FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, May 11, 1999

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[English]

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

In accordance with the order of reference of the House of Commons of Tuesday, April 13, 1999, the committee resumes its study of Bill C-67, An Act to amend the Bank Act, the Winding-up and Restructuring Act and other acts relating to financial institutions and to make consequential amendments to other acts.

This morning we have the pleasure to have with us the Honourable Jim Peterson, Secretary of State for International Financial Institutions.

Mr. Peterson, welcome.

Hon. Jim Peterson (Secretary of State for International Financial Institutions): Thank you very much, Mr. Chairman,

[Translation]

and members of the committee. I must admit that I am much more nervous on this side of the table than I was on the other side.

[English]

It's very pleasant to be back with the finance committee.

Bill C-67 would allow foreign banks to offer a range of banking services to businesses and consumers through branches. The goal of this legislation is straightforward. We want to help sustain a viable foreign bank presence in Canada in order that Canadians will have greater access to financial resources.

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For many foreign banks, the option of establishing a Canadian branch will be more cost-effective than the current requirement of setting up a separate, fully regulated bank subsidiary.

This is important, because the number of foreign bank subsidiaries operating in Canada has been in decline for more than a decade. It reached a peak of 59 in 1987, and last year there were only 45. Their market share has fallen from about 12% of Canadian banking assets to under 10%.

The government believes providing a more competitive and flexible entry regime for foreign banks will address this situation. Existing players will be more likely to expand, and new players more likely to set up operation.

[Translation]

The members of this committee are very familiar with the origins of this bill. The suggestion of allowing foreign banks to open branches in Canada resulted from consultations which led to a review of the legislation governing the financial sector in 1997. At the time the suggestion was made in reports submitted by this committee and the Senate committee. In February of that year, the government announced its intention to allow foreign banks to open branches and it began to draft a bill.

In the wake of that process the Minister of Finance distributed a consultation paper on access for foreign banks. It received close to 40 presentations from a wide range of stakeholders including SMEs, consumers' groups, as well as Canadian and foreign banks.

The decision to allow foreign banks to open branches and the proposal contained in the bill before you today are the result of a very open consultation and discussion process.

[English]

The MacKay task force had the opportunity to consider the branching proposal outlined in the department's consultation paper. In his final report last fall, MacKay strongly endorsed foreign bank branching, and called on the government to move quickly to put it into effect.

Mr. Chairman, when this committee and the Senate committee reviewed MacKay, you agreed with that approach.

Let me be more precise about how this bill works. This bill will amend the Bank Act to allow foreign banks to apply to the Minister of Finance for approval to establish branches in Canada. These branches will have essentially the same powers as domestic banks except they will not be permitted to take retail deposits. For the purposes of this legislation, a retail deposit is defined as something less than $150,000.

Foreign bank branches will not be restricted in the kinds of lending they do. Some may choose, for example, to set up branches in Canada to offer credit card lending to ordinary consumers. As well, foreign banks that want to take retail deposits will still have the option of setting up a bank subsidiary in Canada with all the powers of a domestic bank.

Under the proposed regime, foreign banks would have the option of establishing either a full-service branch or a lending branch. As I mentioned, foreign bank branches would generally be prohibited from taking deposits of less than $150,000. A full-service branch, however, would be permitted to take deposits above $150,000. A lending branch, on the other hand, would not be permitted to take any deposits, large or small, from the Canadian public. As the name implies, its sole business would be that of providing loans to Canadians.

The primary advantage of having two branching operations is that regulatory requirements can be tailored to the specific activities of the bank's operations. For example, the lending branch would be subject to generally lighter prudential regulation, reflecting the fact that no individual Canadian depositors will be at risk.

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We know that a number of foreign banks are interested in coming to Canada to make loans without taking deposits here. It makes sense, then, to provide an option in our legislation that explicitly prohibits deposit taking so that the regulatory requirements can be reduced accordingly.

Relaxation of our foreign bank entry rules has widespread support from small businesses, foreign banks, and domestic banks.

This legislation is clearly a step, members of this committee. I want to emphasize that it will not lead to dramatic or sudden changes in Canada's financial sector. It will not, as many groups might indicate, lead to foreign domination of our financial sector.

Some may ask why the government did not open up the market to foreign competition by allowing foreign branches to take deposits. In response, the first point to be made is that foreign banks will still be able to come in and take deposits, but only in subsidiary form.

As for the other reasons for restriction, the key issue is the degree of regulatory control over the foreign bank branch. Because a foreign bank branch is part of a foreign bank incorporated in another country, and its primary regulator is not in Canada, the Canadian regulator would not be able to exercise the same degree of prudential control over a branch as over a foreign bank subsidiary or a domestic bank. So it's really prudential concerns we have in mind here.

