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37th PARLIAMENT, 2nd SESSION

Standing Committee on Industry, Science and Technology

EVIDENCE

CONTENTS

Tuesday, November 4, 2003

0905

The Chair (Mr. Walt Lastewka (St. Catharines, Lib.))

Mr. Garth Whyte (Executive Vice-President, National Affairs, Canadian Federation of Independent Business)

The Chair

Mr. Garth Whyte

0910

0915

The Chair

Mr. Garth Whyte

Mr. Brien Gray (Senior Vice-President, Field Operations, Canadian Federation of Independent Business)

Mr. Garth Whyte

0920

Mr. Doug Bruce (Director of Research, Canadian Federation of Independent Business)

0925

0930

0935

The Chair

Mr. Brien Gray

0940

The Chair

Mrs. Cheryl Gallant (Renfrew—Nipissing—Pembroke, Canadian Alliance)

Mr. Doug Bruce

Mrs. Cheryl Gallant

Mr. Garth Whyte

Mrs. Cheryl Gallant

Mr. Garth Whyte

Mrs. Cheryl Gallant

Mr. Garth Whyte

Mr. Brien Gray

Mrs. Cheryl Gallant

Mr. Brien Gray

0945

Mrs. Cheryl Gallant

Mr. Brien Gray

Mrs. Cheryl Gallant

Mr. Brien Gray

The Chair

Mr. Larry Bagnell (Yukon, Lib.)

0950

Mr. Garth Whyte

Mr. Larry Bagnell

Mr. Brien Gray

0955

Mr. Garth Whyte

The Chair

Mr. Larry Bagnell

Mr. Brien Gray

1000

The Chair

Mr. Paul Crête (Kamouraska—Rivière-du-Loup—Témiscouata—Les Basques, BQ)

Mr. André Piché (Director, National Affairs, Canadian Federation of Independent Business)

The Chair

Mr. Serge Marcil (Beauharnois—Salaberry, Lib.)

1005

Mr. Brien Gray

Mr. Serge Marcil

Mr. Garth Whyte

Mr. Serge Marcil

1010

Mr. Brien Gray

Mr. Serge Marcil

Mr. Brien Gray

Mr. Serge Marcil

The Chair

Mr. James Rajotte (Edmonton Southwest, Canadian Alliance)

Mr. Garth Whyte

1015

Mr. Brien Gray

Mr. André Piché

Mr. James Rajotte

Mr. Doug Bruce

Mr. James Rajotte

1020

Mr. Doug Bruce

Mr. James Rajotte

Mr. Doug Bruce

Mr. James Rajotte

Mr. Doug Bruce

Mr. James Rajotte

Mr. Doug Bruce

Mr. James Rajotte

Mr. Doug Bruce

Mr. James Rajotte

1025

Mr. Brien Gray

Mr. James Rajotte

Mr. Brien Gray

The Chair

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.)

1030

Mr. Brien Gray

Mr. Dan McTeague

Mr. Brien Gray

Mr. Dan McTeague

Mr. Brien Gray

1035

Mr. Dan McTeague

The Chair

Mr. Paul Crête

Mr. Brien Gray

Mr. Paul Crête

Mr. Brien Gray

1040

Mr. Paul Crête

Mr. Garth Whyte

Mr. Brien Gray

The Chair

Mr. Doug Bruce

The Chair

Mr. Brien Gray

1045

The Chair

Mr. Yvon Godin (Acadie—Bathurst, NDP)

Mr. Garth Whyte

1050

Mr. Yvon Godin

Mr. Garth Whyte

Mr. Yvon Godin

Mr. Garth Whyte

Mr. Yvon Godin

Mr. Brien Gray

1055

The Chair

Mr. Larry Bagnell

Mr. Brien Gray

Mr. Larry Bagnell

Mr. Brien Gray

Mr. Garth Whyte

Mr. Larry Bagnell

The Chair

1100

Mr. Garth Whyte

Mr. Brien Gray

The Chair

CANADA

Standing Committee on Industry, Science and Technology

NUMBER 065

2nd SESSION

37th PARLIAMENT

EVIDENCE

Tuesday, November 4, 2003

[Recorded by Electronic Apparatus]

¿ (0905)

[English]

The Chair (Mr. Walt Lastewka (St. Catharines, Lib.)): Pursuant to Standing Order 108(2), a study on small and medium-sized enterprise bank lending, SME financing, today we have the Canadian Federation of Independent Business: Mr. Garth Whyte, executive vice-president, national affairs; Mr. André Piché, director, national affairs; and Mr. Doug Bruce, director of research.

It's good to see you back. It has been a while since you were here at the industry committee. I want to welcome you. I would ask that you start with your presentation, and then we'll go on with questions.

Mr. Whyte.

Mr. Garth Whyte (Executive Vice-President, National Affairs, Canadian Federation of Independent Business): Thank you, Mr. Chairman.

We want to thank the committee for inviting us back again, and we want to commend the committee for the excellent work you've been doing. We were really supportive and appreciated the report on mergers that you did, and the guidance there.

Today you should have a package in front of you that includes our Banking on Canada's Entrepreneurial Economy, which we're going to talk about. There's also the Quarterly Business Barometerin there, and Banking on Competition, the results of our most recent CFIB banking research.

Our colleague Brien Gray was to be a co-presenter. He is in transit. I think the snowstorm outside means he may be coming in looking a little harried in about 10 minutes or so.

But my colleague Doug Bruce, who wrote the report and did the research on banking, will be co-presenting; and André Piché, our director of national affairs, has written the committee presentation.

Before I get into our presentation, I want to talk about one of our 105,000 members. I remember talking to this member a few years ago. He said he was interested in setting up a regional airline between Ottawa and Toronto, and many people thought it was a good idea.

His grand opening was scheduled for September 12, 2001, the day after the horrible events of September 11 when we saw the twin towers collapse. There couldn't be a worse time to be in the airline business, and though it got off to a terrible start, today it's a very successful venture that employs several people and provides five or six flights between Ottawa and Toronto daily. I think you know the airline. Some of you use it. It flies into Buttonville. It's called Bearskin Airlines.

Ironically, this venture might not have been successful if Bearskin Airlines had started the process after September 11, because they may not have been able to get insurance and, in turn, financing for this business expansion.

This story highlights the three messages of our presentation today.

One, it shows the perseverance, the resiliency, and the optimism of the small and medium-sized enterprise economy, which we call the non-stock market economy, which has created most of the jobs in Canada in the last two years.

Two, it talks about the lack of access to insurance coverage and the increasing cost of insurance premiums, which are becoming a major impediment to small business growth and job creation.

And three, it talks about our most recent banking research findings, which demonstrate that there is a need to improve the domestic market for small business banking services.

The small business sector is important to Canada's economic growth and job creation. Twenty-five years ago it was one quarter, or 25%, of the GDP. Today it's almost half the GDP and over half the total employment in Canada.

Yesterday's economic and fiscal statement in this very room quotes our Quarterly Business Barometer. They use it. The Bank of Canada uses it. We've thrown it in this report because it's important, because it talks about why we should be concerned about small business, why we're at this committee in the first place.

If you'll turn to page 5 of the report in your package, I'll be talking to figure 2.

The Chair: The report is entitled Banking on Canada's Entrepreneurial Economy--page 5, figure 2.

Mr. Garth Whyte: In our business barometer, we ask our members their expectations for their own business over the next 12 months, and then that becomes an indicator. As you can see in the blue graph in figure 2, we've been doing that since 1989, for the last 14 years or so. What we found and we layered over top of the gross domestic product, which is the yellow line, is that they're almost exactly the same, that they're an incredible predictor--or not a predictor, but a mirror of the economy. Doug is going to keep me in line when I say these things. But it's an important message.

I refer you to the next page. The economic update focused on the turnaround that the Canadian economy has had in the last 10 years. It talked about the hard decisions that the government had to make on debt reduction, on tax reductions. I remember the Prime Minister 10 years ago saying to the private sector, you have to deliver.

Well, we did deliver. Three million jobs were created, primarily in the private sector, primarily through small business. Since September 11, when everyone said the economy was going to go down.... I remember sitting in this very committee saying we think there are 250,000 to 300,000 jobs that aren't being filled. We were wrong. It was 540,000 jobs that were filled in 2002, primarily from small business.

What we found when we were doing our business barometer were two economies. If you look at figure 3, in which now they've converged, the blue graph is that barometer figure, our members' expectations, which reflected the GDP. The green figure is the TSX Index. When we saw Nortel and Enron fall, the small business economy kept our economy going. It's one of the major reasons why Canada's economy grew in 2002 and why it's growing today.

We found two economies. The blue line we would call the non-stock market economy. The green line, which is the TSX, we'd call the stock market economy. So there are two economies.

We're here today to talk about the non-stock market economy. That's why it's important when we talk about banking and the need for small business financing and when we talk about insurance, because this is the backdrop for all policies. We need to help nurture that small business growth and job creation.

The economic statement referred to our business barometer, and the most recent one is in your package. But figure 4 shows what they were talking about, that despite SARS, BSE, fires, the hurricane, and the power outage, our barometer did dip during those times, but it has come back.

In figure 4, the red bar shows that 15% say their expectations for their own business will be weaker, 36% expect their business to be the same over the next 12 months, and 49% expect their business to be stronger.

Moving to the next graph very quickly, figure 5, that translates into jobs, and this is where they are a predictor. They have been predicting job creation, and figure 5 shows that three out of ten SME owners expect to increase full-time employment over the next year; six out of ten expect no change; and only one out of ten expects to plan a decrease in full-time employment. This is good news.

We want to nurture this. We want this to continue, because we saw that dividend following September 11. It wasn't Enron or Nortel that created those jobs; it was small and medium-sized enterprises.

We're here to talk about banking, but we're going to spend a few moments talking about insurance, because we'd be doing a major disservice if we did not tell you of a looming crisis that we see.

When we do the survey--which we present to Governor Dodge and the Bank of Canada on a regular basis, and they use it, and the finance committee, as you know, through the economic statement, uses it--we do 4,600 small business visits a week, week in and week out. In our surveys and in our visits, every visit, we're hearing about insurance.

