FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, September 28, 2000

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[English]

The Clerk of the Committee: Honourable members, I see a quorum.

Pursuant to Standing Orders 106(1) and (2), your first item of business is to elect a chair. I am ready to receive motions to that effect.

[Translation]

Honourable members, I see we have a quorum. In accordance with Standing Orders 106(1) and 106(2), the first item on our agenda is the election of the chairman. I am ready to entertain motions to that effect.

Mr. Cullen.

[English]

Mr. Roy Cullen (Etobicoke North, Lib.): Madam Clerk, I would like to nominate for chair my very distinguished and competent colleague, Mr. Maurizio Bevilacqua.

Mr. Rick Borotsik (Brandon—Souris, PC): Excuse me, Madam Clerk, which one is he?

Some hon. members: Oh, oh!

Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.): There's only one in Canada, just in case you want to know.

[Translation]

The Clerk: So moved that Mr. Bevilacqua take the chair of this committee,

[English]

that Mr. Bevilacqua do take the chair of the committee.

Mr. Epp.

Mr. Ken Epp (Elk Island, Canadian Alliance): Before we vote for him, I want just simply to extract from this member a commitment that he'll be very fair to all the members of the committee.

Mr. Maurizio Bevilacqua: Absolutely.

Mr. Ken Epp: There you go.

Mr. Maurizio Bevilacqua: So help me God.

Some hon. members: Oh, oh!

[Translation]

The Clerk: The motion reads as follows:

[English]

that Mr. Bevilacqua do take the chair of the committee,

[Translation]

that Mr. Bevilacqua do take the chair of this committee.

[English]

(Motion agreed to)

Mr. Rick Borotsik: Mr. Chair, I would assume that you hope that all elections go that easily for you, don't you?

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): Yes. Thank you very much.

The next item of business is the election of vice-chairs. Mrs. Barnes.

Mrs. Sue Barnes (London West, Lib.): I would like to nominate for government vice-chair Nick Discepola, who is not here today but who has consented to act in this capacity.

(Motion agreed to)

The Chair: Congratulations to Mr. Discepola.

We also have another vice-chair to be elected.

Mr. Ken Epp: I can't elect myself, can I?

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): I'll nominate Mr. Epp.

(Motion agreed to)

The Chair: Congratulations, Mr. Epp.

Mr. Ken Epp: It's my honour and my privilege.

The Chair: You didn't even know you were going to become vice-chair coming into this.

Mr. Ovid L. Jackson (Bruce—Grey—Owen Sound, Lib.): Are you sure you want to be chairman of vice?

The Chair: The order of the day, as everyone may know, is that we'll move right into our work schedule with Bill C-38, an act to establish the Financial Consumer Agency of Canada and to amend certain acts in relation to financial institutions.

I'm going to ask the witnesses from the Department of Finance to come forward. We also have representatives from the Office of the Superintendent of Financial Institutions Canada.

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I understand we're going to be viewing a presentation. Hard copies are going to be available for everyone.

We'll suspend for two minutes to get everybody set up and for the members to receive the hard copy of the slide presentation.

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The Chair: We're ready to begin. I'd like to welcome everyone once again.

We're going to have some opening comments from Mr. Frank Swedlove, who will also introduce the rest of the panel. Mr. Swedlove, welcome. Thank you for the large book you sent us. We really appreciate that.

Mr. Frank Swedlove (General Director, Financial Sector Policy Branch, Department of Finance Canada): Thank you, Mr. Chairman. Today I don't actually have any opening comments because we do have a full presentation to make. We'd like to take you through these PowerPoint presentations.

But I'd like to start off by introducing my colleagues at the table: from the Department of Finance Canada, Leah Anderson, Gerry Salembier, and Eleanor Ryan; Rhoda Attwood from the Department of Justice and who also works in Finance; and from the Office of the Superintendent of Financial Institutions Canada, Norm Bergevin.

If you would agree, Mr. Chairman, I'll proceed with the presentation.

The Chair: Sure.

Mr. Frank Swedlove: I'd be pleased after the presentation to respond to any questions committee members may have.

We have been involved for some significant period of time in reviewing the financial sector. Perhaps I could just explain a little bit of the history. We started our work with a review of the payment system in June 1996. That was followed by the establishment of the Task Force on the Future of the Canadian Financial Services Sector in December 1996. That task force reported in September 1998. That was followed by public hearings by this committee and also by the Senate banking committee in the fall of 1998, and both committees did reports in December of that year. That was followed by the government policy paper on the financial sector, which was released in June 1999. Then, of course, the bill was tabled on June 13 of this year.

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All of this work led to a framework that had four basic themes. The first theme was to promote efficiency and growth in the financial sector, the second theme was to foster domestic competition in the Canadian marketplace, the third was to empower and to protect consumers, and the fourth was to improve the regulatory environment. All of the legislation and policies somehow tie into one of these four themes.

The instruments we have in order to bring forward this framework are as follows. First and most important is the legislation, Bill C-38. There are also government policy statements and initiatives. We will be introducing a number of regulations once the legislation is passed. We will also be introducing guidelines, for example in the areas of merger review and control.

I'd like to now go through the individual acts that appear in Bill C-38.

The first one is the Financial Consumer Agency of Canada Act. This is a brand new act. This act will consolidate and strengthen existing activities that occur in several agencies in Ottawa today.

The function of this agency first will be to administer the consumer provisions of federal financial institutions legislation, and that very much is a regulatory function. It will monitor and report on self-regulatory initiatives, it will provide consumer information, it will improve consumer education in the financial sector field, and it will forward specific complaints to the appropriate ombudsman.

In terms of governance, the agency will report to the Minister of Finance. It will have a GIC-appointed commissioner. It will have the right and the ability to impose administrative monetary penalties, or fines, and it will have additional powers as provided by the individual financial institutions' acts.

The agency will be financed by assessments on the financial institutions themselves. It will not be expensed out of the CRF. This is general practice for all regulatory agencies.

Now I will turn to the Bank Act, which is the act most affected by Bill C-38. The first provision regarding the Bank Act is to lower the minimum capital requirements to start a bank. Previously it was required that a bank have $10 million of capital for start-up. That has now been dropped to $5 million. The objective here is to encourage new entry into the marketplace, particularly raising the possibility of small community-based banks throughout the country.

In terms of measures to improve corporate governance, the Bank Act states that the conduct review committee will review related party transactions. There is a provision that will reduce the existing requirement that three-quarters of the directors be Canadian residents; this will be reduced to two-thirds of directors required to be Canadian residents. There will be a requirement that one unaffiliated director should be at all meetings of statutory committees, and there is a provision that says civil servants may sit on the board of a bank when a bank is owned by a co-operative for civil servants.

In the area of merger review, the legislation lists the factors the minister may consider in the review of a merger, and it also authorizes the minister to impose sanctions for non-compliance with any merger terms and conditions given by the institutions that are merging.

The next graph shows the merger review guidelines. I wish to note this is not in legislation but rather is a draft version of the guidelines that were provided at the same time as the tabling of the legislation. What we have here is a process that we think adds to transparency and provides greater public input.

What would occur is that the merger parties would prepare a public interest impact assessment, and that assessment would be tabled with this committee. This committee would review the impact assessment and presumably also obtain views of Canadians and provide their views to the Minister of Finance.

I should mention by the way that this involves mergers of banks greater than $5 billion in equity.

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At the same time as this process with the House finance committee, the Competition Bureau will be reviewing the merger as required under the Competition Act. Also it would be looking at the prudential issues related to the merger. The finance minister then would look at all of these inputs and would make a decision as to whether to proceed to negotiate remedies. If successful remedies could be negotiated, then the merger could proceed.

The Bank Act also has changes to the rule for widely held ownership. Here there is a desire by the government to permit significant share exchanges to allow strategic alliances and joint ventures. Therefore the government is changing the rule for widely held ownership from the present 10% limit to 20% for voting shares and 30% for non-voting shares.

Bill C-38 also establishes a size-based ownership regime. There are essentially three categories of banks. There are the large banks, with greater than $5 billion of equity, and these banks are subject to the rule for widely held ownership that I just described. There are also medium-sized banks, between $1 billion and $5 billion, and they are subject to a 35% public float. That means 35% of the shares of that bank must be traded on a Canadian stock exchange. Then for small banks—that is, those less than $1 billion—there will be no ownership restrictions.

Also, in order to ensure that control of large banks is not being exercised by any one shareholder, we will be introducing control guidelines, which will state that a single person or persons acting in concert will be prohibited from controlling that bank. We are now working with stakeholders on developing guidelines for control.

