banks. This is where we add the value.

If you want to have a loan as a business concern, you have to get yourself known to a banker. Who else are you going to turn to? You might want to be known by two or three bankers to hedge your bets, which is fine; I propose you do that. But the guy would like to know you and you would like the guy to know you as well. This is a cultural element, and you have to be close to your client to do that. You cannot do that by machine. You cannot do that by credit scoring.

I could speak for hours on this. I'll stop here, but I hope that answers your question.

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Mr. Gary Pillitteri: I just want to follow up, Mr. Chairman.

That brings me to the next question. Does the bank need to get larger to be competitive because there's so much competition coming in? You mentioned Wells Fargo, Capital One and so on. Are they really competition to you, as they say they are? Have any deals, inside or outside of Canada, been so large that you have had to turn them down because you weren't large enough?

Mr. Léon Courville: Your question is two-pronged. With respect to Wells Fargo, you refer to the small business lending. Just like ING with their virtual bank, they are not making a big dent and spending big bucks. They are not in competition with us. They are doing something we should have done before, by the way, so it's a good thing they are doing that. We've started doing what they do for riskier, smaller companies. We do what they do, and they are right. We have to shape up. It's not because they have come here. I must say that the merger proposals look more like protectionism than otherwise. It's good to have competition because it promotes efficiency at home. If you don't have efficiency at home, you won't be efficient outside.

With respect to big deals, there have been big deals we could not engage in ourselves, and even the Royal Bank could not, which is the biggest bank in Canada. But why should all the deals be done in Canada? By the way, these big deals are syndicated. You are part of a bigger group. You can buy the loan and settle back. You have to take risks in doing that, but this is an international market in which you can participate like any of the others. We participated in big deals, and in fact sometimes we would have preferred not to because they turned a bit sour and I wanted to go back in history. You know what I'm referring to. What prevents us from doing so?

Mr. Gary Pillitteri: Thank you very much.

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

We have time for one question from Mr. Nystrom and one question from Mr. Brison.

[Translation]

Mr. Lorne Nystrom: I am from Saskatchewan. The National Bank doesn't have much of a presence in my area, but there are certain similarities with the region where you operate, since you have caisses populaires, whereas we have credit unions.

I want to ask you the same question I put to Mr. Godsoe this morning. If we allowed the banks to merge, two banks would end up having 72 per cent of the Canadian market, which is a larger market share than in any other country in the world. Would such a mega- bank be too big to fail? And what would the consequences of a mega- bank failure be for the financial sector and Canadian taxpayers? Canadians from all across the country often ask me that. A significant amount of capital is at stake here. We have witnessed bank failures in Japan and France, with the Crédit Lyonnais a few years ago, when the bailout cost $20 billion. That's a lot of money. What would the consequences of such a failure be here in Canada?

Mr. Léon Courville: I believe the consequences would be disastrous. We have already experienced this sort of thing. For example, when the trust companies starting have problems, we had to put a whole structure in place to facilitate the needed transition. You also witnessed the series of inquiries that had to be called into the failure of the Northland Bank and the CCB, which did not actually represent a significant proportion of the Canadian financial system. We are already too big to fail. Bank failures would lead to very serious problems. If the National Bank, which is the smallest of the major banks, were facing serious difficulties, that would raise all kinds of questions about the Canadian financial system, not only in Canada but internationally.

By putting all our eggs—indeed, very large ones—in the same basket, we risk putting a hole in that basket and seeing all the eggs fall and break, which would be disastrous. As far as I'm concerned, that's a very serious argument. If representatives of the Bank of Canada appear before the Committee, I do hope you will ask them that question. Their viewpoint may be more objective than my own, since we oppose bank mergers. But there is no denying that it does pose considerable risks and that we would have a hard time dealing with the resultant problems.

[English]

The Chairman: Thank you, Mr. Nystrom.

[Translation]

Mr. Lorne Nystrom: Thank you very much.

[English]

Mr. Scott Brison: Thank you for your presentation. In your presentation you say the two merged entities would have 49% of the market for personal deposits. You imply that would be too high. Yet in Quebec between you and the Caisse Desjardins you have 60% of deposits. Caisse Desjardins has 44% and you have 16%. The logical corollary of this is that you would seek to divest interest in Quebec so as to meet the national standard that you are suggesting. Is that your intention, to be consistent with what your positing?

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Mr. Léon Courville: No. It's not our intention. We have achieved that position, sir, in spite of everybody else competing with us. We haven't had to merge to get there.

Mr. Scott Brison: But you're there.

Mr. Léon Courville: But the others are there as well.

Mr. Scott Brison: Consumers don't care how you got there; you're there.

Mr. Léon Courville: No, there's a difference between concentration that is the result of competitive behaviour and potential competition being there. If we raise the price of mortgages a bit too high or deposits a bit too low, the Royal Bank will get it or the Bank of Montreal will get it or the caisses populaires will get it. But if they're not there, who will get it? The price will be raised. That's the difference.

If you win the Stanley Cup and you win it 10 years in a row, it's because you're the best team. It's not because there's no other team playing against you. We have teams playing against us. The Bank of Montreal is there, the Royal Bank is there, and the Bank of Nova Scotia is there. They're all there. You're asking them to leave, say in Ontario, and to give them that position? We cannot, because potential competitors are there.

By the way, the 40% of the caisses populaires is a bit misleading because they operate in a structural and organizational fashion that is a bit different. They are very decentralized, much more than we are, even though we are decentralized. They have different entities among themselves.

But that being said, even if they were one entity, it's the result of competitive behaviour. We are not able to move the price differently from the price of the Royal Bank for our mortgages; otherwise they'll move. We know that. But if the Royal Bank is not there any more, then we'll jack up the price. We will probably stay at 16% or 18%. We'll be making money and the consumer will suffer. That's the difference.

Mr. Scott Brison: Thank you.

The Chairman: Thank you, Mr. Brison.

Mr. Courville, Madame Vachon, on behalf of the committee, thank you very much. Certainly you have given us much to think about, and we'll be using the material as we reflect upon the recommendations that we should be making to the Minister of Finance. Thank you very much.

We're going to suspend for one minute and we'll be back with representatives from Canada Life, Mr. David Nield.