Related concerns would make it very difficult to extend Canadian deposit insurance to retail deposits of a foreign bank branch. I would add that MacKay, as well as this committee and the Senate banking committee, agreed that foreign branches should not take retail deposits.

Finally, the restriction on deposit taking has a positive side for foreign banks. It means lending branches will in fact be more lightly regulated. This was the goal. An important area where regulation will not be lighter is where consumer protection is concerned. The foreign bank branches will be subject to consumer protection provisions, including regulations covering disclosure of the cost of borrowing and disclosure of interest and other charges.

[Translation]

Before concluding my presentation, I would like to briefly discuss four technical changes also contained in Bill C-67.

Firstly, foreign bank branches from member countries of the World Trade Organization will no longer have to ask for authorization whenever they want to open a local branch in Canada. They will receive a single authorization when they open their first branch in Canada.

The second proposal consists in eliminating the reciprocity provisions contained in the laws governing financial institutions in order to respect the most-favoured-nation principle which is adhered to within the WTO. Pursuant to that principle the parties to the agreement must not discriminate in any way against the financial institutions of various countries. This means that Canadian companies may expect to be treated in the same way as other foreign companies on the markets of other WTO countries. Thirdly, the amendment will allow the Minister of Finance to conclude agreements with provincial governments that want to delegate regulatory responsibility to the federal regulatory agency.

Finally, an amendment will give the Office of the Superintendent of Financial Institutions the power to make regulations concerning the disclosure of supervisory information. matters.

[English]

I would reiterate that Bill C-67 will establish a regulatory environment capable of supporting a healthy foreign bank presence in Canada. It will not change the competitive landscape of the banking sector in a dramatic way but will yield benefits for Canadians. Small and medium-size businesses, customers, consumers, credit card users—all will enjoy access to a wider range of financing sources.

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Before I conclude, I would like to add that since we tabled this bill on February 11, we have had further extensive discussions with stakeholders and with certain members of this committee. We have suggested that further changes can be made to the regime for foreign branching in Canada pursuant to the discussions we've had.

Accordingly, the government will be introducing a small number of relatively technical amendments when this committee undertakes its clause-by-clause examination. I would just like to go over briefly what some of those changes are that have resulted from our ongoing discussions with the stakeholders.

First, full-service branches, as I mentioned, will be restricted to taking deposits of only $150,000 or more. Now, this is intended to ensure that depositors in a full-service branch are sophisticated and understand the nature of the institution they're dealing with. They're not looking to deposit insurance to protect them. These are sophisticated investors.

The bill contains a de minimis provision that permits full-service branches to hold deposits of less than this $150,000 as long as they make up less than 1% of the bank's total deposits.

This gives the banks a certain degree of flexibility, but the foreign bank community has a legitimate concern, we believe, that this requirement of only 1% could have unintended consequences and constrain commercial operations.

To deal with this, we will be bringing in regulations that will allow that 1% to be expanded in certain cases without jeopardizing the need to protect consumers. We believe this is important to achieve in the fundamental policy objective of expanding the availability of credit to Canadian businesses.

Another amendment relates to the funding options for lending branches. The bill allows the lending branches to borrow from financial institutions but prohibits the subsequent sale of any debt obligations, bankers' acceptances, or guarantees issued by the lending branch. The amendment would permit these instruments to be subsequently traded, subject to terms and conditions set out in the regulations. The general intent would be to ensure that subsequent trading would be limited to other financial institutions and of course not to unsophisticated investors.

Third, the government will introduce an amendment extending the time, allowing for the filing of auditors' reports, to make it consistent with the requirement of foreign insurance branches. We'll be increasing it from 60 days to about five months.

The other amendments are more technical and can be considered at clause-by-clause.

In terms of taxes, let me say that we are proposing some changes. These changes will ensure that foreign bank branches pay an appropriate level of taxes on their Canadian operations. In particular, foreign banks will bear income capital and withholding tax costs in respect of their Canadian businesses in a way that will be similar to domestic banks. The tax rules to accomplish this are not in the bill. They will be submitted to Parliament later, but they have been described in general terms in a notice of ways and means motion and have been extensively discussed with the foreign bank community.

We are offering transitional rules. They will be introduced to ensure that a foreign bank does not incur an undue tax liability when it converts an existing subsidiary into a branch. These subsidiaries will be able, for a limited time only, to transfer their property to a branch without accelerating any tax liability and without losing the use of any tax losses they may have accumulated in Canada. However, foreign branches will take on the exact same tax liabilities and obligations that existed in the former subsidiary and will pay the same taxes when they subsequently may sell any property that has been transferred.

Foreign bank branches are also liable for Canadian income taxes, Canadian capital taxes, and Canadian withholding taxes. In other words, we are offering a transitional rollover, one time, for the banks that are now established in Canada as subsidiaries but are converting into branches of their foreign parent.