We asked our members what external factors affected the performance of their business over the previous 12 months. Historically it's tax, or it's regulation, or it's other areas. For the first time we found over the summer that business ranked input costs as having the greatest impact on their business. As the figures show, when we asked what those input costs were, 83% identified insurance premiums as the most significant issue having an impact on their business, followed by fuel costs at 65%, and bank service charges at 57%.

¿ (0910)

We're here to talk about number one and number two. To further the talk about this, after 9/11, a growing number of our members reported that they were experiencing drastic increases in their property and casualty insurance for their businesses, and in some instances insurance coverage was no longer available.

We did a survey in May 2002, which we've given to the committee, with 8,200 responses. We did a survey in May 2003. You saw the survey that we did in the summer. You see the survey below, when we asked about the crises that were happening, SARS, BSE, the softwood lumber dispute, the border issue, and fishery closures. We asked about that at the request of the Bank of Canada. We decided to throw on insurance as an afterthought.

As you see in figure 7, SARS had an impact on Toronto and Ontario. For our members in the tourism industry, 21% of our members said it was a problem. BSE is primarily in Saskatchewan and Manitoba, in other areas in our livestock membership, and in agri-business, but again, 23% identified it as a problem. For softwood lumber, in B.C., northern Ontario, and Quebec, about 30% identified it as a problem. The border issue, again, is along border communities; about 33% saw this issue as a problem. When we came to insurance, 75% identified insurance as harming their business. It was in every province, from Newfoundland right across to British Columbia.

We hear it daily. We have a series of comments. These are only comments on insurance from our membership. We have one member who writes that her insurance company dropped her with no notice, as they deemed the recruiting industry as high risk. She has had no claims in the 19 years she has been in business. She is now rushing around to secure insurance at a cost triple to what she was paying.

Another member said that, in a nutshell, sales are down 35% due to the economy and insurance has risen 50%. Yesterday a member told us that they have 20 people in manufacturing in the Annapolis Valley. Last year the insurance went up 25%. This year it went up another 50% with no notice. We're talking about tens of thousands. They told us that it's going to encourage them to move to the States.

Another member said that, basically, their liability insurance has tripled in two years. He says that, on top of this, his liability has decreased from $2 million to $1 million without his being told. He's seeing 132% over four years. He actually has no coverage on the most important part of his work, which is removing oil tanks from residential properties. No company will insure him for this.

¿ (0915)

The Chair: Mr. Whyte, you might want to slow down a little bit. Our interpreters would like to translate your complete speech.

Mr. Garth Whyte: I'm sorry. We're passionate about this, and I apologize. We're quite passionate about this.

This member is asked to take out oil tanks from residential properties because insurance companies require it. The irony is that the very insurance companies that require homeowners to comply with new regulations and upgrade their tanks will not insure the person who is required to take those tanks out. Anyways, it goes on and on.

We have a trucker in Thunder Bay whose insurance on 170 trucks went from $400,000 to $800,000. We have another member who has a huge exporting contract, and his insurance went from $20,000 to $120,000. He can't get product liability insurance.

We have a message, before I leave insurance. We wrote a letter to the Secretary of State for International Financial Institutions, Minister Bevilacqua, to recommend a public examination by both the federal and provincial governments to look at this problem and focus on substantial solutions to alleviate this problem. We surveyed our members. We asked if there should be a parliamentary committee to review the insurance industry, so we can understand what's going on, not to push solutions. After 12,000 responses, 78% said yes, 15% said no, and 7% were undecided.

We have been told that this is a provincial issue. We are working with each province. We're told that this is an auto insurance issue. It's more than auto insurance, even though our members do use commercial auto insurance. This is a property and casualty insurance issue. It's a federal issue, it's a national issue. We think that it's a bigger crisis than SARS, mad cow, and softwood lumber.

We have launched a fax alert campaign. We saved you folks. We focused on the minister for financial institutions. Here are a few that we received this week. We have already distributed over 10,000 surveys to him from our members.

This is a ticking time bomb. Our members do not differentiate between this being a federal or a provincial issue. We think that, of all committees, this is the committee that should review it. This committee has done a great job in reviewing bank issues in small business lending. Why not insurance?

We think a review should look at the following: What are the overall impacts on the Canadian economy? What are the impacts on small business and job creation? What are the impacts on regional economies and exports? Are government regulations set right, and is there federal-provincial overlap? How can insurance rates be lowered?

The way we see this committee, if we put a spotlight on this issue, that will get the provinces to study it more. But it's a national problem, not just a provincial problem. We're recommending that the federal government hold committee hearings to assess the impact of soaring insurance costs on the small business sector, the Canadian economy, and job creation. If you can't get insurance, you cannot get bank financing.

My colleague Brien Gray has arrived from the snowstorm, and I'm finished.

Brien, are you ready to do this, or should we let Doug do it? How do you want to do this?

Mr. Brien Gray (Senior Vice-President, Field Operations, Canadian Federation of Independent Business): Let Doug go ahead and keep the continuity.

Thank you.

Mr. Garth Whyte: Brien has been doing this for 15 years on bank issues. It's very important. We're going to be focusing on our bank survey issues, but we wanted to put the importance on the table. We would not be doing our job, and we'd be doing you a disservice, if we did not bring to your attention the serious impact of insurance on our members in access and cost.

Now we should move on to the task at hand. I do thank you, Mr. Chairman, for allowing us to do that.

We're talking about the banking highlights of our surveys. Doug, just talk basically about what we found.

¿ (0920)

Mr. Doug Bruce (Director of Research, Canadian Federation of Independent Business): Great. Thank you.

We will now turn to the issue of banking and small business. A key document that you have in your kits is called Banking on Competition and highlights the survey results that CFIB conducted in the spring of this year from which we received close to 9,600 responses from business owners across the country.

A key objective of the survey was to focus on the level of competition. It has now been five years since the MacKay task force reported, and we wanted to get an indication from the small business community at large where the level of competition in their local community has gone. Has it increased, has it stayed the same, or has it decreased in the past several years? That's a key focus of our survey, and I will be getting into some survey results on that.

Another focus of the survey was on which banks and other financial institutions are providing the best services to the small business segment of the Canadian market. In essence, we have a report card indicating which banks are doing the best and which ones are not doing the best in serving the small business market. We also focus on various financing indicators, the level of financing, the amount of small business loans, loan rejection rates, and I will be sharing with the committee some survey results on that aspect of the core financing issues affecting small businesses.

If you turn your attention to figure 9, a key question in the survey asked about the overall level of competition in your local community--has it changed, has it stayed the same in the past three years, has it increased, and has it decreased? Unfortunately, the results are not very optimistic; close to 69% of members indicated that competition for banking in their local community has not changed. Actually, 16% indicated that it had decreased, and only 15% indicated that overall competition in the banking industry had increased for their business.

We have provincial results broken out in figure 9, and unfortunately, members in Ontario were least likely to state that competition had increased. We believe a large part of the reason for that is due to the TD Bank acquisition of Canada Trust a couple of years ago.

I will read you a couple of quotes from our members. This one is a commercial printer based in Oakville and he writes:

The results of decreased competition through the merger of TD/Canada Trust for me has been a decrease in service, and a large increase in fees and interest, particularly with credit card services.

Another member writes, a consultant based in Toronto:

I would sincerely like to see more competition in business banking services. Virtually all the Trust Companies have been bought up by the major banks and, in all cases, the level of service at the former trust company branches have declined substantially, as service charges have increased. The lineups, both for personal and biz banking have grown substantially. Further mergers are not going to help this lack of competition!

We will be getting into the issue of bank mergers later on in our presentation, but as far as overall competition out there is concerned, when it comes to small business, not much has really happened in the domestic market in the past three years.

I turn your attention to figure 10. We asked our members, where have the banks been active? Have they been focusing on ATMs, wealth management, providing loans, and other key business services? Unfortunately, according to our members, what they say is that the banks are putting most of their efforts into establishing ATMs across the country and focusing more or less on wealth management services, such as selling mutual funds and RRSPs. When it comes down to providing key core business services to our members across the country, such as business account services, deposit services, cash and coin, business loans, and credit lines, the banks have not been very active in that area at all.

Turning to figure 11, a key survey question was, how would you like to do your banking? What are the most important service delivery methods for banking for your own business? The message is straightforward. Small business owners across the country--95% of them--state that they want to do their banking through a full-service branch that's conveniently located in their own community. They don't want to do it through ATMs, they don't want to do it through the Internet, and they don't want to do it through the telephone. Essentially, full-service local branch access is critical to the smooth operation of small businesses across the country.

¿ (0925)

Turning to figure 12, going back to the MacKay task force, there were key recommendations made to make it easier and more attractive for foreign institutions, foreign banks, to come into the domestic market and service the small business segment of this economy. We asked this question back in 2000. We asked it again. Basically, the question is, have you ever used the services of these key foreign institutions? The institutions are American Express, GE Capital, MBNA, Capital One, ING DIRECT, and Wells Fargo.

As you can see, a lot of our members are using the services of American Express, but of course, that's credit card. GE Capital is for leasing; one in three of our members do use that. MBNA, Cap One--again, it's credit cards. ING DIRECT--only 13% of our members across the country use that. But again, that's not really commercial banking; it's personal banking. Wells Fargo is at the bottom. Just one in ten, or 12% of our members are using the services of Wells Fargo. And one in four have not used the services of these institutions at all.

The message is quite clear. While small business owners are using the services of these foreign institutions, they are not full substitutes for banking. They don't provide the full range of banking services for small business owners. Again, it's credit cards, it's leasing. They're basically one-offs.

These institutions are also not setting up shop in local communities. There are basically two types of communities in Canada. There are major urban centres, such as Toronto, Calgary, Vancouver, Montreal, and then there's the rest of Canada, the rural segment. These institutions are not big players, if at all, in the rural segment of Canada.

We have various bank market share data, and referring to figure 13, we see there have been dramatic changes over the past decade or so in the market share of the small business market held by the major banks--unfortunately, major institutions such as CIBC and Royal Bank, and I remind you they were the two major proponents of bank mergers back in 1998.