What about existing small and medium-sized banks that are subject to the rule for widely held ownership at this time? They will continue to be widely held. However, there is the ability to reclassify these banks to permit ownership greater than 20%. That will be at the discretion of the minister. As a matter of government policy, the minister has stated that he will consider the public interest when assessing a reclassification and he will require approval of two-thirds of the shareholders and a majority of the directors before approving any reclassification.

Also as a matter of policy, the government has stated that large banks will not be allowed to acquire or merge with large demutualized insurance companies. This same restriction will apply to the holding companies of large banks or large insurance companies.

There are a number of consumer measures in the Bank Act, and I will go through these quite quickly.

The first area is in the opening of an account. In 1997 there was an agreement between the Department of Finance and the banks with respect to the kinds of identification required in opening an account. The government has decided to legislate this 1997 agreement, and banks will be required to open an account and cash federal cheques, as long as the customer can provide basic identification, unless fraud is suspected. Neither employment nor a minimum deposit is required in order to open an account.

In the area of low-cost accounts, the legislation provides for regulation-making authority to define a low-cost account. We have decided for the time being to work with the institutions to prepare a memorandum of understanding that will ensure the banks provide a low-cost account. These low-cost accounts will have a low monthly fee and will have some in-branch transactions. The government has stated that if problems exist with this self-regulatory approach, then we will be in a position to regulate a low-cost account.

In the area of branch closures, the government has stated that there will be a minimum of four months' notice before a branch can be closed. In rural areas, six months' notice will be required to close the last branch within a ten-kilometre radius.

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There will also be the ability for consultations to take place with affected communities in certain prescribed cases and the ability to make regulations to establish exceptions to the branch closure regime, for example, in the case of an act of God or in the case of public safety.

There will also be greater public accountability. Financial institutions with equity greater than $1 billion will be required to prepare a public accountability statement. This will describe an institution's contribution to the Canadian economy and to society.

There will also be the establishment of a Canadian Financial Services Ombudsman. The legislation requires that banks join this designated complaint-handling body, the CFSO, and the minister may appoint a majority of the directors of the CFSO. The minister will also approve its bylaws and amendments. Our objective is for the CFSO, on a day-to-day basis, to operate independently of industry and of government. The CFSO will be open to all other financial institutions to join, whether that be federal non-bank institutions or provincial institutions.

In the area of coercive tied selling, we are broadening the scope of the ban to include all products, not just loan products. We will also require that disclosure on tied selling be provided and that the materials should be clear, concise, in plain language, and available in all branches.

In the area of transparency and disclosure, in all four of the financial institutions acts there will be a regulation-making authority to require disclosure in certain prescribed circumstances. We plan to move in the area of index-linked deposits, which are products that are increasingly being sold by banks. We also are working now with the provinces and stakeholders to develop model language for loan contracts. That work is ongoing.

In the area of child and family support, support orders will no longer have to be served at the branch where the debtor keeps the deposits. For many who were trying to serve orders, it was difficult to find the actual branch where the individual was carrying out their business. Orders could be served at one designated location in any jurisdiction, making the enforcement much easier.

In the area of financing small and medium-sized enterprises, we want to establish a comprehensive program to ensure effective public policy development. Our first measure in this area is for Statistics Canada to collect and publish data on the supply and demand of debt and equity financing. This was something the task force strongly recommended. Industry Canada will also provide analysis, additional surveys and research, and will report annually on the state of SME financing in Canada.

Moving to bank holding companies, this will be the first time there will be an ability for large banks to create bank holding companies, which is an ability that banks have in many other countries around the world. This will help banks confront competition, especially from monolines and unregulated service providers. It will also help small and medium-sized institutions come together to compete with larger institutions.

In terms of the structure of a bank holding company, our next graph shows this. At the top will be a widely held bank holding company. Underneath, you can have many different kinds of companies and institutions, first of all, obviously, a bank, or it could be several banks. It could be a retail bank or a wholesale bank or it could be banks established on regional lines.

The bank holding company will also be able to have other regulated financial institutions like insurance companies and trust companies. They could also provide other financial services, for example, the establishment of a credit card company. They could own financial agents and related services like mutual funds, and there are other activities related to financial services that they will be able to own, like information services companies and real estate companies.

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For bank holding companies, the rules will be similar to what exists for banks, particularly in the areas of ownership and permitted investments. But there will also be differences, for example, in the areas of insolvency, related party transactions, and, in some cases, in the role of the regulator. For example, in the case of a bank holding company, OSFI will not be responsible for the holding company creditors.

In the area of permitted investments, we are providing a broader range of permitted investments for banks and holding companies. In general, any activity permitted to a bank may now be conducted in a subsidiary or an affiliate. For example, under the existing legislation, credit card activity had to be carried out within a bank. Under the new legislation, a bank will be able to establish a separate credit card affiliate or subsidiary. We also have the regulation-making authority to add activities. This flexibility will permit, for example, more Internet-related activities.

In the area of foreign banks, what we're looking for here is consistency with the domestic regime. Of course, as there is more flexibility built into the domestic regime, there is also more flexibility built into the foreign regime. We are building on changes we made with respect to the rules on foreign banks in the 1997 legislation and the 1999 foreign branching legislation. As I mentioned, this provides greater flexibility. There's also the opportunity for streamlined approvals. This change in legislation sustains a viable foreign bank presence in the country.

Now in the prudential area, OSFI will have the ability to enter into prudential agreements and will have removal powers of directors in certain circumstances. This will help maintain safety and soundness in the new environment and will strengthen OSFI's powers to deal with potential increased risk.

Under the Bank Act, the Financial Consumer Agency of Canada commissioner will be able to access information necessary to administer consumer provisions, is required to conduct annual compliance examinations, and is able to enter into compliance agreements.

Now I'll leave the Bank Act and move on to the new Canadian Payments Act. This act will expand access to the Canadian Payments Association for the first time to life insurance companies, securities dealers, and money market mutual funds. This should provide more competition for deposit-like services in the marketplace.

We will also change the CPA governance. We are improving its mandate. We are expanding its board. New participants like life insurance companies will of course be eligible to be board members, but we will also have three independent members of the CPA board. We will also legislate the stakeholder advisory council, which is a council that was established to provide advice to the board and has been in operation for a number of years.

The minister will also have the ability to disallow any proposed new rules or amendments. The minister can issue directives to make, amend, or repeal rules, bylaws, or standards in the public interest.

The minister may also designate other systems in the payment area. If a system is designated, then the minister will have the ability to disallow rules and the power to issue directives.

Moving on to the Cooperative Credit Associations Act, what we are doing here is establishing the ability for the credit union movement to create a national services entity. By doing this, it would facilitate the creation of a national branch. There would be better coordination among provincial credit unions and it could reduce duplication and costs. This is something that the credit union movement has aggressively sought. It has been recommended that we proceed with this by all of the committees and the task force that reviewed this.

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Specifically, in the legislation, we will permit the credit union system to restructure from its present three-tier structure to a two-tier structure, if they wish to do so. It permits the creation of a federal retail association with powers similar to other federal deposit-taking institutions. For federal retail associations, they will be required to provide the same kind of consumer protection as is the case for trust companies.

The next act is the Insurance Companies Act. Many provisions are the same as appear in the Bank Act, particularly with regard to lower minimum capital requirements, improved corporate governance, the merger review provisions that are found in the legislation, expanded permitted investments, prudential agreements and removal powers for OSFI, and then the powers of the Financial Consumer Agency commissioner.

There'll be a new ownership regime for insurance companies. We have established a common demutualization transition period for the four large demutualized companies that occurred over the past year, and that transition period ends on December 31, 2001. During the transition period, what we define as the large firms, that is, the firms that are over $5 billion, will be subject to the new 20%-30% ownership rule that I mentioned in the Bank Act review, and medium-sized firms will still be subject to the old 10% rule.

After December 31, 2001, that is, at the end of the transition period, the legislation states that large insurance companies will remain widely held unless the minister permits a recategorization. But the medium-sized companies, that is, Clarica and Canada Life, will automatically be eligible to be closely held after December 31, 2001. Now, as a matter of policy, the minister has stated that SunLife and ManuLife shall remain widely held to encourage independent financial institutions of the country.

With regard to consumer provisions in the Insurance Companies Act, there is also a requirement for public accountability statements for insurance companies with over $1 billion in equity. They will be required to be a member of a third-party dispute resolution regime. There is no requirement for them to join the Canadian Financial Services Ombudsman, although the government would welcome them to join the CFSO. There is also the ability to regulate disclosure for the insurance companies.

