FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, October 8, 1998

• 0810

[English]

The Vice-Chair (Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.)): Good morning. Welcome, colleagues and guests. Pursuant to Standing Order 108(2), the committee resumes its study on the report of the Task Force on the Future of the Canadian Financial Services Sector.

Just for the record, before I introduce this morning's list of witnesses, I'd like to explain a brief change in the orders of yesterday's meeting for the pre-budget consultation. As we know, Dr. Gérald Boudreau, general secretary and registrar of the Université Sainte-Anne arrived at the meeting at 3.30 p.m. after a three-hour drive to Dartmouth, expecting to participate in a discussion of the MacKay task force report. Thanks to the agreement that was reached, the committee agreed to hear Mr. Boudreau's presentation. His testimony will therefore be published in the committee's evidence for meeting number 125, Wednesday, October 7, 1998.

Once again I would like to thank witnesses who were delayed at yesterday's pre-budget hearing, our colleagues, and Mr. Boudreau in particular for his patience and understanding. Again, colleagues, this is just so that when people are looking for the transcripts, they'll know where to find Mr. Boudreau's testimony.

We have a full slate of guests this morning, so I'd like to begin right away. I would welcome Mr. Bill Casey, here on his own behalf and representing the Nova Scotia riding of Cumberland—Colchester. From the Centre for Women in Business we have Dr. Daurene Lewis. From Davis Strait Fisheries Ltd. we have the president, Mr. Grant Stonehouse. From the Insurance Brokers' Association of Nova Scotia we have Mr. Stephen Greene, the executive director. From the Metropolitan Halifax Chamber of Commerce we have Nancy Conrad. From O'Regan's National Leasing we have Mr. Stephen O'Regan. And Mr. Terry Norman is here from the Metropolitan Halifax Chamber of Commerce. I believe that's the full list, and I would just say that we're normally here until about 11.30 this morning.

Mr. Lipsett, I didn't have your name.

Mr. Bruce Lipsett (President, Insurance Brokers' Association of Nova Scotia): There were originally four looking to sit here with me this morning. Due to lack of space around the table, though, there's only room for one. I'll therefore be making the presentation on behalf of the Insurance Brokers' Association of Nova Scotia.

The Vice-Chair (Mr. Nick Discepola): All right, thank you.

I didn't mention Mr. Ferguson's name either. I'm sorry, but which group are you with?

Mr. Lorne Ferguson (Executive Director, Corporate Planning and Evaluation, Innovacorp): Innovacorp.

The Vice-Chair (Mr. Nick Discepola): Great. Then we'll get started. If you would, please restrict your comments to about eight to ten minutes so that we can get everyone's testimony in. We'll then have ample time for questions and dialogue. I would appreciate that, and I'd also like a volunteer to break the ice.

Go ahead, Bill.

Mr. Bill Casey (Cumberland—Colchester, PC): First of all, I'd like to thank you for the opportunity to speak. I feel I have a kind of unique perspective in that I'm a member of Parliament now.

I used to be a car dealer before. I was a General Motors dealer for eight years and a Ford dealer for ten years. Those businesses are now totally tied up with banks as far as financing car businesses, consumer loans, consumer financing, and financing leases are concerned.

After that, I was a stockbroker, which I feel gives me an interesting perspective in that the government allowed banks into the brokerage business and the impact was substantial. I myself felt that impact very much.

As a member of Parliament for a rural area of Nova Scotia and a rural area of Canada, I'm also very much involved with banks. I do believe I have something to add to this debate—at least I hope I do.

I'm not anti-bank. In fact, my experience with banks has been positive in that they've worked with me, especially at the local level. When my business was in the soup, I had nothing but support from my local manager. Although I would have been put out of business under a credit scoring system, the local manager helped me, and I'll never forget what he did for me.

• 0815

As a member of Parliament, just in the last month I've attended business meetings with other businesses in trouble. I've dealt with local managers of the Royal Bank and the Bank of Nova Scotia. We attended to businesses that were in trouble, and they were very helpful on the local level. However, I do strongly oppose bank mergers, bank intervention in the insurance business, and banks engaging in car leasing, and I'll try to give you my reasons very briefly.

As far as mergers go, I see zero advantage to the people in my riding of Cumberland—Colchester, in northern Nova Scotia. Many of my communities have only one bank, and I feel they are jeopardized under the merger scenario. I feel that competition will be definitely reduced, and service will be reduced. I believe decision-making will be pushed forward to regional offices and to national offices. As this happens more and more, it makes it very difficult for small businesses, because they can't talk to the people who make the decisions. In my case, when I was in trouble, I could talk to my bank manager. He had faith in me because he knew I wasn't going anywhere. He was a Bank of Commerce manager and he carried me through the last recession. Under a credit scoring system, I know he should have put me out of business, but he didn't. I fear that if banks merge, such decisions will be pushed on further down the road.

I see absolutely no advantage for consumers. Most people tell me that bank service has declined, not improved, over the last few years. I feel banks should focus on improving their service, on bringing it back to the way it used to be. I think that's what most people want.

On the insurance aspect, when banks were given permission to go into the brokerage business, which I was in, they virtually completely consumed the brokerage business. Not only did they consume the brokerage business, but they consumed the brokerage police department, the Investment Dealers Association of Canada. At one time, if an independent broker, a small broker or whoever, had a problem, that broker could go to the self-regulatory body, the IDA, to complain about a government policy, a bank intervention, or a bank policy. Brokers can't do that now because the banks have not only consumed the business, but they've consumed its police department, if you know what I mean. This gives them total control over the brokerage business for big companies and small companies. That has definitely been a damaging impact as far as I'm concerned.

As a broker, I saw tied selling. We had great debates about tied selling, but I can give you examples of senior citizens who were brought to tears because so much pressure was put on them when they wanted to change their investments and do something that the banks didn't offer. But when they went to the banks and said they wanted to change their investment objective, that they'd known Bill Casey for 25 years and wanted to deal with me, they were told they had to do so with the bank's brokerage arm. They were brought to tears.

I have three examples of tied selling here, and these are just three of what we've already talked about. One was a senior lady who had just lost her husband. She wanted to get a hold of her financial affairs. In the second, a businessman went to the bank because he wanted to move his RRSPs. They intimidated him enough that he felt they would call his line of credit on his business if he moved his RRSPs. The same thing happened with a retired couple.

Let me turn to leasing in the car business. I was a car dealer for eighteen years. The first thing I had to do when I went into the car business was to supply my customer list to the bank for security of my line of credit. In the future, if the banks are in leasing, car dealers will have to supply their customer lists to their competition. That is absolutely unfair.

I don't know what the percentage is in the retail business, but a great percentage of cars are financed through bank financing. The car dealers take the application on behalf of the bank, they fax it into the bank, and the bank approves it or rejects it. Again, car dealerships will effectively be faxing car deals and customer lists to their own competition. I think that's extremely unfair.

The banks say this will provide far more competition in the car leasing field. I don't agree with that at all. There are 4,000 car dealers in Canada. If the banks have their way, there will be three banks, which means there will effectively be 4,003 leasing outlets in Canada on the first day. I believe the banks will consume about 20% of the retail car business, which will put a lot of car dealers out of business. In some communities in my riding, there's only one car dealership. If that car dealership goes out of business, there's no warranty and there's no service to the customer, because the banks sure aren't going to do it.

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Every single aspect of the car business is closely associated with banking and financing. Banks controlled my leasing line of credit. They decided how many cars I could lease. They decided how much operating money I had to operate my car business. They had access to my entire customer list. If those people, those organizations, are given the opportunity to be my competition, it's going to be extremely unfair.

We're also going to see the tied selling aspect come back into this again. If somebody goes in to get a mortgage, banks will act just like they do with RRSPs. The bank manager is going to say to a customer that his application looks really good but would be much stronger if the bank had his insurance and car leases, and the manager is sure he could then get it through. It's subtle, but it's still tied selling. It goes on every single day in the banks, even though the bank presidents and chairmen have come to these committees and have said there is no such thing as tied selling.

In summary, I see no advantage to the small business community that I represent and have been a part of for thirty years. I see no advantage in the mergers for the people I represent, the people in small-town Nova Scotia. I think most people believe bank service has declined, and they feel the banks' focus should be on improving their service right now. I oppose mergers, bank insurance, and bank leasing because they are just simply not in the interests of my constituents. Again, I encourage banks to focus on what they do best. They do well at it, and I think they should focus on improving that system.

I would make one little allowance on mergers if there was a long-term schedule to allow other organizations to be competitive, to get into competition with the banks in towns like Parrsboro, Stewiacke, Tatamagouche, Advocate Harbour, Amherst and Truro. It's okay to say there are 54 banks in Canada that provide all kinds of competition, but in real life there is none. In rural Nova Scotia, in my riding, there is no competition. There are the banks and credit unions. Until other organizations have a chance to establish themselves, I don't think the banks should be allowed to merge. The mergers are not in the interests of my constituents.

I have passed around a little thing here. I responded to a newspaper request for information on these issues, and I printed it and sent a copy to everybody. I've roughly followed it, but let's see if there's anything I missed.

I think that does it. If anybody has any questions, I'd be more than pleased to answer them. Again, though, it is not in the interests of the people I represent for any of these three things to proceed.

The Vice-Chair (Mr. Nick Discepola): Thank you very much, Mr. Casey.

I would like to now call upon Dr. Lewis.

Dr. Daurene E. Lewis (Centre for Women in Business): Thank you for giving me an opportunity to address the committee.

We live in interesting times, times of enormous change. Change is regarded by many people as a threat. For many others it's an opportunity to accept a challenge, to learn, to grow, and to open ourselves to new and valuable experiences. Regardless of our perspective or optimism, however, change is always perplexing.

We are truly in a global village, and survival for any organization must consider participation in the global economy. We are all very aware of the impact of the Asian crisis on our dollar in relation to the American dollar. A Canadian bank cannot, will not, and does not function exclusively within the geographical confines of Canada. On the world stage, size matters.

As a former resident of rural Nova Scotia, I recently moved to Halifax. I have seen many changes in the past ten years in terms of how I do my personal banking. In the time before automatic teller machines, if I wanted to cash a cheque at a branch that was not my own, that branch would call my home branch to verify my identification. The identification usually revolved around my physical description. Now, like many other people, I rarely enter a bank. I carry a very small amount of cash, preferring to pay for goods or services with my bank client card through Interac, or with a credit card.

Earlier this year, when shopping in Hong Kong, I found it fascinating that I could insert my Royal Bank client card that had been issued in Annapolis Royal, Nova Scotia, into a banking machine in Hong Kong and have my account in Nova Scotia debited. The transaction debited my account in Canadian funds and delivered Hong Kong dollars to my fingertips.

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Technology has dramatically changed the expectations of consumers, and technology has made the world seem so much smaller. Canadian banks do need to consider where they fit in order to survive global competition. The free trade agreement opened the borders between Canada and the United States, and the North American Free Trade Agreement introduced Canada to competition and to the challenge of being able to prosper in the North American economy.

It doesn't seem that many years ago that while doing a craft show in Toronto, I found the bank branches refusing to deposit my Visa sales to my account in Nova Scotia. At that time they would not engage in transactions with bank branches east of Montreal.

The changes in technology and the creation of giant trading blocks, such as the European Community, the Asian-Pacific economic community, and the ever-expanding number of countries joining NAFTA, are challenges and opportunities for any business. Performance on the global stage has become mandatory in order to survive competition.

As the executive director of the Centre for Women in Business at Mount Saint Vincent University, I am well aware of the challenges facing women seeking start-up capital. In a study by Women's World Finance, the Canadian branch of Women's World Banking, entitled Measuring the Economic Impact: Women Business Owners in Atlantic Canada, the researchers found that 60% of women start a business with less than $10,000. These women usually access funding through private and personal means. The remaining 40% of new business starts by women do require funding from a financial institution. These women report having very good relations with their bank.

The Royal Bank of Canada has a very strong presence in Atlantic Canada. They currently serve 48,000 small businesses. The bank has had for many years a division for independent business. This division has been more recently and appropriately renamed small and medium enterprises, or SMEs. In Atlantic Canada alone the Royal Bank has invested $693 million directly in small business and another $250 million in commercial mortgages. That is a total of almost $1 billion invested in small business in Atlantic Canada. This represents a sizeable percentage of the bank's client base. Actually, small and medium-sized enterprises and personal financial services account for about 75% of the business for the major banks, a very powerful lobby.

I mentioned earlier Women's World Finance, a branch of the international peer-lending system for women. The Royal Bank is providing access to funding of $500,000 to help support the expansion of this initiative. This infusion of funds from the federal and provincial governments and the Royal Bank will provide access to funding for women-owned micro-enterprises all across Atlantic Canada. This commitment will benefit the group of businesses that have traditionally not even been served by banks. They previously had to access personal funds in order to finance their business start-up.

The Royal Bank is a funding partner of the newly formed national organization called the Women Business Owners of Canada Inc. The cross-Canada launch on June 17 was celebrated by connecting the centres across Canada, Halifax included, by teleconferencing. The Royal Bank Capital Corporation has committed $3 million for small and medium-sized enterprises in Nova Scotia. Dialogue has been opened with small business, and now is an opportune moment to support Canadian businesses as they prepare to face the global financial giants.

The banks have committed funds to support small business in Atlantic Canada, and we have the opportunity to support them in turn. The merging of Canadian banks provides a monolith by our standards, but they will still be very small compared to their competition. Even in Canada the competition for banks is very steep. For many years banks provided payroll services for many organizations. That service is now supplied by American banks. Canadian banks have not to date been able to repel the advances of foreign-owned banks that are fortified by their economies of scale and expertise. Our banking services are being constantly eroded.

• 0830

My preference is to deal with a bank in this country that invests in its people. Within recent memory, Canadian-owned department stores were the anchors in our shopping communities. Those who did not adjust to the changing trends and consumer needs are but a faded memory.

Yes, the Royal Bank has shown its concern for women entrepreneurs by financially supporting programs and services. The Bank of Montreal supports the activities of the Centre for Women in Business by providing core funding. CIBC is a major sponsor for the programs we deliver at the centre that helps to create and support women entrepreneurs.

This is an opportunity for Canadians to support bank mergers and to support our Canadian institutions as they prepare to compete on a world stage. If not, our only recourse will be to accept the global monolith based on Wall Street, in London, or in Zurich. It's a question of survival. It's a question of national pride, and mergers will make a stronger presence on the world stage.

I do find it is a bit of an irony today that we are sitting with bated breath waiting to see whether Canada gets a seat on the Security Council of the United Nations and we are all debating whether or not we are going to keep our financial institutions, the heart of the economy, based only in Canada alone.

Thank you.

The Vice-Chair (Mr. Nick Discepola): Thank you, Dr. Lewis.

Mr. Stonehouse, please.

Mr. Grant Stonehouse (President, Davis Strait Fisheries Limited): Good morning, Mr. Chairman and members of the committee. As well, I'd like to thank you very much for giving me the time to discuss with you the future of financial services in Canada. I want your process to be successful and I want your eventual insight to truly make a difference. The only way I can contribute is just to share a few of my experiences with you this morning, which I hope will provide some reflection in this process.