Details of these transitional provisions are explained in a news release that was issued today by the Department of Finance.

Thank you very much.

The Chairman: Thank you very much, Minister.

We'll now go to our question and answer session.

Mr. Ritz.

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

Thank you, gentlemen, for appearing this morning.

The whole thrust of this bill as explained is that it is intended to enhance competition in the banking industry in Canada. I have a couple of points.

First, on the $150,000 benchmark you've set, how was that decided? Who decided that was the benchmark?

Mr. Jim Peterson: It's fairly arbitrary. I think we took this from some other legislation that was looking at $150,000 as a benchmark. There's no magic in it.

We felt that if a person has $150,000 to deposit at one time, they're generally fairly sophisticated and would understand that deposit insurance is not available. We will have provisions ensuring that there are notices in these banks that CDIC insurance does not apply. The deposit slip will have to show that there is no such insurance.

So there's really no magic in the $150,000.

Mr. Gerry Ritz: Okay.

On the technical amendments you're talking about that will be tabled later on as they're required and so on, will those be done on a case-by-case basis, and who will decide which direction to take on those?

Mr. Jim Peterson: I'm sorry; I'm not sure which amendments you're—

Mr. Gerry Ritz: You talked about bringing forward some technical amendments.

Mr. Jim Peterson: Oh, yes. We will be bringing those forward at clause-by-clause. We could certainly go through some of them today.

They would result in simple word changes, some of them where the French version does not adequately reflect the English version. I didn't want to mention them in detail because I don't think they have significant policy implications for us.

Mr. Gerry Ritz: Fine. Thank you.

The Chairman: Monsieur Loubier.

[Translation]

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Mr. Peterson, welcome to your former committee. I'm very happy to see you again. We had some good times together, and some not so good, but let's say we remember the good times. That's what is important in politics.

Mr. Peterson, first of all, I would like to say that the Bloc Québécois supports this bill. There is, however, something that worries us. I had the honour of doing exactly what you are doing today, which was to testify as a witness after the MacKay report was tabled. We had determined at the time that three things were essential if we were to strengthen the Canadian financial sector. First, we had to change property regulations to allow small and medium businesses in the financial sector to form groups or consortiums to face the competition from the large merged banks, since at the time, the merger of four large Canadian banks was being discussed. It was said that without these changes to property regulations our financial sector would have less flexibility to face not only domestic competition but also international competition.

Secondly, we were concerned by a problem involving domestic competition. That concern was particularly acute during the debate on bank mergers and it was expressed vigorously, in no uncertain terms. In that connection, consumers seemed less well served than they would normally have been had there been more competition.

Thirdly, we encouraged the government to stimulate this competition, which it could do in part through international financial institutions, banks in particular, which would offer a better range of products to consumers in a context of enhanced domestic competition.

Even though your bill seems good to me, I think the first two aspects are lacking. We must first of all strengthen our financial sector and then open our borders somewhat more by facilitating the penetration of the Canadian market for foreign businesses. I wonder how you feel about that? I would have two other questions for you a bit later.

Mr. Jim Peterson: I agree with most of what you've said, Mr. Loubier.

When the merger of Canadian banks was being discussed the biggest problem was the one you raised in second place, that of domestic competition in Canada. We were all aware of the opinion of the Competition Bureau on the matter. Following that report, it was obvious that the government would have to deal with a great many problems should the banks merge.

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This bill is in the same vein as the recommendations contained in the MacKay report and put forward by your committee in order to promote competition among financial institutions in Canada. I can't guarantee that they will be doing a great many things, but we will give them the possibility of competing in Canada as they do elsewhere throughout the world, that is with branches rather than Canadian companies. We hope that this will help Canadians.

Mr. Yvan Loubier: I understand that, Mr. Minister, and I agree with you on that point. Indeed, as everyone here can testify, we ourselves promoted increased competition in the financial sector.

I am worried that at the present time Canadian banking and financial institutions have certain weaknesses. Even in the MacKay report, a report prepared by a consulting firm—I can't remember its name at the moment—was alluded to and this report stated that even the biggest Canadian banks were not necessarily the best banks in the world. If we open our borders and stimulate greater competition here, eventually, in a few years, following the next World Trade Organization negotiations and even within the three Americas—who knows—Canadian banks and the financial sector in general will be facing even greater competition.

I'm concerned that at the present time Canadian banks, even those that are reputed to be the most important and are in fact the four that were to merge, are not the most efficient institutions in the world. We have to look at that closely. We are in favour of opening up our borders to bring about greater competition and to see to it that consumers are better served, but we also feel that at the same time the financial institutions here need to be strengthened.