With regard to insurance holding companies, there are a number of insurance companies that have established insurance holding companies in Canada but that in fact are regulated insurance companies. They will continue to be able to hold what we call ICA holding companies, or they will be able to convert to the new holding company structure.

In terms of the Trust and Loans Companies Act, again, there's a lot of parallel to the Bank Act in terms of lower minimum capital requirements, improved corporate governance, the merger for review provisions and legislation, child and family support, expanded permitted investments, prudential agreements and removal powers for OSFI, and the FCAC commissioner powers.

On ownership, there'll be requirements that when a trust company reaches $1 billion in size, they will be subject to a 35% public float. There is a provision now in the Trust Companies Act that requires this float to occur at $750 million. The task force recommended that this be increased to $1 billion, and we have accepted that. Small firms, of course, may be owned 100% by any approved person.

In terms of consumer provisions in the Trust and Loan Companies Act, trust companies will also be subject to the branch closure protocol. They will be subject to public accountability statements if they have over $1 billion in equity. They, too, will be required to have a third-party dispute resolution system, and again we welcome them to join the CFSO. Also, the ability to make disclosure regulations also applies in the Trust and Loans Companies Act.

Going forward, the four financial institution acts will sunset five years after royal assent and coming into force. This is the same provision that existed in the 1997 legislation.

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As a general comment, the government maintains the flexibility to continue to work to improve the framework between legislative reviews through regulation and revising of policy.

Thank you for your patience. I'd be pleased to respond to any questions you may have.

The Chair: Thank you very much, Mr. Swedlove.

Now we're going to go to the question-and-answer session.

But before we do that, I'd like to take this opportunity to welcome new members of the committee: Sue Barnes; Rick Borotsik; Jason Kenney; Pauline Picard; and also Carolyn Bennett, who has made a comeback. She has tried other committees, but obviously she came back.

Mr. Epp, we'll go with a ten-minute round.

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

Thank you for your presentation. I find it interesting, fascinating, and somewhat overwhelming. As you know, Dick Harris is our chief critic in the area of financial institutions, and unfortunately he is unable to be here. He will be picking up the ball when he returns.

I have a few questions with regard to the presentation. First of all, you indicated that you are reducing the minimum capital requirement from $10 million to $5 million. I'm just a poor farm kid from Saskatchewan, so anything over $100,000 is a lot of money to me. But it seems to me that starting a bank with only $5 million might put into question its viability and safety to the participants in that bank. How would you answer that?

Mr. Frank Swedlove: There's no question that when you introduce the possibility of smaller institutions and more regionally focused institutions, there is an element of risk that arises. We've had a lot of discussions with the superintendent, and the superintendent feels comfortable that with the expanded powers that are provided for him in the legislation, he is in a position to deal with this added risk.

I may also add that the market has allowed for improved techniques in terms of risk management over the years, and a number of jurisdictions permit smaller institutions. Indeed, there are certain jurisdictions in the United States that allow for the establishment of a bank at about $1 million. A number of provincial jurisdictions allow for the establishment of credit unions at levels significantly less than $10 million and even less than $5 million. So we have confidence that while there is some additional risk, at the same time that risk can be dealt with.

Mr. Ken Epp: Do you anticipate that this would increase greatly the workload of the superintendent in trying to manage myriads of small banks with small capital?

Mr. Frank Swedlove: First of all, we don't know to what extent we will be seeing a significant growth in these kinds of institutions. It's uncertain at this point in time how many we'll have. But the hope is that we will see some new institutions established, and the superintendent is confident that these institutions can be managed in a proper fashion. Of course, the industry is responsible for covering the cost of the superintendent, and if additional staff is required in order to regulate these institutions, then the superintendent has the ability to expand.

Mr. Ken Epp: Okay.

Now, with regard to mergers, it's my understanding from the legislation that any banks that have capitalization of less than $5 billion can merge at will. Obviously, they must have to register somewhere their intention to do so. Is there any regulatory framework to manage those mergers, or are they in fact, as indicated, just unrestricted?

Mr. Frank Swedlove: The merger review process we've outlined is indeed for banks that are greater than $5 billion of equity. But that doesn't mean that when there's a merger among other financial institutions or other banks, there isn't a process to follow. As is the case now, the Minister of Finance must approve the transaction, OSFI will review the transaction for prudential considerations, and the Competition Bureau will look at it under its own act to ensure that competition is maintained.

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So there is a review, in any event. There is not the process of public interest impact analysis being prepared and there is not an automatic reference to the House finance committee.

Mr. Ken Epp: With respect to these merger reviews, then, the minister basically is the one who makes the final decision. It seems to me the act is really quite vacant in terms of specifying the criteria he or she will use to make those decisions. In fact, in your overhead you said the factors the minister may consider—in other words, you don't even require the minister to consider certain factors. It's obvious there will be the usual ones taken into account. But we know that when it comes to ministers and governments and elections and things like that, political considerations can sometimes override common sense. I'm just wondering whether you gave any amount of thought at all in drafting this legislation to actually specifying the factors the minister must take into account when considering a merger approval.

Mr. Gerry Salembier (Acting Director, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance Canada): Thank you.

The legislation does set out a rather explicit list of criteria the minister may take into account in considering an application for a merger or an application for an acquisition. It does not restrict the minister to any subset of that list of criteria. The minister, in making his decisions on approvals under the act, is bound to do so in a fashion that is consistent with the objects and purposes of the act. The criteria that are set out, which indicate what he is permitted to look at, will ensure that that decision is taken in that fashion.

Mr. Ken Epp: You have these lists of criteria there, and the heading says the minister may take these into account. The minister could in fact ignore all of them. Right? What I am arguing for here is whether or not we should have a minimum set of criteria that he must take into account, and then perhaps, in addition, he could take these into account.

Mr. Gerry Salembier: The minister's decisions under the act have to be decisions that he takes with a view to ensuring that the public interest is met in any transaction, whether it's a merger or an acquisition. The list we have constructed ensures that he has the flexibility he requires in order to take a decision that in the case of any particular transaction will bring into consideration the factors that are necessary for that particular transaction.

Mr. Ken Epp: The other thing is the requirement of two-thirds approval of the shareholders. Quite clearly, this would be the shareholders of both banks that are merging. You would require that two-thirds of them would approve that. Am I correct in that?

Mr. Frank Swedlove: That was in reference to the reclassifying of an existing bank from a widely held institution to a closely held institution. That's where that arises. It's not in the case of a merger review.

Mr. Ken Epp: Well, in the case of a merger, what requirements are there in terms of the shareholders?

Mr. Frank Swedlove: Sorry. In the presentation, when the reference was made to two-thirds, it was with respect to reclassification.

Ms. Rhoda Attwood (General Counsel, Legal Services, Department of Finance Canada): There is also a requirement for two-thirds approval by shareholders of the amalgamating companies or banks.

Mr. Ken Epp: And that would apply obviously to both or more if there are more than two that are merging.

Ms. Rhoda Attwood: Yes. That's the present case right now. The existing legislation provides for this, and we're just continuing that.

Mr. Ken Epp: Okay. I just wanted to confirm that.

Moving way ahead, in the finance committee we heard in our consultations a lot of people concerned that people in the lower-income bracket have trouble with banks. It looks to me as if you're trying to address that in this new act by having these low-cost accounts. You're basically mandating them. You're saying a bank must have a low-cost account available. Am I correct in that?

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Mr. Frank Swedlove: The legislation gives us the regulation-making authority to specify a low-cost account.

Mr. Ken Epp: But you haven't said what a low-cost account would cost. You haven't gone into that at all. You're just saying there must be a low-cost account.

Mr. Frank Swedlove: What we have decided to do is allow the individual institutions to establish their own low-cost accounts. One advantage of that is, by having different kinds of low-cost accounts, there is some more choice for consumers to pick one that best suits their needs. We thought there was an advantage to that, as opposed to specifying one specific low-cost account.

But if the banks do not willingly continue to provide low-cost accounts, then we will have the ability to regulate one through legislation.

Mr. Ken Epp: When they have a low-cost account, they can obviously charge a monthly fee for that account as long as it's considered low-cost. Who decides what's low-cost?

Mr. Frank Swedlove: In the June 1999 paper we said a low-cost account would be in the area of $4 a month with 12 transactions, some of which could be carried out in-branch. That's the general guideline we have applied.

In discussions we've had with institutions, some of them are looking at providing a lower number of transactions, but presumably if they were to do that, they would also lower the cost from $4: fewer transactions, lower cost. That's the guideline we've been operating under in the discussions we've had with the institutions.