Mr. Chairman, your committee is in Atlantic Canada. I am in the fish business. We know about regulations, we know about foreign competition, and we know about mergers. Before I get too much of your attention, there are many things we do not know so much about such as the process of managing change. Therefore, we do hope you will consider carefully the corollaries that exist to this and to these industries, and when required you will take decisive and timely decisions.

I'm involved in a young company. We started in October 1991. From one full-time employee, this has grown to 75 in seven short years, and we have a good group of hard-working young men and women. With the support of industry members and partners here in Atlantic Canada, our group attained gross sales revenues last year of $44 million. On Monday night, these employees were honoured with one of ten Canada Export Awards for 1998, which was presented to us in Calgary.

By way of example, I want to just describe for you the nature of the seafood business today. The most efficient way I can do this, the most effective way I can do this, is just to have you consider our distribution and our transport schedule during the month of October. Quite honestly, when I got back, I walked through our office looking at the schedules of our trucking and some containers we have arriving and I made these notes for you.

We have pollock fillets arriving from China for sale and delivery into the United States. We have some shrimp arriving from Iceland for sale and delivery into the U.S. We have scallops, which we're importing from Japan for sale in both Canada and the U.S. We have scallops arriving from Korea. We're reprocessing them here in Nova Scotia for sale in Canada. We have redfish, which we are purchasing in Iceland and reprocessing here in Nova Scotia for sale here and in the United States. We have codfish from Russia for sale and reprocessing in Newfoundland. We have some haddock fish coming in from Norway, which is going to a reprocessing factory in Nova Scotia. We have codfish arriving from Alaska, which is going to be reprocessed in Quebec.

• 0835

From our own fishing vessels and landing this coming Saturday, the scheduled transport is as follows. We have raw shrimp for export to Japan. We have raw shrimp for export to Iceland. We have cooked shrimp for export to Scandinavia and the U.S.A. and then some domestic sales.

Quite honestly, that's a lot of work to do in a month, but some of these shipments are smaller, some are medium, and some are larger. This commercial activity is becoming second nature to me, but compared to 1991, and as a result of foreign competition, technological change, and the impact of globalization, as you can well imagine, we require quality financial services. As a small company I require currency exchange at competitive rates. We need documentary credit and bank collection services. We need credit information and trade reconnaissance, not just in Canada but in all these countries I've mentioned.

In Halifax I need access to U.S. funds, Japanese yen, Danish kroner. I need to discount letters of credit open to us, I need to factor invoices for sales we make, and I need good advice to manage my risk.

This is not a unique example that I provide for your consideration this morning, Mr. Chairman. This is a small fish business. We reside in a truly globalized economy. Every day in an Atlantic Canadian small business I have to decide and I have to make choices as we try to take the next step to expand—to expand the marketplace, to expand our revenues, or simply to concentrate on one species or one market—but truly I have no choice.

I may be accused of simplifying a very complex issue or be credited with some insight.

The managers and directors of four Canadian banks made a decision in January of this year on which path to follow, one of two ways: growth or perhaps selected concentration. Mergers are not about getting smaller, they're not about slashing services, they're not about lay-offs. Global competition expands a customer base. It generates new revenues, which in turn improves the productivity ratio and aids in paying for the investments required to upgrade and innovate services. As in my own business history, competing in the international market is absolutely necessary to survive and grow a venture. Our Canadian banks must be provided the opportunity to truly compete globally. Earning profits outside of this country simply supports economic growth here, job creation here, and shareholder value here.

Specifically, on the proposed mergers, some of the figures I've heard are that initially they'll be earning perhaps upwards of 40% of their profits outside of Canada. They certainly are repatriated to this country.

Information and communication technology is rapidly changing every arena of entrepreneurial activity. The pace is fast. I'm using digital photography onboard our vessels to Internet-transmit pictures of inspection services to my clients in Japan in real time. The pace is fastest within the financial services industry in this country: ABM, debit cards, smart cards, telephone, PC on-line banking, Internet banking, and e-trading.

Our banks are falling behind. In the 1970s CIBC was among the 20 largest banks in the world. Today it's not even in the top 50. Competition in financial services is skyrocketing and Canadian banks have to be ready. Their ability to meet domestic and foreign competition will depend on their technological superiority, and this requires a huge investment in training, software, and hardware.

In 1996 the Bank of Montreal spent $640 million on R and D. Citibank spent $3 billion.

I realize we must balance the need for safety and the need to facilitate competition and innovation. Change involves risk. I believe the delay involves even greater risk. Mergers are a simple business concept. There are certain members in my own industry that are healthy and well.

• 0840

I would ask you perhaps to avoid some chronocentric traps. It's a relatively new word, and it simply means the tendency to regard this period in time, 1998, as the be-all and end-all in time. It is not.

The products and services we will require of our banks in a very few short years are barely imaginable today. We must ensure our competitive spirit, and we must ensure our banks are able to adjust and to build on these strengths in order to provide them with a competitive base in the global markets.

I believe the process should be brought to a definitive conclusion as quickly as possible and that the mergers should be allowed, while at the same time not being subject to onerous regulatory conditions that would defeat the basic premise of being able to compete internationally, to grow their service, to offer innovation, and to provide jobs and financial security and centres in Canada for Canadian businesses.

Thank you very much for your time.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Stonehouse.

I'd like now to turn to Mr. Lipsett, please.

Mr. Bruce Lipsett: Thank you, Mr. Chairman.

Good morning, Mr. Chairman and other committee members. My name is Bruce Lipsett, and I am president of the Insurance Brokers' Association of Nova Scotia. With me this morning, but unfortunately not at the table, are three other members of our association.

The Insurance Brokers' Association of Nova Scotia represents approximately 760 independent insurance brokers and their staffs in this province. In other words, our members write about 80% of all the property and casualty insurance in Nova Scotia in any given year.

We believe the task force has utterly failed in its task of assessing the quality of competition within the financial services sector, including various segments of that sector.

We believe it is wrong that the task force has focused almost exclusively on the interests of the banks. We feel this probably shouldn't be surprising, given the fact that the task force is independent from government. It was asked for by the banks and inspired by the banks, and, at least for a while, dominated by people who had close ties to the banks.

In looking at this report we have to remember that consumers did not ask for it. In fact, in all my years as an insurance broker I've never heard it expressed to me by any of my customers that they wished they could buy insurance at a bank or that they believed they didn't have enough choice. I also have never heard it from any other broker or read it anywhere. MacKay himself offers no evidence for it. And no bankers have ever told me their customers wished they could buy insurance from them.

I believe the reason consumers have not come forward to support the task force report is that, unlike the banking industry in this country, the property and casualty insurance sector is highly competitive, and consumers know it. Whereas only a handful of banks operate in Nova Scotia—and if they have their way there will be even fewer—there are more than 1,000 independent insurance brokers in Nova Scotia who work in over 100 companies, which have roughly 175 offices scattered around the province. These 1,000 Nova Scotia brokers and these 175 insurance offices operating in many small Nova Scotia towns source the best and most cost-effective insurance for their customers from a large array of national and multinational insurance companies.

We believe the failure of the task force to acknowledge Canadians already enjoy the benefits of one of the most solid, competitive, and cost-effective property and casualty insurance sectors in the world is not only shocking but represents a major weakness in the report. Failure to look at these competitive aspects calls into question the basis for all the report's recommendations that deal with competition in the property and casualty sector.

Despite what some sections of the report say about enhancing competition, we believe the MacKay report is really about limiting competition. We believe the 1992 changes to the law, which gave banks the right to compete in the insurance industry, really did enhance competition. Those legal changes gave consumers more choice, without adversely affecting their traditional suppliers of insurance. Those legal changes put insurance companies on notice such that if they were going to compete with a new player with the financial resources of the banks, then they would have to become a little smarter, a little more technologically driven, a little better at marketing, and a little more cost-effective. At the end of the day, if some of us did not respond to the change in the environment, then we would have lost a fair fight.

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In short, the 1992 laws did enhance competition, in our view. But it's clear that the 1992 changes weren't enough for the banks; they wanted more. So at their urging, MacKay recommended that banks be allowed to sell insurance from their branches.

Mr. Chairman, we believe that if this recommendation becomes law, the ultimate impact will be this: just as there is a handful of places for a consumer to get a car loan or general banking services today, tomorrow there will be only a handful of places where consumers can buy property and casualty insurance. Why? It's not because consumers would get better service from banks. No, I believe it's only common sense to recognize that people in Yarmouth, for example, will get better service from a Yarmouth broker—this is a person who is part of the community and who understands the people in that area—than they would from a large bank with its layers of bureaucracy in a head office located far away. It won't be the price either, as we all know how a bank's service charges can sneak up on us.

Mr. Chairman, if we lose customers to banks, it will be because the banks have been able to use their influence with their bank customers to also gain their insurance business. We believe this kind of competition is unfair because the banks have privileges we don't have. We acknowledge MacKay's recommendations with respect to tied selling and the current bill before Parliament, but Mr. Chairman, all the legislation in the world will not stop consumers from feeling the pressure to buy the bank's insurance products when they're asking for a car loan or a mortgage. The question consumers will be asking themselves is, will I get the loan at favourable terms if I don't buy the insurance too?

We believe that MacKay's recommendations do not serve the public interest for two reasons.

One, they will ultimately lead to less choice for consumers, and when there are fewer choices, Mr. Chairman, there will be higher prices.

Two, the hundred or so insurance brokerages in many small towns in Nova Scotia will begin to disappear. These companies, Mr. Chairman, are very important to their communities. They employ more people and use more goods and services from the local community than a bank branch would if it took over the community's insurance business.

Bridgewater, Nova Scotia, for example, which is where I come from, is a town of fewer than 10,000 people. There are 39 insurance brokers, who with their staff are operating from eight brokerage companies. These brokers compete for customers against themselves, call centres, various group plans, and the co-op. Mr. Chairman, the people of Bridgewater have tremendous choice about where and how to spend their insurance dollars.

I must add that I'm not even including in this analysis the towns of Lunenburg, Mahone Bay, New Ross, or New Germany, all of which are only 15 to 25 minutes away, where additional brokers compete for the business in Bridgewater. The only industry I can think of in Bridgewater that has more competition for a consumer's dollar than our industry is the restaurant business.

Mr. Chairman, Bridgewater is not unique. I believe the same kinds of results can be found for small towns right across the country. It doesn't matter whether you're in Truro in Nova Scotia, Orillia in Ontario, or Red Deer in Alberta. If the banks are allowed to sell insurance from their branches, competition in the property and casualty insurance industry will shrink. Employment in small communities will decrease, the tax base in small communities will erode, and consumers will be left with less choice. It will have been public policy, not globalization, that made it so.

The Liberal government has said in many places in its policy books that the interests of small business are a priority, and politicians of all stripes tell us that small business is the backbone of our country. So the government must understand, Mr. Chairman, that this report is bad for small business. The effect of it will be to reduce the opportunities for capital formation in small communities. It will harm a stable, professionally run industry, and it serves no pressing public need.

The MacKay report makes extensive use of the issue of globalization to underpin its recommendations. If the forces of globalization put me out of business, so be it. These forces are natural and are hard to resist. Government policy must accommodate these forces. It cannot hold up a hand to shun them or pretend they don't exist. Whenever a government's policies have been found to run counter to these forces, the experience over the last 20 years in trade deal after trade deal has been that the government has been forced to abandon such policies.

• 0850

We also know, after the turmoil in the world's financial markets this summer, that the forces of globalization do not always lead to good things. We find the world's leading governments, including the Canadian government, looking for ways to mitigate the worst effects of globalization on world financial markets.

If you think carefully about the issues before you, Mr. Chairman, as I'm sure you are, you will conclude in the case report that the globalization argument is actually specious. The report could just as easily have been written in 1968, before globalization became part of conventionalism, as in 1998. The recommendations in this report are independent of the argument about the forces of globalization, which is used to disguise the bank's true intent, which is to move into another industry. Globalization is a phony issue in this debate because there are no foreign governments that, at the urging of their domestic industries, are asking Canada to change some of its insurance laws.

So the MacKay report is not about changing government policy in order to accommodate the demands of globalization. No, Mr. Chairman, the MacKay report is about changing government policy in order to invade a successful industry that others have built over generations. The MacKay report is not about creating new business, it's about taking away established business. The MacKay report is not about enhancing competition, it's about limiting competition. The MacKay report is not about creating new jobs, it's about taking away established, year-round, full-time jobs, which in this region are hard to come by. The MacKay report is not about satisfying the needs of consumers, it's about satisfying the hunger of powerful financial institutions to increase their profits so they can have more international clout.

Mr. Chairman, there is no issue of globalization here. The issue before you is about a public policy choice over what is best for Canadians. Mr. Chairman, you can say no to the MacKay report and still be on the side of globalization.

Thank you very much.

The Vice-Chair (Mr. Nick Discepola): Thank you very much.

I'd like to now turn to the Metropolitan Halifax Chamber of Commerce. We have Mr. Norman and Ms. Conrad.

Mr. Terry Norman (Chair, Bank Merger Task Force, Metropolitan Halifax Chamber of Commerce): Thank you, Mr. Chairman.

As the voice of business for our region, the Metropolitan Halifax Chamber of Commerce welcomes the opportunity to address the House of Commons Standing Committee on Finance.

The MacKay report is a comprehensive set of documents that reflects considerable research and thought. We believe public consultation by the Standing Committee on Finance provides an excellent forum for open debate on a number of issues important to Canadians regarding the future of financial services in Canada.

To that end, we have designed our submission to focus on five key issues that we have identified as having special importance to the 1,500 small and medium-sized businesses represented by the Metropolitan Halifax Chamber of Commerce.

The first issue is the lack of access to debt capital by small and medium-sized enterprises, or SMEs, as we generally call them. Two-thirds of our members are small businesses with ten or fewer employees. They typically have less than $200,000 outstanding in credit, and banks are their primary source of debt capital.

Quoting from the Task Force on the Future of the Canadian Financial Services Sector, on page 57 of background paper 4, it is stated that during the recession of 1989-1992, Canadian companies with loan authorizations of less than $200,000 “experienced nearly a 25% decrease in their outstanding bank credit, while total business lending by the banks rose by 3.2%.” According to the Bank of Canada Review, Canadian bank lending to SMEs under authorization limits of less than $200,000 did not recover to its 1989 level until eight years later.

A survey was conducted by Ekos Research Associates in March and April 1998 regarding the financial services sector. They found that 87% of the market in Atlantic Canada is covered by the big six chartered banks. Credit unions were the second alternative for 9% of the market. Trust companies were a distant third with 3% of the market. In fact, in Nova Scotia, it appears the banks have an even higher percentage of the market than the Atlantic Canadian average because, according to the Bank of Canada, credit unions had only a 5% share of the assets by deposit-taking institutions in Nova Scotia in 1997.