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The Chairman: I'd like to call the meeting to order and welcome, from Canada Life, the president and CEO, Mr. David Nield.

You understand how this committee functions. You have approximately ten to fifteen minutes to make your presentation and thereafter we'll engage in a question and answer session. Welcome.

Mr. David A. Nield (President and Chief Executive Officer, Canada Life Assurance Company): Thank you very much, Mr. Chairman, and good afternoon everybody. My name is David Nield and I am chairman, president and chief executive officer of the Canada Life Assurance Company. I appreciate the courtesy of the standing committee for giving me this opportunity to appear before you.

I join with others in congratulating Mr. MacKay and his task force members for the timely delivery of a comprehensive and wisely considered report. We now need to translate the recommendations of the report into a new and workable policy framework for the future governance of Canadian financial service institutions. It is readily apparent that there is general support to get on with that job. Canada Life gladly offers any support required to assist in that work.

These certainly are very interesting times for life insurance companies in general and mutual life insurance companies in particular. There are many changes occurring. One of those, which I will not spend too much time on today, is demutualization. The MacKay task force pointed out that it believed demutualization will be in the best interests of the mutual companies, their policyholders and the future evolution of the financial services sector. We believe this is true, and our board has asked Canada Life to prepare a plan for demutualization and we are actively engaged in doing that.

This is a fairly complex process and one that will involve significant time, energy and money. There are internal challenges, for example, considering how to restructure our company and how to allocate shares to our participating policyholders equitably—and especially in Canada, external communication challenges as well. I say they're external communication challenges especially in Canada, because in the United Kingdom and Ireland, two countries in which we operate, demutualization is almost old hat to the public, but in Canada this is a new process and we need to educate our policyholders using means that are as broad and varied as possible. Internally, this is probably the most important structural change since 1961.

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Let me explain that by telling you a little bit about Canada Life before moving on to the main body of my comments. Canada Life was founded in Hamilton, Ontario, in 1847. It was the first Canadian life insurance company. We were established originally as a stock company.

The year 1961 is significant for us because that's the year in which we mutualized. Some people say that if you live long enough, things often come full circle, and that's certainly true in the case of demutualization. Today, we serve more than eight million people with individual and group products in Canada, the United Kingdom, Ireland, and the United States. As an international company, at the end of 1997 we had company and segregated fund assets under administration of $39.6 billion, of which $16 billion, or 40%, were in Canada. The total premium income of my company last year was $5.2 billion, and we had a net income of $266 million. Canada Life has total insurance in force in Canada and abroad exceeding $260 billion. To give you an indication of our relative size in the Canadian market, we are the fifth-largest insurance company in assets, but we would not rank on the list of the top 50 global players in life insurance.

The task force set the stage for dealing with the implications of massive change in the highly competitive environment in which our institutions operate. The highlights of the report note:

It is extraordinary how quickly the world is changing. Driven by technology and new ideas, the world is fundamentally different as we approach the millennium than it was even 10 or 15 years ago.

How true that is. The volatility spawned by changing events has clearly created the need for this update of the rules for financial companies. In fact, even since the task force began its work early in 1997, the operating and competitive landscape has changed. Familiar examples would include the purchase of London Life by Great-West Life and the proposed merger of four banks into two banks here in Canada.

Some very massive acquisitions and mergers have occurred in the international arena. I think here of the merger of Citicorp and Travelers Group in the United States; the continued growth of the powerful ING Group, which is based in the Netherlands; the international growth of AXA, which is based in France; bank mergers in Switzerland; and the acquisition of Sun America organization by AIG, which is one of the largest financial enterprises in North America and global in its interests. Canada Life itself has been active in that process with eight friendly acquisitions in the past six years, and we have one more pending, which is Crown Life.

I cite these examples to indicate two things. First, the pressure of change continues unabated, and the size of financial institutions globally is increasing geometrically. Second, Canada cannot isolate itself from the fact of consolidation in the financial services industry.

The consolidation is being driven by two factors. First, there are too many players at a time when the market for traditional life insurance product is declining. Second, historic life product providers are reacting to new, non-traditional competitors, particularly in the wealth accumulation business. Mutual funds and banks are major players here.

In this context, I believe the regulatory framework being considered must encourage and foster as much freedom of choice and innovation as possible. It must be prudent free choice, but free choice nevertheless.

It is prudent and necessary to protect legitimate public interests, particularly to ensure we have financially strong and competitive financial companies. It's also necessary that the regulatory framework encourages and recognizes free choice by ensuring the rules of engagement are not unnecessarily bureaucratic, restrictive, or cumbersome.

In my view, most of the MacKay report achieves these goals. I welcome, for example, its recommendations regarding access to the Canadian payment system, the badly needed adjustments to the capital taxes on financial institutions, and a level playing field in the area of consumer protection. I also welcome the three-year timeframe for protection from hostile takeovers following demutualization.

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But given the pace and degree of change in the marketplace, I suggest we'd want to preserve our ability to undertake a friendly merger during the transition period, if our board and policyholders believe it's in the company's and their best interest. The MacKay report permits this if it is clearly demonstrated that it would be in the public interest and it is desirable to proceed before the three-year transition period has expired. However, as I will explain later, we have some concerns with both the public interest criteria and the public review process contained in the report.

I see some other areas as problematic. I'm speaking here of the recommendations dealing with ownership policies and proposals regarding mergers and acquisitions. These are critical areas for consideration for companies, such as mine, that have both a Canadian and an international presence. Let me elaborate.

As I mentioned, we have been very active in growing Canada Life by acquisitions. Since 1992 we have made three acquisitions in the United Kingdom, three in the United States, one in Ireland, and we are working on our second in Canada. But even with these, we have barely kept pace with what's going on in the marketplace. If there are new rules that inhibit or slow down our growth, our ability to enhance or even maintain our performance will be at risk.

This is not a theoretical argument; it is reality. Recently two raiding agencies—Moody's Investors Service and Duff & Phelps—gave Canada Life a negative outlook. Why? Because both felt we needed to be a bigger player in the Canadian domestic market. Citing the wave of consolidations in Canada, Moody's said large top-tier companies enjoy a competitive advantage over companies, including Canada Life, that they now say form a second tier. For Canada Life to become a top-tier company as defined by Moody's, we need to become larger.