Mr. Ken Epp: It's quite obvious that it would be impractical to put the actual amount of the cost into the legislation, but it's your intention to have those guidelines in the regulations. Is that correct?

Mr. Frank Swedlove: It is our intention to work with the institutions in preparing memoranda of understanding, and those memoranda of understanding would be made public and would specify the details of the low-cost account. That's our intention at this point in time.

The Chair: Thank you, Mr. Epp.

Mr. Loubier.

[Translation]

Mr. Yvan Loubier: Thank you, Mr. Chairman. I have several questions, but for the moment, I'll stick to the basics.

Earlier, Mr. Swedlove, you mentioned an important aspect of the bill, namely the whole question of widely held ownership. The bill stipulates that banks with over $5 billion in capital would not be prohibited from having widely held ownership. A single shareholder can hold up to 65 per cent of the voting shares of a financial institution of this nature. I'm deeply concerned about such a provision and I have often put questions to the Finance Minister since the release of his White Paper last June. I have asked him why he believed that easing the rules respecting widely held ownership, namely by allowing a single shareholder to hold up to 65 per cent of the shares in a bank like the National Bank, could enhance the flexibility of the financial sector. The Minister talks a great deal about flexibility and efficiency, but if a single person holds 65 per cent of the voting shares, how does this ensure greater flexibility than if 65 investors each held one per cent of the shares?

Maybe now I can get an answer to my question.

[English]

Mr. Frank Swedlove: The reason the minister has referred to flexibility associated with reclassification is that the present situation for these existing schedule I banks that are below $5 billion is that nobody will be able to own more than 20% of the voting shares of that bank. That's to create opportunities for strategic alliances and joint ventures.

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The minister has stated that by allowing for reclassification, arrangements could be made for greater participation than the 20%. It could go up to 40%, 49%, or 65%, as you have noted. That's what creates the greater flexibility.

[Translation]

Mr. Yvan Loubier: You're giving me the same answers as the minister. You're not telling me how flexibility is increased when a single individual controls a bank with equity greater that $5 billion. I tend to think the opposite is true, since a single person will be making all of the decisions affecting the future of this bank. This does not ensure flexibility, but rather brings an element of inflexibility to the system.

It's possible to agree on this bill. In fact, I'll tell you right now that we don't have a problem with 97 per cent of the bill's provisions. We've even spoken out in favour of a number of them. For example, I can understand how creating a holding company and paving the way for strategic alliances between a bank and various other financial institutions can enhance the flexibility and capabilities of the newly formed entity and help it compete. However, how will flexibility be enhanced by offering up on a silver platter 65 per cent of the institution's shares? I'd like you to explain this provision to me. I'm told that a precedent for it was set in the past and that the rule could have been set at 50 per cent plus one, which would have been just as satisfactory.

I can understand the provision concerning holding companies, but why should a large bank in Canada be allowed to be widely held—we're talking about 80 per cent—whereas in the case of a medium-sized bank like the National Bank, the largest bank in Quebec, ownership is restricted to a 35 per cent public float, ostensibly because flexibility is thus enhanced? Moreover, we hear that the National Bank is in no danger of being taken over, even though that remains a very real possibility. That's the first part of my question.

Secondly, the widely held ownership rule was brought in for a variety of reasons since the passage of the initial Bank Act. Among other things, it is designed to prevent a situation where the majority shareholder in a bank, who might also be an industrialist in a particular sector, could compete unfairly with one of his competitors in the industry by making decisions about loans issued to those competitors. Therefore, isn't there a danger here, not only of a person taking control with all of the inconveniences this entails, but also a danger of competition being adversely affected by the actions of a single shareholder who might also be involved in activities outside the banking sector?

[English]

Mr. Frank Swedlove: Regarding the issue you've raised of single ownership, the process is that the minister needs to reclassify the institution before the single ownership or control could take place. As the minister has stated, he would need to consider the public interest and the interests of those who live in the region where that bank operates before making any decision to reclassify an institution. So there is a process, as part of the reclassifying, to ensure the public interest is applied.

At the same time, in the case you describe of the possibility of an acquisition by a single shareholder, there would also be of course a process of reviewing that merger, and all of the merger criteria Mr. Salembier talked about would also apply.

[Translation]

Mr. Yvan Loubier: May I ask some additional questions, Mr. Chairman?

[English]

The Chair: Sure, go ahead.

[Translation]

Mr. Yvan Loubier: You stated earlier that the holding company was subject to the same ownership rules as institutions.

Mr. Frank Swedlove: That's correct.

Mr. Yvan Loubier: Could you explain to me why this is so, if that's possible?

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[English]

Mr. Frank Swedlove: We give the institutions the full flexibility to establish a holding company regime. If we did not also require the same kind of ownership rules that apply at the holding company level as would apply at the banking level and if a bank wished to get around the ownership regime, they would simply establish a holding company and then proceed to do what they wanted to do, contrary to the spirit of the legislation.

[Translation]

Mr. Yvan Loubier: However, it wouldn't be a problem, for instance, if a holding company were classified as a medium-sized institution, that is as having a 35 per cent public float, and were to control banks not subject to the same ownership rules. That wouldn't pose any major technical problems.

Mr. Frank Swedlove: I'm sorry, but I didn't understand your question.

Mr. Yvan Loubier: Take, for instance, a holding company that is subject to the same ownership rules as a bank and that, depending on its size, falls into the category where 35 per cent of the shares are subject to a public float and where up to 65 per cent of the voting shares can be held by a single person. If this holding company controls institutions subject to different ownership rules, then there is no major problem. Let's assume this holding company controls a bank that falls into the category of a small institution, that is one where, according to your bill, 100 per cent of the shares are widely held and that is also affiliated with an insurance company. This wouldn't pose any significant problems. The fact that this holding company is subject to different ownership rules than its subsidiaries does not present a contradiction or pose any problems.

[English]

Mr. Frank Swedlove: If I understand the question correctly, the answer would be that the category you fit in, whether it is large banks, medium-sized banks, or small banks, is based on a conglomerate calculation. You could not have a situation where the holding company is subject to a widely held regime but a subsidiary bank is subject to the 35% rule. So as a conglomerate, a large bank or bank holding company, it is therefore subject to the widely held rule, if as a conglomerate its equity is greater than $5 billion. That reflects the question you've asked.

[Translation]

Mr. Yvan Loubier: I want to be certain that I clearly understand this very important question.

Let us assume that a bank such as the National Bank has average capital holdings and enters into an association with an insurance or trust company. This bank could enter into an association with a large bank subject to a widely held ownership rule of 80 per cent. Would the holding company automatically adopt the most stringent rules, the most flexible ownership rules or agree on some kind of common denominator? What would determine the ownership rules to which this holding company would now be subject?

Mr. Normand Bergevin (Director, Legislation and Regulations, Office of the Superintendent of Financial Institutions): I'd like to speak to this issue. I don't know, though, whether I can clarify matters or if I will merely create more confusion.

Mr. Yvan Loubier: By all means.

Mr. Normand Bergevin: As I understand it, the ownership rules to which the holding company will be subject will be determined by the scope of the banking activities to be undertaken by the company. Whether the holding company controls one bank or five or ten, the determining factor in whether or not the holding company is subject to the widely held ownership rule is the combined total capital or activities of these banks.

Mr. Yvan Loubier: I see.

With your permission, Mr. Chairman, I'd like to ask one last brief question.

Clause 397 of the bill which replaces subsection 420(1) of the act lists a series of criteria to guide the Minister of Finance in making any decisions concerning financial transactions. These include increasing from 10 per cent to 20 per cent the number of voting shares than can be held by a single person. The clause also refers to the following criteria: “the character and integrity... if the applicant or any of the applicants is a body corporate”; “whether the company will be operated responsibly by persons with the competence and experience...”; “the impact of any integration of the businesses and operations of the applicant or applicants with those of the company on the conduct of those businesses and operations”; “the opinion of the Superintendent regarding the extent to which the corporate structure of the applicant or applicants and their affiliates may affect the supervision or regulation of the company”; “the nature and extent of the proposed financial services activities”; and “the best interests of the financial system in Canada”.

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These provisions apply to institutions where a single shareholder can hold 20 per cent of the voting shares, up from the original 10 per cent.

However, further on, the bill notes that these criteria apply as a whole only to financial institutions with less than $5 billion in equity. When an institution's equity exceeds $5 billion, only one criterion applies, namely the one stipulated in the proposed new paragraph 420(1)d), specifically the character and integrity of the applicant.