We continue to see a decline in the respective market shares of the small business market of those two major institutions, the most dramatic decline being with CIBC. As you can see, back in 1989 CIBC held 19.3% of the small business market and they are now at only 12.6%. We have also continued to see a decline in Royal Bank's small business market share, their market share falling from just over 24% to 20% since 1989.

We believe it's unlikely the downward trend in market share between Royal Bank and CIBC is caused by market conditions. Market share losses of this magnitude do not happen by accident, and it points to further evidence that the market share is actually being lost by design. Those two major banks, time and time again, have said that the small business market is very important in their business, but according to our data, we continue to see a decline in market share data for those two major institutions.

As I mentioned earlier in my opening remarks, we also did a ranking of banking institutions. Essentially, we had nine performance indicators asking our members what kind of service they received from their bank, did they get the loan amount, were they satisfied with the terms of the loan, to what extent are they satisfied with online banking? Access to a branch that's open at convenient hours and is based in a convenient location were other factors that were included in the report card.

¿ (0930)

As you can see in figure 14, none of the major banks is in the top three spots. In fact, we see credit unions and HSBC and ATB Financial in the top three spots again. We did the same survey three years ago, back in 2000. As you can see, the results are on the left-hand side for that survey in 2000. Again credit unions, HSBC, and ATB Financial are quite consistent in coming into the top three spots.

The major banks are in the middle. TD/Canada Trust and Scotiabank are tied in fourth place, the Bank of Montreal in sixth, and as we see, Royal Bank and CIBC are at the bottom of the pack of the big five. Both those key institutions are tied in seventh place. We see the Quebec-based institutions, Desjardins and National Bank, again in the last place, ranking ninth and tenth respectively.

As figure 15 shows, CFIB has been tracking Bank of Canada data for quite some time and looking at loan authorization data since the late 1980s. If one looks at loan authorizations for amounts of $200,000 or more, we actually see the trend line going up quite a bit since 1988. Essentially, lending to bigger businesses has been increasing quite a bit since 1988. There have been some ups and downs, but overall the trend line is upward.

If you look at the loan authorization line for amounts under $200,000.... I would remind you, the median loan amount with small businesses across the country is much lower than that. The median amount through our survey results comes out at $100,000, and for the vast majority of members we're looking at loan amounts of about $45,000 or $50,000. That's really the small business segment of this economy when it comes to bank loans.

As we see, the line for loan authorizations under $200,000 has actually remained flat since 1988. We see that as a very troublesome indication that even though the small business segment of the economy has grown quite dramatically since 1988, bank loan activity to that key segment of the economy has not increased at all in the past few decades. That's a key issue of concern for everyone involved.

Figure 16 reveals another troublesome spot. We've been tracking credit applications of small businesses since the late 1980s. What we find is that fewer and fewer small businesses are applying at their bank for credit financing. Whether it's a business loan, a new line of credit, or an extension of an existing line of credit, we see a dramatic decline in the demand for credit financing at banks by small businesses.

One possible explanation for this is that there was a credit crunch in the early 1990s with the recession. A lot of our members at that time indicated that their banks called in their lines of credit, or called in their loans. Essentially small businesses were cut off in their financing by their bankers back in the early 1990s.

We still hear to this day from business owners that they do not want their livelihood to be heavily reliant on their banker. In fact, through our survey data we find that one in ten business owners—it's just over 11%, I think—actually don't use any financing from their bank at all. We find that to be quite consistent since the early 1990s. We point to that as a serious indication. If business owners aren't going to their banks for financing, where are they going?

Loan rejection rates are shown in figure 17. We see back in 2000 the loan rejection rate in the small business community was 10.5%. This surprised us when we saw it, and it's a troublesome finding: the new number now is 16%. Sixteen percent of business owners who applied at their own bank for small business financing were rejected outright by their banker and couldn't get the financing—at their own bank. That's a critical issue. The small business segment is close to 50% of GDP, 50% of the economy, and we have 16% of small business owners applying at their banks for financing and not getting it.

¿ (0935)

We find the loan rejection rates actually vary with the size of business: the smaller the business, the more the loan rejection rate increases dramatically. We also find a direct relationship with the account manager. What the banks are doing right now is automating a lot of things. One area they're doing in banking is the credit application process. They're doing credit scoring. Basically the credit applicant—the business owner—would provide basic data. They put it into a computer model, and out comes an answer: yes, or no, or yes at a lower amount than requested.

What's really driving this is automation and cost savings within the banking industry. We find that it's a key explanation of why the loan rejection rate has gone from 10.5% to 16%. Also affecting the account manager is that a lot of decision-making is centralized. The credit applications are being decided through the credit scoring model, but the actual decision is being made either at the regional office or through a head office. There's not much decision-making authority given to the local branch manager or the account manager for the small business client.

We find that's a key area the banks really need to work on, essentially to beef up the authority and the decision-making power account managers can exercise in dealing with their small business client, to ensure that they get the financing.

Mr. Whyte has indicated to me that for the very small firms the loan rejection rates are in fact quite higher. We find too that if they're in business for a fewer number of years, the loan rejection rate is also very high. For example, if a business has been around for less than 10 years, the loan rejection rate is actually 25%; one in four young growing firms is not able to get the financing from their bank. We see serious implications in this for overall economic growth for Canada, and of course for the small business sector.

I think that basically concludes the highlights of the survey. I might turn it over to Mr. Gray to focus on some other aspects of banking.

The Chair: We need to get to questioning. Mr. Gray, if you want to make some remarks, we can then maybe put the rest into the questioning.

Mr. Brien Gray: Yes, Mr. Chair. Once again, I apologize for being late. Having to depend on the one national airline, I'm sure you people know as well as I do, isn't always a treat.

I'd just like to wrap up by saying we do these surveys once every three years, the reason being that we feel it takes about that long sometimes for some of these massive bureaucracies to respond. I think from our perspective the most troubling findings relate to the apparent lack of competitive alternatives cropping up within the Canadian market.

Back in 1998 when we appeared before a number of parliamentary committees, including the finance committee, the Senate banking committee, and yours, we were somewhat reluctant to take the leap of faith that we should go ahead with mergers and hope and pray we'd have alternatives, from a competitive standpoint, in the market. The government, to its credit, did not proceed to allow mergers and went forward with a number of legislative amendments to try to encourage competition in the marketplace. I'd be very glad to talk to how those competitive alternatives are working to date.

Unfortunately, as you can see, our members don't have a lot of hope that these competitive alternatives are making much difference when the rubber hits the road across that table between themselves and their financial institution. I would say the vote we had a year ago reinforced our saying please don't proceed with any mergers until such time as real sustainable alternatives—competitive alternatives—are sitting in the marketplace; hold off on mergers until that point.

There are a number of recommendations in the brief. I'm not going to repeat them all before you. I thank you very much for the opportunity to share these findings with you and for your taking the time to meet with us on these very important matters.

Thank you very much, Mr. Chair and honourable members. We very much look forward to questions.

¿ (0940)

The Chair: Ms. Gallant.

Mrs. Cheryl Gallant (Renfrew—Nipissing—Pembroke, Canadian Alliance): Thank you, Mr. Chairman.

Through you to the witness, first of all, I want to get an idea of how representative your data is of business across the country. You surveyed your members, is that correct?

Mr. Doug Bruce: That's right.

Mrs. Cheryl Gallant: Okay. So what percentage of SMEs would your membership represent?

Mr. Garth Whyte: Well, just to put it on the record, and then I'll let Doug speak, we have 105,000 business owners as members and we're representative of the business community. Basically, we have members in every sector, in every region, in every town. We're very representative, and we've been used by this committee for a decade.

Mrs. Cheryl Gallant: But as a percentage of SMEs across the country, would you have an estimation of that?

Mr. Garth Whyte: Ten percent.

Mrs. Cheryl Gallant: The reason I ask is that by virtue of being a member of your organization, the sentiments might be skewed more in one way than in another.

Mr. Garth Whyte: No. We've done this.... Go ahead, Brien.

Mr. Brien Gray: In terms of the representativeness of the sample, by and large on these surveys we would have anywhere up to 10,000 responses. That's a huge number by any definition, and I don't think you can attribute all that to a form of self-selection. We do--and Doug can talk to the methodology--select out those that are at the extreme end one way or the other to make sure our data are clean.

The other thing that's curious about it is that when the data are complimentary to a given financial institution, say HSBC, or the Royal Bank in the past, they've been happy to use the data as a form of marketing out there in the marketplace. When they don't appear to be quite as encouraging or applauding in their regard, then they tend to question the methodology. However, when we've compared our data against base data from any of the financial institutions in private meetings with them, they tend to acknowledge that yes, the trend lines and the types of findings they're finding are not inconsistent with what we're finding.

Mrs. Cheryl Gallant: Thank you. And I certainly appreciate the surveys that the federation sends to my office, as well. It keeps me on pulse with the businesses.

Now, in terms of the banking, one of the common complaints I get is that collateral-wise, the actual loan applications are a fraction of what is being demanded in terms of collateral. Legislatively speaking, are there actions or measures you would like to see on that part?

Mr. Brien Gray: The collateral issue is a very serious one for the small business owner-operator, although I must be fair to the financial institutions themselves and say that over the last, say, 10 years, the collateral requirements on average have come down.

Doug Bruce talked earlier, however, about a very serious issue that affects many small businesses, and that is the issue of account manager turnover. As you can see from your graphs in the presentation, as the number of account managers who are looking after that account go up over a short period of time, the risk inherent in that relationship goes up hugely.

What's curious about this is that it is something over which the entrepreneur-owner has absolutely no control and the financial institution has absolute, total control. What we've found through previous base research is that the risk that comes from this rotation of account managers reflects itself in a number of ways. One would be increased demands for collateral, such as you are talking about. Another would be higher rates of interest. Another would be higher service charges allotted to that account. And the rejection rates for those loan applications would go up accordingly, as well. Those results can be found on page 14 in figure 12.

So when you're talking about collateral coverage, whether it's in the form of assets or personal guarantees, yes, it's very much an issue with many small business people throughout the country.