Viewed in the context of what might be called this street reality, I find the report's somewhat implicit bias against creating larger-sized companies troublesome. On page 112 the report states:

The evidence we have reviewed does not sustain a case that, for most purposes, size is a strategically important variable—

Well, I can assure you, when you head up a company just given negative outlooks, principally because our domestic presence isn't substantial enough, size is indeed a strategically important variable, regardless of any theoretical arguments to the contrary.

In defining what size constitutes a large financial institution, the report uses a $5 billion shareholders' equity criterion. Ownership rules and public review of mergers are then related to this figure. For a definition of “large”, $5 billion is too low; $5 billion in shareholders' equity would not put a company in the top tier globally, and it is still much lower than that of the major banks. I'd suggest a minimum of at least $10 billion.

Turning to the ownership issue, the report recommends that financial institutions with shareholders' equity exceeding $5 billion be widely held. Institutions with less than $1 billion in shareholders' equity could be held by anyone who is approved as fit and proper by the Minister of Finance. Institutions with shareholders' equity greater than $1 billion and less than $5 billion would be required to have a minimum of 35% of their voting, participating shares widely held and publicly traded.

These three differing ownership requirements based on size will add costly complexity and leave in doubt what happens when a company moves either up or down one or more size categories. The regulatory framework should focus on fostering strong, agile, competitive financial institutions that can respond quickly to a fast-changing marketplace, and not set up rules that will require difficult interpretation.

Size is also a criterion for the public review process for mergers. The review process is required whenever two institutions plan to merge to form a new company with at least $5 billion in shareholders' equity and each of the two merging institutions has at least $1 billion of shareholders' equity. Mergers, by definition, involve extensive management time, corporate energy, and cost. Requiring a cumbersome public review process for relatively small mergers seems to be an unnecessary additional burden.

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Also, the public review process includes consideration of domestic public interest. With the exception of a nod to international competitiveness, the criterion seems to ignore the legitimate interests of our stakeholders abroad, which, depending on circumstances, could be unfair. We employ significant numbers of staff in the United Kingdom, Ireland, and the United States. In fact our operations in the United Kingdom are almost as large as those in Canada. With half our business and participating policyholders outside Canada, we have a responsibility to balance their interests. It seems to me that the public interest criterion needs to more fully recognize the fact that some companies have significant numbers of important stakeholders outside Canada.

I began my remarks by saying that the regulatory framework being considered must encourage and foster as much freedom of choice and innovation as possible. It must be prudent free choice, but free choice nonetheless. Canada needs a healthy, vibrant, growing financial services industry. The regulatory framework must allow companies to be agile and to quickly adapt to a changing and complex marketplace. The recommendations in the MacKay report, taken together with the modifications I've suggested, will go a long way to achieving those goals.

Thank you very much.

The Chairman: Thank you very much, Mr. Nield. We will now proceed to a question-and-answer session. This is a five-minute round for the following members: Mr. Ritz, Mr. Brison, and Mr. Discepola.

Mr. Gerry Ritz: Thank you, Mr. Chairman.

Thank you, Mr. Nield, for your presentation here today.

I have questions about a couple of points that you brought up. It sounds as if mergers and acquisitions worth billions and billions of dollars are old hat to you folks, so you maybe don't give it the same credibility as a lot of consumers out there do.

You talk about a cumbersome public review process for relatively small mergers. I guess I need to know the definition of “small”.

You say self-regulation in your industry is sufficient to safeguard consumers on these small mergers. I just wondered if you'd give me a little bit of thought on that.

Mr. David Nield: Maybe I could start off with the size and public interest question. What I was saying is the size of $5 billion is not a large firm as we look around, even in the context of the banks. My company has just over $2.5 billion of what's equivalent to shareholders' equity. I have 2,500 employees in Canada. If I were to join with another company of a similar size, we would have 5,000 employees in Canada. CNR announced this past week that in adjusting their size, 3,000 employees are deemed to be an appropriate change. So it's in that context that I ask, how do you balance the public interest?

The other dimension of course is, if I look at the spread of my total business across the four countries in which I do business, my Canadian equity is something in excess of $1 billion, and yet I'm regarded as solely a domestic company. If I proceed with the demutualization process, I will have policyholders and shareholders outside the country in excess of what I have in the country. I'm not sure how one balances the public interest criterion in a report that seems solely focused on domestic Canadian.

That is the context in which I was making my remarks.

Mr. Gerry Ritz: Okay, so do you have some points we should consider in the demutualization?

Mr. David Nield: The starting point is the basic question as to whether $5 billion is the right target figure for extensive public interest hearings. That's number one.

The second point is—and the lawyers in the group here may be better able to answer this than I am—the MacKay report talks in terms of “in the public interest”, which is a very high standard of requirement. I would have hoped, if there were public reviews, that it would be “anything against the public interest might not be considered”, which is a slightly different standard and a much more attainable standard. In that context, it might better balance the international stakeholders that a company such as mine has.

Mr. Gerry Ritz: Thank you.

The Chairman: Thank you, Mr. Ritz.

Mr. Brison.

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Mr. Scott Brison: Thank you.

To what extent, if implemented, will MacKay's recommendations on changes to the payment system affect your business in terms of the life insurance? How would it affect your business, and to what extent would there be take-up, or do you feel that you will utilize those—

Mr. David Nield: The CLHIA report this morning covered the subject very well. We do disburse considerable funds. Access to them through the payment system would be a convenience to many of our policyholders. It would not fit all, but it would fit many.

To put all this in perspective, life insurance companies are thought of primarily as protection companies. This is the traditional view of life insurance. In my own company, more than 75% of my assets are really in a mutual fund or savings context. So while we're not in the deposit-taking business in the same way as are the banks, which have many deposits of fairly small size, many of our products are in direct competition with mutual funds in banks.

We have many products with guaranteed interest, where we take sizeable deposits. It could have gone to a bank, but we're more competitive, so they will come to us. The ability for our customers to access those funds would be a convenience and would tie very much into the section in the MacKay report about the necessity to strengthen the life insurance industry as a competitive dimension. This would be one aspect of bringing that competition more readily to the surface, and it's something we would use. I can't say it would completely fall into place tomorrow, but it is a dimension that we would develop to enhance our competitiveness.