Why would the minister resort to two different evaluation systems or to two different sets of criteria? One set is fairly comprehensive, although some criteria that we would like to suggest are still lacking, and applies to institutions with less than $5 billion in capital. The sole other consideration, in the case of large financial institutions, is the character and integrity of the body corporate conducting the financial transactions. I fail to see why seven criteria are set aside and why, when shares in a large company are being acquired, character and integrity are the only important considerations.

Mr. Gerry Salembier: In cases where the number of shares held by a single person increases from 10 per cent to 20 per cent, there is no possibility of that person taking control of the company. In such instances, the only criteria that the minister will look to will be the integrity and character of the investor. When the possibility exists of acquiring more than 20 per cent of a company's shares, then it's also possible for a person to wrest control of the company. In that case, the Minister of Finance will review the complete set of criteria before authorizing the transaction.

Mr. Yvan Loubier: Therefore, as you see it, when a single person holds more than 20 per cent of the shares, in essence, he gains control, given the way the Canadian banking system is structured. What I'm saying is that when a single person holds more than 20 per cent of the shares, in your view, given the current ownership structure of banks, that person effectively has control of the bank.

A voice: Not necessarily.

Mr. Normand Bergevin: Pursuant to the Bank Act, a person may not acquire more than 20 per cent of the voting shares. Furthermore, a provision in the legislation stipulates that a bank may not be controlled by a single person. These provisions will apply to banks with more than $5 billion in equity.

When an individual acquires 10 per cent or more of the voting shares—and this percentage could go as high as 100 per cent—assuming control is a real possibility and that's why the full set of criteria would be applied. If in fact an individual does acquire 15 per cent of the institution's shares, then it will be up to the minister to decide which criteria to invoke, since this isn't a case of that person taking control.

[English]

The Chair: Thank you, Mr. Loubier.

Mr. Borotsik.

Mr. Rick Borotsik: Thank you, Mr. Chairman.

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First of all, I would like to say that the presentation was well done. I should also tell you that I'm a neophyte on this committee, having just begun sitting on the Standing Committee on Finance. So for some of the questions I ask, please take them where they're coming from.

I should also say that your presentation was riveting. We have to get a little life in the committee. This is not a really romantic type of subject, but we'll try to see what we can do.

It's a very interesting piece of legislation, by the way, which I hope I have an opportunity of getting to, debating, and looking at clause by clause. That's another issue for another day.

However, I do have a couple of questions. First of all, it's called the Financial Consumer Agency of Canada Act. As I understand it, this is a new act and a new agency. Am I correct?

Looking at the mandate and going through this, I have a couple of questions. First of all, as I see this mandate, it reminds me of the Canadian Bankers Association, the CBA. They were responsible, through the financial institutions, for putting forward consumer information. They were to put forward the educational component of it, which they have done in the past in a couple of exercises that, in my opinion, have worked very well.

Do you see this as being in a bit of conflict with the CBA? I do know you have more legislative authority than the CBA does, obviously, with the levelling of fines and things of that nature, but do you see that this is perhaps removing the CBA and going to a government agency?

In saying that, I'd also like to know this: who is going to be the Financial Consumer Agency of Canada? I know it's a GIC; it's going to be a Governor in Council appointment. Are there going to be other people who will be accessible, if you will, to members of Parliament or to the financial institutions or to consumers? Give me a little background, please.

Mr. Frank Swedlove: First and foremost, the Financial Consumer Agency will be a regulator. It will be responsible for the consumer-related provisions in the federal financial acts. As such, it takes over the responsibility that OSFI now has for these provisions. That is essentially its first function. It will also, of course, provide consumer information. That consumer information is provided by a number of Ottawa agencies now. For example, it is provided by the Department of Finance itself, but also by OSFI to some extent and by Industry Canada to some extent.

Mr. Rick Borotsik: The banks.

Mr. Frank Swedlove: Indeed, the banks do provide information. The Canadian Bankers Association has a very active information program. The agency will work with the institutions to ensure that as much information as possible can be provided. We do not see ourselves as the agency taking over the role of the CBA in the information area. Rather, it's another vehicle to provide information and to help coordinate—

Mr. Rick Borotsik: And totally funded by the financial institutions.

Mr. Frank Swedlove: As is the case with all regulators—for example, OSFI—it is funded by the institutions.

Mr. Rick Borotsik: Okay.

Mr. Frank Swedlove: In terms of the commissioner, the commissioner is indeed a GIC appointment. As is the case with the superintendent, from time to time they are asked to appear before committee and would do so and would express views in front of the committee regarding the consumer-related provisions of the legislation.

Mr. Rick Borotsik: Will there be annual reports from the commission itself that will come not only to committee but to Parliament?

Mr. Frank Swedlove: Yes, there is a requirement in the legislation for an annual report to be tabled in Parliament through the minister.

Mr. Rick Borotsik: Going on into the legislation and talking about bank closures, which is a very important part of this, particularly where I come from, a rural area, and in smaller rural communities, in your particular case you're going to say that in bank closures the Financial Consumer Agency of Canada is going to consult, I take it, with the communities themselves and have a consultation process between the banks and the communities.

Do you see the Financial Consumer Agency of Canada having any specific power to be able to overturn, perhaps, a decision that's made by a bank with respect to a closure?

Mr. Frank Swedlove: No, there is no ability to overturn a decision.

Mr. Rick Borotsik: So what does consultation do, then?

Mr. Frank Swedlove: The object here is to permit some opportunity for discussion among the community, leaders in the community, and the institution that's considering closing the branch.

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The intent here is that there be an opportunity to look at the possibility of providing alternative services, whether that is having an ATM or some kind of mobile banking service that could provide banking services a few days a week, whatever may be possible to help the community in continuing to receive banking services.

Mr. Rick Borotsik: But you have to agree, Mr. Swedlove, that it's really a moot point. You can communicate and you can have your consultative process. You're not acting as a mediator as such; you're simply saying, “Let's talk about it.” But if any of those alternatives don't come to fruition, you have no legislative authority. You can't make any changes yourself with this agency. Is that correct?

Mr. Frank Swedlove: The government felt that it wasn't in a position to demand that they—

Mr. Rick Borotsik: I'm not saying you should have, by the way. I'm just trying to find out exactly what you can do. No, I don't think we as a government should have the right to tell a business what they can and cannot do with respect to their debates.

Mr. Frank Swedlove: There is also in the public accountability statement the requirement to publish the information on branch closures, so there is some degree of public accountability.

Mr. Rick Borotsik: Okay. That's a great segue, by the way, right into your public accountability statement. As I see it, right now the banks table and file their annual statements, their financial statements. As part of those annual statements, they talk about how many taxes they pay, they talk about how many employees they employ, and they talk about how many branches they have open. In my opinion, on a regular basis, an annual basis, banks do this.

How do you see that expanding at all with this public accountability? It seems to be a public relations exercise for the banks, quite frankly, in legislation. Can you maybe expand on that a bit?

Mr. Frank Swedlove: We will specify in regulation the areas that will need to be covered in a public accountability statement. I don't know to what extent all banks now provide that information. My sense is that they don't all provide that kind of information.

I think there will be an expansion of information that's available. It will be in a form that people can review and compare.

Mr. Rick Borotsik: So the terms of reference, the regulation, will be done in regulations as opposed to in legislation, then.

Mr. Frank Swedlove: Yes, the kinds of things that will be required to be covered will be in regulation.

Mr. Rick Borotsik: Do we have any ideas on that?

Mr. Frank Swedlove: The requirement to issue a public accountability statement is in the legislation. There is the ability, through regulation, to expand that list over time if it's felt appropriate to do so.

Mr. Rick Borotsik: Okay. Again in my constituency, small and medium-sized enterprises are very important. One of the major problems—or at least it is perceived to be major—we have with the financial institutions right now is that small and medium-sized enterprises don't have access to the capital that's required.

In this legislation you're suggesting that Industry Canada, I believe, and Statistics Canada are going to provide you with all this wonderful information on SMEs, but I don't see anything coming from that. If, for example, it's seen that the SMEs are in fact having difficulty accessing capital, I don't see anything in your presentation that would allow a regulatory body to ask the banks to change that aspect of their banking system. Just simply gathering data doesn't do it for me. Can you expand on that a bit?

Mr. Frank Swedlove: The objective was to have available more information on small and medium-sized business financing. The task force stated the concern that there was not sufficient information available by which public policy could then be made.

So what we're doing, with the help of Statistics Canada and Industry Canada, is providing the framework for that information to be made available and also, frankly, for it to be publicly available, which then creates the framework for public policy—

Mr. Rick Borotsik: So it could, Mr. Swedlove, be part of the regulations that we talked about with the accountability portion of it. Banks would have to say how much of their capital goes into the small and medium-sized enterprises. That could be part of those regulations.