That piece of the puzzle is missing. I would like to hear your opinion on that. Do you intend to table a bill in the near future that would allow us to strengthen our national financial institutions? If that is the case, you should not wait too long because if you enact Bill C-67 and apply it quickly but delay in putting in place the missing piece of the puzzle, we may run into problems. These difficulties are already apparent in the four large Canadian banks.

Mr. Jim Peterson: Mr. Loubier, as we will indicate in our response to the MacKay report, in future the government and this committee will have to ensure that the Canadian banks and financial institutions remain strong and competitive everywhere in the world.

Mr. Yvan Loubier: When will you respond to the report?

Mr. Jim Peterson: It will be prior to July and perhaps, I hope, before the House adjourns for the summer.

In any case, you will have many opportunities to discuss the issues that it will raise. I must say that at this time I'm very proud of our financial institutions. They remain competitive throughout the world. Forty percent of their income is derived from foreign exports. When you travel, you can see that our banks and insurance companies are present everywhere in the world. The people who work there are sometimes leaders in the commercial sector in these other countries.

Mr. Yvan Loubier: Our institutions may be leaders elsewhere, Mr. Minister, but they're experiencing certain problems here. Their branches may be very successful in the Caribbean, for instance, where regulations are more permissive, but here they're subject to some rather serious constraints.

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That is why I was alluding to the second part of the response to the MacKay report. It must be released in the near future and measures must be put in place otherwise we may regret our lack of adequate action later.

I would like to ask you another question, a more specific one this time. You talked about branch taxes that foreign banks exporting their gains abroad will have to pay. Did you check to see whether this new branch tax for foreign banks was in compliance with WTO rules? Our Canadian banks are not subject to such a branch tax. You intend to create a tax that would be different for foreign bank gains that might be exported to those banks' home countries. Are we sure that some member country of the World Trade Organization will not challenge us on that particular measure?

Mr. Jim Peterson: Before replying to that question I would like to introduce the colleagues accompanying me. They are David Tobin, Charles Seeto and Paul Berg-Dick from the Department of Finance, and John Thompson and Brian Long from the Office of the Superintendent of Financial Institutions.

When we drafted this withholding tax provision, we respected the provisions of the tax legislation for branches and businesses established in Canada which provides for equivalency. We wanted foreign institutions that have relations with Canada to be exactly in the same position, whether they are branches or businesses established in Canada. That is exactly what we are doing here with the banks. In theory, there will be no difference between the taxes to be paid by bank branches and the other institutions.

Mr. Yvan Loubier: When this tax on branch gains will be calculated the other type of tax on 10% of risk-weighted assets will also bo taken into account. If one looks at the overall tax structure, in the final analysis, we should be able to say that a Canadian bank is not treated differently from a foreign bank on Canadian soil. Is that correct?

Mr. Jim Peterson: In line with our tax agreements and treaties with other countries, there will be a kind of tax reciprocity. We have seen to it that this regime respects the provisions contained in tax agreements we have entered into with all other countries.

[English]

Paul, do you want to add something?

[Translation]

Mr. Paul Berg-Dick (Director, Business Income Tax Division, Department of Finance): This tax on branches will not cause any problem with the WTO. Indeed, the United States levy the same kind of branch tax. Hence, there is no problem with regard to our international agreements.

Mr. Yvan Loubier: I see. Thank you, Mr. Minister, for these answers and clarifications.

[English]

The Chairman: Mr. Pillitteri.

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

Good day, Mr. Peterson. It's good to see you back here.

This is long overdue, of course. Being a businessman, I would like to see more capital come into Canada. Especially for a small business, this would be one way of having more commercial lending available.

I have two questions. The first is with regard to branch banking. As we know, today, our Canadian banks, contrary to what Mr. Loubier might say, are quite healthy here in Canada. It's been very hard for anyone coming into this country, really, to have the same opportunity. They'll have that opportunity now.

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In the branch bank, in off-setting losses of those banks from foreign countries that come in here, if they create losses in Canada will they be able to take those losses into their home country?

That's one part. As for the other part, where...not that some of those countries are fully independent banks for the state, or the country has any part in the direction of that bank. How will this government look at it? It would be interference from other states within the banking system. How will we look at that part?

Mr. Jim Peterson: Those are two important questions, Mr. Pillitteri.

First of all, in our transitional rules we are allowing any losses that a foreign bank subsidiary in Canada has incurred to date to be transferred into the branch. Now, in effect, the taxpayer is no longer the Canadian subsidiary; it is the foreign bank incorporated elsewhere. For tax purposes, however, we treat that Canadian branch exactly the same as we do the subsidiary.

So we hive off its Canadian branch operations from the foreign parent for tax purposes and equate it to the subsidiary. All we are doing is allowing a transitional rollover from the subsidiary into the branch form.