¿ (0945)

Mrs. Cheryl Gallant: What lending institutions tell me is that the people who are applying for the loans, even though they've had loans in the past that were completely paid off and they never defaulted on any payments, simply don't have the acumen or the wherewithal to give a good business plan presentation. How do you respond to that?

Mr. Brien Gray: You know, it's funny, because this is a kind of repetitive refrain from many financial institutions, that it's the lack of business acumen or business planning that is at the root of why small businesses cannot get financing.

I think this comes as a real rub for many entrepreneurs who have been very successful in their businesses and who have proper financial plans and projections when they go to see their account manager. I think it rubs even more so when they see some of the mistakes that senior management in many of Canada's financial institutions have made over the past 10 to 20 years. So to be dismissed as having no business acumen when they see the same sorts of things reflected in our biggest financial institutions, that is a rub.

That's not to say this is not something owner-operators need to keep an eye on. They do. We've never said that just because you are in business you are deserving of a loan. You do have to prepare. You do have to put your projections forward. You do have to make your case. But in our estimation, most small business people do take the time and effort with their accountants to do so.

Mrs. Cheryl Gallant: Okay.

Now, we're seeing in certain segments they're not lending to different business owners. For example, banks just don't want to take on mortgages for commercial buildings whatsoever. With the beef crisis currently, we have our equipment salespeople who cannot even get a line of credit. As soon as it's paid off, it's not being extended again.

Are there specific measures, such as they have in the States, for example, that you would recommend we look into?

Mr. Brien Gray: Well, as an organization that represents the business community, our preference would not be to legislate behaviours of business in the private market. That being said, however, there is no question it is becoming more and more difficult to obtain a commercial mortgage through a traditional bank. They used to be in the game. They seem to be vacating the game--some institutions more than others.

When it comes to things like farm equipment and vacating the leasing activity, this is yet another example of what I would refer to as many banks moving away from the customer, whether it's in terms of branch closures and restricted hours; in terms of the decision-making authority of the local account manager being limited to $10,000 to $30,000 and no more, the fact that decision-making for any real amount of credit happens centrally within those banks; whether it's the decision to vacate in certain regional sectors of the economy; or whether it's in terms of certain product types, such as you've discussed today.

When we hear from the financial institutions that there is a whole array of other financing alternatives out there that the small business owner might go to, that's true. But as Doug said, they're pretty much one-offs; they're not what I would call a full financing alternative for a small business.

So, for example, when you see a number such as we have for GE Capital, that's a one-off on a leasing piece, perhaps a piece of farm equipment, where traditionally the banks might have done that. They've moved out of that sector in some parts of Canada. Then the entrepreneur is forced to go to another alternative, which would be perhaps a leasing asset, a basic leasing company.

The Chair: Thank you very much, Ms. Gallant. Your time is up.

I'll go to Mr. Bagnell.

Mr. Larry Bagnell (Yukon, Lib.): Thank you.

Thank you for coming. I always enjoy your reports. Your information is very well researched and useful to us in our work.

On insurance, as you said, your members don't understand which levels of government have which authority over which jurisdictions. I think it would be useful if you made them aware of the exact legislative authorities of the various orders of government, because there's no use their lobbying an order of government that can't do anything about a particular aspect of insurance. We're all well aware of how serious the problem is.

Are you aware of the women's task force report, the Prime Minister's task force report that just came out this week on women and entrepreneurship, and the recommendations there related to financing for women entrepreneurs in small business? Are those useful, or do you think they're a parallel tract and that the solution for financing should be more mainstream?

¿ (0950)

Mr. Garth Whyte: I'll start off with the first point. We are well aware that a lot of insurance companies are provincially regulated. Actually, OSFI regulates a lot too; it's almost fifty-fifty. But this is becoming a national issue, and I would answer the previous member's question as well, which was what can you do? Well, what you're doing with banking....

I remember seven years ago or so we were told by the banks that we really shouldn't be having committee hearings just to put a spotlight on the issue, and the most we could break down the loan was $2 million. That was a small business loan. We started having these hearings, and they could break the loan out by $50,000. Now the banks seem to come here and actually appreciate some of the stuff; for instance, a lot of our report is more to the banks. It has put a spotlight on the issue and we worked on solutions. We're making that recommendation here to this committee.

Someone has to put a spotlight nationally on the insurance issue. And there are federal issues. It's hitting export big time. We're presenting to another committee on the need to export. We're dealing with Canada-U.S. trade relations. Insurance is undermining that. It becomes a federal issue. If a province decides to cap insurance, that influences the amount required by OSFI for insurance company insolvency. The solvency issue becomes a national issue. If we don't look at this, if some of us aren't looking at this, we're going to have a big problem.

We're not saying that you make recommendations, we're saying let's look at it and find out what the issues are. In the United States, they have a lot more information on property and casuality insurance than we do here.

On the second issue, the entrepreneurial women report, there were some recommendations there we disagree with strongly. We told them that. Catherine Swift, as you know, is our president--she couldn't be here today--and she met with the committee and basically told them, for example, that maternity leave for entrepreneurs is not on as far as our female membership is concerned, yet they made the recommendation. So we would say that rather than have a specific recommendation for women entrepreneurs, we would see it better to be for everyone. That's what our recommendation would be.

Mr. Larry Bagnell: When you're doing your studying, do you find in banking less access for women, and also for people in rural areas, for the north, and specifically for tourism businesses? Those all affect my area.

Mr. Brien Gray: I've often said, when I've talked about the provision of bank services for small business in Canada, that there are effectively two Canadas out there. There's the Canada that Mr. Volpe might have in his riding, which is Toronto, and which is largely pretty well serviced with a diverse number of institutions and services. I'm not saying people in Toronto don't have problems, but the choice and the variety of people offering services in financial services to the average small business in Toronto would be a whole lot greater than it would be in the outlying parts of the country.

Just last night I was reading a report given to ACOA that came out last year, and it talked about the branch network system in Newfoundland and Atlantic Canada having declined by something like 16% in the last few years, and that Newfoundland itself has seen the loss of about 23% of its network. That is huge. And so as we go on out, I think the debate ought not to be about the urban centres, but about the non-urban parts of Canada. And to the extent that tourism is very much a region-based phenomenon, northern Ontario and parts of the country in the outlying regions are disadvantaged in the competitive mix right now.

Credit unions, to their credit, are trying to come forward, but there are true difficulties in their coming forward. Part of it is linked to their history, their whole independent-mindedness, the lack of economies of scale, the fact that their cost structures are quite a bit higher than those of the banks, that in most cases they've been deposit-taking institutions and don't have experience in commercial lending. It has taken the banks a long time to learn commercial lending to small business, and the credit unions have a lot of catching up to do.

So in answer to your question, it is tough out there, and we do need more competitive alternatives sitting out there in the marketplace.

¿ (0955)

Mr. Garth Whyte: To supplement what Brien said, the other part of the answer, if you're in the Yukon, in your riding, for example, is about competition. Number one, if there's less competition, we see the stiffer requirements, and higher rates, and more loan rejections. And again this is the full report, Banking on Competition, which is in your package.

On page 14, figure 2, we talk about loan rejection rates, and it explains a lot. Again, I would imagine in Yukon you might have higher branch account manager turnover. And if you look there, for those members who, over a three-year period, had four or more branch managers, 32% said they had higher loan rejection rates. This is bank risk; this has nothing to do with the entrepreneur risk. Of those who had only one account manager over three years, only 11% said they had a loan rejection rate. Likewise, size of firms--we have a lot of members in the Yukon, and some are smaller firms, but of those with fewer than four employees, one out of four identified loan rejection rate as an issue.

So it's size. So if you layer across less competition--and we talk about the Yukon, but, let's say, in remote regions; it doesn't matter where we choose--and higher branch manager turnover and younger firms, that's a recipe for a high loan rejection rate.

The big issue we've been talking about here is that our economy has grown and is staying afoot right now because of small and medium-sized enterprises, and we think banks are missing the boat.

The Chair: Mr. Bagnell, one more.

Mr. Larry Bagnell: Given that some of the major banks may ultimately have to merge to keep competitive with the world's big banks, how can we get more banks, more competition? And you suggested foreign banks, but I would prefer to have more Canadian chartered banks. How can we get more Canadian institutions into the mix so there is more competition?

Mr. Brien Gray: The great regret of the small business community in Canada is that we had at least one and possibly two huge opportunities to build on a platform that was already there.

The Canada Trust effective merger with TD Bank lost us the opportunity to take a platform and a network that was already there. The big issue in banking in Canada is to have the network and the infrastructure to begin with. It's curious that two years later, Martin Glynn from HSBC said, I would have taken those. At the time it would have been great had he stepped up and done it then, because we would have been not just largely in western Canada and some pockets of the rest of Canada, but HSBC would have been much more present in Ontario and other parts of Canada.

That's important because in Ontario, for example, there is virtually no second tier. There is very little emphasis on second tier in Atlantic Canada as well. So particularly when you're outside of the urban centres, that becomes hugely problematic. Had those mergers gone through, either the ones proposed in 1998 or the one that was talked about a year ago, you would have seen in the hands of the big three or four the vast number of small businesses in Ontario serviced by three or maybe four banks, and I'm not sure that's healthy for the economy.

In terms of other alternatives, despite the changes in the legislation, foreign banks, like the Bank of America, are not coming to a small town near you any time soon. With regard to community banks, there have been some attempts, I know. It's halting in its development. It is an American phenomenon that I would submit has worked well for the Americans, but you can't just flip a switch in Canada and expect, given our banking history, where we have had a social compact with the major financial institutions, that if we support you in certain ways you will support the government in its priorities and other ways. You can't flip a switch and expect community banks to come into markets and be able to compete against this hugely dominant force in the financial institution market.

The last is credit unions. I think they're the best hope of competitive alternatives, but they have a long way to go because they don't have the distinctive competence to lend to small business at the moment, except in Quebec.

À (1000)

The Chair: Thank you, Mr. Bagnell.

Monsieur Crête, s'il vous plaît.