Mr. Frank Swedlove: Yes. They will be required to be providing statistics on small and medium-sized businesses.

Mr. Rick Borotsik: But you agree there are no teeth at all in this legislation with respect to the SMEs, other than the fact that you're going to be an information gathering agency, I suspect.

Mr. Frank Swedlove: I would say that it's a significant contribution to a better understanding of financing the small and medium-sized enterprises.

Mr. Rick Borotsik: Maybe we differ on that opinion, but at least it's a step in the right direction.

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Here's my last question, Mr. Chairman.

This was touched on very briefly. You've reduced the capital requirements of banking from $10 million to $5 million, as I understand it. You can now set up a bank basically on a street corner with $5 million capital. Is that correct?

Mr. Frank Swedlove: I think a street corner... I'm not sure what you—

Mr. Rick Borotsik: Well, no, with $5 million capital—

Mr. Frank Swedlove: I should note that there still is a process for obtaining a bank licence.

Mr. Rick Borotsik: Sure.

Mr. Frank Swedlove: There would be—

Mr. Rick Borotsik: But the capital requirements have been reduced from $10 million to $5 million.

Mr. Frank Swedlove: Yes. Maybe I could ask Mr. Bergevin to talk about some of the requirements associated with setting up a bank.

Mr. Normand Bergevin: I should point out that those are the minimum capital requirements, just like $10 million was the minimum before. That doesn't mean you may not be required to have more, depending on your business plans, your growth plans, your capitalization plans, etc., all of which are required before you're given a bank charter.

Mr. Rick Borotsik: Why set a limit at $5 million, then?

Mr. Normand Bergevin: Well, before this the absolute minimum was $10 million, so it was absolutely impossible to start up—

Mr. Rick Borotsik: But the same rules were there too. If it's a minimum, it may require more, depending upon the business.

Mr. Normand Bergevin: Exactly. You still have to meet the OSFI capital requirements. There are capital rules that apply to all banks. They vary depending on the risk of the business of the bank and the size of the business of the bank.

Mr. Rick Borotsik: Absolutely.

Mr. Normand Bergevin: But when your minimum is $10 million, that means that no matter what your business plan says, you cannot start up a bank with less than $10 million.

We don't know because we can't predict the future, but you might want to start up a small bank, a single-purpose bank, with limited activities. Yet the Bank Act currently states that you can only do that with $10 million. You might be able to justify starting up one of those with $5 million and still meet the capital requirements that are required to operate a bank.

Mr. Rick Borotsik: All right. Do you believe there will be banking functions and institutions that will come forward with a $5 million requirement or a request for $5 million in capital?

Mr. Normand Bergevin: I have no idea.

Mr. Rick Borotsik: Thank you, Mr. Chair.

The Chair: Mr. Cullen.

Mr. Roy Cullen: Thank you, Mr. Chairman.

Thank you, Mr. Swedlove and officials. I just have three short questions at this point.

One has to do with co-ops. The way you've described it, the government is anxious to encourage the co-operative movement to provide alternatives to Canadian consumers. Certainly the members on this side have been encouraging that as well, in order to provide more choice for consumers and a bigger role for the co-ops.

As I understand it, there was some national initiative afoot to try to facilitate that. This legislation, as I understand it, is enabling; in other words, it provides an opportunity for them to expand their role. If the co-ops don't come forward in such a way that they can or would want to expand, no one can force them, of course. I understand there was some national initiative but one of the major co-ops dropped out and that initiative fell flat.

Does that mean it's dead in the water? How are we going to get the co-ops more engaged or more involved in providing consumers with greater options? One of the options that has been presented, I know, is that co-ops would own banks. I gather that this act precludes that. Or does it not?

Mr. Frank Swedlove: Maybe it's best to give a bit of background here. When the task force reported a view that we should be encouraging the credit union movement and providing opportunities for them to operate on a more national basis, and that this was strongly supported by the credit union movement, there were essentially, within the credit union movement itself, two points of view and two different directions.

One group wanted to have the ability to establish a national services entity that would allow individual credit unions to pool not all services and activities but certain services, and to market that on a national basis. It would be building on the existing credit union system. That was one initiative that was going on.

The second initiative was from individual credit unions that wanted to be in a position to essentially bring all of their activity together into a national co-operative bank, which would continue to be owned by its members. It wouldn't be a stock company. It would still be based on co-operative principles but would be one co-operative bank that would provide services across the country, although there may be local co-operatives that would contribute to the national organization. So there were two different philosophies, two different approaches.

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In June 1999, when we came out with our paper, we said we would be pleased to work with both groups to try to encourage the ability of credit unions to expand their focus on operations. There continue to be discussions on the national services entity. We were able to incorporate in the legislation the ability to facilitate the establishment of the national services entity.

On the initiative to establish what we call a co-operative bank, there were a number of different proposals. The credit unions that were involved in the co-op bank proposal could not agree on one particular direction. There was not consensus amongst them in terms of the way to proceed forward. So we were not in a position to establish in legislation something that would accommodate a co-operative bank. As a matter of policy, we stated that we are willing to continue to work with the proponents of that to see whether we can bring in this kind of concept sometime in the future, but not as part of Bill C-38.

I should note that credit unions can establish banks as subsidiaries. VanCity has had a bank for many years, and another credit union is in the midst of proceeding with the establishment of a bank subsidiary. So there is the ability for a credit union to have a bank as a subsidiary.

Mr. Roy Cullen: But regarding the other initiative, because there was a lack of consensus, is there no way in the legislation that one could craft provisions that would be broad enough ultimately to accommodate proposals that eventually do come forward? The concern would be that it's perhaps some time away before those provisions will be looked at again, so we may miss an opportunity.

Mr. Frank Swedlove: The area is a fairly difficult one, in the sense that you are changing your approach from a stock company to a co-operative model, and a number of areas have to be looked at, including the governance of the bank. So while in my personal view it's certainly possible over time to be able to find a way of incorporating that in the Bank Act, it's going to take some very significant and careful thought.

Mr. Roy Cullen: Thank you. I'll switch gears then to the merger review process. Your chart shows the House finance committee, but it doesn't show a role for the Senate. I gather the act itself offers that flexibility. If the Senate decides it wants to involve itself in that process, presumably the act doesn't preclude that at this point in time.

Mr. Frank Swedlove: That's correct.

Mr. Roy Cullen: Okay. Finally, with respect to the payment system, one of your slides talked about other designated systems. It said the minister may designate other payment systems, disallow rules, and issue directives. Could you give me a better flavour of that? Could you give me an example of what types of other payment systems we're talking about, and maybe in a generic sense, give an example of the types of rules the minister might disallow? In a generic sense, what are we really concerned about? Also, what type of directive might be forthcoming, if indeed anything is?

Mr. Frank Swedlove: The ability of the minister to designate a system is a recognition that we really aren't certain where the future may go.

Right now of course the system we have oversight responsibility for is the Canadian Payments Association, and they on the retail side are responsible for the paper-based system, the clearing and settlement of cheques. As we know, increasingly transactions are being dealt with electronically, and over time there may be other systems for which, from a public policy perspective, it would be equally important that there be some kind of oversight responsibility.

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The legislation permits the government to respond to that and to have the ability to designate. We don't at this point in time feel there's any particular association that would need designation. The legislation requires that such a system be extremely important for the operations of the payment system and for the financial sector, or that it be national in scope. So this is not anything that would be taken lightly, and it would have to be a significant participant in the payment system. That's the intention.

In terms of what might be subject to disapproval by the minister, clearly an occurrence that is simply not in the public interest—something that would lead to reduced competition or that would lead to a group in society being shut out from the payment system—is the kind of issue that, theoretically anyway, could arise with a private payment system that might be subject to designation in the future.

The Chair: Thank you, Mr. Cullen.

Ms. Leung, Mrs. Barnes, then Ms. Bennett.

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

I enjoyed your presentation. I have a question. I am also interested in the appointment of the commissioner for FCAC. You say it's done by GIC. Can you tell me a little bit about the nature and the structure of GIC? Are they appointed? Are they represented throughout Canada? What's their nature?

Mr. Frank Swedlove: I don't know if my colleagues have any further detail on GIC appointments. Is the question how GIC appointments come about?

Ms. Sophia Leung: CCRA, the Canada Customs and Revenue Agency, has a board of its own. I am wondering if this GIC is related in that nature.