If the mergers of the Royal Bank and Bank of Montreal and also the CIBC and TD banks are approved, then SMEs in Nova Scotia will have only three chartered banks as competitors of any significance. In order to provide competitive alternatives for SMEs in Nova Scotia, it will be necessary to foster the growth of tier-two banks, foreign banks, trust companies, and credit unions, as well as train their personnel to handle the special financing needs of SMEs.

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In the interim period, while these competitive factors are being developed, it is essential that the big six chartered banks maintain their commitment to meeting the financing needs of SMEs in Atlantic Canada. We submit that the big six chartered banks should each guarantee that the credit facilities available to SMEs with authorizations outstanding of less than $200,000 in Atlantic Canada will be maintained by that bank in proportion to the total credit facilities available to all commercial clients of the bank in Atlantic Canada.

This means if credit is to be reduced at the request of the bank, it should be reduced on an equal percentage basis for large and small businesses in the region where they are located. In general, credit facilities should increase when a region's economy is growing. On the other hand, if a region is in recession it's likely the credit facilities would shrink. We propose that this obligation should be reviewed annually as part of the community accountability statement from the banks that has been proposed by the MacKay task force.

The second issue is the need for increased competition for financial services. As we've already mentioned, the high concentration of banking services with the big six chartered banks in Atlantic Canada requires action to create new competitors. This could be done by reducing barriers to the entry of foreign banks, encouraging insurance companies to enter the SME market, fostering the growth of new regional or community banks, and encouraging credit unions to expand into the SME market.

A key element in this new competitive environment for financial services is open membership in the Canadian payment system, subject to minimum regulatory liquidity, operational and technical criteria, and broad access to such services as Interac by all financial institutions.

Coupled with increased competition is the need for training of financial services personnel to handle the special needs of SMEs. This is even more important for sectors of the SME markets such as knowledge-based industries, or KBIs, as they're often called. Much of the growth in the SME market is being driven by KBIs, and they have non-traditional financing needs. A big portion of the assets of the KBI go home every night in the way of their personnel. This requires the shift from asset-based lending to cashflow lending, coupled with a thorough knowledge of the market. In some cases it also requires pricing loans for risk, which is contrary to the common practice of the big six chartered banks. Usually, commercial loans in Canada are priced with a spread of up to 3% over prime. If the loan is considered higher risk, it is declined, rather than approving it at a higher spread, as is the common practice in the United States.

The level of competition in the regional market should also be reviewed annually as part of the community accountability statement by the banks, in our view.

The third issue we've identified is the lack of research on the financing needs of SMEs. The Task Force on the Future of the Canadian Financial Services Sector was surprised to learn that there's very little information about the financing needs of SMEs in Canada. The task force has recommended that Statistics Canada and Industry Canada be assigned the responsibility of surveying the industry on a regular basis in order to develop benchmark information for analysis of the financing needs of SMEs.

While we do not disagree with the nomination of these government departments, we believe collaboration with representatives of the small businesses across Canada, such as the local chambers of commerce and the Canadian Federation of Independent Business, would be beneficial in ensuring that the data collected are truly representative of the market. The Metropolitan Halifax Chamber of Commerce is pleased to offer its assistance to the federal government in determining the best way to conduct this important research with the least intrusion and the highest participation rate by SMEs.

The fourth issue we've identified is the need to reduce capital taxes on financial institutions. Currently both the federal government and many provincial governments levy capital taxes on financial institutions. We believe this is regressive. Capital taxes penalize the growth of strong financial institutions. We believe all capital taxes on financial institutions should be eliminated. This would create a level playing field that would encourage new competition to enter the financial services industry.

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The last issue we've identified is the need to improve commercial account management by banks. Many of our members report that they've experienced a high turnover rate for commercial account managers of the big six chartered banks. This requires the SME to train a new account manager about their business every year or two. This is inefficient for both the bank and the SME.

We recommend that banks adopt a policy of commercial account teams where each commercial account would have an account manager and an assistant account manager. The transfer of an account manager could only be made if the assistant account manager had been on the job for at least one year, and vice-versa for the transfer of an assistant account manager.

This would eliminate most of the problems relating to knowledge of the account and would ensure proper coverage for vacations and illness. It would also reduce the heavy account load currently carried by many commercial account managers, and it would ease the transition when a commercial account manager leaves the bank for another job. The results would be continuous coverage of accounts and less frustration by commercial clients of the bank.

Another factor is the need for professional training of commercial account managers. All of the big six chartered banks have in-house training facilities for commercial banking. However, there are limited training facilities for educating new commercial account managers who may be employed by smaller financial institutions, credit unions, or insurance companies that have not yet developed this expertise.

We believe independent training facilities should be established in consultation with universities, colleges, or private training schools to provide training to meet the need for professionally trained commercial account managers.

In conclusion, the Metropolitan Halifax Chamber of Commerce believes the MacKay report is a comprehensive set of documents that lays out a blueprint for the future of financial services in Canada. We endorse the vast majority of the 124 recommendations contained in that report.

However, we believe much more attention needs to be paid to the financing needs of small and medium-sized businesses in Canada. In particular, the special financing needs of SMEs in Atlantic Canada should be addressed because there are few strong alternatives to the major chartered banks in this region.

The Halifax chamber would be pleased to participate in future research regarding the financing needs of SMEs in Atlantic Canada. We believe many members of our chamber would gladly volunteer their time to assist in this process.

We also believe new initiatives should be undertaken by the federal government to promote the growth of competition in financial services in Atlantic Canada. SMEs have historically suffered greater reductions in credit available during recessions. Atlantic Canada has a larger concentration of SMEs and fewer large corporations per capita than the rest of Canada. Therefore, it is vitally important to our standard of living that availability of credit to SMEs in Atlantic Canada should be maintained or grow at the same rate as the regional average for all commercial loans throughout the economic cycles. These conditions should form part of the annual community accountability statements by the banks.

Capital taxes on financial institutions should be eliminated because they are counterproductive. We want strong financial institutions that have solid capital bases. Capital taxes inhibit the growth of these institutions.

Local decision-making on the granting of loans by financial institutions is also very important to SMEs in Atlantic Canada. The problems of excessive account loads, high turnover, and proper training of commercial account managers need to be resolved by the banks.

In conclusion, we appreciate the opportunity to present the views of our 1,500 small and medium-sized businesses who are members of the Metropolitan Halifax Chamber of Commerce.

The Vice-Chair (Mr. Nick Discepola): Thank you very much, Mr. Norman.

I would like to now turn to O'Regan National Leasing, Mr. Stephen O'Regan.

Mr. Stephen O'Regan (Owner, O'Regan National Leasing): My name is Steve O'Regan and I'm here with my brother Paul. We operate and own the O'Regan automotive group. This includes seven dealerships in Halifax and Bridgewater, as well as O'Regan National Leasing, which is one of the largest independent automobile leasing companies in Atlantic Canada.

As a family, we've been in the automobile business in Nova Scotia since 1915. Both of us were brought up in the car business. I studied engineering and worked for almost 20 years in engineering before coming into the business to join Paul, who has an education background and taught school for many years before coming back to the car business. We have a fairly extensive background in this business. We have built a company in this area that today employs about 225 people. We have sales of close to $100 million annually.

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We have a lot of concerns about the MacKay report. I truly believe the MacKay task force focus is really all about what's good for the financial services sector and the banks; it's not about what is good for small business and the consumers in the long run.

The banks have lobbied for the right to bypass small business dealers such as ourselves and sell their lease products directly through their branches. The automobile dealership business is very capital intensive, and I'll just tell you some of the products we look to the banks to provide for us. There is mortgage financing for our buildings and our facilities. They provide the operating lines of credit to run our business. They provide the floor-plan financing that allows us to finance our new vehicle inventories. They provide the consumer loans to our customers who buy our new and used vehicles. They really control about 50% of the leasing business today through the retail lease programs that are marketed through our dealerships, as well as by providing lease financing to our in-house wholesale lease operations.

Paul will just run over some of the concerns in a more specific area we have with regard to the MacKay task force.

Mr. Paul O'Regan (Owner, O'Regan National Leasing): One of the situations that really differentiates small business—and we consider ourselves small business, although we are one of the larger automotive companies in this area—is that while banks report to their shareholders, we report to our employees, our families, and our communities.

We're constantly barraged by the thought that we need to have the banks in the car business to have more competition. There couldn't be anything more absurd than this. The car business has to be probably one of the most competitive businesses in the world, and I can tell you we've all experienced that. We fundamentally have no problem with the banks, but we feel the banks should be partners, not competitors. We have to rely on them for some of the services Steve has mentioned, and now to think of them leasing cars over the counter is totally absurd.

They control our financing and they control the lists of our customers. It would be like me going out to McPhee Pontiac or to the Ford dealer in town and giving him my list. It makes no sense. It's totally absurd.

Back in the 1950s, the Canadian Automobile Association and the federal government got together when leasing started out and set up a situation of capital cost allowance. I don't know whether you people are familiar with capital cost allowance, but essentially capital cost allowance allows an asset to be written off quicker than the normal rate. In other words, it allows a leasing company to take their inventory of automobiles and protect taxation to some degree, to save some taxation in the short term. This allows an automobile dealer to protect some of the taxes we pay each year, and we can use this money to build new buildings and reinvest in our businesses.

This was designed because of the capital-intensive nature of the car business, and I think that's what the banks are looking for. They're looking for something that was never designed for their purposes. This was designed for the 4,000 car dealers in Canada to help them reinvest in their businesses. The banks have $3 billion of profits they want to push forward and protect, and I think this is why they want to glom onto this car business, because it's a great opportunity for them to protect their huge profits, and it was never designed that way.

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The other thing that fundamentally concerns me is the future of our entrepreneurs. When I left teaching in 1974 after the death of my son...I was tied up for a year with a sick child and we were back and forth to Toronto. I started a gas station down on the corner of Thistle and Maple Street with one of my grade 12 students. When we started out we had no money and we had a lot to learn. We've been very successful, but one of the things that concerns me is this real fear of what will happen to future entrepreneurs.

Quite frankly, today, with the amount of competition out there to get money, I would never make it as an entrepreneur. There wouldn't be a hope in hell that I could make it because of the fact that to get a property financed in Canada, a commercial property in the automotive business, which is a one-sector property—it's only good for automotive—it's very difficult unless you're well-established and so on. We have just put the power in so few places that it's extremely difficult to get this done.

The other thing is that when I look back over our history of ups and downs, through 1981, when interest rates went to 23%, to 1990 with the dip in the 1990-1992 market, it's incredible to think we're concentrating so much power in the hands of so few people. Financial institutions generally are very much fair-weather friends, and we've had the good luck to have some of these automotive financial institutions like Toyota Credit, GMAC, and Ford Motor Credit, which have provided financing for buildings and so on during those periods when banks don't want to do it because they don't see the opportunity and profit for their competitors.

In closing, I just have to reiterate that if banks want to merger, I don't have a fundamental problem with that, but I have a fundamental problem with the fact that it's going to be the individual small businesses that are going to provide the funding in the communities. It's the O'Regan companies that provide approximately $100,000, pumped back into the communities, into the cancer societies, the theatres, the various small communities. I think we have a problem when we take that away and allow banks to get into my business. I don't want to go in the banking business, and I have a fundamental problem when they can get in, grab the profits, wreck the business, and move on to something else.

Steve.

Mr. Stephen O'Regan: I think it may be appropriate to end our presentation with one quotation. This is a quotation from Reuben Cohen, who some of you may know as the founder of one of the very large trust companies in Atlantic Canada, Central Capital. Mr. Cohen is a very respected member of the community in Atlantic Canada, and he certainly has had a lot of experience in dealing with banks. He has written a book recently, which some of you may have read, called A Time to Tell. It's an autobiography. He was in Halifax recently promoting his book, and there was a quote that I took out of one of the local papers, a quote of his relative to the banks. I'll read it for you, and I'll close on that:

The banks are so powerful today that there's no power on earth that can compete with them. They swallow up everything.

I think that's something we should keep very much in mind.

The Vice-Chair (Mr. Nick Discepola): Thank you very much, gentlemen. I'd like to now conclude the presentations with Mr. Ferguson from Innovacorp.

Mr. Lorne Ferguson: Thank you, Mr. Chairman, and thank you for the opportunity to be here. My name is Lorne Ferguson. I'm executive director of corporate planning and evaluation with Innovacorp.

Innovacorp is a provincially owned crown corporation that was established by the Government of Nova Scotia in 1995. It was established for the purpose of focusing on the technology/commercialization requirements for moving forward in the knowledge economy.

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The mission of Innovacorp is to enable Nova Scotia companies to compete in the global economy. One thing I would like to say right off the bat is that all of the companies we deal with are technology-based businesses. Examples would be things like medical device companies, multimedia companies, and so on. All of these companies are focused on the international marketplace. They require access to services and support that enable them to penetrate those markets.

We add value through our technology/commercialization process to those individual firms, and we work individually with companies to help them develop their products, define their marketing strategies, form their business plans, distribute their products, and also in meeting their financing requirements.

We also work with key sectors in the technology field, and our sector focus is in four key areas of technology. In the life sciences sector we mean firms that are biotechnology companies, medical device companies. We are also focusing on medical services and health management services as well as the commercialization of research that might be based in universities or research organizations.

We're also targeting the information technology sector as well as the advanced materials and engineering sector and ocean technologies. These have been selected because in Nova Scotia there are good capabilities in these sectors. They're all high-growth sectors in the global marketplace and good opportunities for Nova Scotians to grow.

You can think of Innovacorp as being a part of the new kind of infrastructure for the shift into the knowledge economy. I think it's also fair to say that this is a formative approach to changing the way we do business in Nova Scotia. I think it's also quite clear that there are no real rules to go by. People are looking at what the opportunities are and establishing new methods for approaching those opportunities.

A key tool for us in that is in the area of partnership. We ourselves offer a variety of services to the companies that we deal with. We deliver the National Research Council's industrial research assistance plan for small business, which assists in the prototyping of new technologies. We also employ a scientific and engineering staff and operate scientific and engineering laboratories to help in the evaluation of technologies and the enhancing of the design of new products and services.

We deliver a venture capital program, and I'm pleased to say that we have recently partnered with Royal Bank Capital Corporation to enhance the access of small businesses, small technology companies, to early-stage venture capital.

We deliver business mentoring services as well in the form of counselling for companies that might need help with business planning or marketing or other aspects of developing their enterprise.

We also operate a growing network of business incubation centres. On our own campus, which is located in Dartmouth, Nova Scotia, we have a technology innovation centre where 35 small companies are currently being incubated. We recently completed a best practices study indicating that this process is a necessary ingredient for growing technology-based companies yielding very promising results. There is a much higher success rate coming out of companies that go through this type of process.

We also have one of what we consider to be the best technology research libraries in eastern Canada, helping companies with issues relating to intellectual property and competitive intelligence and so on.

I also want to mention that we feel there's a requirement for strong financial infrastructure to assist companies that are technology based to be able to penetrate markets. As I think I mentioned, all of the companies we are working with are technology focused and all of them require access to international markets. The domestic markets are simply not large enough to absorb the products and services that these companies, even though they may be small, are developing.