Quite frankly, we're doing this for a couple of reasons. First of all, we forced the foreign banks to come into Canada in 1980 as subsidiaries. We did not allow them to branch, which is not the way of any other country in the OECD except for Mexico, and Canada today. So we are out of step in terms of the international financial services sector, and we are attempting to rectify that. We don't feel they should be unduly penalized because we did not give them the choice when they came in of establishing a branch or a subsidiary. That is basically the reason we're doing it.

As well, we want to make sure there's no tax impediment to their expanding these operations and having access to their foreign capital in order to carry on business in Canada.

Your second question related to the regulatory regime. You're quite right; the major regulator of any foreign branch is going to be the regulator in their home jurisdiction, be it the United States or Holland or Germany or England or France—wherever. If they still maintain a subsidiary in Canada, then OSFI will be the main regulator of that subsidiary, but as they do today, they will consult frequently with the foreign home regulator. If they establish a branch, either in addition to that subsidiary or just a branch, the need for Canadian regulation will be far less.

A full-service branch that can take deposits of over $150,000, but only from sophisticated people, will not require the degree of supervision a retail branch would. So OSFI will exercise a certain degree of regulation over that.

If they're just a lending branch in Canada, however, and they're not taking deposits at all, then the degree of regulation will be very light. This is the course of action I think a lot of these foreign banks are going to take in increasing their lending to business persons here in Canada.

So they're going to have three options for being in Canada. Each one will be a degree of regulation based not on what they are but on what they do.

Mr. Gary Pillitteri: Just to follow up, I like it in your presentation when you say deposits over $150,000 would be sophisticated.

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I beg to differ with you a little bit. I know many immigrants who have very little skill in or knowledge of the English language, and I wonder what would happen if these banks would start offering 0.5% or 1% more in interest that, really, as Canadians....

What I'm saying is that I'm sure a lot of people out there are not as sophisticated as we think they might be but have more than $150,000 in deposits in banks. What guarantee can we give them with the exception of saying you're...? How far will we go to inform those people?

Mr. Jim Peterson: This is always going to be a problem. You allude to issues that arose back in the 1970s and 1980s, when some trust companies went under in Canada. They took a lot of money out of Canadians depositing more than what was allowed, more than what was covered by the CDIC, the amount of $60,000. A lot of these institutions were offering excessively high rates of interest, and therefore had to make very risky investments in order to cover the cost of interest they were paying on their deposits.

Probably the best safeguard against these people losing our money is going to be a vigilant, well-staffed, highly active Office of the Superintendent of Financial Institutions. I can't stress this enough. This, to me, is probably the foremost mandate I have as secretary of state—to ensure the safety and prudential factors attached to our financial services sector. I don't want to see bankruptcies and I don't want to see Canadian depositors hurt, be they sophisticated or be they big or small.

I'm going to have to be very honest with you: We're in good times right now, and our financial services sector is in very good shape, but if we suffer a major downturn we can't always guarantee this, and we cannot guarantee against failures of institutions.

I think this committee can play a major role, in its meetings with the Office of the Superintendent of Financial Institutions, by making sure this message gets through and checking on the work they're doing.

That is the first line of attack. The second is going to be to try to inform people in writing that these deposits of $150,000 and more are not subject to CDIC protection. That will be posted in each of the banks, and the foreign banks that are here. It will be on each of the documents with regard to where they've deposited money.

Apart from that, if this committee has any further suggestions, we would welcome them.

Mr. Gary Pillitteri: To follow up on that, yes, I do have a suggestion.

I would suggest that, apart from the two two official languages within our regulations, disclosure be added in people's own language, whether it be Italian or Polish or German. Those are the individuals who are going to be depositing in there and need disclosure in their own language, because they are not guaranteed.

Mr. Jim Peterson: Mr. Pillitteri, I think that's a very good suggestion. I believe this is something we can best implement through discussions with the individual banks taking wholesale deposits here in Canada. I think it's worth discussing with those that continue to work at the retail level through a Canadian subsidiary and are catering to groups who have come to Canada from particular countries and who may have language difficulties in either of the two Canadian official languages.

So I would suggest that this is something we can best do not by regulation, or legislative amendment, but through discussions with the individual banks. It might be something you would want to monitor a year from now to see the degree of implementation, done on a voluntary basis, to meet the needs of special customers.

Mr. Gary Pillitteri: Thank you very much.

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The Chairman: Thank you, Mr. Pillitteri.

We'll go to Ms. Leung, then Mr. Loubier, and then Mr. Bonin.

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

Thank you, Minister, for your proposal.

I have a couple of questions. First, I understand there is a decline in the foreign banks, and that the market value shares have dropped from 12% to 10%. I wonder if the foreign banks have approached you or your ministry with their concerns or requests for this change.

As well, after the new bill is introduced, will that improve their position?

Mr. Jim Peterson: Thank you for those important questions.