Mr. Frank Swedlove: Okay; I'm sorry. No, there is no board established with the Financial Consumer Agency. We have structured the governance of the agency to be quite comparable to the Office of the Superintendent of Financial Institutions. That's been in place for some significant period of time and has, we think, served Canadians well. The system works, so we've used that model in establishing the governance structure for the FCAC.

Ms. Sophia Leung: Okay. I have another little question regarding foreign banks. I understand the act is trying to give foreign banks more access to the Canadian market. In the meantime, you are also trying to restrict. For instance, you are only allowed to have a full-services branch or lending branch. Those are the two premises.

For the service bank, the deposits only go through a subsidiary. Why that restriction? I know it's protection, but what do you mean by a subsidiary? Secondly, the lending branches may not take deposits. There is a lot of restriction. Can you explain what will be the benefit for any foreign banks to come?

Mr. Frank Swedlove: Foreign banks have a number of options they can use to enter the market. They can enter as a subsidiary, which means they are incorporated in Canada, they provide capital, they have a board of directors, and a full governance structure applies to them. They are essentially treated as would be a domestically owned bank. That provides us the greatest comfort and certainty with respect to regulation of a bank, and therefore we are willing to allow those kinds of institutions to take retail deposits, which are in our view the area where we want to ensure the greatest amount of oversight and regulation.

But we also provide other opportunities and vehicles for foreign banks. They can establish a branch, which means they're not separately incorporated, they don't provide capital, and to some extent we rely on the regulation in the home jurisdiction. We still regulate them in Canada—there is still oversight by OSFI—but OSFI is of the view that it's not to the same degree of certainty that is provided in the case of a fully incorporated subsidiary.

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Consequently we do not permit those institutions to take retail deposits. They can take deposits over $150,000, so they can go after deposits in the wholesale market, but retail deposits we restrict to incorporated banks. That's the same as in the United States, for example. So that's an opportunity for the foreign banks, but with that one restriction.

Foreign banks can also establish what we call lending branches, which are another step down in the regulatory oversight, in the sense that even less regulation would apply in the case of a lending branch. But in exchange for that, we have said they will not raise money in Canada, so they aren't able to take any deposits, whether they be retail or wholesale. Essentially they obtain financing from abroad or from the interbank market, and then they can lend out to Canadians. That provides opportunity for more lending in the country, so we think that is a positive step.

Then foreign banks can also establish unregulated entities and be free from any regulation. So there are a lot of different opportunities for them to compete effectively in the Canadian marketplace, essentially on a level playing field with Canadian companies, whether they be banks or other kinds of financial companies.

The Chair: Thank you.

We'll have a five-minute round from Mrs. Barnes, Ms. Bennett, Mr. Epp, and Mr. Loubier.

Mrs. Sue Barnes: Thank you, Mr. Chair. I'm happy to be here with colleagues of the House on this new committee. I probably won't speak as much as usual for the first little bit.

I just want to follow up on Mr. Borotsik's question to you and the answer you provided about the assessments from the banking institutions funding the agency. I notice in subclauses 13(1) and 13(2), allowance is made for funds out of the consolidated revenue fund to go directly into the agency and the agency is able to spend those resources. First of all, I want to confirm that that is, in addition to the answer provided, part of what we're talking about here—that funds are coming directly over—and at an interest rate.

I want to follow up that question specifically. The way the clause is drafted, even though it says the funds come on terms and conditions, it really doesn't specify directly that it's a repayable loan at that stage. I'm wondering why, when in other pieces of legislation of a similar nature, when funds are removed from that fund... Why don't you specifically draft it to say it's a repayable loan?

Ms. Leah Anderson (Acting Chief, Consumer Issues, Financial Institutions Division, Department of Finance Canada): The provision for the money to come out of the CRF is for a cash advance to the agency, so it is understood that it is a loan. That money will be repaid by the agency once it collects its funds at the year end. Its assessments on financial institutions will be for the previous year, and at that time it will repay whatever it's borrowed from the government for that fiscal year.

Mrs. Sue Barnes: But there are other pieces of legislation affecting OSFI where you have direct sections legislated in the drafting to say there is debt repayment, and here it doesn't spell it out as clearly. I'm wondering why.

It doesn't have to be answered today. I think I'll be here for a few days, so...

Mr. Frank Swedlove: We'll have to take that under advisement and get back to you as to why there's the difference. The intent is quite clear. We'll try to give you a response as to why the drafting is different here from the drafting of other pieces of legislation.

Mrs. Sue Barnes: Thank you.

That's it for now.

The Chair: Ms. Bennett.

Ms. Carolyn Bennett (St. Paul's, Lib.): In an attempt to look after the consumer, it's becoming increasingly important that the consumer get data that is comparable, and that they can measure, whether it's how you measure waiting lists in health care or how you measure the performance indicators in anything else.

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I just want to know, in setting up this really important agency, what we are able to do in terms of ensuring that the data that is presented by the institutions is comparable in nature. Will there be some sort of template in which they report? If you look at public accountability—describe institutions' contributions to the Canadian economy—could some banks say how much money they give, other banks say how much volunteer time they give... Is there a way of making sure that a report such as that is actually about contribution to Canadian society and the economy?

On the public impact assessment that would come to the House finance committee, is there a template of certain things you would definitely want to know, such that all such impact assessment statements would have certain things that would be there?

I also want to know, in the Insurance Companies Act, where is the public accountability statement? Again, is there some provision that those be comparable data we can look at? I also want to know, although they're welcome to join the CFSO, why is that optional?

Mr. Frank Swedlove: In terms of the public accountability statement, we will specify in regulation the kinds of material that would be provided. Will banks look at it differently? I think that what we'll be doing and what the Financial Consumer Agency will be doing would be working with the financial institutions to assure a high degree of comparability. I think over time we will certainly see that.

With respect to the public interest impact analysis, which occurs in the case of a merger between two banks over $5 billion, the merger review process specifies the kinds of material that should be included in such a statement. So that's the way we cover that off.

The third question, I'm sorry, was...

Ms. Carolyn Bennett: Insurance companies, comparable data.

Mr. Frank Swedlove: Oh, yes. The reason we have required the banks to be members of the Canadian Financial Services Ombudsman but haven't done so for insurance companies and for trust companies is a view by our lawyers that constitutionally we are not in a position to require these companies to be members of the CFSO. We just are not in a position to require them to be a member of any specific organization. What we have done is require that they be a member of a third party dispute resolution system, because the focus of our regulation in the area of insurance and trust companies is with respect to disclosure and with respect to procedures within an organization.

Ms. Carolyn Bennett: On that branch closures piece, obviously in the Bank Act there's not really much we can do other than moral persuasion and the consultation of the community. Is there a provision somehow through the CBA or through anywhere to make sure every Canadian has access to banking somehow? Do we know the percentage of Canadians who can use an ATM? Do we know whether the mobile truck will come in, or each bank will take it? I think we did a good job on getting the SMEs being able to do deposits through the ATMs and those sorts of things, but I guess it seems sort of normal. I also was concerned, when we were up north again this summer, that when there is only one server in Iqaluit, to have people even technically being able to do things online with huge long-distance charges... I mean, what is our responsibility as a government to make sure that people can do banking?

Mr. Frank Swedlove: I think it's been a difficult issue as branches are being closed in a number of rural areas. What we have proposed here we felt was about the only way we could proceed in terms of providing the opportunity for discussion to take place and providing opportunities for communities to react and to try to find alternatives.

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There are a number of initiatives. For example, in some areas I'm aware that Canada Post is looking at providing some banking services on behalf of banks. Those are the kinds of things that I think the government continues to support.

The Chair: Thank you, Dr. Bennett.

Mr. Epp.

Mr. Ken Epp: My question is one of duplication. I'm aware that there's presently the Office of the Superintendent of Financial Institutions. I believe that each bank has, in the last number of years, established their own ombudsman to look after consumer complaints. Now we have in this act, as I see it—and please correct me if I'm wrong—two new additional agencies. We have the Canadian Financial Services Ombudsman, to which banks are required to subscribe and to fund that. And in addition, you have the Financial Consumer Agency of Canada, with a commissioner. As I read it, you are encouraging people to be involved in this. So we have altogether five different ways or separate offices that are there to deal with consumer complaints.

Now, we know that there's a strong market out there for holding banks accountable and making sure they don't treat consumers unfairly, but it seems to me that when you have five different arms to go to in order to handle complaints, perhaps that's a little overkill. Could you comment? And correct me if any of my statements are wrong.