Some of the other examples of partnering arrangements that are in place to help companies we come into contact with, for example, would include the Royal Bank's financing program for innovating small business in Nova Scotia that was established in 1997. It's a joint venture with the Nova Scotia Department of Economic Development and Tourism. This program provides funds to meet the research and development needs of small and medium-sized businesses in the pre-commercial and commercial development stages, and that includes production and marketing.

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The primary focus is on knowledge-based industry sectors. The Royal Bank has committed $10 million from its national small and medium-sized enterprise financing program to support this particular venture.

Another interesting initiative that we think is important is the Canadian Youth Business Foundation. The Atlantic office of that national program opened in 1996, and the major national funders of that program are the Royal Bank and the CIBC. This program provides start-up capital as well as mentoring and business plan development assistance to aspiring entrepreneurs.

The Royal Bank staff also participate as mentors and advisers to the young entrepreneurs and businesses that emerge out of that process. A couple of examples of this program would be—some local people here may know—the Ceilidh Connection Internet café and the Cape Breton Tea Room.

These are all fairly new kinds of examples of ways to help technology and other small businesses grow, and we think this type of development and experimentation is important.

One particular need we've identified is in the area of early-stage financing for technology-based companies. When you look at the life cycle requirements of technology companies, they begin at the early idea stage, and the NRC's industrial research assistance program is targeted to help with technology prototyping.

Innovacorp is positioned at the latter stage of research and development and the early stage of product development. We see the venture capital industry playing at the latter stage of product development and the early stage of production distribution. We see the major financial institutions like the banks really playing around the production and distribution stage. Then we see the major pension funds and public subscriptions playing at the mature business stage. So it's really profiled around risk and how these financial institutions want to situate themselves in the risk environment.

Innovacorp is positioned at a fairly early stage of risk. We see that there is a need for more emphasis for early-stage financing, or what we call seed financing, at the pre-commercial stage. There are good examples, like the ones I just mentioned, of services that are available there, but we really believe there's a requirement to develop more in this direction and to improve the access that start-up companies have at the early stage of seed development.

We think this is important for one very basic reason. We think this is the new source of wealth for Canada, and we feel that new investment in Nova Scotia and Canada, as well as the development of future exports and the creation of high-value jobs, will emerge out of this kind of activity. So we think the future growth opportunities of the economy will have an awful lot to do with the technology innovation that's happening at a fairly early stage now.

You may or may not know that there are approximately 200 companies and related organizations doing biotechnology in Nova Scotia today. There are also well in excess of 200 information technology companies that are members of the information technology industry association in Nova Scotia today. I mention these as examples of what is already happening.

In Cape Breton there is a technology advisory group that meets on a monthly basis and has approximately 600 members. It is a vibrant group that's actually helping to grow the new economy in Cape Breton. So I think it's safe to say that although perhaps it doesn't always get the public profile it deserves, there is a dynamic of new technological innovation happening in Nova Scotia today. We believe this is very important.

The last thing I'd like to say is that to come back to the notion of an innovation system, the intellectual assets that exist in Nova Scotia are very strong. On a per capita basis, we're second only to the Ottawa area in the number of PhDs in the province. We are also, by contrast, extremely low in the level of commercial activity coming out of those intellectual assets. That's really what Innovacorp has intended to address—to help us to realize more value from the assets that exist here.

I think the financial infrastructure is a key part of the enabling of innovation to happen, driven by individual entrepreneurs. So we're currently working with our partners in industry, academia, and the public sector to design a new system of innovation, which we think is necessary in order to enhance the growth and development of strong and vibrant technology entrepreneurs.

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Thank you very much for this opportunity to speak. I look forward to an opportunity to discuss what's happening.

The Vice-Chair (Mr. Nick Discepola): Thank you very much.

I'd like to now turn to our colleagues. We have about an hour, so if we go with about ten minutes per person we should be able to get everybody in.

I'd like to turn to Mr. Forseth first.

Mr. Paul Forseth (New Westminster—Coquitlam—Burnaby, Ref.): Thank you very much for coming today. I will pose a question to you and just let you go across the table, anyone who wants to jump in. We've heard a variety of opinions expressed in varied ways, but I would like to give you an opportunity to refine and concentrate your answers.

What would be your bottom-line list of items that you would want of conditions or new rules that would permit you to relent to the bank merger proposal? In other words, if you say that bank mergers may be inevitable, or the government may decide if it's to go ahead, from your perspective, what would be your priority list of guarantees or conditions? What would be the bottom-line balances or the rules that you really feel are required for the mergers to go ahead?

The Vice-Chair (Mr. Nick Discepola): Who would like to jump in first to that one?

Mr. Bill Casey: As I said earlier, I believe that competition has to be available on the street in small-town Canada before mergers go ahead. And in small-town rural Canada I know in a lot of the towns in my riding there's one bank, and I know they'll disappear under mergers. The competition has to be there.

The chamber of commerce representative outlined the high turnover rate in banks' personnel now. That is a key problem now, because there is no personal establishment. It's all done by credit scoring on a small business. There is no allowance for the person involved. I think that mergers will exacerbate that problem.

I think local companies would help a lot, but it has to be in small towns. Most of the emphasis is on large towns or large centres in Canada. Very little—

Mr. Paul Forseth: So what I hear you saying is that for you to swallow the merger proposal, you're looking for the operational competition to be already established and working in the community first, before the mergers. So you're talking about a list of things.

The banks are saying give us mergers and we'll participate in broader competition and change the rules. You want to maybe change the rules first and see how things emerge, and have a viable, competitive environment, then mergers as the secondary proposal.

Mr. Bill Casey: With all due respect, I don't trust the banks to follow through on that promise.

I came to this committee and I heard the bank senior executives say, in reference to tied selling, that it doesn't happen, that we have regulations. I know it happens.

Mr. Lipsett and the insurance industry will be devastated if the banks are allowed to get into retail insurance in the banks. It will be even worse than what's happening in the investment business. When they were allowed into the investment business, at least they paid for the business. They bought the businesses in Canada. They swallowed it whole, but they bought it.

In the insurance business, if they are allowed to retail insurance in the banks, they'll just take it and they'll leave roadkill behind them, which will be insurance brokers all across the country.

So I don't have a lot of credibility in.... They may mean it when they say it; I'm not suggesting they're dishonest or anything. But there seem to be two different worlds: what the bank senior executives say, and what really happens on the street, even in their own branches. It's completely different.

I would want to see evidence in small-town Nova Scotia, small-town Canada, that there really is an option for seniors, for unemployed, for small business, and for everybody to walk in and do their banking—not a bank machine, not a plastic card. Those are parts of banking, but it's just a part of banking.

Mr. Paul Forseth: Thank you.

The Vice-Chair (Mr. Nick Discepola): Mr. Norman, please.

Mr. Terry Norman: With regard to the key conditions, for us as a chamber of commerce, access to capital is one of the key conditions, and competition is the other one. We don't expect that the competition is going to be there very quickly, though.

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We've had a situation in which the banks in the past have really discouraged that. They lobbied to keep the conditions in Canada such that there was limited foreign competition. Now we're proposing to open that up. Well, that's fine, but it's going to take some time for that to happen. Even in Halifax, I think, we see competition in Toronto, but we have very few of these foreign banks operating in Halifax. If you look at Nova Scotia overall, it's just not there.

First of all, we've got to put conditions in place that will enable that to happen. We've got to permit conditions for new banks to form. We have not had that happen. In the past 15 years, I think we've only had two or three banks started in Canada compared to the 223 that were started in the U.S. in the past year, I believe. So we need to have better conditions for open competition in the creation of new competitors.

We're seeing changes in the financial services market with category killers coming in. We welcome that because they can provide services that are very specific, but we need to open up the conditions for them to be able to come into Canada and compete right across the country, even in small towns.

Internet banking is coming. So far we've got about 10% of customers using Internet banking. We see that as growing. That will help in small communities as more people get access to the Internet. That's something that Nova Scotia's pushing very much. But we need these things to happen. Right now, it's not there. We've got approximately a 90% concentration by the banks. So in the interim period, if we're going to allow mergers, then we need to have some guarantees that the availability of capital will be there for people while we build the competition over the next 10 years.

Mr. Paul Forseth: But banks are saying the same thing. They're saying let's have an open, level playing field. They say they're prepared to be in a much more open competitive market, but what's the difference between what you're saying and what they're saying?

Mr. Terry Norman: Well, really, the difference is that it's not there today. This is something new that the banks are saying. They have not said that until just recently.

It's going to take some time to create that. You can't just open the gates and then all of a sudden it's there. That's not realistic. So we need to have a transition time for how we ensure that this happens and then monitor that on an annual basis in moving toward that. In the meantime, we need to have guarantees that the services will be there for people during this transition phase.

Mr. Bruce Lipsett: I have to speak from the perspective of our industry. My colleagues and I certainly don't see ourselves as being experts on what the banks do, although our industry has to use the banks as we borrow money from them to finance our operations. I do find it kind of ironic that if they want to take over our business, then I'll still owe them the money and maybe not be in business any longer.

We came here today to talk about banks. We're not anti-bank in terms of saying that the banks shouldn't be allowed to merge. We were taking exception to the lack of recognition in the report that there isn't extensive competition in the property and casualty marketplace.

If, as Mr. Casey indicates, they do get a chance to retail their insurance from their branches, which is what they would like to have, it will put a lot of people out of work in local rural areas, even in some of the major centres as well. There are jobs at stake. It'll be unfair competitively. Like the car dealers, every time somebody has a mortgage or a lien on their car, we have to send them a copy of the policy. They know exactly what we're doing.

We're here to fight and let you know that banks merging may not affect our industry, but banks being allowed to retail insurance through their branches will definitely have a major impact on competition in the future because there will not be as many of us around to compete. I think we did indicate in our brief, looking at just the small town that I live in, that there's lots of competition.

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Mr. Paul Forseth: That's relating to the brokerage or the selling of insurance.

Mr. Bruce Lipsett: That's right.

Mr. Paul Forseth: The comment in that factor was that the banks should be subject to the same ongoing accreditation, training, and the management of standards that you as associations and so on subscribe to.

It's the same with getting into developing a certified life underwriter situation for life insurance: how do you ensure that the banks will truly be operating on the same level playing field concerning ongoing accreditation and training? It goes to the next question. Pretty soon it may be that the banks, instead of selling the insurance, will own the insurance company. They will buy up insurance companies themselves. How far does it go?

Mr. Bruce Lipsett: They're doing that now, and they compete fairly with us now. The question, Mr. Forseth, is on unfair competition. Since 1992, competition was enhanced in our industry when the banks were allowed to become owners of insurance companies and then retail insurance through those companies.

The CIBC in Ontario, for example, has grown to be one of the largest insurance companies in Ontario, even in Canada, with a 30% growth rate. They're competing fairly with brokers like ourselves. We don't object to that; we just object to the fact that you have a group in your bank branch itself that perhaps will be able to bring undue influence onto a client that will affect their buying decision, whether it's the right buying decision or not.

The Vice-Chair (Mr. Nick Discepola): A very brief question.

Mr. Paul Forseth: I was just wondering if anyone else wanted to jump in. I posed that general question: what was the bottom-line balance? If mergers have to be, from your particular spectrum of the economy, what would be the basic limits that would allow you to swallow the merger question?

The Vice-Chair (Mr. Nick Discepola): I think he said he's not against the merger. He doesn't want them to sell branch—

Mr. Paul Forseth: I was just waiting for someone else to answer the same question.

Mr. Lorne Ferguson: My perspective is somewhat different in that the focus is on international markets for the technology companies we deal with. We believe it's vital for the companies to have access to a strong financial infrastructure and capital to finance their business development on the international stage. That means probably having a strong global presence in those markets and a knowledge of those markets that can be made available to companies based in Nova Scotia. We think that's a very necessary part of the healthy development of those kinds of businesses.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Forseth. I'd like to now turn to Mr. Pillitteri.

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

Good morning, everyone. I liked your presentations. I thought they were very intriguing.

I'll let you in on a little secret. A few years ago, in the corridors of Parliament, one of my colleagues was saying that banks were bad while insurance companies were good, and banks were bad while auto leasing and car dealers were good.

The reason why the banks were asking for auto leasing and selling insurance.... The government of the day of course decided not to, but I became more intrigued and wanted to know something about the banks, what they do. Of course, we've had extensive hearings. A Liberal committee group task force went in and asked the banks a lot of questions when they appeared before us, specifically all the chairmen of the boards.

Let me quote you some of their answers. They wanted to merge because of technology. They wanted to merge because they wanted to be world-competitive. They wanted to merge because it's a changing world there.

I heard even this morning that Stonehouse made a remark that Canadian banks spent $600 million on new technology, while the American bank Citibank spent $3 billion.

The point is this. Canadian banks are far more advanced than those south of our border. They need to spend a lot more money to catch up to Canadian banking institutions. We have excellent banking institutions here in Canada, some of the best in the world. Our concentration in banking is second only to, I think, the Netherlands, which has a concentration of three banks. In Canada, with the six chartered banks, we have an excellent franchise protected.

• 0940

We also have a 10% rule that says no one can own more than 10% of our banks. We don't have a bad banking institution; we have an excellent banking service for Canadians.

They're not afraid of the competition coming in here. We keep making the mistake that by bringing in competition, it's going to be more competitive and it's going to be better for us. I'm sorry, but from what I've seen from the outside, it's the competition that I'm not happy with. Before the Standing Committee on Finance early last week, we had Capital Fund, Wells Fargo, Capital One, and all of those that dare to be banks, all saying they want to come into Canada.

Ladies and gentlemen, the banks have been here for a lot of years. Twenty years ago, there were 52 foreign banks here in Canada. Now there are 48. If it was a such a great deal for them, they would have been rushing to come over here. They want to operate in Canada in wholesale money. They don't want to be part of the deposit-taking and the paying of guarantees; they want to come in here as branch banking. That competition from the outside doesn't want to put in bricks and mortar here in Canada; they just want to operate like Wells Fargo. Canadians, by dealing with them, have to say, “Buyer beware”, because the Canadian consumer will have no access if that bank doesn't run. He'll sign a contract responsible to the laws of California. There's nothing that will make those institutions that want to come in here responsible to Canadian citizens and the Canadian government. Those are the kinds of people who want to come in here.

As far as not having the ability to have much more competition is concerned, Mr. MacKay has not reinvented the wheel. The insurance companies, through a subsidiary, have been able to open up a bank since 1992. They never wanted to because their own field is protected. We have looked at it and said there should be competition for the sake of competition. So I say again that Mr. MacKay didn't reinvent the wheel. He's just copying a wheel, which has possibly been there since twenty or fifty years ago in the United States. There, they're chartered from different states, and now they want to merge. I don't want to see us in the cycle of going backwards twenty years and coming ahead again only to reach the point where we are today in the banking institutions in Canada.

The Vice-Chair (Mr. Nick Discepola): Mr. Pillitteri, could you—

Mr. Gary Pillitteri: Yes, but I want to pose a question.

On being large and being more competitive, a question was asked of the payroll business that the banks have here. They were asked if they would bring back the 600 jobs that were lost to the payroll they sold out to in another banking institution in the United States if they merged. The answer was no. Do you know that none of the banks do their payroll here in Canada? And even if they merge, the jobs will not come back here.