Mr. Scott Brison: You haven't expressed too much opposition to banks being able to broker life insurance, so you don't have a problem with that, right?

Mr. David Nield: No. I'm someone who believes in competition. Good companies prosper in the face of competition. The qualifications I would offer, though, are very much the same ones you've heard already this morning, namely: it should be a level playing field, the intermediary should be qualified and subject to the same licensing, and tied selling and privacy should be very strongly enforced. I acknowledge the point made that it's very difficult to know how to mandate that, but I'm sure tools are available to deal with it.

So I have no problem with the banks expanding their business. I might say parenthetically, though, that when I look at the rate of return of a bank and the rate of return of a life company, I can't imagine why anyone would want to get into a low-margin business. But I guess everybody sees other businesses as being easier, and their own as tough.

Mr. Scott Brison: That's a good reason to stay out of politics.

Voices: Oh, oh!

The Chairman: Thank you, Mr. Brison.

Mr. Discepola.

Mr. Nick Discepola: Thank you, Chair. I'll be sharing my time with Mr. Szabo.

I have a very brief question. Mr. Nield, on page 3 of your brief, you mention that you agree with the MacKay task force recommendation of having a three-year protection period following the period of demutualization.

Mr. David Nield: For hostiles.

Mr. Nick Discepola: For hostile takeovers, correct.

We had testimony before us last week from the Mutual Group, and I asked them why they insisted on having a three-year protection period on a friendly takeover. They were adamant that they wanted protection on both accounts, not only for hostile but also for friendly, negotiated ones. One of the reasons they gave was that undue influence or pressure might be exercised over the board of directors. So I'd like to have your comments as to why you feel— Which position should we adopt, theirs or yours?

Mr. David Nield: Well, obviously, I think you should be adopting mine. I hope I'm a strong advocate this afternoon for it.

It all ties back. The benefit of listening to a number of witnesses today, as I've had the opportunity to do, is that you can see the thrust.

• 1310

Mr. Peter Godsoe talked about the difficulty of a three- to five-year timeframe for strategic planning and charting the course of the organization. I now would talk about monthly. I talk in those terms not facetiously but because the marketplace is changing that quickly. Because I operate in four major geographical areas, I may see some of the changes faster than may be apparent in Canada. Things have a way of moving around the world, and therefore I'm seeing very rapid change.

A three-year complete lock-up to me would not be doing a service to the important stakeholders, the policyholders I have, the potential shareholders, or the community at large, because competition is moving forward very quickly. I feel quite strongly that a tie-in for three years against something deemed to be in the interest of the organization would tie our hands, and the world would pass us by.

As for the board of directors being unduly influenced, I can assure you that my board of directors would not be. I can tell you that they subject anything I raise with them to very intense scrutiny, questioning, and probing. They're very much their own people. They have what they think is right, and they will listen to what I have to say, but in the end they'll make their own decisions. So I don't see the undue influence on a board of directors.

Mr. Nick Discepola: Thank you.

The Chairman: Mr. Szabo.

Mr. Paul Szabo: Thank you.

Great-West Life and Mutual Life both came before us, and their concerns were similar. Great-West Life surprised me though; they gave a very blunt assessment that they cannot compete because there is not a level playing field.

Don Stewart from Sun Life came before us—he's one of my constituents, by the way—and said, “I support the principles of open competition and consumer choice, and we can compete.” I sense that you're closer to the Sun Life position vis-à-vis those issues that MacKay has brought forward.

It's interesting that the life industry doesn't seem to have a homogeneous position on this, and I have a feeling that a lot of it has to do with the whole issue of coercive tied selling, or the substantial influence, and whether or not you could really set up some rules and regulations so that all parties in the industry could compete in a financial services segment. How do you feel about being able to compete and achieve a level playing field?

Mr. David Nield: Thanks for the question. I wouldn't mind, though, pointing out that I was delighted to see that Sun is following Canada Life's position, rather than the other way around. He did testify earlier, but—

The Chairman: We'll take that as a point of clarification.

Mr. David Nield: Thank you. In fact I've been saying much the same thing for a long time now.

There are two aspects of that. First of all, I'm very used to competing with banks in the United Kingdom and Ireland. They've had bancassurance there for more than 10 years. We've competed very effectively and nicely with them. They've obviously taken market share, but at the same time, we can compete.

Concerning the issue, though, of tied selling and privacy—and I think you've had anecdotal evidence here that privacy is a concern—it was an issue for us in Ireland several years ago. We had examples of someone buying a policy with us, the cheque clearing the bank, and before we knew it, the bank had sold that individual insurance. This is anecdotal, but you can see how privacy is compromised when the bank manager sees a cheque obviously made out for an insurance premium and then decides to send an agent in and change the sale. So I agree with those two issues.

But equally important, as you heard from the CLHIA this morning, it depends on distribution. How do you sell your products?

My company is what I would characterize as multi-channel. We do it in a number of ways. We have agents in branches, we sell through brokers, we sell through stockbrokers, and in our property and casualty company, we sell through the Internet. I can deliver our products to the consumer in whatever way the consumer wants to deal with me. I'm not solely on one channel or another.

• 1315

The companies you mentioned are, in terms of the individual products, essentially single-channel companies. It may be a tougher competitive item, which is one of the reasons there is diversity in the industry. We all have differences. We have some common goals and interests, but in the end, we're competing very vigorously with each other. When there are 130 companies in your industry plus banks as well, if you can't compete, you won't be around.

Mr. Paul Szabo: Thank you.

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

Mr. Nield, thank you very much for your presentation.

Mr. David Nield: Thank you.

The Chairman: We will certainly review it and take the best parts out of it. Thanks very much.

We're going to suspend for approximately 30 seconds.

• 1316

• 1317

The Chairman: I call the meeting to order. I'd like to welcome the president and CEO of Manulife Financial, Mr. Dominic D'Alessandro.

Of course you know how the finance committee operates. You have approximately 10 to 15 minutes to make your presentation, and thereafter we will engage in a question-and-answer session. Welcome.

Mr. Dominic D'Alessandro (President and Chief Executive Officer, Manulife Financial): Thank you very much, Mr. Chairman and members of the committee. I won't need the 15 minutes; my comments today are quite brief.