Mr. Frank Swedlove: The Financial Consumer Agency of Canada is a regulator. It will be responsible for the consumer-related provisions of the legislation, and as such is taking over that responsibility from OSFI. So there is no added burden in terms of complaint-handling procedures that exist today. Canadians have the right today to call OSFI if they have a concern about their institution.

Generally, what would be occurring is that the interest of the regulator would be if the banks are not meeting the requirements of the legislation—for example, if there's abusive tied selling that's going on, or if the proper information is not being provided that is required by the legislation with respect to opening an account, etc. So that would be of particular interest if there was a complaint of an institution by the Financial Consumer Agency.

An ombudsman is quite a different kind of organization, in the sense that it deals with the issue of fairness and the way the banks are treating their customers. There is a present system. You correctly identified the fact that banks have their own internal ombudsmen, but there also is the Canadian Banking Ombudsman. The CBO does look at these fairness issues. It's envisaged that the Canadian Financial Services Ombudsman would essentially take over the responsibilities of the Canadian Banking Ombudsman. I think that's the direction in which we're heading.

So it's not a duplication of an existing structure but rather building on the Canadian Banking Ombudsman and adding to its credibility and adding somewhat to its accountability. My understanding is that the banks are generally favourable to a broader Canadian Financial Services Ombudsman.

Mr. Ken Epp: Okay. Are you telling me then that the present office of the superintendent is going to disappear with this act?

Mr. Frank Swedlove: No, that's not the case. The consumer-related provisions will no longer be the responsibility of OSFI, but OSFI still has the broad responsibility for the safety and soundness of the banks and other federal financial institutions.

Mr. Ken Epp: Okay. And do each of these report directly to the minister?

Mr. Frank Swedlove: The superintendent does report to the minister, as will the commissioner of the Financial Consumer Agency.

Mr. Ken Epp: Okay. But who is the Canadian Financial Services Ombudsman accountable to?

Mr. Frank Swedlove: The paper in June 1999 stated that the government objective was to establish an ombudsman that will essentially operate independent of both government and industry. The objective is to establish a board of directors that would include the institutions that are members of the CFSO, but it would also have a majority of independent directors. The legislation permits the Minister of Finance to appoint a majority of the board. We need to have this authority in order, in the first instance, to establish the independent directors of the board, because in the absence of that, how does one arrive at independent directors? So the intention is that at the establishment of the board of the Canadian Financial Services Ombudsman, the minister would appoint the majority of that board, but subsequent to that he would not be appointing the majority of the independent members of the board.

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He will also have general responsibilities with regard to the bylaws and the letters patent of the organization, but in the absence of any changes in the bylaws or letters patent, it would be up to that board to administer the office of the ombudsman and to deal with all of the issues related to the day-to-day operations of it.

Mr. Ken Epp: Okay. I would like to recommend—and I don't know whether this should be in the regulations or just be put in as a request to the banks—that maybe once a year they should include in their bank statements that they send to every customer a brief summary of whom to go to if they have troubles with the banks. It seems to me that we could get into a pass-the-buck situation here where a consumer would go to one agency, and it would say, no, you should go there, and then they would say, no, you should go there, and the consumer would basically get the runaround, not unlike when you deal with the government. I shouldn't have said that, should I? No.

The Chair: Because you said that, your time is up.

Mr. Loubier.

Mr. Ken Epp: Oh, no. I have one more quick question.

The Chair: Okay, go ahead.

Mr. Ken Epp: I have a question with regard to the radius of notice required when you shut down a branch. You took ten kilometres, which is, I think, woefully inadequate for most of Canada. Ten kilometres is as far as we walk to our vehicle when we're out in the country. You go into the woods and you walk back that far. This is what I'm talking about. We're thousands of kilometres apart sometimes from one bank to the next. Are you saying that for anything less than ten kilometres you have to give this notice? Maybe it should be batted to 100.

Mr. Frank Swedlove: There are two notices of requirement. One is a four-month requirement for any branch in Canada. So even if there's a branch across the street, you still have to provide four months' notice. What we've done is we've said that there'll be an extended notice of six months if you are the last branch within a ten-kilometre radius. In order to make a differentiation between the four months and the six months, one has to pick a number that would apply. We chose ten kilometres in recognition that there are some towns, for example, that are ten kilometres apart, and it would actually be a requirement for people living in one town to go do their banking in another town. I agree that there is an arbitrariness to this, but we did have to try to draw a line somewhere. But what would be involved is simply providing two months' extra notice, which I don't think should be too onerous.

Mr. Ken Epp: Okay.

The Chair: Thank you, Mr. Epp.

Our final questioner is Mr Loubier.

[Translation]

Mr. Yvan Loubier: Following up on what Mr. Epp said, regarding branch closures, this bill favours cities. It's not kind to rural communities.

I don't live in the West, where distances are far greater, but even in a semi-rural riding like Saint-Hyacinthe—Bagot, farmers live rather far from urban centres, sometimes a minimum of 50 or 60 kilometres.

I admit that I am somewhat disappointed about consumer protection issues and adequate insurance services for the future. Some consumer groups claim to be satisfied, but I don't quite understand them because regardless of whether four months' or six months' notice is given, the branch is still going to be closed and the services lost.

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I have to wonder why you have not taken into consideration the pleas of many stakeholders for community reinvestment. This has happened and is continuing to happen in the United States. Right now, we're seeing banks and other financial institutions abandon rural areas, while leaving some service desks open. Earlier, you spoke of the Canada Post Corporation and the possibility of it accepting deposits or otherwise. Of course the banks are willing to accept deposits from rural customers, but they invest that money elsewhere. Under a community reinvestment scheme, in underserviced and remote areas or in areas where the unemployment rate exceeds the national average, all of the deposits made to financial institutions are evaluated, together with the loans and advances made by these institutions within the community.

It's an easy matter to take in deposits from rural residents and to use these funds for development in large urban centres. However, I feel that rural regions deserves some consideration. Because ours is such a vast country, the bill should have focused not only on urban dwellers, but on rural residents as well. Where do you stand on the subject of community reinvestment? Could the bill be amended some way to introduce provisions of this nature? Isn't there at least room for some improvements on this front?

[English]

Mr. Frank Swedlove: There have been a number of requests to establish a Community Reinvestment Act kind of structure in Canada. In the view of the government, the CRA was established in the United States very much to deal with a specific problem about investment in certain communities that were in some cases determined by banks not to be beneficial to invest in at all. So there was essentially no capital and no lending available for individuals or companies in certain areas of the United States, and I think that particularly applied to the poorer areas in the major cities in the United States. So that was what they were responding to with their Community Reinvestment Act.

We haven't shown the same kind of evidence of that situation arising in Canada. There are clearly differences that occur in any one part of the country in terms of the amount of money that is essentially lent as opposed to the amount of money that is borrowed from any region in the country. If every region of the country got the exact same amount, then that would clearly affect the efficiency of the banking system to do the job it does in the sense of obtaining funds and distributing them throughout the economy in the most efficient way possible.

One thing has occurred, and you'll be doing this with the public accountability statement: there will be a clear understanding of where the lending occurs with regard to small and medium-sized enterprises, at least on a regional basis. There will be requirements to report that kind of information, so people can make some assessments as to how much money is flowing in from the banking community at any given time.

[Translation]

Mr. Yvan Loubier: In terms of low-cost accounts, the Minister of Finance is free to determine the parameters. How do you plan to get banks to go along with two types of parallel accounts, that is low-cost accounts and regular accounts?

[English]

Mr. Frank Swedlove: With regard to low-cost accounts, the intent is for signing a memorandum of understanding. The banks will make proposals with regard to what they perceive to be an acceptable low-cost account. If the minister agrees, then a memorandum of understanding will be signed that will ensure that the low-cost account will be provided.

As I mentioned before, we have provided in the June 1999 paper what we perceive to be an acceptable low-cost account, but we recognize that there could be variations of that where a lower amount will be charged for fewer transactions, and that provides greater choice for consumers.

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So we will hold the banks accountable to provide low-cost accounts. As the government has stated, if the banks do not meet that accountability, then we would have the ability in regulation to specify what is a low-cost account and require banks to comply.

The Chair: Thank you, Mr. Loubier.

Mr. Swedlove, thank you so much. On behalf of the committee, I also want to thank not only the participants here on this panel but also the many people who worked to produce Bill C-38. It's impressive work. I know that many stakeholders were involved in the process to bring about this great piece of work. I also want specifically to thank the officials of the various departments involved in Bill C-38. I know this is going to mean a lot of work for us, but it's very important work. So thanks again.

Mr. Frank Swedlove: Thank you.

The Chair: The meeting is adjourned.