[Translation]

Mr. Paul Crête (Kamouraska—Rivière-du-Loup—Témiscouata—Les Basques, BQ): I would like to apologize to the representatives from the federation, because I will probably have to leave quickly to ensure that the House does not adjourn early.

You are calling for an investigation into the issue of insurance. Could you set out the points that come under federal jurisdiction specifically and that you would like dealt with?

Mr. André Piché (Director, National Affairs, Canadian Federation of Independent Business): With respect to an inquiry into insurance, there are many points that involve the federal government. For example, the information we get from Statistics Canada on insurance at the moment is very limited. For his part, the Governor of the Bank of Canada drew our attention to the impact of rising interest premiums on inflation. He had to do so using Statistics Canada data that had to do with car insurance. He did not do this for business insurance, because no such information is available at the moment. So there is a great deal to be done even as regards information to ensure we have all the data required to make the right decisions.

As to the questions we would like to see raised before the committee, there is the economic impact on the country of the steep increases in business insurance. We need to look at the impact on job creation and on the performance of our exports. These are some of the questions that could be considered. There are also other things that could be done, that we as an organization could undertake with the provinces. We can follow up with the provincial governments when common issues have to be reviewed.

[English]

The Chair: We're checking with the whip's office to find out when the vote is. We'll adjourn the meeting five minutes before the vote, then go in and vote and come back.

Mr. Marcil, would you ask your questions now.

[Translation]

Mr. Serge Marcil (Beauharnois—Salaberry, Lib.): Thank you, Mr. Chairman.

I found your report very interesting. I did not think that the SMEs were in such a precarious position as regards financing. I understood from your presentation that there were two external factors that are really harmful, that slow down the economic development of SMEs. One of them is the cost of insurance premiums, and you ask that we review this issue. You suggest that we organize committee hearings to assess the impact of the significant increases in insurance premiums on SMEs, on the Canadian economy and on job creation. That could be a very good job for our committee to undertake.

I think it is time to do this, because insurance costs are going up all the time. There are also mergers happening in this field. We always think mergers seek to improve a situation, but their sole purpose is to improve the situation of the merging business, by reducing its costs and services.

You also highlighted the staggering costs and the difficulties you have dealing with banks, particularly the chartered banks, for loans and access to services. This is true more of the regions than the major urban centres, of course.

However, given that chartered banks often have to absorb the loan losses they sustain in foreign countries, which also has an impact on administrative costs and is often passed on to a large extent to clients—

I do not know whether I am getting off topic, but I would like you to talk to me about your relationship with the Business Development Bank of Canada. I don't know whether you did not think of this or whether you decided not to mention it, since this bank does not necessarily have the same impact as the chartered banks.

Could this organization, which is a government body that complements the work of the existing chartered banks, not play a greater, more significant role strictly in the business sector, not for personal loans, and so on? Could the Business Development Bank of Canada play a role? Could it become a chartered bank and specialize solely in services for businesses? I would like to hear what you think about that. Is there a focus this bank should adopt with respect to SMEs? Are you satisfied with the BDC, or are there difficulties here as well? It is a tool for the government, and a tool for the SMEs as well. So when there are problems with a chartered bank, then businesses generally tend to turn to the Business Development Bank of Canada. I would like to hear your views on this.

À (1005)

Mr. Brien Gray: I would just like to tell you that we have been asked the same question about the Business Development Bank of Canada a number of times, by the Standing Committee on Finance or the Senate committee.

Clearly, the Business Development Bank of Canada plays an important to some extent, but its role is complementary rather than a core business. In other words, it is not a chartered bank, and does not offer all the services and options they do.

In addition, most chartered banks have about 1,000 branches, while the Business Development Bank of Canada may have about 100 across the country. The chartered banks are closing down so many branches that I do not think the Business Development Bank of Canada could fill the gap. So we see it as a choice, but it is a choice for companies that represent an above-average risk. The BDC does play a very important role, but I do not think it is a real solution to the needs of most SMEs across Canada.

Mr. Serge Marcil: My second question is also about insurance.

Yes?

[English]

Mr. Garth Whyte: Again, in our banking report on page 10, we asked our members about the types of credit financing they get. In figure 7, the line of credit was number one, at 74%; and just below the 10 other options were loans from crown corporations, at 7.9%.

So just to complement what Brian said, we have an excellent working relationship with the Export Development Corporation. It is at the margins, as people don't know about the Export Development Corporation, and they don't use it. It has a good product in export financing, but it doesn't help out with product liability, it doesn't help in insuring the warehouse, and there are a lot of other things that it just could not get involved in.

Sometimes it's appealing to move to crown corporations, but they really don't have, as Brien said, the branches and the profile. Even when we tell our members, they will still only be at the margins.

[Translation]

Mr. Serge Marcil: Thank you.

We have also seen that the caisses populaires are playing an increasing role with SMEs, perhaps because they are corporate movements involving people from the community in their operations and on their boards of directors. Consequently, they are probably more sensitive to the SMEs, which identify more with the regions.

However, you spoke about insurance, and in your survey, that was probably the external input that caused the most problems in terms of the economic development of SMEs. I would like to hear your opinion on the difference in the cost of insurance sold outside the financial institutions. I would mention the example of the Desjardins Movement, which is now selling insurance in its institutions. Some chartered banks are also planning to sell insurance.

Is there any difference? Does the fact that banks are allowed to sell insurance to SMEs, just as insurance companies do, have a positive effect on SMEs or change nothing at all? Are insurance premiums rising regardless of whether the insurance company has a connection to a financial institution or is completely independent?

À (1010)

Mr. Brien Gray: I would like to start by saying that for about 20 years now, the members of the federation have been absolutely opposed to the idea of selling insurance in banks or other financial institutions, in Quebec and elsewhere.

You asked about the cost difference between insurance sold by the Desjardins Caisses Populaires, for example, and that sold by an insurance company. Personally, I have seen no evidence that there is a huge difference in cost. The problems with insurance exist everywhere—in Manitoba, Quebec, and other parts of the world. It is a huge problem, but one that should be studied by the appropriate people in government and the large insurance companies.

Mr. Serge Marcil: Thank you.

Why do the credit unions and the Desjardins Movement in Quebec account for more of the market for SMEs than is the case in other provinces, where the banks are the main players in the market? Is there any special reason for that?

Mr. Brien Gray: You are probably more familiar with the reasons for this than I, but there is no doubt that historically, there is a tremendous difference between Quebec and the other provinces. In Quebec, there has always been support for financial institutions other than chartered banks, which can provide some type of competition to the major chartered banks. The Caisses Desjardins are a phenomenon unique to Quebec, and I take my hat off to the Desjardins Movement, which has really built a huge and very efficient financial institution for the SMEs of Quebec.

The National Bank, for its part, resulted from a merger between the Provincial Bank and the Banque Canadienne Nationale. There again, for the most part, this is a bank located in Quebec, for Quebeckers, and that is an interesting phenomenon. Historically, when the federation did surveys of our members on financial services, until this year, these two institutions were at the top of the list in terms of customer service and satisfaction. The other interesting point regarding the competition provided by Desjardins and the National Bank to the other chartered banks, is that the level of satisfaction was higher in Quebec than elsewhere in Canada. So in our opinion, this shows the more competition there is, the greater opportunities there are for SMEs. Business people in Quebec are at an advantage compared to those in other parts of Canada.

Mr. Serge Marcil: I have one final question, Mr. Chairman.

[English]

The Chair: No.Thank you very much, Mr. Marcil. We'll be back to you.

Mr. Rajotte.

Mr. James Rajotte (Edmonton Southwest, Canadian Alliance): Thank you very much, Mr. Chairman.

Thank you very much, gentlemen, for coming in today and for your information.

First, in terms of insurance costs, I think you raise an excellent point, and I've actually written back to you, Mr. Whyte, indicating I would certainly support either this committee or the finance committee looking at that issue. I think you'd find almost every member of this committee agreeing with that. The tough thing is finding the time to actually do it, so I'm sure we can work with you on that.

In terms of the actual insurance costs themselves, I don't know how deeply you've studied this, but do you have any guidance for us at this point at to why costs are rising? Have you looked at all the factors that go into that? Secondly, do you have some suggestions as to what can be done about this to try to alleviate some of these effects on small businesses?

Mr. Garth Whyte: There are multiple reasons why insurance costs have increased. You could say--and Brien will want to kick in on this one too--that at the virtual level it could be statutory requirements that have increased. That's one area. Another area could be because of September 11, and they've been rocked. Underinsuring and underwriting has been really diminished lately, and that's another issue.

There are also international issues. They're telling their domestic companies to withdraw from certain areas. We're seeing, ironically, less competition, too. There may be upwards of 400 insurance companies, I think 385 insurance companies. But if you take Manitoba, I was talking to one broker who said at one time if someone had a commercial property, there'd be five companies saying they want a 20% piece of that commercial property. Now only two companies are saying they want 20%. That adds up to 40%, and three have withdrawn because they've been merged or amalgamated. There are some things there, so in certain provinces there've been fewer and fewer companies.

There's a myriad of issues and we need to look at it. We need to get the kind of information to understand what the problems are and then understand what it is. Are we over-regulated? We don't know. There's a multiplicity of issues here that I think are worth identifying, and that's what we'd like the committee to help us find out, because in aggregate....

By the way, we're meeting with the Insurance Bureau of Canada to work with this. We've met with them. We meet with the brokers. We're trying to meet with all the different players to really get a handle on this issue, but when we look at it as a silo, if we see it only as a New Brunswick problem or only as one particular type of insurance.... That's how people seem to be looking at this issue, when really it's an issue across the country. That's how we have to look at it. No one's looking at the overall impacts.

À (1015)

Mr. Brien Gray: If I may, Mr. Chair, one of the things about insurance coverage is that if you're in business you pretty much have to have insurance coverage against a bunch of elements or you're not in business, or you're foolishly running your business.