I want to thank you first of all for inviting me to address you. I'm here out of the conviction that you as legislators and we as business people are facing one of the most critical periods in the history of the evolution of the financial services sector in Canada. We have a responsibility to work together to shape a financial sector that remains strong and among the very best in the world. It's important that we get it right.

Before turning to some of the specifics of the MacKay report, it is worth while to highlight the significance of the financial services sector within the Canadian economy as a whole. The sector represents fully 5% of GDP. It provides 550,000 direct jobs, of which 100,000 are in the life insurance industry. The sector is a major player in Canada's international trade in services. Most of our larger financial institutions have the scale and capability to compete with the best in the world and do provide Canadians with a quality of product and service that is second to none.

The challenge before us is to ensure that the vibrancy and competitive spirit that have characterized the sector to date continue. That is why we at Manulife are very pleased that the MacKay task force recognized the need for structural adjustments, such as increased access to the Canadian payment system, the rapid demutualization of life insurance companies, and the removal of competitive inequities that currently prevail with regard to consumer insurance plans.

We are also encouraged by the task force's comment on the potential for the life insurance industry to play a broader role in providing financial services to Canadians, perhaps even emerging as a viable alternative to our chartered banks.

However, I have to tell you that one cannot escape the reality that banks command an extraordinarily dominant position in the financial services sector in Canada. We do not believe this dominance is likely to change in the near term. On the contrary, it is our view that unless the retention and strengthening of an independent life insurance industry is made an explicit public policy objective, the banks will come to dominate our industry, just as they have done in the case of trust companies and investment dealers.

Today I want to briefly comment on three issues that are fundamental in this regard: widely held ownership, demutualization, and the treatment of business combinations.

Manulife supports the task force's recommendation that the widely held ownership regime, also referred to as the 10% shareholding limit, be retained for large institutions in perpetuity. This policy has served our industry and our country well. I am convinced that without it, our financial services sector would not have evolved into the strong and competitive sector it is today, nor would it be domestically controlled, as it is today.

• 1320

Canada's mutual life insurance companies are very much a part of the widely held ownership tradition. However, we have now reached a critical juncture in our evolution as we transform, through the process of demutualization, to publicly held stock company status.

Demutualization will improve our competitive position by allowing us to raise equity capital and thus compete on a level playing field with most other financial institutions. Demutualization will also expose us fully to the healthy discipline of the financial markets. And demutualization will improve our ability to attract and retain quality management.

As important, demutualization will also provide substantial benefits to our policyholders. They will receive equity shares or cash representing 100% of the value of the demutualizing companies. At the same time, their policy entitlements will not change.

The demutualization of the four major mutual insurers will likely represent the single largest distribution of wealth in Canadian history. An estimated $10 billion will be distributed to approximately 2 million Canadians. A simple calculation shows that the average distribution will be about $5,000. In Manulife's case the average will be $7,000. In either event, the amount will be a very tangible reward to the policyholders.

Demutualization will also have a very positive impact on the Canadian economy. The distribution of equity to Canadians will provide an important stimulus without imposing a fiscal burden on the government. In fact tax revenues will rise as policyholders crystallize their new wealth.

The MacKay task force report strongly supports demutualization as being positive for the sector and in the best interests of policyholders and of the companies themselves. Over the past several months, we have consulted and communicated with our policyholders and we have worked closely with policymakers to develop draft regulations that ensure fair and equitable treatment of policyholders.

We are now engaging you as parliamentarians. We hope you will agree with us that it is urgent to complete the demutualization process. We ask you to support the earliest possible passage of necessary legislative amendments, which, we have been advised by the government, will be introduced imminently.

Demutualization is a worldwide development that is under way in South Africa, Australia, the U.K., and the U.S. In all demutualizations that have been completed to date, policyholders have voted overwhelmingly in favour of demutualization. Our expectation is that they will do so in Canada too.

But we must recognize that the modernization of our ownership structure is just the first step in the transformation of our companies. It will take time for the markets to adjust to our new public company status and it will take time for us to make the internal cultural changes entailed in becoming a public company. In Manulife's case, given the quality of our franchises and the strong potential of our businesses around the world, the reality is that once demutualized, we—and in my view, other demutualizing companies—will represent attractive takeover targets.

The task force has recognized this situation and has recommended a three-year transition period free of hostile takeovers and merger proposals. However, this is too brief a transition period. A five-year period would be a more realistic timeframe in which to establish ourselves as strong, stand-alone public companies.

The task force further recommends that the ban on merger transactions should not extend to friendly transactions amongst the demutualizing insurance companies themselves. The task force feels a prohibition on such mergers would unnecessarily restrict the industry's ability to consolidate. Manulife agrees with the task force and strongly recommends that mergers between consenting demutualized life companies be permitted during any transition period.

It is to be noted that after the transition period, the task force's recommendations would allow the takeover of a large demutualized life company by a chartered bank. Indeed the acquisition of one or all demutualized companies is easy to foresee. It could be argued that such takeovers would be counter to the vision put forward by the task force of an independent life insurance industry competing vigorously with the large established banks.

• 1325

Which brings me back to the essential point made earlier: that favourable public policy considerations will be necessary if insurers are to have the desired opportunity to blossom. These considerations, I repeat, would include, among other things, access to the payment system, government support of our consumer protection plans, a widely held ownership regime, and an extended transition period.

The recommendations we are making today greatly increase the prospects for the emergence of yet more Canadian-based, world-class financial services enterprises. I hope you will agree with me that this is an objective worth striving for.

Thank you for the opportunity to speak with you today. I welcome your questions on Manulife's response to the task force and indeed on any of our activities.

The Chairman: Thank you very much, Mr. D'Alessandro. We'll now proceed to the question-and-answer session.

Mr. Ritz.

Mr. Gerry Ritz: Thank you, Mr. Chairman.

Thank you, sir, for your intervention here today.

You raised a couple of points about the phase-in periods and so on. You're calling for a five-year phase-in rather than the two- or three-year period that's been kicked around. Also, you're taking the stance that the three-year lock-up, as Mr. Nield called it, on friendly mergers should be negated. You say they should be allowed.

How do we as legislators balance the act between no bank mergers during that five-year phase-in period, as you're calling for, and yet if the bank mergers are friendly— How do we rationalize all of that out there? I understand it's an apples and oranges type of thing, just the semantics of it.