Yes, the presence of foreign banks since we opened up Canada to foreign banks in the early eighties has actually declined, and the percentage of Canadian bank assets has declined. I think there are two reasons for this. I think the biggest reason is that they have encountered very strong competition from Canada's current banks, banks that they have found to be extremely well entrenched throughout the entire country.

We have a branch banking system in Canada that is, to many, the envy of the world. Our banking regulatory system is, to many, the envy of the world. I think a lot of them just found that getting a foothold in Canada in the face of the existing competition was not as easy as it would be, or was, in many other countries of the world. So we've seen some of them pull out.

The second reason, of course, is why we have this bill today. This bill is designed to tailor the degree of regulation to the activities carried out in Canada. In the past we had a very archaic form, I think, of regulating our financial institutions. We regulated based on who you were—i.e., if you were a bank anywhere in the world, or if you had a bank anywhere in your chain throughout the world, you were regulated as a bank in Canada, even if all you were doing was issuing credit cards or lending to Canadians.

We're now focusing on what you do here. If you're just lending to Canadians, then you need far less a degree of regulation and capital than if you were actually taking deposits—wholesale deposits, such as a full-service branch, or retail deposits, such as a subsidiary. So by tailoring the regulatory regime and the capital requirements to the particular operations, they have the flexibility that will enhance their competitiveness.

This is why so many of the banks have indicated that they want to see this regime here in Canada. First of all, it will mean more opportunities for them, but secondly, it is in line with what every other country, except Mexico now, in the OECD, has implemented.

So I hope to see an increase in foreign bank activities as a result of this bill.

Ms. Sophia Leung: Okay.

Bill C-67 would allow a foreign bank to transfer the existing assets and associated tax liabilities to its Canadian banking for the newly established branch. That's an interesting one.

You mentioned that there is a time limit of within, what, a year, three years, five years? And what's the reason for that?

Mr. Jim Peterson: Thank you. I'll turn this over to Paul Berg-Dick.

Mr. Paul Berg-Dick: Yes, there is a time limit placed on this to allow banks first to decide whether they want to take advantage of this option. They then have to apply to the regulator for permission to open up a branch. The time period they would have to complete that transaction would be to the end of 2002. It's actually the earlier of six months after they receive permission to do it or 2002.

I think this provides an opportunity for them to decide what approach they want to take and then see if they want to take advantage of this particular provision.

Ms. Sophia Leung: Thank you.

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[Translation]

The Chairman: Mr. Loubier.

Mr. Yvan Loubier: One last question, Mr. Minister. You mentioned earlier that you will probably be tabling a white paper in June in response to the MacKay report. What will be the follow- up to this white paper? In other words, should we expect that next winter, for instance, the review of the Bank Act will be completed, taking into account the highlights of the white paper which may be enriched by the debates we will hold here and the consultations we will be holding on these matters? What is the timeframe, what can we expect?

Mr. Jim Peterson: My problem, Mr. Loubier, is that I am too impatient.

Mr. Yvan Loubier: Me too.

Mr. Jim Peterson: I would like us to be able to apply the provisions of the new laws this year, before Christmas, but this may not be realistic.

We will be tabling a report prior to the month of July and I hope that we will be able to present a bill in September or October and that your committee will have the opportunity of hearing witnesses concerning the changes we will be proposing. It would be very important for us to be able to benefit from the reaction of your committee.

Mr. Yvan Loubier: Do you think that the changes you will be tabling will really complete the Bank Act reform that began in 1997? Will your proposals allow us to complete the review of all of the aspects that had not been covered during the 1997 exercise?

Mr. Jim Peterson: Yes. We hope that our response to the MacKay report will be complete even though we're all aware of the fact that bills are never perfect. We are always ready to entertain amendments and suggestions as we understand full well that only through discussions with all of the stakeholders will we be able to fine-tune the provisions of the act. We will do everything in our power to do so. We have benefited from your suggestions in the past and from the public discussions that were held over the course of the past two years.

I hope that we will be able to pass this new bill without too many problems. Thanks to your co-operation, we will be able to improve our proposals and put the provisions of this bill into effect as quickly as possible.

Mr. Yvan Loubier: If your bill is a good one, Minister, there will be no reason for us not to support it.

Mr. Jim Peterson: We'll see. I am sure we can count on your co-operation.

Mr. Yvan Loubier: Thank you very much.

The Chairman: Mr. Bonin.

Mr. Raymond Bonin (Nickel Belt, Lib.): Mr. Minister, thank you for your interesting presentation. Even though I am not a permanent member of this committee...

Mr. Jim Peterson: That's a shame.

Mr. Raymond Bonin: ...I understood it without too much difficulty.