Unlike banking, for example, where at any given time a third to a half may not actually need bank financing, insurance isn't the same game. From our perspective this is very important, from a social policy perspective as well, because if you have a situation such as was reported to us in New Brunswick, where a police spot-check of vehicles identified in a period of several hours somewhere near 200 vehicles without insurance, how does that impact social policy and social consequences? Hugely. I would submit, too, that although I would hope people aren't either underinsuring or not insuring in terms of their business operations, no doubt it is going on. If that's as a result of access and costs getting so great that you cannot operate, that's not good either. I certainly don't condone it; I'm only saying these are possible outcomes in a market where these things have become so difficult.

Mr. André Piché: I have one last point, Mr. Rajotte. The premiers, when they met in July in Charlottetown, discussed a number of issues, such as BSE, insurance, and so on. Insurance was number two on their list, and they issued a press release that said in part that premiers are calling on the federal government to do its part by immediately reviewing its regulations pertaining to the insurance industry. They understand that a lot of it they can do themselves, but they realize also that the federal government has a role to play in that.

Mr. James Rajotte: As I said, you certainly have my support in finding a time for the committee to study this issue, and I think you're right to expand it. I know auto insurance is the big one now. People are focusing on it politically, but we need to look at the entire gamut of insurance, I think.

Moving now to SME financing, I want to talk about the loan rejection rates, the figure you have on page 15 where it goes from 10.5% to 16% in 2003. Is this a long-term trend? You said you do surveys every three years, so do you have figures from 1997 and 1994?

Mr. Doug Bruce: Yes. The survey results from the late 1990s were around the 10%, 11%, and 12% range. We haven't seen loan rejection rates this high in the 1990s. It's a key area of concern. I mean, 16%.... To put it in perspective, Stats Canada does conduct a survey as well and they look at loan acceptance rates, basically the inverse of the loan rejection rate, and the latest data they have out, I believe, for the year 2002 is 80%. So in fact, the loan rejection rate according to the Stats Canada survey is even higher than our survey results show.

Mr. James Rajotte: Do you have the overall numbers for this in terms of the number of businesses that applied and the number that were rejected, so we can have the gross numbers?

À (1020)

Mr. Doug Bruce: Yes. In fact, the proportion of businesses that did apply for financing is in figure 9, page 12, in the Banking on Competition report. As you can see, back in 1987 close to three-quarters of businesses did apply at their bank for credit financing, and now that number has dwindled down to about 60%. In fact, when you look at these numbers by the size of business, it's even lower for very small and young growing businesses. I believe the number is around the 50% mark. In effect, then, the demand for bank financing is even lower with the younger and smaller businesses out there.

Mr. James Rajotte: This is a percentage. I guess what I was asking is...for instance, in 2000 and 2003, how many businesses in total applied for loans? What would be the total figure?

Mr. Doug Bruce: The sample for this is based on 10,000, so in fact we're seeing that 5,000 of our members actually did apply for financing.

Mr. James Rajotte: So 5,000 did, and 16% of those were rejected.

Mr. Doug Bruce: Yes. The way the question was asked, it was referring to the previous three-year period. Since we conduct this major comprehensive survey every three years, and to get time series data on this, we actually ask for the previous three-year period, so it's even more important because it's not only focusing on a single year, as the Stats Canada survey does. Our survey methodology focuses on a three-year period.

Mr. James Rajotte: What should the figure be? What is the optimum? If we're looking at this as policy-makers, should we be looking at 8% or 7%? Has the CFIB come up with an optimum?

Mr. Doug Bruce: That's a very good question.

I believe what's very troublesome from our perspective is the downward trend line. In fact, when you look at the time period in figure 9 and at the proportion of small businesses who applied at their bank for credit financing, it fell from close to 75% down to 60% in the time period of 1987 to this year. If you look at the business cycle throughout that period, we've had a recession and ups and downs in the economy, but lo and behold, there's been a continued stable downward trend in that. We haven't it seen it go up in that length of time, from 1987 to 2003. We find that very troublesome.

Mr. James Rajotte: The question to me, which I think is even more important, is why are people being rejected? What is the reason that small business owners who are walking into a financial institution are getting rejected? That really is, I think, the biggest question.

Have you done a fairly good analysis as to why? I know you talked about account managers being moved, but are there other reasons that you can point to?

Mr. Doug Bruce: One key focus of that is that there is a banking industry code of conduct, and if the loan or credit applicant is rejected outright by their bank, the code of conduct stipulates that the bank should state the actual reasons for declining the loan application.

The code actually goes even further. It states that if the bank can't provide the actual credit financing for the business applicant, then it is supposed to stipulate alternative methods of financing. According to our survey data, one in four of our members who were rejected by their bank for credit financing state that their banker didn't provide them with valid reasons for why they were rejected.

In fact, we're actually calling on the banking industry and the banking association to ensure that this banking code of conduct is consistently enforced throughout the banking industry—and even challenging the banking industry to go a couple of steps further in strengthening the banking code of conduct, so that the banks are in a better position to provide better services to this key segment of the economy.

Mr. James Rajotte: I have perhaps just one more big question to follow up on then.

I know that Mr. Marcil asked about BDC, and I appreciated your answers in terms of access to services and numbers of branches, but it seems to me that we're asking our banks to compete with the newly merged bank in the U.S. and to compete with Citibank on a global basis, and then we're asking them to provide services in every community.

I'm spoiled, as I come from Edmonton, which has, I would say, very good banking services. But it seems to me we're really asking them to do two very distinct things, so perhaps you could touch on that in terms of not allowing them to merge. For me, it does make sense in light of what's happening globally to allow them to merge, but you can touch on that.

The second thing is if you would perhaps talk about whether there are more alternatives that we should be pushing and that we should, as policy-makers, be making more prevalent.

Mr. Gray, I know you touched on credit unions and how they seem to work better in Quebec than in the rest of Canada. Perhaps you want to touch on that, too.

Should we be looking at perhaps more alternatives for small- to medium-sized financing, and at allowing the big financial institutions to compete more globally?

À (1025)

Mr. Brien Gray: There are a lot of issues and a lot of answers.

First of all, with regard to merger, I think the small business community has made it pretty clear that they, and we, are not willing to take the leap of faith to go with the mergers until such time as they see competitive alternatives up, established, running, and viable. If you're here in another 10 years and you've allowed mergers and not had those measures put in before, you're perhaps not going to be re-elected, I would submit.

Mr. James Rajotte: Well, we're doing a merger now to see if that happens.

Some hon. members: Oh, oh!

Mr. Brien Gray: The other element here is that, happily, you happen to be from a jurisdiction where the credit union movement is actually a pretty effective second tier, and you have the unique Alberta Treasury Branches financial institution. I would submit that in the early eighties and early nineties, most Albertans would have said, “Thank God for the ATB and the credit unions, because, had they not been there, I would have been gone”.

That is also the case in terms of Quebec offering yet a second tier of competitive balance, but I can tell you that in other parts of Canada and, shockingly, in Ontario there is no effective second tier to the major chartered banks.

Yes, the major chartered banks want to merge. Yes, they want to be as big as Citibank. Even if they all merged together, they still wouldn't be as big as Citibank. The way they would do business is through syndication, even if they were as big as Citibank, so they hedge their risks that way.

Yes, there are arguments for mergers, but I would argue that in terms of the balance of the Canadian economy and the fact that SMEs are half of the GDP now—and not a third, as they were 20 years ago—we have to take very seriously any impacts on that very important job creator in the economy of less competition in the marketplace.

The Chair: Thank you very much.

We'll now switch over to Mr. McTeague. Then I will go to Monsieur Crête and Monsieur Godin. If any time is left, we'll be back to Mr. Bagnell.

Mr. McTeague.

[Translation]

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.): Thank you, Mr. Chairman. I find it interesting that you came here today to talk to us about the problems you are facing at the moment. The committee is looking at a number of issues, but members seem to agree that we should consider your comments and have a committee review the problems you raised. That would be done because of the two matters you raised today and their potential impact. I congratulate you on what you have done.

[English]

I don't think I need to make a long introduction. I think it is extremely important that you have brought this to our attention here today.

I have a question for you, Mr. Gray. I noticed that on the subject of banking—and perhaps in the light of what Mr. Rajotte has said—we've tended to focus on large banks. There's a great understanding there about the concerns that exist on questions of mergers. More recently—and I can appreciate this for Mr. Whyte—in the work I've done on competition I've been bombarded with smaller retail enterprises who are members of yours, who are also seemingly concerned about the less-noticed mergers occurring in the retail banking sector, in particular the merger between GE Capital and Transamerica.

Many retailers use either of these companies to finance the purchasing power they have as individuals. They certainly can't compete, as an example, in the electronics industry with Best Buy or Future Shop, so what they do is build up or bulk up, and of course they receive financing and consideration from these groups.

We understand that in the one particular merger that's before the Competition Bureau today, two out of the three groups will effectively be merged into one group, leaving many of your retailers without an option. These are time-sensitive, real concerns today.

I'm wondering if you've had an opportunity to canvass your membership. They're canvassing us as members of Parliament. We have one lever at our disposal. It's the Competition Act. This committee has made a number of suggestions about how to change it to ensure the presence of a vigorous and effective competitor. But clearly in this case, given what the large banks are doing with respect to loans, we have real time concerns today about companies that are, as vigorous and effective competitors, effectively going to find themselves without the same terms in which to compete against these large players.

How does the CFIB respond, or what interventions have you made or can you make, to ensure that these issues are brought to light?

À (1030)

Mr. Brien Gray: I really thank you for raising this particular issue.

We have not surveyed our members on this issue. It has come to our attention, but I wouldn't call it any stampede quite yet. I'm sure it's coming.

We are meeting with the Competition Bureau this afternoon, however, and we will pursue it with them ourselves. I would really encourage you, if you would care to, to share with us any questions you think might be appropriate for us to throw at our retail members.

You raise a point around what I'd call financial sovereignty in financial services. It would worry me if it were to become a trend in the banking sector, for example on high-risk loans, for our chartered banks—or other institutions, for that matter—to start to park the competence for understanding the risk of a loan, say, with Wells Fargo instead of keeping it in-house. In the past, when I've talked to some senior bankers and asked them why they don't lend against risk, they would openly admit—one of them, at least, honestly said to me—that they've lost that competence.