Mr. Dominic D'Alessandro: I'd begin by pointing out the position of the various insurance providers in the country relative to the position of the banks. If you added up all of the approximately 100 life insurance companies in Canada, you might end up with an entity the size of the Royal Bank. So the merging of some of the insurance companies doesn't have the same consequences for the Canadian economy or the Canadian consumer as do the bank mergers being proposed, where they each have a very high share of the market.

Plus, substitutes for our products are available from other providers, and our products are not as essential to the functioning of an economy on a day-to-day basis as are the products and services offered by banks. How many times do you talk to your insurance company? Contrast that to how many times you talk—

Mr. Gerry Ritz: Hopefully not that often.

Mr. Dominic D'Alessandro: That's right. Most people's contact with insurance companies is quite a bit different. The bank mergers have much more consequence.

The MacKay report asks that these things not be outlawed on a knee-jerk basis but rather be subject to full scrutiny and so on. The government's process in this thing has been dead-on.

Mr. Gerry Ritz: Are there two separate factors at work here—the mergers as one, and the financial sector upgrades that we're seeing? Should they be handled as two separate entities?

Mr. Dominic D'Alessandro: The demutualization of the life insurance industry and the modernization of our capital structures and so on—

As I mentioned in my comments, demutualization is a worldwide phenomenon; it's not just happening here in Canada. It's happening because the capital structures are felt to be no longer relevant to the way the financial system is evolving. There are a lot of reasons for this: globalization, technology, demographics, and consumer preferences. All those things play a role.

It would be wrong to mix the demutualization initiatives with the bank merger initiatives that are under way. They are two completely separate issues.

Mr. Gerry Ritz: Thank you

The Chairman: Thank you, Mr. Ritz.

Mr. Szabo.

Mr. Paul Szabo: Thank you.

Thank you for your presentation. Actually it's a little bit refreshing to see that we're looking a little farther out. This is an industry that is not concerned about being gobbled up by banks but is going to be a big player down the road as the industry matures and the demutualization process takes place. It's kind of interesting.

The way I read it, you said that you see the appetite for takeovers or mergers in your industry as inevitable and that you need a little longer period. It would helpful if you would elaborate on exactly why you would be more susceptible to that tomorrow than you would be today.

• 1330

Mr. Dominic D'Alessandro: Thank you very much. I'll use the opportunity of your question to tell you a little bit about Manulife's vision.

Manulife is a bit like Canada Life. We operate in a dozen countries. About 65% of our revenue and profits come from outside Canada. We recently celebrated our 100th anniversary in Hong Kong; we've been in Asia for a long time. We're the second company in the world to be licensed to do business in the People's Republic of China. We have a big business in Indonesia, Korea, Taiwan, Singapore, and the Philippines. We have a very big business in the United States, and we have a business here.

We see that we have the makings of and an ability to create in Canada what I call yet another world-class financial services company. By the way, I happen to think our banks are capable of competing with anybody in the world.

We need some time to do that. The day after we demutualize, our company is going to be owned by 700,000 people around the world, none of whom will know that they own the company. Most mutual company policyholders bought their insurance policy, not because they wanted to become an owner, but because they wanted the protection or some other feature that they acquired from the insurance company.

So you can imagine if, let's say this time next year, all these people who own the stock and don't really know what Manulife's prospects are receive an offer in the mail to buy the stock at 25% more than it's listed for on the stock exchange. It would be very easy for the people to be tempted into selling their position.

As well, as a mutual company, to operate a certain way— As Mr. Nield, the previous witness, asked, why would people want to go from a business earning 18% returns into a business earning 6% or 7%? Hopefully, as a public company, and as you start to organize your affairs, you will be able to earn better rates of return.

It will take some time for you to transition from a mutual company status, where some would argue the focus has been on different things, to one where the focus is on properly or fully employing the capital that your policyholders or your shareholders have made available to you. There are publicly owned life insurance companies that earn very good rates of return. Great-West Life is one of them in this country.

Realistically, you need time for the markets to get to know you and for you to get around the world to tell your story to these institutional investors so that they can do a proper— And you'd be very vulnerable if you didn't have the time. We're a very large company. We're not as large as the banks, but we have very diverse operations in different parts of the world, and to get them all humming the same way, it's going to take some time.

It's unreasonable to think you could do that in two years.

Mr. Paul Szabo: The P and C sector and the brokers all write to us regularly. I was just looking at a letter from another constituent who is the president of GRCS Insurance Brokers Inc., and they're frightened. They're frightened that they will go out of business with bank branches selling.

But it's a little bit different on the life side, because even more so, the advice-based service and expertise being offered give you a lot more insulation. That can't be developed very quickly.

If it were to open up, wouldn't the life companies be concerned that if the bank branches were able to market life products, they would instantaneously go out and virtually cherry-pick the best people out of the life sector?

Mr. Dominic D'Alessandro: Yes. There are really two things. As some of the earlier witnesses were describing, it is a fact that banks are in the insurance business right now. They do write a fair amount of insurance through subsidiaries, and they will in time, with those subsidiaries, garner a bigger and bigger share of the market. And of course, to the extent that they get that business, it doesn't go into the life companies, and the pie is only so big.

Of course what the banks want is the ability to use their data banks to target market, and in the process, cherry-pick customers. There are concerns about coercive tied selling. Did you know that 80% of the mortgages that people take at banks have life insurance attached to them? You should ask your banking witnesses to tell you how much money they make on that insurance. It's a tied product. The customer is free not to take the insurance, but as I say, 80% of them take it. So that's another concern.

• 1335

Our company's view is that inevitably, as the blurring of products continues, banks will get into our business. And they will get into our business in the way they want. It's just a question of when. That's our view.

There's revolutionary change and there's gradual change. If you were to let them in tomorrow, I think it would be very disruptive—maybe not so much to a company such as Manulife, because of our businesses elsewhere, but it would be disruptive to the 50,000 people or so who sell insurance in Canada in different communities. It would be very disruptive. If it were phased in gradually—

In Australia, where they let the banks distribute insurance, the agent population over a period of time contracted, I'm going to say by a factor of five. It contracted very significantly. The consumer is now getting his insurance. There are agents still working; there just are not as many of them. We think that will happen here in time as well.