[English]

I have a question. You mentioned that foreign banks will be able with this legislation to open up branches or subsidiaries. Will they be able to do this under one roof, both under one roof, and if so, how will we protect the unsophisticated consumer?

Mr. Jim Peterson: No, they will not be.

What we envisage is that if you are continuing to take retail deposits through a Canadian subsidiary, and you wanted to establish a lending branch, you could not. You could establish a full-service branch that would be able to take the wholesale deposits in addition to that, but you would not be able to operate in the same premises. You would have to operate out of different premises, because you are appealing to different people, and we want to avoid that possibility of confusion.

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The possibility of confusion could arise because you would have the word “bank” attached to the full-service lending branch. This is why we are trying to do everything we can to eliminate that confusion.

That's why the suggestion from Mr. Pillitteri could be interesting in terms of people who have particular language needs.

Mr. Raymond Bonin: Yes, because $150,000, when the boomers start leaving their worth to their children, will not be a lot of money.

Not allowing both under one roof is good protection for them, and I appreciate that.

Mr. Jim Peterson: Thank you.

Well, to me, $150,000 does look like a lot of money.

Voices: Oh, oh.

Mr. Raymond Bonin: I don't believe everything I hear in Ottawa.

Voices: Oh, oh.

Mr. Jim Peterson: I'm also a boomer.

Mr. Raymond Bonin: That, I believe.

Mr. Jim Peterson: You shouldn't.

Voices: Oh, oh!

The Chairman: Mr. Ritz.

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

The Chairman: What do you think; is $150,000 a lot of money?

Mr. Gerry Ritz: That's a lot of cash, yes, especially to us poor farmers.

Mr. Peterson, I have just one small point. Bill C-67 is definitely going in the right direction, and we'll have no problem supporting it, but it makes not only some major changes to the Bank Act but also significant changes to the tax act. We don't see those. You talk about a ways and means motion at a later date, and I'm wondering why we don't have a complete package here.

Mr. Jim Peterson: I'll be very frank with you. We tabled ways and means measures on February 11 for some of the provisions. Let me go through the process in terms of what happened.

Having tabled that bill, we received additional representations from the foreign bank community and from the schedule I banks about the need to provide transitional relief of a temporary nature to allow a rollover into the branch operation.

We had requested details, because we're not going to try to go into these things blindly. Having received a short while ago details as to what the possible tax implications could be, and how this could probably impact negatively on the moving into branches, we had to come to the decision of whether or not to offer transitional relief. We felt it was very important to do it for the reasons I have cited. We had forced them into this arcane form of doing business in Canada originally, one we had contracted through the WTO to get out of. Of course, we want them to be part of the strong second-tier financial services sector in Canada.

We have not yet prepared the exact wording for the legislation but we have indicated, in no uncertain terms, that we will be offering this type of temporary transitional rollover that is not foreign to our tax system.

So we just don't have it prepared yet, but we will, and we will introduce it in time. We will do so in consultation with the stakeholders, as we have done throughout the drafting of all of this.

Mr. Gerry Ritz: Will that affect the time schedule you've set?

Mr. Jim Peterson: No, it won't. I think we can probably see this in a ways and means form.

Paul, when can we expect it?

Mr. Paul Berg-Dick: Later this year.

Mr. Jim Peterson: It will certainly be tabled before....

In our discussions with the foreign banks, the lack of detailed tax legislation this time will not be an impediment to their being rolled over into branches.

Mr. Gerry Ritz: All right. Good.

Thank you.

The Chairman: Thank you, Mr. Ritz.

I want to follow up on a question asked by Ms. Leung. You responded by saying that in the past, you regulated by who they were, not by what they did in Canada. You recall saying that, right?

Mr. Jim Peterson: I do, yes.

The Chairman: So is there basically a shift from regulation by institution to regulation by function?

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Mr. Jim Peterson: I think so. I think it's dictated by the virtual dissolution or breakup of the traditional four pillars that used to exist and what is happening globally, how you have financial institutions that no longer resemble what they did in the past. You have convergence, where various financial institutions throughout the world are offering full services in all sorts of areas. Therefore, it makes no sense to regulate just because you're a branch when you weren't even in Canada.

I mean, this was the type of arcane, out-of-date legislation we had until a few years ago, that if you had a branch anywhere in your corporate hierarchy or corporate chain in the world, we said, “You're a branch”, which we still do to a certain extent.

We're trying to get rid of that type of fixation to streamline our regulations so that they protect Canadians where they should, provide prudential controls where they should, and where there is no Canadian interest in protecting, such as where you have a lending operation only, or a credit card, then all you have to worry about is full disclosure of costs and interest rates and service charges. You don't have to worry about the prudential nature.

If a foreign bank lending to you as a Canadian goes bankrupt, it really doesn't affect you greatly. It may mean your loan gets called a little early, but it's not as if you were depositing money with that bank.