What I want to ask you is whether any of you, as business people—or any business person you know—have not been serviced by the banks today when you're doing business overseas? I haven't found any, because they are overseas. They are all over the world.

And if I can offer just one more quote, there is not—

The Vice-Chair (Mr. Nick Discepola):

[Editor's Note: Inaudible]

Mr. Gary Pillitteri: I'm going to ask another question.

There's not one deal in the world that was large enough that any one of the six chartered banks could not handle it. Each chairman said that on every deal that there's been in the world, they would have been able to compete if they had wanted to deal with it, they were large enough to do so. So I haven't seen a good business plan...and I have not been refused. Do you know anyone who has been refused because they are not large enough to do business outside of Canada?

The Vice-Chair (Mr. Nick Discepola): Who'd like to answer that question?

Mr. Terry Norman: I'd like to take a shot at that.

• 0945

First of all, in order to get export financing, you have to be a certain minimum size. You have to be talking about $500,000 in sales. Right away, a small business wanting to deal in foreign markets has a problem. The banks will not give you financing on receivables that are foreign receivables. If they're not in Canada, sorry, but you can't get it. So I can give you a lot of examples of companies that would like to do business overseas but cannot get financing from the Canadian banks with the way things are today.

Mr. Gary Pillitteri: I beg to differ with you, sir, but I deal overseas, too, and I only deal in letters of credit.

Mr. Terry Norman: What size are you talking about? Are they more than $500,000?

Mr. Gary Pillitteri: Well, yes, but that's what—

Mr. Terry Norman: Small business is very different. You should talk to small business people.

Mr. Gary Pillitteri: Yes, but these people—

The Vice-Chair (Mr. Nick Discepola): The problem that small businesses have is accessing capital. You say that hasn't changed, and I agree with you. It hasn't changed in the five or six years that I've been in politics. What would change if the banks merge?

Mr. Terry Norman: I don't think there are any changes that we're going to see unless we insist upon some changes and have them in writing.

The Vice-Chair (Mr. Nick Discepola): So access to capital would be one of your criteria for allowing the mergers to go through.

Mr. Terry Norman: Guaranteed in writing.

Mr. Gary Pillitteri: They'll guarantee anything you want. All the chairmen have committed to that. They'll guarantee all the conditions you put upon them.

Mr. Terry Norman: And I understand there are going to be restrictions—

Mr. Gary Pillitteri: I don't want to be argumentative today, but they haven't even made up the conditions in terms of payment, haven't given anything to OSFI. They still haven't come up with them yet, because there's some disagreement yet between the banks and OSFI, so they'll guarantee anything.

The Vice-Chair (Mr. Nick Discepola): Does anyone else want to make a comment? Dr. Lewis.

Dr. Daurene Lewis: Very quickly on that topic, further to what Terry was commenting on, I think the banks are very willing to compromise at this point because they're being asked to answer an awful lot of questions without having any kind of assurance that they can move forward on this.

I think Terry's response to the question was on what is happening with small business. I mentioned in my presentation that 75% of the banks' business is with SMEs and personal financing. This is our opportunity to lobby to guarantee those items, to get them in writing, as Terry has indicated. Yes, they are receptive at this point in terms of supporting SMEs in exporting, but there is a gap. If you are a very large business, you do have the opportunity. If you are a small business or a micro-enterprise, it becomes the problem. I believe they have been very receptive at this point to any concrete suggestions.

The Vice-Chair (Mr. Nick Discepola): Anyone else?

Mr. Pillitteri, you have time for one final question, but you can pass if you wish.

Mr. Gary Pillitteri: I'll pass. Let somebody else have a go.

The Vice-Chair (Mr. Nick Discepola): All right, thank you.

Mr. Loubier.

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): I'm very happy. It's the first time Mr. Pillitteri has given me time.

Mr. Gary Pillitteri: Be nice. Don't pass it to anyone else.

Mr. Yvan Loubier: Okay, I won't. I owe you something now.

[Translation]

The Vice-Chairman (Mr. Nick Discepola): Fine, Mr. Loubier, go ahead if you wish.

Mr. Yvan Loubier: I want to thank you for your presentations this morning. They enlightened us considerably about the MacKay Report. I do, however, have a number of questions and comments.

In my view, you've been very hard on banks, with the exception of Ms. Lewis and Mr. Stonehouse who spoke eloquently about the needs of the financial sector in general down the road and about the fact that banks are not foreign to us. We own the banks, they belong to us and we're happy when banks and other financial institutions are in a position to succeed. We feel the same way about insurance brokers.

• 0950

You've been very critical of banks. Mr. Pillitteri is perhaps pleased that for once, we are more suspicious of banks then we are of politicians and their promises, but that's another story.

I for one take what the banks say very seriously, particularly since the release of the MacKay report. One of the report's main recommendations was that if the mergers went through, certain undertakings must be legislated and sanctions must be imposed on those who fail to respect these undertakings. This means that if the banks, once the mergers go through, pledge to maintain or create jobs and to keep prices competitive for small businesses and individuals and subsequently fail to fulfill these commitments, they could leave themselves open to serious sanctions.

I had an opportunity to question Mr. MacKay when he appeared before the Standing Committee on Finance. He discussed possible sanctions along the lines of those imposed in the case of trade disputes between Canada, the United States and Mexico arising from NAFTA. If one party deems that actions taken have been prejudicial toward it, the financial institution in question would have to compensate that party financially in an amount deemed equivalent to the damage caused. That's a very serious recommendation.

If such undertakings were made, and if, at the same time, other recommendations in the MacKay report were carried out, such as giving small and medium-sized financial institutions and other players in the financial services sector opportunities to forge strategic alliances and to form consortiums to offset the effect of mergers on concentration in the industry, wouldn't competition be a given then in the financial sector? That's my first question. I have others that I'd like to ask.

The Vice-Chairman (Mr. Nick Discepola): Would you like to take that question? Fine. Next question.

[English]

Anyone? Mr. Norman, please.

Mr. Terry Norman: Thank you. I'll take a stab at that one.

It's a complex question you've raised. As I understand it, looking at the possibility of alliances between financial institutions is much along the lines of what we're seeing in other industries, such as airlines and so on. I think it's probably more difficult to achieve that in the financial services industry because it is a global market with global competition. It may be possible that you might have some institutions that are specialists in a certain field and they might align themselves with other specialists and therefore be able to provide broader services.

What we've seen so far is consolidation, in North America in particular but also worldwide, with major financial institutions and the growth of those globally. Our Canadian institutions have done a pretty good job internationally in growing and providing services to Canadian companies and other companies worldwide.

I think it is a possibility. Realistically, though, the growth is going to come from individual institutions. If they merge to become bigger in order to be able to compete, then certainly they could offer more services. We've seen a major change in the United States in the past ten years. It used to be that they had just regional banks and small community banks. They're now moving to a really national system. Many of the large banks are merging and are becoming even bigger, like Citibank, Bank of America, Nations Bank, and so on. They are clearly going to be a major competitive factor in the world in the future, and we have to recognize that.

[Translation]

Mr. Yvan Loubier: As Ms. Lewis, Mr. Stonehouse and you yourself have said, the announced merger of the four big banks was a business decision, a move intended to address the new competitive climate in the financial sector. This decision has nothing to do with past situations or with what is happening today with the opening up of borders.

However, quite apart from these banks, there are other banking and financial institutions, and even insurance companies and brokers, that have chosen not to go the merger route and who will not opt for this because mergers do not provide them with tools they need to compete.

• 0955

However, if they were given the necessary legislative tools to forge strategic alliances—for instance, an alliance between a small or medium-sized bank and insurance company, or between a mutual fund company and an insurance broker association—to pool their capital or to establish a moderate-sized consortium to operate in an open environment or even within the Canadian market so as to offset the impact of bank mergers, then this would be an advantage for them.

Some banks and financial institutions have already made similar demands. They argue that if banks are allowed to merge, then they too need some concessions so that they can be on an equal footing. As Mr. Casey said earlier, this doesn't mean that we need to wait for the competition to be here before allowing banks to merge. We could wait 10 or 15 years and still miss the boat and get overtaken by international companies.

If everyone were given an equal opportunity, if everyone were on an equal footing, if legislative tools were provided to allow for strategic alliances, wouldn't this be an improvement? I'm not talking about brokers. We have made our position clear. Banks must not be allowed to sell insurance over-the-counter. However, there could be room for strategic alliances to offset the mergers and then companies would have a choice. It's not up to politicians to say that we will wait until competition is a reality before we allow the mergers to proceed. Our banking institutions might not survive the wait.

[English]

Mr. Terry Norman: I agree with your point, and I think a lot of that has come out in the MacKay report. If we create the structure and make it a possibility, then we could have holding companies, for example, in the financial services industry. This would permit that type of alliance to happen.

The credit unions are already moving on this. They're looking at creating a national organization whereby they can then strengthen the credit union movement across Canada. Right now, they're very much community-oriented, and it's difficult to access services if you're not in your own community. If they get a national organization, though, that would help.

We have a lot of growth in mutual funds. There's a lot of capital invested there. There certainly would be possibilities to form alliances and to create strong financial institutions through those alliances, so I agree with your point.

[Translation]

The Vice-Chairman (Mr. Nick Discepola): Are there any other comments? Mr. Loubier, you are entitled to one final brief question.

Mr. Yvan Loubier: Fine. I'm quite happy to hear you say that, Mr. Chairman. It's because of Mr. Pillitteri.

The Vice-Chairman (Mr. Nick Discepola): Undoubtedly.

Mr. Yvan Loubier: I have one brief comment and a short question. We still tend to think that our Canadian banks are very good and very efficient, but I invite you to read an appendix to the MacKay report which refers to a study looking into the efficiency, structure and performance of Canada's banking sector.

Admittedly, our institutions were very good in the past and they still are today. They have very solid foundations. However, the study maintains, among other things, that if, seven or eight years down the road, the market is more open than it is today and the competition from Citibank and other major world banks is greater, Canadian banks would do well to operate more efficiently. They are not performing as well as we think. They perform well on the closed market, but if borders are opened up, then caution will be in order. If business decisions regarding mergers or strategic alliances have to be made, I think these individuals are well positioned to say that perhaps this is what we need to face future competition head on.

My question concerns leasing. Two years ago, we debated this issue. The Canadian and Quebec Automobile Dealers Association even met with the Bloc caucus in Ottawa. We were reluctant to let banks get into the leasing business, primarily because banks had threatened to acquire vehicle fleets, that is to bypass the dealers altogether and go directly to the manufacturers to purchase their vehicles, which they would then lease to customers.

Once we have received assurances in writing from all Canadian banks that they will not acquire fleets, shouldn't we then, at some point, question the advisability of getting back the money which currently is going to Ford Credit or GMAC, two Americans businesses?

• 1000

The Americans are making money at our expense and this money is flowing to the United States and benefiting Americans instead of Canadians. We have talked about strategic alliances. Isn't there some way that Canadian banks can get involved in leasing operations along with automobile dealers so that both parties can benefit? This would stem the flow of capital to the United States through Ford Credit, GMAC and even Toyota, a company you mentioned earlier. These are good examples.

The Vice-Chairman (Mr. Nick Discepola): Would you care to comment, Mr. O'Regan? Mr. Casey perhaps?

[English]

Mr. O'Regan, please.

Mr. Stephen O'Regan: I think the concern here really is that although it's fine to get whatever we want in writing—we can put whatever sort of assurance tag on these things—I don't have a lot of confidence that these rules and regulations will end up accomplishing what we really need to accomplish.

We talk about the captive finance companies, the GMACs and the Ford Credits and so on. From a dealer's point of view, these people are really a very comfortable assurance. Notwithstanding the fact that perhaps the profits they're making in part go out of the country, their interests are very much in tune with our interests, and that is running our business. That's contrary to the banks, whose interests are generating profit for themselves.

When we're dealing with Toyota Credit or GMAC, we have a lot of comfort in knowing that they're going to be on our side in tough times, because their motivation is really the same as ours. They're motivated by the manufacturers to sell cars. Banks don't have that same focus or that same allegiance. In tough times, we've seen many examples in which banks have very much gone contrary to the interests of our business. Had we not had these captive finance companies to support our businesses, we would certainly not be in business today.

So I really have a lot of concern about trying to regulate and put in rules and so on that would require certain procedures to happen. I don't have a lot of confidence that those would be very effective over the longer term.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. O'Regan.

I wonder if Mr. Casey might touch upon whether banks would give 0% financing on a vehicle that's not moving very well.

Mr. Bill Casey: Yeah, right. As somebody said the other day, when hell freezes over.

I just wanted to make a comment about—

The Vice-Chair (Mr. Nick Discepola): Tied selling.

Mr. Bill Casey: Well, I could make a comment on tied selling, but I was going to say something about assurances by banks. The bank executives have come to this committee and have said tied selling doesn't happen. They held up a little pamphlet that said it's against their rules to have it. But if that's the case, then why are we passing legislation in the House of Commons now that is going to incur a fine of $100,000 and a one-year jail sentence if somebody is convicted of it? They say it doesn't happen. The fact of the matter is that it does happen, even though the banks have committed that it wouldn't happen.

I would like to make another little comment on another observation. Just sitting here at this table is rather interesting. I was thinking about this thing. When the car companies first got into the car business, they manufactured cars and they sold them to the customers directly. When they got bigger, as national companies, they started to sell through dealerships. When they got to be global, they recognized that franchising or some other arrangement is necessary to do the retail level. That's why General Motors doesn't own O'Regan's Chevrolet and all their other dealerships. The car companies, the manufacturers, recognize that they can't have it all. If they want to have the global market, they have to allow somebody else to address the retail level.

It's the same thing with the oil companies. The oil companies do not own the service stations. They recognize that, at the retail level, they have to have somebody else delivering the service. It's also the same thing with insurance companies. The insurance companies do not deliver insurance directly. They recognize that if they're going to be international companies and global companies, they need another basis to deliver the services at the retail level. It's the same with fast food and many other things.

The banks don't recognize that. They want it all from top to bottom. They don't see that there's any place for anybody in the business in any of these businesses. I think that's why the government has to regulate the banks. The banks are so powerful now, and they will be more powerful in the future. The government has to establish the regulations and limit them, because they will not limit themselves, as other industries have.

The Vice-Chair (Mr. Nick Discepola): Thank you very much, Mr. Casey.

Mr. Greene.

• 1005

Mr. Stephen Greene (Executive Director, Insurance Brokers' Association of Nova Scotia): I have two points to make. One is specific and one is a general point.

Just by accident, I happened to have a conversation with an MT&T representative yesterday. In the course of the conversation, I was reminded that when the mobility part of the telecommunications industry grew up, MT&T was not allowed to bundle services together. If they were going to get into the mobility field, they had to set up a separate company and bill their customers separately from their MT&T phone lines. The CRTC did that in order to protect the small businesses that were growing up in that industry. Well, the CRTC has now ruled that they no longer have to separate the two industries. They can bundle services, and now the smaller operators, the smaller mobility companies, are complaining that they've been put at a disadvantage.