Mr. Paul Szabo: I like your optimism for the future of the industry. It's good to know.

Mr. Dominic D'Alessandro: But as I emphasize, we need some favourable public policy considerations. We're not asking for any handouts. We just want a chance to be able to stand on our own two feet. If we don't get an umbrella of some kind—

You saw the Royal Bank made an offer to buy London Life. Why did it offer to buy London Life? Well, because Great-West Life wasn't available and because none of the mutuals could be bought. But as soon as the mutuals become available, especially if they're not allowed to merge amongst themselves, all of them are sitting targets.

Mr. Paul Szabo: A previous witness said, “Don't do it fast; do it right.” I have a feeling you agree.

Mr. Dominic D'Alessandro: Yes, I do.

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

The Chairman: Thank you.

Mr. Discepola.

Mr. Nick Discepola: I have a very brief question, Mr. Chairman.

I want to take the benefit of Mr. D'Alessandro's experience in both the banking sector and the insurance sector.

I share an awful lot of your concerns, and I do believe we have a very difficult decision, but it has to be made.

On the question of demutualization, sir, even if we were to go beyond the three- or five-year period, I don't believe that's really relevant. My viewpoint is that we probably should disallow hostile takeovers altogether. Doesn't it seem inevitable that even after the five-year or three-year protection period, you will be tempting targets for the banks, and inevitably they're going to swallow you up anyway?

Mr. Dominic D'Alessandro: That's a good question, and it gives me an opportunity to make two points that I'd forgotten to make.

The five years that we at Manulife are advocating is the normal practice in other countries where mutuals have demutualized. In the state of New York, for example, they have a five-year period during which the demutualizing company cannot be acquired. Why do we want the five years? It's exactly to be in a position to avoid the situation you've described.

Manulife by itself, when we become a public company, assuming reasonable markets, will have a market capitalization of $10 billion or maybe more. That's not too far, you know, from some of the Canadian banks. If in fact a few Canadian mutuals or Manulife decide to merge with someone else, if we use that five years properly, there's nothing to say we can't have a capital base bigger than what the Canadian banks have, and then we can stand along beside them.

This AIG company, which someone was mentioning earlier this morning, has a market capitalization, by the way, greater than that of Citibank and Travelers put together. Yet most people don't know that. It's one of the wealthiest and strongest companies in the world. It is possible for us to dream of creating a mini-AIG that's based here in Canada. That would be good for Canada, for Manulife, for our employees, and for our policyholders.

Our company on Bloor Street in Toronto has 2,000 people, and thank goodness we have them there, because of the dollar and so on. They are busy servicing— All the administration of our U.S. business is done in Canada. That's good for Canada and it's good for us.

• 1340

Public policy should be working to foster the creation, not of fewer and bigger companies, but of more strong, capable companies. The argument being put forward that these banks have to come together in order to hold on to their territory and compete internationally is nonsense, absolute nonsense. They've been at it for nine months, trying to sell it to the Canadian public, and they're not having big takers, because the storyline is nonsense.

Mr. Nick Discepola: One of the other requests that the banks are making is that if the widely held rule of 10% ownership applies to them, maybe it should apply to all the financial services sector. How would you see that restriction applying to your sector?

Mr. Dominic D'Alessandro: We're asking for the 10% rule for the five years. After five years, if we can't stand on our own, then another bank or another financial institution that's widely held itself and that complies with the law of Canada should be free to take us over.

The 10% rule, as I said in my opening remarks, has served this country extraordinarily well. Our economy is highly concentrated for a small country such as ours. Would you really have wanted some of those conglomerates that got in trouble not so long ago to own the Royal Bank? Would you have wanted that? I don't think so. I don't think you want even more concentration.

The fact is that credit-granting and the intermediation process are different from any other business. They're the ones who decide who gets credit and who doesn't. There are all kinds of issues to do with sovereignty that are commingled with the idea of management of the banking system. You don't want that managed in too few hands, nor do you want it managed by foreigners.

The notion that we should throw away the 10% rule and allow all the foreigners to come in here and buy our big banks is insane. There isn't any industrialized country in the world that would allow that. They may not have a 10% rule, but believe me, they have other rules that would stop it.

Mr. Nick Discepola: Would you be in favour of increasing that to 20% or some other number?

Mr. Dominic D'Alessandro: MacKay was realistic in the recommendations where he essentially said there may be temporary periods or there may be a need to affect certain things if you're doing a large acquisition where you want to pay in stock and so on. So yes, the flexibility—

The 10% has worked well. Once you get too large a shareholding— One of the reasons for the 10% rule was to avoid undue influence on the operations of the bank by any one owner, because sometimes the owner and depositor interests may be in conflict. That's a good rule. Again, it's served this country well.

Mr. Nick Discepola: So you think the bottom line is that your industry will be able to withstand the challenges if we—

Mr. Dominic D'Alessandro: The bottom line is that if we had this meeting five years from now, there wouldn't be as many of us talking to you. There is no room in Canada for 100 life insurance companies; there just isn't. And as I said earlier, as the banks get into the business—even if they only get into it in the way they're allowed to get into it, through subsidiaries—they're going to take away business.

In the last three or four years, who have we seen leave? We've seen New York Life, Prudential of England, Prudential of the U.S., Metropolitan Life, and a whole bunch of life companies leave Canada, because the market is not big enough to support everybody.

I think there's going to be a consolidation. My judgment is that maybe one or two life companies will survive along the lines that I'm describing, as stand-alone companies that could stand side by side with our large banks, but certainly not five or six.

Mr. Nick Discepola: Thank you very much.

The Chairman: Thank you, Mr. Discepola.

Mr. Pillitteri.

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

Good day, Mr. D'Alessandro. I'm sorry I was not here for your presentation, but I understand that you also are within the banking system. I forgot to ask this question of a previous presenter. They're talking in the U.S. about so many mergers going on and over 9,000 banks. I know there are more laws in the United States than there are here in Canada to protect the consumer. If the same laws were to be here in Canada as to how much deposit-taking they could have in one area, what would not be allowed in this merger here if it were in the United States?

Mr. Dominic D'Alessandro: I'm sorry; you're asking me whether in the U.S. the proposed mergers that are being discussed in Canada would be allowed?