This is why we're trying to tailor our legislation in the way you've suggested.

The Chairman: Are you signalling something here?

Mr. Jim Peterson: I hope we're signalling a few things—that our financial services sector is probably one of our most important industries in Canada; that we want to keep up with global developments so that they can have the benefits of regulatory regimes that meet the needs of prudence and protecting consumers but are not overly burdensome; and that, yes, consumers are given enhanced protection where they need it.

I think a lot of these themes will come through in our response to MacKay, but I think this is a start of that trend to look at what the public policy purposes are in being involved in regulating in a particular area, and where there is no public purpose, or very little public purpose, that regulatory regime can be much lighter than for a full-service bank.

The Chairman: I know we're talking about foreign banks now, but when you think about it, if there is this major shift from regulation by institution to regulation by function, then I would think the next logical step would also be that this kind of outlook would be seen throughout our financial services sector industry here in Canada, would it not?

Mr. Jim Peterson: It's a very good question. Your committee had various suggestions on that in terms of a response to MacKay. Part of your report, which was an excellent report, suggested where we should maybe have a little more regulation to protect consumers, and where we should have less regulation in terms of some of the institutions where they didn't need it.

As a government and as a parliament, I think we owe it to our institutions to continually review our regulatory regimes to see that they are actually performing the purposes required on behalf of Canadians but not be overly burdensome. We are now competing globally, and we can't repeal globalization. I think we have an obligation to work with our institutions to see that they have if not almost the best, then probably the very best regulatory regime in the world.

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The Chairman: You read our report, of course. Tell me something; what does this say, what does this shift mean, in terms of a holding company model?

Mr. Jim Peterson: This was a suggestion put forward by you and put forward by MacKay and put forward by the Senate committee, that banks and other financial institutions need greater flexibility in terms of being able to organize their activities.

We see here with the foreign banks—and this could be one of the intents of your question, Mr. Chairman—that because we are allowing a flexible regulatory regime, depending on the activities you do in Canada through the three different modalities...and banks can't do that right now. Banks don't have holding companies. If a bank has particular operations, they all have to be within the bank, and they all come under the heavy burden of regulating retail operations.

This is why you had suggested that holding companies should be introduced, to give flexibility in the operations. Of course, we have read, with a great deal of interest, your suggestions to us, and we will be responding to those suggestions in the not-too-distant future.

Having said that, I know OSFI has always had concerns that if you allow the holding company regime to get out of control, you lose the ability to preclude contagion from spreading throughout a corporate group. In dealing with this, we will have to balance the needs for corporate flexibility and how they structure their operations with the overriding need for prudential, sound management of our financial institutions so that through a more complex corporate structure they will not have the opportunities or possibilities to have one part of a huge corporate holding globally contaminated by another portion of it.

So that's our concern. It's just a trade-off.

The Chairman: Am I reading too much into this? I mean, if you're going to go with regulation by function, you're essentially saying that the holding company model is not a bad idea.

Mr. Jim Peterson: I certain wouldn't want to scoop the department on what we might be doing in responding to MacKay, but let me say this: We always take very seriously the recommendations that come to us from this committee.

The Chairman: I would be very surprised, after you made this important distinction in your comments, if in fact we wouldn't be seriously looking, as a government, at the holding company model as the way to go.

Mr. Jim Peterson: We have always taken very seriously your considered opinions and suggestions to us, but these things are never open-and-shut. When you have a win-win situation in politics, you do it quickly and you forget about it. There's no disagreement. There is always the trade-off. Are you sacrificing the capacity to regulate in a prudential manner a particular institution?

As I said, we have to anticipate bad times ahead. We have to be prepared with a regulatory regime that can withstand the onslaught of a downturn in our economy if and when it should come. So prudential concerns are also at the top of our radar screen.

The Chairman: But, Minister, how reasonable is it at this point, when you look at all the changes occurring in the financial services sector, to still go on and regulate by institution?

Mr. Jim Peterson: I think we're moving in the direction in which you've suggested we should move in terms of tailoring the regulatory regime to the precise activities carried on in Canada. I think this is a model that has been adopted in a lot of other countries of the world.

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Again, let me assure you of this: My overwhelming concern always will be the prudential aspects of our financial services sector. This method of regulation in the past is part of what has given us such a splendid reputation around the world. When you go into other countries, Canadian financial service institutions are highly respected, in part because of the regulatory regime we have here in Canada.

The Chairman: Are there any further questions?

I think we've had quite a few answers today, and I want to thank the minister and his officials for, as always, a very thorough and helpful presentation.

The next meeting will be at 3.30 p.m. today.

Mr. Jim Peterson: I'd like to thank the members very much for their assistance and suggestions on an ongoing basis.

The Chairman: The meeting is adjourned.