So rules can change. There can be a prohibition or a regulation one day, but it can be removed very simply the next.

The general comment I have relates to small business. We think it's clear in our brief, and it's clear in the presentation by the O'Regans, that we're facing a very important public policy choice. That choice involves the ability of small businesses to develop in rural communities. We believe that if the banks are allowed to move into the insurance industry, the car leasing industry, or whatever other industry they want to move into next, the opportunities for capital formation in small, rural communities will decrease over time. Is that a good thing for Canadians? I think you all have to ask yourselves that question. I believe it is not a good thing, so I think there is a very important public policy choice before you. You have to take that choice very seriously.

The Vice-Chair (Mr. Nick Discepola): Thank you very much, Mr. Greene.

I would like to now turn to Mrs. Redman.

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

I'd like to thank everybody for their very articulate presentations. I have to say that I think Mr. Stonehouse has actually given the most eloquent illustration of the international forces at play and of the fact that truly we are in a global economy.

The MacKay task force deals with much besides bank mergers. We've touched on the ability of banks to sell auto leasing and to sell insurance and on the fact that these are things MacKay says need to be looked at. One of the lenses I really am personally concerned about looking at with enough refinement is that of the international forces. I think it's up to the banks to justify why they want to merge. They say it's to be internationally competitive, and the balance of that argument is enough to compensate for some of the things that may happen domestically.

We have had foreign banks make presentations, like ING and Wells Fargo. They look like monoline services. They look like what's been called niche marketing or cherry-picking. They come in and offer a specific service, but they don't particularly want to be deposit takers. I believe that with Wells Fargo, when they gave us their basis point spread, it looked like they were going to offer loans at approximately 6% to 8% above prime. That's a lot of money to ask a small business to undertake, and they do it on the paperwork of about a two- or three-page questionnaire. So I do have a fear that these monoline banks will come in and will offer services that, in the long run, will not serve Canadians particularly well.

But I would go back to something I wrote down, although I'm not sure if I wrote it down correctly. Mr. Stonehouse was talking about the fallacy of looking at the future at this point in time, because clearly the future is evolving. What MacKay is trying to do is set a compass on what the next millennium is going to look like for the financial sector.

I represent a riding in southern Ontario. We have seven head offices of insurance companies. One of the suggestions of the MacKay task force is that we allow them to have access to ATMs and allow them to be able to sell funds that way. I look at Mutual Life acquiring Met Life and at the demutualization that occurred, and I think we are making major decisions.

• 1010

Whether or not the bank mergers go ahead will have to be decided on whether or not they are good business decisions for banking. But there are a lot of other issues, and I'm just wondering if anyone would like to comment on something. Mr. Loubier brought up the strengthening of credit unions, as well as the fact that insurance companies may look a little bit more like banks than they have in the past. If anyone has looked through that lens, how may it impact you in rural Canada?

The Vice-Chair (Mr. Nick Discepola): Mr. Norman, please.

Mr. Terry Norman: I'd like to comment on both issues you've raised, especially the one of the category killers or monoline foreign financial institutions coming into Canada. Historically, for businesses in Canada—and focusing more on small business, as we have from the chamber of commerce—financing has been and is available typically in the range of prime plus one to prime plus three. Once you get to that point, Canadian banks typically say the risk is too high, and they won't do the loan.

In the United States, the range is quite different. It ranges from prime plus one to prime plus eight. The surveys that have been done of businesses in the United States, when compared to surveys in Canada, show that American businesses rate their bankers much more highly, even though they're paying prime plus six on a loan. They say they're getting good service; they're getting availability of capital when they need it. They have a more entrepreneurial business climate in the U.S., and that's something we haven't had in Canada. It's been difficult for companies to get credit when starting out, especially in the first two or three years of business.

I think many small business owners would say they are prepared to pay Wells Fargo prime plus six on a $50,000 line of credit that they're giving over the Internet because those small business owners can get $50,000 when they need it, but couldn't get it in Canada. I don't think that's a particularly bad thing. In this case, they're lending us money. If that loan goes bad, Wells Fargo writes it off in the United States. It hasn't really hurt Canadians. And if they're going to sue you in California courts, good luck. How are they going to get you to go there, and what are they going to do to realize on any security? Basically, they're doing this unsecured. So if there's additional competition coming in from them, that's not a bad thing.

On your comment that we're paying prime plus six, if the company can make good profits by getting that money early and by then building their company when they're paying prime plus six, obviously they feel it's worth it or they wouldn't do it in the first place. I think that should be an individual decision. In this case, they're not a deposit-taking institution in Canada, but they are bringing capital into Canada, and if it's available where it wouldn't be otherwise, then I don't think that's a bad thing.

With regard to the insurance companies, we're seeing a trend toward demutualization now. I think we're going to see the insurance companies become more bank-like, with shareholders. That will change that industry. If they're allowed to participate in the Canadian payment system and to become deposit-taking institutions, I think we could see more competition from the insurance companies vis-à-vis the banks, and I think that may be a good thing in the long term.

The Vice-Chair (Mr. Nick Discepola): Thank you.

Mr. Casey, briefly.

Mr. Bill Casey: I just want to respond to the honourable member. All we're doing is bringing the problems to the table. You have the big challenge of finding the solution, and it is a very big challenge.

I don't know the solution. I think we're going to have a hard time finding foreign investors—or any investors—who will come to towns like Parrsboro or Advocate Harbour or Stewiacke to establish banks. On the other hand, I don't think we need the castles the banks have now. The banks always want to have the best facility in town, the most expensive, and they do that for tax write-offs and all kinds of other reasons.

You're absolutely right on everything you say, but the challenge is to find a solution. Maybe one of the solutions is to allow insurance brokers to become more bank-like and to provide the services the banks do. But it's going to be very hard to attract foreign investment. As I said to Mr. Forseth, my condition before we allow mergers is that we have small towns with competition. In reality, it's going to be very hard to do that. It's going to be hard to get people to invest money. With the resources and facilities and people we have now in small-town Canada and rural Canada, I think we have to find a way to provide the services before we allow the banks to merge.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Casey.

Mr. Ferguson, you had something to add.

• 1015

Mr. Lorne Ferguson: I just have an observation from the perspective of where innovation is occurring. In fact, I don't think it's possible to separate the rural economy from the global economy. It seems to me that the innovation we observe occurring is happening everywhere. The companies in the issues that we deal with are all over Nova Scotia in both urban and rural areas.

I guess I can give an example of our local information technology human resource capability. We're being corporately raided today for people to go to California, Toronto, Boston, Europe, and all over the world. So that's a major issue for us.

Also, local companies in small towns are developing new innovative business opportunities that really require access to global markets. It's not a traditional economic base that needs to be dealt with as a separate issue, but at least insofar as new technology-based companies are concerned and where the new jobs are going to come from, it's important that the financial infrastructure recognize that the markets for that technology are international.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Ferguson.

Mrs. Redman.

Mrs. Karen Redman: If I may, I have just one other question. It's about timing.

Minister Martin has been very clear that whether or not mergers go ahead, these will be dealt with in a global context process as part of the MacKay task force. After that, as to whether or not specific mergers were to go ahead, there would be specific hearings.

Again, Mr. Stonehouse, in his presentation, did talk about timing. I just wonder if you would like to comment on the need for a speedy reaction to those issues.

The Vice-Chair (Mr. Nick Discepola): Mr. Stonehouse, please.

Mr. Grant Stonehouse: You get what you negotiate. I guess that's a little adage that some of my businesses and staff work by.

We have a really simple choice. Exports make up 40% of Canada's GDP. That means exports in work and development by all firms, whether insurance, cars, or whatever, working outside the boundaries of Canada. That's 40% of GDP. We can either lead in the banking sector as we globalize and as the economies develop in all the countries or we can just simply participate. If we allow the mergers, we lead. If we don't allow the mergers, then we're just going to walk down the road and not lead or innovate.

We talked about competition. Last night, in my mailbox, an offer arrived from MBNA for myself, my wife, and my 10-year-old son of 6.9% interest financing and a $100,000 line of credit for each of us. It was an unclear solicitation to me, but that competition is there right now in a rural mailbox in Tantallon, Nova Scotia. In the U.S., 54% of doctors, 63% of dentists, and 36% of lawyers all have something in common: an MBNA credit card. This is a Delaware corporation with $10 billion in billing assets. They're looking to build over the next year. What's that? Is that competition? Sure it is.

What we have to focus on here is the fact that not all the banks are going to merge. Perhaps even some of the mergers that have been indicated that may take place may not take place, but we have to provide the framework for that simple process of business activity to take place. We have to be free to let them make that decision and let them go ahead. We have to do that now.

Two years ago, the banking industry was radically different. It will be radically different again if we drag this out for months and months and put on conditions that are so onerous that it loses its impact. We're going to lose an opportunity for a Canadian entity to truly compete in the global marketplace.

I'm having LCs opened to me by banks in Japan that I have now to get confirmed. We're not sure whether they're going to work or not. I need that information. For my branch, my bank here, to operate there, I need them to have access to that information.

I think what's important is that, yes, of course, we have to review things.

• 1020

We're a funny bunch. We all want the bank in Parrsboro or Digby, where you couldn't park and where there were lineups. You know, 75% of our banking is done electronically. Canadians have grasped it. It's unbelievable. Who would have thought that the Canadian population would have been so friendly to a technological development? So 75% of our banking is done through a card, an ATM, and 75% of the banks' business is small and medium enterprises and personal finance.

I think what we have to recognize here is that the banks need the opportunity to grow. If not, they will not have the jobs resident in Canada, they will not have the technology, they will not innovate, they will not be able to support the branch networks they have in place—and there are good networks.

You get what you negotiate. The banks have made major commitments now. I'm a young man. The banks have always had an extremely important part in the Canadian business economy. They are widely held. They do report to their shareholders, and that responsibility will still be there.

Thank you.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Stonehouse.

I'm trying to accommodate some of the travel schedules of members; I'm not trying to cut anybody off. We'll continue after, but I'd like, with permission from members, as in yesterday, to turn the floor over to Mr. Szabo, who has a flight to catch.

Mr. Paul Szabo (Mississauga South, Lib.): When John Cleghorn came before the committee, he said that the infrastructure they have, considering the investment they made in technology, represents needless duplication and expendable costs. I thought that was a very telling strategy on behalf of the banks: face-to-face banking, in their view, in the long run, is not a high priority for the consumer. They have quite a different vision, and I think that follows from the comments we've just heard.

The witnesses today have been very consistent with what we heard from many other witnesses. People are afraid of losing their jobs. Even Great-West Life Assurance Company and Power Corp. of Canada said they're afraid of going out of business on their insurance line because they can't compete. So you're damn right they're afraid. That's what's happening. These are real people: brokers and insurance companies.

So maybe the question really is, can we compete? Have we got the right vision of the consumer and the public interest? It seems to me that the public is very price-elastic these days. Time is important, and I don't care which insurance I go to. I don't care who finances it. I really don't care about that stuff. All I care about is that I want the best available cost and reasonable service. I don't spend my life monkeying around in the details. That's somebody else's business.

The consumer may be changing. If we're really afraid of not being able to compete, then maybe there's some rationalization. I think MacKay probably has come to the point where we have to look a little bit farther than this year or next year. The payment system is open, deposit insurance is broadly available, and there are openings for foreign banks. In other words, if the regulatory environment changes so that there are other players, then near banks and foreign banks will get in to fill gaps you may perceive.

Maybe the question isn't whether or not there will ever be any mergers; maybe it's about the rules of the game these will be under. So maybe the question for you is, are we stuck in the mud in the old way of doing business or are we just disagreeing with the banks on the vision of what the heck the consumer really is for tomorrow?

The Vice-Chair (Mr. Nick Discepola): Dr. Lewis.

Dr. Daurene Lewis: I would like to make a comment on that. Grant and I have already given our personal experiences of how banking has changed.

Prior to my becoming the executive director of the Centre for Women in Business, I spent ten years in the home care program here in Nova Scotia. That deals with senior citizens and the disabled.

• 1025

One of the major changes for them was the freedom of having their cheques deposited in a bank automatically and their ability to be able to do their banking over the phone. So their need for face-to-face banking had changed quite drastically over time.

My understanding, and the information I have, particularly from the Royal Bank, is that the whole role of the accounts manager is changing. Yes, they are looking at having accounts managers being in a location for much longer than the one or two years that had been traditionally in place. Also, the requirement is now that an accounts manager spend more time physically in a business. How can they possibly relate to what the needs of a business are if they don't know the location and some of the intricacies of that business?

So yes, consumers' needs have changed quite drastically in the last five years, and the banks are responding to that in a different way, which also addresses the area that I believe Mr. Casey was talking about—job losses or employment decreases. I think what you are going to see is that people's activities are going to change. It's the same idea as when the ATMs first came in place.

Again, I say I'm from the town of Annapolis Royal, which has a population of 738 people. The banks were positive that it was going to be the end of their tellers. We still have two banks in that town. All the tellers are still there, but they're doing activities that are quite different. The roles have changed. This is a changing world and people's job descriptions are quite different. I think the mergers are going to have to respond to that. Whether it is a lobbying point, it has been identified in both situations. Customers are different today. Banks are also different today.

Thank you.

The Vice-Chair (Mr. Nick Discepola): Does anyone else want to respond?

Mr. Ferguson.

Mr. Lorne Ferguson: I'd like to say that I think all of this is really, as I'm sure you all know, just being driven by information technology and communication networks. For example, the largest MBA school in Canada is based in Edinburgh, Scotland. It has more MBA students than any Canadian university. It delivers its program via the Internet. It's probably generating multiple millions of dollars back to Scotland by delivering distance education. That's a tiny example of what's happening.

I think our view would be that we haven't even begun to see the tip of the iceberg of change that the development of new ways of doing things will bring about, and I actually don't think there's a choice for us. I think we have to embrace change and I think we have to have strategies for change management that complement the natural forces of what's happening out in the economy. We have to have our plan and our strategy in place for moving forward.

I support what Mr. Stonehouse said about putting Canada in a leadership position in this area.

Going in the other direction is not going to produce the kinds of solutions that people require. There will probably be significant job changes not only in financial institutions but in all aspects of the economy, so I think it behoves us to demonstrate the path forward.

That's really all I have to say.

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Ferguson. I probably concur with you. I think it's maybe because it's being driven by a media frenzy that the focus of attention by everybody seems to be on just bank mergers, but that's just one aspect of the changing environment around this. We have a tendency of only focusing on bank mergers as the end-all and be-all in being able to accomplish some of the things we want. We have to disassociate ourselves from that.

You've given excellent examples of how the technology is changing, but then I could counter that as devil's advocate and say the university that's offering the Internet course didn't have to merge to do it; they still did it. I believe it's our challenge to try to disassociate ourselves just from that one aspect of bank mergers and look at the whole financial service sector so that we may be competitive for the 21st century.

Colleagues, thank you very much again. We will see you in Ottawa shortly. Have a safe flight.

I would like now to turn to Ms. Lill.

Ms. Wendy Lill (Dartmouth, NDP): Thank you.