Mr. Gary Pillitteri: Yes.

• 1345

Mr. Dominic D'Alessandro: No, there's no way in heaven that would be allowed in the United States. First of all, they don't yet have a national banking system. Even the merger of Bank of America and Nations Bank, which is going to create the biggest retail bank in the United States, does not have coast-to-coast banking; they're in 36 or 35 of the 50 states. The market share of that entity in the U.S. market is around 3% or 4%.

The merger of Citibank and Travelers, again, doesn't hit anywhere near the thresholds that we would be talking about in Canada. I don't think a bank that had the market share of any of our large five banks would be tolerated in the U.S.

Mr. Gary Pillitteri: Thank you.

You talked about the Manulife operation that you have all over the world. Are they being regulated in the United States similarly to the way we are here in Canada?

Mr. Dominic D'Alessandro: Yes. We have to comply—

Canada is viewed as having good regulation and as having financial institutions that are very respected and that operate soundly and properly. These other countries look to Canada as the lead regulator, but that doesn't obviate the fact that we have to comply with the rules and regulations in each and every country.

But the regulators in those countries place some reliance on our home country regulator.

Mr. Gary Pillitteri: So basically, when somebody brings up the bank mergers going on in the United States and all around the world, it does not really hold water here in Canada, because really, that would not happen in the United States.

Mr. Dominic D'Alessandro: No. I thought one of the earlier witnesses put it very well, and I think the Prime Minister put it very well too when he said if bigness was everything, then the Japanese banks would be fantastic. Of the 10 largest banks in the world, seven are in Japan. When was the last time you heard of an innovative Japanese bank? Ask yourself, are those banks delivering good services to the Japanese public? They're all strangled to death now; the whole country is paralyzed.

To just use asset size, the way our banks are doing—saying, “Well, look, this other company has twice as many assets as I have”—is ridiculous. As one of them said, assets are just a statistic; it's not a quality. There is nothing—and I say this to you as someone who was the chief financial officer of the Royal Bank, who was the president of a small Canadian bank, and who is now the president of an insurance company—there is absolutely nothing our large banks can't do in their present size that they will be able to do when they double their size, except maybe pass on more inefficiencies to the Canadian public.

Mr. Gary Pillitteri: Thank you.

The Chairman: Mr. D'Alessandro, you've worked both in the banking field and in insurance. As legislators, of course we seek public input and depend upon individuals like you, experts in the field, to give us some guidance. Yet we're in a unique situation with the issue related to mergers, because four of the top CEOs in this country are telling us the mergers are a good thing for the Canadian financial services sector. What do you think is motivating this?

Mr. Dominic D'Alessandro: I gave a speech to my annual meeting earlier this year, just after the Bank of Montreal-Royal Bank arrangement was announced. I started off my remarks by saying I admired what they'd been able to achieve. As businessmen, that's what we're taught to do. We're leading an organization, and we want to lead that organization to dominance. We want to lead it to a position where it's unassailable by competition, where its standing is unchallengeable, where it can withstand whatever threat is in front of it. So this is what they're trying to do.

In my judgment, the mergers are all about dominance of the domestic market. It's all among hegemony and ensuring that forever, whatever happens, no one is going to touch this franchise. That is their big strength; I don't fault them for doing that. That's what we as businessmen are supposed to do. In the process of trying to create wealth and using capital wisely and so on, we're taught to enjoy market share, to enjoy market position. This is what Mr. Gates is being criticized for.

• 1350

The Chairman: So in your business, that's a natural process. As a matter of fact, you also stated yourself that you'd like your company of course to grow and to merge if possible.

Mr. Dominic D'Alessandro: Sure, exactly. Don't get me wrong; this is not an ignoble ambition that these people have, not at all. If they can pull it off, fantastic.

The Chairman: So you're saying if you were a CEO of one of the banks, you'd probably think that way as well.

Mr. Dominic D'Alessandro: I might not have done it exactly the way they did it.

The Chairman: Okay.

Mr. Nick Discepola: You would have waited until afterwards.

Mr. Dominic D'Alessandro: I might have. I might have handled it somewhat differently.

The Canadian banking system has the base in Canada with which to— How many companies in our country have a capital base as large as theirs, have a market share as large as theirs, and have a guaranteed income stream from the consumer banking side of $1 billion-plus a year? How many companies are there like this?

I'm competing against them in certain products, but I'm seeing what I'm trying to do in our company around the world. When I hear them, I say, “Christ, if I have to listen to these guys, and if it's true what they're saying, maybe I should tell my board we shouldn't get out of bed in the morning, because if they can't compete, what can we do?” What should the rest of Canada be doing? Don't you think—

These companies that have all of these resources are claiming that the world is coming down on their necks and we'd better give them dominance in the domestic market, otherwise God help us. I wouldn't buy that one.

The Chairman: But you're saying it's a natural process.

Mr. Dominic D'Alessandro: Well, yes, and that's why we have a Parliament. That's why you people are doing what you're doing. There's a natural tension here between what's in the public policy interest and what's maximizing business profitability. We have to have rules of the game.

I don't fault Mr. Gates for wanting to dominate. Everybody can look at the wealth he's created and say, “What a great thing.” But is he getting so big that he's maybe stepping over the rules? There have to be rules. That's what this is about. There are rules in this country, and these proposed mergers are being examined. I'm giving you my view unvarnished.

The Chairman: As you know, Mr. D'Alessandro, this committee is not reviewing those two proposed mergers. We're looking to provide the Minister of Finance with some guidance as to what the financial services sector should look like in the future. We have found, however, that most people come to the committee and speak very much about the present. And a good number of them also like to protect their own firms—

Mr. Dominic D'Alessandro: Of course.

The Chairman: —which is also a natural thing to do.

As legislators, though, we have two major tasks. One of them is to make sure the public interest is protected, and that's first and foremost in our minds. Also, we have to be, and people look to us to be, a little bit ahead of the curve on as many issues as possible. So this is basically a tradeoff in the push and pull factors that we have to deal with.

I simply want to tell you that you've been quite helpful in identifying some of the key issues that concern your industry, and for that we're very grateful.

Mr. Dominic D'Alessandro: Thank you very much.

The Chairman: Thank you very much.

The meeting is adjourned.