You cannot afford, from a sovereignty point of view, to lose your competence in these key financial areas such as assessing risk, underwriting, and so on; otherwise you're going to be a product taker, not a product or price negotiator.

Mr. Dan McTeague: I thank you for that, because it deals with my overarching concern—not with the question of the dominant characteristics of the marketplace in general in Canada, but with the ability of small business to be productive. I think Mr. Bruce has eloquently described the concern as it relates to insurance, and I think it's incumbent on the industry committee, if no other committee, to undertake this as soon as possible.

I am concerned, however, about the lack of oversight or understanding of the complexity sometimes involved with respect to banking in itself. I'll go to the example of the electronics retailer who has to deal with a large supplier who has been accustomed to large purchasing bodies purchasing large amounts and getting the discounts that are equivalent to those of the large dominant retailer of the day.

Should the committee, in your view, also make a comprehensive understanding, or have raised in its deliberations, that the usual business terms no longer mean I can buy one widget and sell one widget, but in fact we're going to have to find constructive and creative financial means to ensure that these small competitors as a group can continue to survive against the large dominant players?

Mr. Brien Gray: I think you make a strong point, but I don't think it's only around financing. I think the issue has to do as well with what I call corporate practices, in terms of “I will not sell to you unless it's 10,000 pieces of paper”. For example, if I'm ordering paper for my paper supply shop, there are minimum order quantities and things like that around behaviours of selling, as opposed to just financing.

The small independent can be forced out of a market in any number of ways, not just on the financing side.

Mr. Dan McTeague: Would that not be an equal concern, then? If it's raised here today, an onlooker would say oh, a business can't get financing from the banks. You've alluded to a complex but very important change in the landscape that exists, that large customers will simply not deal with small accounts. And if that is the case, it doesn't matter what terms of credit you get.

Mr. Brien Gray: In the United States, they have “buy America” laws that essentially try to ensure small firms can get pieces of procurement action. It's basically the same mindset you're talking about here. In Canada, we've argued for the same kind of behaviour, that small business is seen as a critical part of the economy.

Some years ago in Quebec, Quebec Hydro decided that for tenders under x amount...they simply weren't going to invite anybody who was playing under that threshold to bid on the action. That effectively spun out the vast majority of small businesses that might have bid on, say, research and development contracts with Quebec Hydro.

I do think it is legitimate to study and assess access to markets for small business.

À (1035)

Mr. Dan McTeague: I appreciate that.

Thank you, Mr. Chair.

The Chair: Thank you very much.

Monsieur Crête.

[Translation]

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

I am very interested in the debate on the banking industry. Rather than allowing the caisses populaires to play a growing role, the shortage of banks in Quebec has caused the caisses populaires, particularly since the creation of the business financial centres (CFEs), to start acting more like banks than cooperatives. This is happening independently of the will of management: it is the sort of market effect related to what is going on at the moment.

I agree that we must stop the hemorrhaging, but I would like you to give us more details about how we could restore competition in rural areas. From what you said earlier, the idea of having the BDC play a greater role is not the solution. Do you see any others?

Mr. Brien Gray: I have been thinking about this matter for a number of years, Mr. Crête. There is no easy solution, because if there were, we would have implemented it already. Without referring to Quebec, I think we can say that the credit unions and caisses populaires still have a role to play, but if the chartered banks want to remain in the Canadian market, they have to be there in good times and bad. They cannot always simply benefit from the situation.

It is interesting to note that in recent years, in cases such as Enron in the United States, the major chartered banks, both in the U.S. and Canada, once again invested massively in these mega corporations and were burned rather seriously. The loyalty of the SMEs to the chartered banks is extraordinary. To some extent, we may say that they have no choice, but the fact remains that they are always there, during good times and bad.

I think it is time the directors of these major chartered banks make some real commitments to SMEs as regards investments throughout the country, not just in large urban centres. I think they have this responsibility, in light of the relatively high level of protectionism that exists here in Canada.

Mr. Paul Crête: Should we not be helping them by passing legislation on reinvesting in communities? This way, banks would have to be accountable every year or every five years for the way in which they treat people in rural regions. Do you think a solution lies in this area, or do you think that banks would simply have to acquire some self-discipline, which they do not have at the moment?

Mr. Brien Gray: The federation is still of the view that helping SMEs in all parts of the country is a good investment and a cost-effective one. Our surveys and studies show that since SMEs use almost all the services and products offered by banks, they generate profit throughout all the products. The profitability of an SME is much more attractive when we take into account the situation as a whole, not just the current account or the savings account. If we look at the whole aspect of relations between banks and SMEs, we see that this is a very profitable sector. It is time the banks recognized this and invest in SMEs. This has to happen.

As regards community investment corporations, I think that generally speaking, SMEs are not necessarily in favour of legislation forcing people to invest. In our view, such investments are clearly profitable; they should start being made.

À (1040)

Mr. Paul Crête: I see. Perhaps my example relied too heavily on legislation governing community investment. That is not the aspect I wanted to discuss. Rather, I wanted to talk about how we ensure that banks are aware of what SMEs do for them. But the banks themselves do not have any community organizations. Are there any incentives or approaches that could be used to make banks accountable or provide certain justifications, or at least, to make them aware of the importance of covering the entire market?

[English]

Mr. Garth Whyte: We don't support specific legislation to outline what has happened in communities because our membership, in some communities, is very small and it would highlight who is getting what loan. We don't support that.

I do think, if you look at our report again, Banking on Canada's Entrepreneurial Economy, and go to the last page, page 21, it talks about market share in Quebec. We haven't referred to that yet, but you basically said that they're looking like the big banks.

When you look at market share in Quebec, Desjardins and National Bank are big banks. It's not surprising now that they're ranked at the bottom among our members, because the market share of the other major banks has diminished significantly; CIBC is only 4%, TD is only 4%.

My point would be, in a parallel process in Quebec to what's happening here, when you put a spotlight on the banks and on market share, it really does make them accountable. When you put a spotlight on it and use our research in terms of what they're doing, the fact that they come here really gives it some accountability and, we think, some improvement.

Instead of a critical document criticizing the banks, they should see this as a marketing document in terms of how to improve their markets and improve service. We believe, as Brien said earlier, that it's good business to invest in small business.

Mr. Brien Gray: I'd like to compliment this committee, which has studied this issue for years now.

When we talked earlier about the code of conduct, if I'm not mistaken, that was an initiative of this committee when Mr. Berger was chair of the committee. That code of conduct is extremely important to small businesses throughout the country. It will be even more important if people adhere to what's written under it.

With regard to the data collection, it was sadly missing in the discussions around what was going on in the banking community five or ten years ago. The documentation of what's in fact going on—not just our numbers but the numbers provided by Stats Canada—makes for a more informed and useful debate. I compliment the committee on its work in those two areas.

The Chair: I want to hitchhike a little bit on Mr. Crête's question before I ask Mr. Godin to ask questions.

There were some comments made earlier that small businesses that have been rejected are not given the reasons why they were rejected from the banks. It was my understanding--in fact, I know it's practised in the Niagara area very religiously--that when a loan is rejected, the bank will explain why it was rejected. In fact, they give it in writing so there's no misunderstanding. You're telling me now, today, that the practice is not being adhered to across the country.

Mr. Doug Bruce: In fact, that's a key question that we did ask in our survey. If you were rejected for credit in your application with your own bank, were you informed of the reasons why? The results we received from the survey were that 25%, or one in four, of our members who were rejected stated that their bank did not provide them with reasons for the credit turndown.

The Chair: Did you go back to the bank to find out whether that was valid or not? My experience has been that when I personally backed it up, the bank did provide a document. In fact, I have an arrangement with some clients that I would be able to serve on their behalf, to really get down to the whys, why they weren't given a loan, and what they had to do to get the loan.

Mr. Brien Gray: I think your point is well taken, to mine down, but remember, when we're doing the survey, it's across all of Canada, across every institution that operates out there. I suppose we could go and mine down further on an individual basis, but we have not done that yet.

I might just say that in terms of other elements, in terms of the dynamic that's going on out there, I'm sure, Mr. Chair, you've very familiar with the whole concept of credit scoring. When the credit scoring phenomenon first came into the market not that long ago, the financial institutions largely were not discussing it with their clients. Their clients were finding out that they had either been accepted or rejected because of a credit score, which in their world was sort of a foggy notion. They had no clue what it was.

One of the things we did in response to that, on behalf of our members, was to go to Equifax Canada and put together a six-page handout on what's a credit score, why it's important to you, and why it's important to your business.

Frankly, that should have been an initiative taken by the financial institutions themselves, given that they were the ones implementing the new plan, and that gets to the core of why you might have been rejected.

À (1045)

The Chair: Thank you.

Monsieur Godin.

[Translation]

Mr. Yvon Godin (Acadie—Bathurst, NDP): Thank you, Mr. Chairman.

I would like to welcome you to this meeting of the Standing Committee on Industry, Science and Technology. My first question has to do with your presentation, in which you spoke about the rising costs of insurance. It is important to discuss this more, because your survey shows that 82.7 per cent of your members said they were concerned about the cost of insurance. I do not think we can ignore this fact; rather, it is something we have to discuss energetically.

Speaking as a member of Parliament for northwestern New Brunswick, I think you know what is happening in our region and can understand our concern. You spoke about increases of 25 per cent to 50 per cent. In our case, I can tell you the increases are 200 per cent and 300 per cent.

A business person came to my office recently. I'm going to bring him to the committee, because it is essential that we understand how important this phenomenon is, not just in New Brunswick, but throughout Canada. When we listen to what people tell us—and I'm sure that the 82.7 per cent of the survey respondents are not all from New Brunswick—we see that all Canadians are concerned about this situation.

I would just like to give you the example of this business person who works in the forestry sector who came into my office. He told me that two years ago, he was paying $19,000 in insurance on his equipment. Last year, he paid $51,000, and this year, $62,000. He told me that the reason he came to see me is that he had to take money out of his GST to pay for his insurance, otherwise he would have lost his company. Now it is the federal government that wants his money, and he doesn't have any.