Thank you very much for your presentation. I found this a fascinating morning. I am sitting in on this committee today because I am the member of Parliament for Dartmouth and I want to hear the concerns of this area. Nelson Riis is the person from the New Democrats who sits on this committee.

• 1030

I'm a playwright by profession, and I see the views that are being posited here as being so incredibly diverse that I would like to put some of these people in a play and see how they eventually came around to understanding one another.

The Vice-Chair (Mr. Nick Discepola): I want to be the chairman of the board.

Ms. Wendy Lill: You'll be in it, don't worry.

But plays are all about bringing two completely diverse sides together and then to some sort of understanding.

I hear what Grant Stonehouse and Daurene Lewis are saying, and also Lorne, about the need to be able to compete in the global economy and with some sort of faith—I would like to be able to ask you about this faith, because I don't really have it—that somehow bigger is better. I want you to address that for me, why it seems to you that—I know the banks are saying they need to be bigger. I would like to know more from you why you think in fact bigger is better, given the fact that the banks in their present size right now are in a lot of trouble globally. We all are. We have a very troubled economic environment, and certainly it has to have something to do with the banks because they are the people with the money.

In terms of what Bill Casey and the O'Regans and Mr. Lipsett have said about the impact on huge parts of our economy—and we're talking of hundreds of thousands of jobs, people in the car industry, people in the insurance industries. The bedrock of our communities has to do with the car dealership, and then there is the insurance broker and also the bank. These are all things that have been the fabric of our communities. How do you two, who are really looking at the international/IT perspective, resolve the changes that would in fact take place in our communities if the competition was wiped out? Certainly, it's the general consensus here that this is what would happen. It wouldn't increase the competition. It would in fact mean banks would not be partners any more; they would be competitors. How do you see the role of our communities, our Canadian communities, in the future? I ask that of the three people who do understand, or have this other view of things, who want to see the globalization.

I'm lecturing here, and I was chastising people yesterday about not listening to people instead of saying what I had to say. I would like to know, first of all, why you think bigger is going to be better. I would like to know how it is that we can resolve the very different occupations and economic structures we're talking about here?

Dr. Daurene Lewis: Bigger is not necessarily always better. However, in the context of the banking industry, that is the only way for survival. Again, I'll come back to the example of the fact that the banks in Canada are no longer doing payroll. They lost all of that business because of the economies of scale of the larger American bank that was able to take that over.

Bit by bit—and I think somebody used the phrase cherry-picking—the services the banks in Canada have traditionally offered are being lost because they cannot compete with the economies of scale. That is why the old Toronto Bank and the old Dominion Bank merged and became the Toronto Dominion Bank. I know this is probably a very simplistic way of looking at it, but in terms of the concern about when Nestlé bought Carnation, no one blinked an eye as to whether or not their products were going to be changed or even further available.

The banks are providing a product, very definitely. You made the comment to the effect of seeing things going to a global perspective. It has already happened. I can relate to the effects of how the world has gotten very much smaller through the Centre for Women in Business.

We have a program now with Hungary that was chosen because we have the expertise here in Nova Scotia. A group of us will be going to Malaysia next month to see what programs we can set up for the women in Malaysia. The world is very small.

Last week I was part of the Women's Trade Mission to Boston, looking at the programs we have to offer. There will undoubtedly be an alliance between Mount Saint Vincent University developing with Boston University, MIT, and Lesley College. So the world has gotten very much smaller, and we have to respond to that.

• 1035

Mr. Grant Stonehouse: I'd like to add a few comments, if you wouldn't mind.

The Vice-Chair (Mr. Nick Discepola): Sure.

Mr. Grant Stonehouse: Forty percent of the profits in the proposed merger of the Royal Bank and the Bank of Montreal will be derived from activities outside of Canada. Seventy-five percent of the shares of these institutions are widely held by Canadians—indirectly or directly, one out of two people.

Most small businesses—mine being a good example, I think—are operating very easily and very quickly in many countries. I deal in over 27 different countries. I had no idea in 1991 that I'd be doing that.

We need to be able to recognize that this globalization is just starting to happen, just beginning. Bigger is not better. But the combination, for example, in a merger, gives the resulting party the ability to compete and to lead.

I'm not sure of how they match up in the world market. As I said, I think the CIBC is number 65 at the moment. In a merge, whether that puts them even in the top 20, I'm not really sure.

Have you heard of Countrywide Credit Industries? Perhaps you haven't. They're located in California and they have $228 billion in mortgages that they control. They have more mortgage underwriting than all of the combined banks in Canada—one company in California.

The MacKay report put it in a certain way, and I'd just like to repeat what was there:

A vibrant, dynamic Canadian-controlled industry, with major players active and competitive in world markets, provides benefits at home by importing best practices from around the world, by repatriating export earnings, and by assisting Canadian businesses to operate abroad. Competitive domestic institutions also contribute to thriving financial centres that offer value-added economic activity, innovation, higher tax revenues, and high-quality employment that can keep our talented young people in Canada.

That's the operative for me, in the last sentence. Bigger is not better, but certainly they're going to be more innovative, they're going to be more competitive, and they're going to bring home the benefits of operating in the countries that a lot of small businesses need to be operating in.

Ms. Wendy Lill: I just want to look at how convincing this globalization imperative is in light of some of the recent failures economically globally.

Look at Japan's mega-banks. The Japanese government has been compelled to commit $16 billion to bail out those banks, and that's possibly just the start. Some of these banks are huge. They have over $1 trillion in assets.

These four banks that we're talking about right here are some of the most profitable banks in the world. For five consecutive years they've raked in record profits. The question is, how big does a bank have to be? What you're talking about, about the wonderful things that are going on with women in business right now—they are happening right now. I understand that globalization is happening, but certainly nobody here at this table has talked about globalization being a bad thing. Certainly the Insurance Brokers Association of Canada doesn't believe in it.

The question is, what do globalization and big banks necessarily have to do with one another? Do they really have anything to do with one another?

Mr. Grant Stonehouse: They certainly do, Madam.

Operating, as you can appreciate, in international markets is going to be basically the norm for so many more companies than do participate in it today. There are many banks here in Canada that can't offer the services I need. I've already found some barriers with all of the firms.

I think their commitment to put together operations that give trade advice, that give access to on-the-ground information, be it in any one of a number of countries.... I think it's naive to believe that by disallowing a basic business activity as a merger you're truly going to penalize these institutions. I think you'll also find our ability to innovate and the Canadian capacity to lead in that industry will be compromised.

• 1040

Ms. Wendy Lill: Thank you. Perhaps Mr. Lipsett or Mr. O'Regan would like to comment on this.

Mr. Bruce Lipsett: Do you want to take that, Dick?

I'll pass it over to Mr. Vansnick for the moment.

Mr. Richard Vansnick (Chairman of the Board, Insurance Brokers' Association of Nova Scotia): It's interesting that throughout all of the commentary this morning, I've never heard anyone say the existing banking system has not served Canadians well. Every business person has found it does work. I've been in debt all my life to the banks. I started very young. I have always found them reasonably accommodating, and I've even had occasion to change banks for various reasons.

If you look at the Canadian banking system with really six major banks and if you believe the contentions of the present chairman of the Bank of Nova Scotia, the one major bank not involved in a merger, it certainly refutes any of the arguments that bank mergers should be allowed to go ahead.

What we are concerned about as insurance brokers in Nova Scotia are the effects on the small communities. I suppose it doesn't make much difference in a case where there are four banks in a community and we may be left with three or possibly even two. There is still some choice. But in some communities this won't be the case. In addition, I think it's very practical, despite any assurances that may be given by the banks, that there is going to be lost employment. It's just inevitable. It cannot help but happen.

If you look at other countries, Australia and Great Britain refused to allow banks to merge in their countries because it was deemed not to be in the public interest. In the case of Britain, it was the largest bank and the third largest bank.

We have a very unique banking system in Canada as opposed to the United States, for example. In the United States there are 10,000 banks serving the country as opposed to 6 or 30 or however many may wish to be used in measuring it. But, by the same token, according to an article in the Globe and Mail, just recently the United States has been studying our banking system because they believe it is 15 or 20 years ahead of theirs.

So there is something to be said for a system that is, apparently, working. The old adage is if it works, don't fix it.

Obviously, your challenge as federal MPs is going to be to weigh the pros and cons of the proposed mergers on the effects not only of people in your communities and constituencies but also on Canadians as a whole. Whether it is good or bad I'm not prepared to say, but I do offer those comments.

The Vice-Chair (Mr. Nick Discepola): Thank you very much, Mr. Vansnick.

I'd like to now turn to Mr. Scott Brison, who has been very patient.

Mr. Scott Brison (Kings—Hants, PC): Mr. Brison is always very patient. He is a Nova Scotian—that helps.

It's terrific to have the opportunity this morning to hear from all of you. I'm the only member of the House of Commons finance committee from Atlantic Canada. We're travelling throughout the country and we've had many representations made in Ottawa by various organizations. Your presentations this morning made me very proud as a Nova Scotian. I saw presentations that were developed and were very holistic in approach to the issues. I thought the Halifax Board of Trade presentation was very sound in dealing with the issues holistically. We're hearing from the information technology sector. I think if Nova Scotia was a cradle for the Canadian banking system pre-Confederation, Nova Scotia can be a cradle for information technology in Canada if we have the right sets of provincial and federal policies. Potentially, one of the things we can lead in is the new banking sector in the future.

• 1045

It was also good to hear from a representative of the new fisheries industry, because there's been a great deal of concern. We've seen the evolution or devolution of fisheries over the years, and I think there's a certain warning we can take when we get interventionists about government and various sectors. There's a warning we can take from the experience of federal and provincial governments' involvement in fisheries, for instance, over the years.

When we stand in the way of the evolution of a free market, for instance in the fisheries, by subsidizing the construction of plants and boats that perhaps should not have been built to maintain levels of employment that should not have been maintained, ultimately we can get into some big troubles.

Being the fifth person to speak, or being a member of the fifth party, is a little bit like being Elizabeth Taylor's fifth husband. I know what to do, but I don't necessarily know how to make it interesting. I'll certainly do my very best.

The MacKay task force has dealt with the issue. My opinion, in a fairly holistic way, is there are elements of it that are very exciting. I guess I have a little bit of a problem with politicians demanding that any other group make guarantees, in areas of job protection, for instance, and even in areas of service provision and branch openings. I don't think politicians or governments have a particularly stellar record in keeping promises, or in things like maintaining commitments to employment. We certainly have seen this in recent years.

I think the task at hand is to design a sector in a very holistic way and to change the regulatory approach to financial services to one that is self-regulating and ultimately will result in the best quality of services for all Canadians.

There was a study done about 15 years ago—I was a student at Dalhousie when I was exposed to the study—that compared the U.S. economy to the Canadian economy and the concentration of wealth. In the early 1900s in the U.S., wealth was very concentrated, as it was in Canada. Since then, in the U.S. wealth became very widely dispersed throughout and it wasn't the Vanderbilts or the Du Ponts or the Rockefellers any more. In Canada, the wealth still was maintained and fairly closely held. It pointed very directly to the differences in the banking systems. In fact, access to capital played a role in that. In the U.S., for instance in Maine, if you were turned down by the Bank of Bath, you could go to the Bank of Bangor. If you were in Georgia and you were turned down by the Bank of Loganville, you could go to the Bank of Snellville, which is an actual bank—it was incorporated about 150 years ago—and it would service you.

One of the things I really like in this MacKay task force is the issue of new banks. While we all suffer from merger-opia sometimes, and that certainly is a political lightening rod, I was really pleased to hear representatives from insurance and representatives from auto leasing were not necessarily averse to bank mergers per se, but you are in terms of the current context and the way banks are set up right now. I would posit that if we do move as a country to change this structure—I think globalization will play a role in that—ultimately the structure we're talking about that exists right now will not exist in a few years.

I'm not a playwright, Wendy, but maybe I can play a role in bringing these groups together. Perhaps we can even do a play together someday in a post-political situation. I don't want to get any merger rumours started here, but I certainly have fewer problems with bank mergers than I do with some political mergers that are discussed periodically.

But in any case, thank you, Mr. Chair.

• 1050

The Vice-Chair (Mr. Nick Discepola): Maybe we'd better get right back to the topic.

Some hon. members: Oh, oh!

Mr. Scott Brison: I've been in debt to the banks most of my life, too. I don't have a lot of political debts at this stage, though. My first loan from a bank was when I was 19. I started up my first business. I was turned down initially by the bank. I was buying refrigerators and I wanted to buy 180 refrigerators to rent out to students who keep beer in them. I can say this now that I'm out of the business, but at that time for parents they were yogurt refrigerators and for students they were beer refrigerators.

I went to a bank and they turned me down because I had no collateral and nothing really to offer. I was turned down by two banks, in fact. But then I was able to finagle a 30-day trade credit and I borrowed $24,000 to buy 180 refrigerators. I rented them out for $100 each for eight months and was able to go to the bank then and make up the difference. I don't know if that was a good thing or a bad thing because I've been in debt ever since for different businesses and that kind of thing. So I have a small business perspective as well that I bring to this.

One of the things I like about the idea with new banks is I think we can come up with a win-win set of policies that can work for everybody. We don't have new banks starting in Canada very often. It doesn't really happen a lot and I don't think the conditions for the new banks starting are conducive to that. I think we can change this. One of MacKay's recommendations was that there be a capital tax holiday, I believe for 10 years, for the new banks.

One of the things that I heard this morning from the Halifax Board of Trade was a recommendation, for instance, that there be more training made available. Perhaps we could facilitate this for small and medium enterprise lending through these new banks.

Arguably, if we make the conditions right, there can be a lot of new banks start across Canada. In fact, there can be in Nova Scotia, because there are some pools of capital in Nova Scotia invested elsewhere.

The first question I have is this. I don't know if you're familiar with this, but with $10 million of capital you can start a new bank under the MacKay recommendations with no capital taxes and some advantages. For instance, what if we were to increase the deposit insurance for a new bank to $120,000 instead of $60,000, which is the deposit insurance for the old banks? That's one of the things we could do. The no capital tax is one thing. I am asking this question of the insurance brokers and the auto leasing people, and we are talking about just the new banks, just these little banks. Ultimately there will be more limitations on these banks in terms of size and that kind of thing.

If we were to say to these new banks that they could participate in auto leasing and they could participate in insurance—I'm not talking about Royal Bank or Bank of Montreal, just these new banks—maybe they won't appear. But it strikes me as being beneficial to the Nova Scotia economy and to the Canadian economy if we create conditions whereby it is profitable for these new banks to start. One of the things we may offer them is access to more services than the big chartered banks or schedule I banks are offered. This may be one of the things it might make sense for us to offer. I would like to get your feedback on this.

The Vice-Chair (Mr. Nick Discepola): Who'd like to take a stab at this?

Mr. Richard Vansnick: I'll speak on this, Mr. Chairman, if you don't mind.