I wanted to tell you this story, because it is not an isolated case. How many of us may have heard similar stories and have seen the situation facing small and medium-sized enterprises? As you said, SMEs employ far more people, percentage-wise, than do large companies. There are few mines left. There is some exploration work being done at the Brunswick mine, but it will be closing down in five or six years. We will be relying on the small and medium-sized enterprises.

And that is not all. Something you did not raise and on which I would like to hear your opinion is the fact that in some regions, SMEs do not offer the highest wages, for example for work in the stores or fast food restaurants. Workers there are paid about $7 or $8 an hour. We talked about the substantial increase in insurance costs, but employees themselves have seen their insurance premiums go from $800 to $4,000. For them, that means that it is no longer worthwhile to work. That is the type of impact rising insurance costs are having on people.

What do you think the government should do? The chamber of commerce told me that normally they do not ask the government to intervene in the private sector. However, when there is abuse on the part of the private sector, someone must intervene.

[English]

Mr. Garth Whyte: To continue with your question, we had one member, a business called The Bow Shop. She doesn't mind us talking about it, because she has been in the media already talking about this. She does not shoot bows and arrows; she sells bows and arrows. She has never had an accident in her company in 19 years. She's in London, Ontario, or Kitchener, and that's in the heart of insurance country.

She found that her premiums were being increased 500%, from $2,000 to $11,000. She said she was going to hire an extra person, and she can't hire that person because her premiums have gone up so much that she can't do it.

She sells bows and arrows to the YMCA and to schools, and as I said, she has never had an accident.

We put this in the media, this one case. It was on national television. Magically, this business was allowed to get insurance for almost the same amount as the year before, and she didn't get the 500% increase.

We're not able to do it for all these cases. I have about 12 per page, all comments like the ones you read to us, from across the country. We can't spotlight every one, but we certainly can ask this committee to put a spotlight on it.

We do not want to see a legislative strategy. We're not sure that's the way to go. We think there are a lot of issues here. There are a lot of people from a lot of different directions. But the fact is that the longer we leave this, the worse it gets. It stops people, not just lower-paying job businesses but higher-paying job businesses.

À (1050)

Mr. Yvon Godin: But then, if you're not recommending legislative action, what are you suggesting? Talk is just talk. I don't think we can take every case that you have there, and just....

I know what you have done, and you've resolved this problem. But how can we do it where we say it's now paralyzing business?

Mr. Garth Whyte: As I said, we might look at each province on statutory requirements. We might look at taxes. There are extra taxes on the insurance industry that you might want to look at. There are international issues; we might want to defend the companies against international forces that are happening. There are just so many different options that need to be looked at. But the first step is to get everybody to the table, to understand and get people appearing before the committee and saying, here are the issues; here is what we're dealing with.

I think there are a bunch of solutions to this problem, not just legislation--and maybe there is legislation in certain areas.

Mr. Yvon Godin: But you don't suggest that we should bring the tax down because the insurance is going up and have the insurance companies make billions and billions of dollars on the backs of taxpayers. People should participate in paying tax, too, for our country.

Mr. Garth Whyte: No, we don't. We have to start driving prices down. The irony is that I'm sure each one of you is hearing from the insurance companies, don't worry; this will settle down. Have you ever seen the premiums go down? The premiums go up and then stay up; they go up again and then stay up. They never come down.

So that's back to your question on taxes, but first we have to stop the upward trend. We have to look at access. We have members who can't even get insurance. That's the problem. Why can't they get insurance?

Mr. Yvon Godin: Do I still have time?

[Translation]

The other thing I'm also hearing from people in small and medium-size enterprises... You raised the matter earlier when you were talking about credit cards. You were saying that it was easier to get credit cards from various financial institutions, with lines of credit of $10,000, than to try to get a loan. Consequently, some SMEs use their credit cards, with an interest rate of 19 per cent, simple because banks will not give them any credit, or give them a loan. Apparently if the rate is 19 per cent, there is no problem. They can get a credit card and spend up to $10,000 or $15,000 without any problem. And yet we have five financial institutions providing loans of $50,000 without any discussion.

So I would like to know whether your organization has had any reports of this type and what you would suggest in such cases. I think you made some good comments on banks and I think that when banks moved away from the rural areas and centralized... For example, in New Brunswick, if one deals with a bank in the Bathurst region, in the Acadian Peninsula, the decisions are made in Halifax. Halifax does not know the company and really has no information about it. So the human element is missing; there is no dialogue between the company and the financial institution. That is where there is a problem, because the banks have moved away from the people. They should come back to their roots.

Mr. Brien Gray: In order to be clearer, I will answer in English.

À (1055)

[English]

I think you make a fundamentally important point. There was a time in this country when the local bank manager actually had authority to make a loan, knew his or her clientele, understood their business, understood their business cycle, understood the community business cycle, understood a whole lot more about that business and its environment than they currently do.

Today the whole industry has moved away from a model that truly understands the client to one that is based almost entirely on statistical reports--for example, credit scoring--as a proxy for how you will behave out there. It's an imperfect system, and as you go to the statistical analysis based not on character and judgment and a willingness to hold up your end of the bargain, which is the true bedrock of small business, it's going to one where you use statistics to understand a business and the business entrepreneur, and you use statistics and an ever-ascending profit motive to say, well, in Bathurst today we can hold three branches there if I'm such and such a bank, but next year we'll move the bar up a little higher, so maybe it'll be two banks, two outlets, in another five years and maybe down to one in ten years.

We've talked a lot in this committee about whether we should really do nasty things to the banks. I'm not advocating doing nasty things to the banks; however, these banks do enjoy a very privileged position in many respects in this environment. As for RRSP legislation, half of the RRSPs held by Canadians are controlled by the banks. That legislation itself is a hugely profitable piece of legislation for Canada's chartered banks. This is something that government, through policy, has done to assist and enhance the position of the banks in Canada.

I think we have a history in this country of a banking policy that's been developed as a form of compact between governments and the major banks, in which we gave them privileges and we expected things in return. I don't think you can just suddenly say, it's not profitable any more, we're getting out of small town Canada, and tough, you'll have to find your products elsewhere.

My worry is that as we go out, particularly in places like northern New Brunswick, the entrepreneur will be forced to go to the United States for a lease, maybe to Europe for another form of financing. They'll get their deposits at the local credit union, they may get a term loan through the BDC, and they'll have to shop around for every different product they use. This is something they've never had to do before and they're least equipped to go and shop around.

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

Mr. Bagnell, did you have a short question? I'd like to follow up with a question.

Mr. Larry Bagnell: I have one question.

Insurance is a really big problem in my riding as well. Lots of people can't get it and are surprised, and some of it has skyrocketed, so we need to do something.

I'm curious as to why you are against--and you talked about more competition in insurance earlier--the chartered banks providing insurance. Would that not bring more competition to the field?

Mr. Brien Gray: I'd ask you the rhetorical question, have the banks brought more competition in banking services?

Mr. Larry Bagnell: But if you have more providers of insurance and there's more competition.... In some of our rural communities, if there is a bank, then a person could go in there and get insurance.

Mr. Brien Gray: Mr. Bagnell, when we come before you, we're not representing Brien Gray or Garth Whyte's personal views. Our members have voted consistently in support of the role of the independent broker in these communities.

A large measure of what's going on in the insurance world right now is issues that are worldwide, they're sectoral, they're through the carriers, issues around underwriting, issues around investment markets, and so on. I think in large measure independent brokers have delivered very well professionally and with legitimate services to these people. I'm not sure whether the price equation would be much different if it were delivered by a bank instead of the insurance broker.

Mr. Garth Whyte: To complement what Brien has said, they're worried about tied selling. They would really like to see their loan divorced from their insurance. If you had it all packaged, it would be terrible to have the loan and insurance yanked at the same time. That's part of the problem. Maybe it's perception, but that's a big issue they're worried about.

Mr. Larry Bagnell: Thank you.

The Chair: The vote is at around 11:20 a.m. So if I may, as chair, I'm going to ask a general question to our witnesses.

The CFIB continually does their surveys, and we, as members, get feedback from it, and so forth. You represent 120,000 members, and I know it has been growing, too--125,000 members. But we have 2.4 million small businesses--if we want to take it down to smaller sizes, maybe 2 million small businesses.

Have you ever contemplated doing a survey across Canada with your other organizations, such as the Canadian Manufacturers & Exporters and the small business section of the Chamber of Commerce and the banks, so that we don't get into saying, well, the CFIB said certain things, but our survey says something else? We, as a committee, get bombarded with all these different reports. Have you ever thought of doing a survey together?

Á (1100)

Mr. Garth Whyte: We have had joint surveys with RBC, for example, the Royal Bank. We've done some surveys and joint work. As a matter of fact, the biggest compliment we have is that certain banks have been quoting our information and quoting our members' outlook. So they're there, and we've done joint work. That one project was with the RBC and also with the Canadian Manufacturers & Exporters.

But on this survey, which we've been doing every three years for I don't know how many years--Brien, 15 or 20 years or so?--we get 10,000 responses. It's not that it's a biased survey; this is across the country.

Mr. Brien Gray: I'd like to add that, for many years in this country, nobody did any surveying on the performance of the banks. CFIB was the first entity in this country to do any comprehensive surveying of the performance of the banks and how that impacts on small business in this country.

That's a huge service, not just to our members but to the banking industry itself. Many banks use that and see that as legitimate marketing information upon which they make decisions and choices.

Back to your own point about whether we can't get together with all the other associations, in many respects you already have that, I'd say, with respect, through the Statistics Canada method of trying to find out what's going on in financial services.

The data gathering that Industry Canada does through the small business unit is in effect what you are talking about, and I would submit that it would be awfully difficult for us to get agreement amongst all these varied associations on what the 20 questions ought to be, because we really don't want to have a 50-page survey going out to small businesses throughout this country. You know what that engenders in terms of response to you with respect to Statistics Canada surveys.

The Chair: Okay, this concludes our session today. I want to thank all our witnesses for providing the presentations and the data and the two hours of good discussion on small business, which, as you know, I believe very strongly is the lifeblood of our country. We need to continue to focus on them. Thank you very much.

The meeting is adjourned until tomorrow at 3:30 p.m.