Number one, the history of new banks starting in Canada is not good. You only have to look at the last one that was bailed out by National Bank. That was the Unity Bank of Canada. Secondly, although $10 million certainly could be raised, in terms of capital, to start a bank, there are also very stringent regulations imposed by the office of the federal superintendent in regard to lending ratios, so there is a multiplier effect.

• 1055

I mean to be complimentary, Paul, but wouldn't this finance your fleet of vehicles and all your operations?

The ability of a new bank to serve or compete would be very limited. It could do so in small communities, for example, and serve much like, perhaps, credit unions do—

Mr. Scott Brison: Sure.

Mr. Richard Vansnick: —but on the larger scale it would be extremely limited.

Mr. Scott Brison: But they wouldn't be able to compete unfairly. You're saying the big banks could compete potentially unfairly. These guys would not have the same advantages as the big banks.

Mr. Richard Vansnick: Well, the only way we've ever said the big banks would be allowed to compete unfairly is if the rules are changed to allow them to retail insurance from their branches. I think that's extremely unfair.

Mr. Scott Brison: Okay. I'd like you to think about what I'm suggesting and maybe we should talk in the future about this. What you want to have is the maximum competition without unfair competition and the best service to consumers. This may be one way of having that.

Mr. Richard Vansnick: I think if you were to look across the country, the credit unions, to a great extent, have filled this void.

Mr. Scott Brison: This has not happened in the small business lending, though. I'm not certain of that. I think there is still a long way to go on the small business side.

The Vice-Chair (Mr. Nick Discepola): Mr. Norman, please.

Mr. Terry Norman: I'd like to comment on this. The credit unions are very strong in Quebec and they're strong in western Canada, but they're not strong in Nova Scotia. They represent 5% of the deposits in Nova Scotia, so if that could be encouraged, we certainly would support it.

We would like to see new banks started. We'd like to see conditions in place to help that. We're not particularly in favour of a tax holiday, though. We'd rather have a level playing field and we'd rather just eliminate capital taxes on all financial institutions instead of saying for the first ten years new ones get a tax holiday.

With regard to some of the conditions that are currently there, the ownership regulations are a problem for new banks starting out because it might be easy to raise $10 million from a particular source, but when you have to have the bank widely held, it means you have to go to a whole bunch of people and get everybody to kick in a little bit. It becomes much more difficult. It's easier to have a sponsor who would get the bank going and maybe as it grows then you can get wider ownership. But I think it would be easier to start more banks if we could have holding company structures and you could have more concentrated ownership, initially in any event.

The Vice-Chair (Mr. Nick Discepola): Mr. O'Regan, you have some complementary comments.

Mr. Paul O'Regan: In finishing here today, I think we have to realize we're talking about two things. We're talking about the bank mergers and we're also talking about unfair competition of the banks in areas. I found—not that we've got confused here, but they're very different things.

I think we all accept change. We all accept the fact that banks are going to change. They're going to merge, they're going to do this, they're going to do that. But as politicians and as citizens, lose sight of the fact that in the insurance business, in our business, or in many other businesses, we cannot allow unfair competition.

Steve and I sat with the MacKay commission for an hour and a quarter. There was a gentleman on there—I can't remember his name—who had been the dean of the Harvard business school. He gave examples of when he was on the board of a major bank—I think it was the Chase Manhattan—and banks got into areas looking for profits. They had the muscle and the money to get in there and to basically mess around with this business. When they found it wasn't profitable, they threw it aside and devastated it.

• 1100

Somebody talked about the payroll business here. The banks got into the payroll business. They weren't very good at it. They didn't do a good job. That's why they're not in it today. We have to accept that fact.

I've worked a lot with young entrepreneurs in this country. Last week I was working with a young man whose father had died. His father had a nice little business that this man was now running, and he wanted to buy that business from his step-mother. Well, I want to tell you that getting $150,000 for a business that has made a couple of hundred thousand is tantamount to impossible in this country. If I had co-signed for him, it might have been possible.

We have to be careful here. I'm not opposed to the banks merging, but I am opposed to them jumping into businesses in such a way that they are going to disrupt the fibre of our society.

We don't mind competition. We're used to it. We deal with it every day. And I don't think the insurance people mind competition. In the little town of Bridgewater, how many people did you say were there?

A witness: Thirty-nine.

Mr. Paul O'Regan: In a town of 7,000, there are 39 people in the insurance business, so that's not what we're worried about. But when you come down and you muscle into a business, and when you start messing it up.... We have to deal with human beings, and we have to deal with the fact that we really don't want to end the day putting a lot of people out of business, taking our profits someplace else.

If mergers take place, that's fine. But we have to do something to protect the fact that people do have resources to be entrepreneurs, to get capital, to continue on in their businesses. I don't think that's best served by banks getting into the insurance business, the leasing business, or any of those things.

The Vice-Chair (Mr. Nick Discepola): Thank you very much.

Mr. Brison, there's time for one small question, if that's possible.

Mr. Scott Brison: Mr. Chair, please cut me some slack. I've been very patient this morning, and I am home. This is a hometown crowd, and you have to allow me to come up to bat more than once.

The Vice-Chair (Mr. Nick Discepola): I understand that.

Mr. Scott Brison: That wasn't my question, by the way.

Mr. O'Regan, I would sense from you that if you were to want to merge with, say, Wood Motors Ford, you would be very frustrated if the government were to say no to that. In fact, you would probably look at it from your perspective as a believer in the free market. It would not be up to you to demonstrate the public good of that merger. It would be up to those who are opposed to demonstrate that it was unequivocally bad, because it was a revolution of the market. So I appreciate your depth and maturity on that issue, as well as on the insurance business.

I believe that if we put in place the right systems in places like Nova Scotia, we will see some new banks in five years. We will see better access to capital, and we will see people lending based on character lending as opposed to ratio lending and that kind of thing.

On this foreign competition, some people are saying the foreign issue is a red herring, but it really isn't. When Wells Fargo presented to us, I asked how many customers they had in Canada a year ago, and they said 10,000. When I asked how many they have now, they said they have over 100,000 customers. When I asked about how many Canadian employees they have, they said 127. That's not a lot of Canadians. But if we create the right system, we can have a Canadian banking system that competes and succeeds globally while employing people across Canada.

There are 400 call centre jobs with the CIBC in Halifax, and CIBC is paying those employees $20 an hour. With the death of distance as a determinant in the cost of telecommunications, Mr. Ferguson, I would argue that Nova Scotia could be a growth centre, particularly if we do a good, aggressive provincial tax strategy to attract these kinds of things. So there are a lot of opportunities here in the future, and everyone can achieve something out of it.

• 1105

On the auto leasing business, one of the arguments against banks getting into auto leasing is cost of capital, in that the banks have an advantage there. In the U.S., GMAC and Ford Credit are big players. I understand that the car makers have 46% of the leasing market in the States. In Canada, the car business has 80% of the leasing market. Is that accurate?

Mr. Stephen O'Regan: Are you talking about the captive finance companies?

Mr. Scott Brison: Yes.

Mr. Stephen O'Regan: No, I don't think it's anything close to that. If that's the pot we're looking at, the banks themselves have about 40% through their wholesale and retail leasing plans.

Mr. Scott Brison: I thought it was about 80%, based on the information I have; about 80% of car leasing in Canada is currently done by actually foreign credit institutions—70% by Ford, GM, and Chrysler, 10% by GE Capital, and 10% by Japanese and European credit entities like Volvo, Toyota, and Honda.

Mr. Stephen O'Regan: I think that perhaps would be an accurate figure based on the past year or two and just looking strictly at the retail leasing—that is, the leasing that dealers do on behalf of these capital finance companies—but maybe Paul could correct that.

The other part of leasing is the wholesale leasing business, like O'Regan's National Leasing. In that area, we borrow money from the banks and administer our own leasing plans. So in the retail leasing recently, I would think 80% is likely a pretty accurate figure.

Mr. Scott Brison: Where are the call centre jobs for those? In general, I guess the question I'm asking is whether those call centre jobs are in Canada or in the U.S. How is it done?

Mr. Paul O'Regan: Do you mean on captive finance companies?

Mr. Scott Brison: Yes.

Mr. Paul O'Regan: They're local jobs. All the captive finance companies have—

Mr. Scott Brison: Even GMAC and Ford Credit?

Mr. Paul O'Regan: GMAC has offices in Halifax.

Mr. Scott Brison: Yes, but what about the call centre jobs? The growth in employment in financial services has not been on the front lines.

Mr. Paul O'Regan: As a General Motors dealer in Halifax, we phone our deals into Halifax. It's all done here. I would presume that it would be the same thing with Toyota and Ford Credit.

Mr. Scott Brison: One of the arguments against banks getting into auto leasing is that they don't understand the business, they don't understand about assessing residual values, and thus won't be able to provide the same quality of service. It's pretty hard for a bank to compete with lease financing that GMAC offers at 1.9%, for instance. That kind of thing is fairly complex. If banks are in fact going to screw that up or are not going to be as good as they think they will be in those areas, why would you be concerned?

Mr. Stephen O'Regan: I think it certainly boils down simply to the power that they have through their deposit-taking facilities. Their cost of money is very low compared to money that we would borrow for our own leasing company. We just could not compete with that over the short term.

Mr. Scott Brison: You guys are different from a lot of dealerships in that sense because of your leasing, but I think GMAC has pretty good access to capital. I would also bet it's probably at pretty competitive rates.

Anyway, your argument is that they would get into the business, that they might not understand it, that they might ultimately lose money at it, and that they would screw up the business somehow.

Mr. Stephen O'Regan: Exactly. From the perspective of a competitive situation, it would be extremely competitive over the short term, but they would devastate the business in no time, putting dealers who are in the leasing business—such as ourselves—out of the market. Once they had devastated the market, I'm sure you would see the competitive situation drastically worsen. We would end up in a much less competitive environment than the one we have today.

Mr. Scott Brison: Sure.

The Vice-Chair (Mr. Nick Discepola): Mr. Brison, I've already given you 25 minutes. We have a bus picking us up for the airport at 12:30. I know you may not be coming with us, but I'd like to wrap it up with one more question, if you don't mind.

• 1110

Mr. Casey has a comment he wishes to make.

Mr. Bill Casey: First of all, I'd like to compliment Mr. Brison on his short question.

Another aspect of banks and the automotive business is they go in cycles. When things are good, the banks are there, but when things get a little dicey, Peter calls Matthew and says, we're not much interested in the car business any more. Then the calls come down to the dealers who are told, we're going to tighten up your line of credit. Eventually, the squeeze is on to the point where you're out of business. But this happens in cycles. The banks take certain sectors and they go into it, but then when it's not lucrative for the short term, they go out of it completely.

Mr. Paul O'Regan: This is exactly what our friend from Harvard University was saying, that a major financial institution that was providing some financing in the Halifax area left town very recently and dropped out of the business.

Mr. Bill Casey: When the last recession hit, car dealers were getting calls almost on the same day during which they were told, we're not much interested in the car business any more, so perhaps you could find financing somewhere else. The dealers communicate with each other, both within one product line and from company to company as well. So it's a universal approach that's very damaging to a sector. There is no commitment. The commitment is only there as long as it's lucrative, and as soon as it isn't, they're out of it. Meanwhile, if they are allowed into leasing, they will take advantage of a lucrative time period. In the meantime, some car dealerships will go out of business. Some communities I represent have one car dealership in them. If they lose 20% of the business, they are doomed. So after they are doomed and out of business and the banks pull out of leasing, the community is left with no dealership, no service, and no employment. That's just another reason. There is no commitment to leasing or cars. It's just cyclical.

The Vice-Chair (Mr. Nick Discepola): Thank you very much, Mr. Brison.

Mr. Scott Brison: Thank you, Mr. Chair. I have just one question I'd like to ask.

The Vice-Chair (Mr. Nick Discepola): Make it one short one, please. Go directly to your question, as the Speaker of the House would say.

Mr. Scott Brison: Thank you, Mr. Speaker. The only difference is in Question Period we don't get answers. It's much better here.

The Vice-Chair (Mr. Nick Discepola): No one said it was answer period. It's called the Question Period in the House of Commons.

Mr. Scott Brison: I'd like to hear from Daurene on this. If we create the right conditions, if we have maybe some capital tax as an advantage, access to a payment system, access to a wider range of services, and some of the other conditions, first of all, do you think we can actually create an environment where new banks actually start up? Secondly, do you think that will improve access to capital for everyone in Nova Scotia, particularly women, in terms of being able to go to a locally owned bank?

The Vice-Chair (Mr. Nick Discepola): Thank you, Mr. Brison.

Dr. Lewis.

Dr. Daurene Lewis: I can only respond in the context of my area of expertise. You're talking about micro enterprises. Women's World Finance is the only branch in Canada of Women's World Banking. It has been based in Cape Breton. With the funding for the $500,000 access to capital by the Royal Bank, it will be expanding its services to include all four Atlantic provinces. They're in the process now of completing negotiations for that. So they are looking after a group of women who have not had access to capital in the past. These are the people who are already going to be refused by other traditional organizations. So 60% of the women starting a new venture in Atlantic Canada will now be served by a bank, when they have not been served in the past.

In any communication I've had directly in relation to the clients of the centre, we have not had that as a challenge. Regarding new banks being viable or a desirable alternative, I will comment on the example of the Canadian Youth Business Foundation. The two businesses, Ceilidh Connection and Cape Breton Tea Room, were both clients of the centre. Their business plans were developed by the centre, and Ceilidh Connection in 1997 was judged to have the best business plan in Canada by CYBF.

• 1115

Mr. Scott Brison: Very good. Thank you very much.

The Vice-Chair (Mr. Nick Discepola): Thanks to all of you. I believe your testimony, as Mr. Brison said, was very clear, concise, and to the point. It was very informative and revealing for us as politicians.

On behalf of the committee members, I would like to thank you for the opportunity to hear your viewpoints.

We have another three weeks of hearings across the country. We've split the group into two sections. One will go west and one will go east. We hope to make our recommendations to the minister by December. Hopefully we will then be in a better position, after hearing what has been said throughout Canada, to make a more enlightened decision on behalf of all Canadians.

[Translation]

Mr. Yvan Loubier: Briefly, on a point of information, Mr. Chairman. Before I left Ottawa, the House of Commons adopted a motion stipulating that the final report of the Finance Committee on pre-budget consultations would be tabled on December 3, and that with respect to the MacKay Report, an interim report would be tabled on December 3 with the final report expected next March. That's news to you, as this has just been decided. Hearings on the MacKay report have been extended.

[English]

The Vice-Chair (Mr. Nick Discepola): We are combining the hearings for efficiency purposes. Yesterday we had the hearings for pre-budget consultation, which will lead to one report that will be deposited in December. At the same time, while we're in the regions across Canada, we'll also be holding hearings on the financial institutions sector and the future of that.

There'll be two separate reports, as Mr. Loubier said, and they have decided that the second report will be deposited in March. In either case, we will be making recommendations to the Minister of Finance. Your input is very valuable. Hopefully we will make a better and more enlightened decision because of the participation of people such as yourselves, who bring forth a wealth of information and very concrete evidence that we sometimes don't get from the perspective of always being in Ottawa. I want to thank you again for your input.

The meeting is adjourned.