[Recorded by Electronic Apparatus]
Thursday, June 20, 1996
.1605 
[English]
The Chairman: I call the meeting to order.
The government 24 hours ago tabled in the House of Commons the 1997 review of the financial sector legislation, proposals for changes. On very short notice our witnesses have agreed to appear before the House of Commons finance committee today to discuss these proposals for changes.
Our witness is the minister responsible, the Secretary of State (International Financial Institutions), the Hon. Douglas Peters. Welcome, Mr. Minister. Perhaps you'd be good enough to introduce the members with you at the table.
Hon. Douglas Peters (Secretary of State (International Financial Institutions)): Thank you, Mr. Chairman. The officials with me are Madame Doyon, Mr. Hamilton and Mr. Swedlove from the Department of Finance. They'll be able to answer all the hard questions.
I appreciate the opportunity to appear before this committee. Even though it's short notice, I appreciate that the committee is here. I also appreciate that the committee would like to get away tomorrow and not meet at another time. So I think it is a good idea to get my appearance here at this particular moment.
First of all, I want to say that in Canada we have one of the strongest financial systems in the world. In this white paper we're proposing to make some adjustments to the system, which is already working extremely well for Canadians.
In 1992 there were major changes in the structure of the financial services industry in Canada, and those changes are just now being swallowed by the industry itself. This white paper is a mid-course correction. You will all recall that the usual practice for the Bank Act has been sunset clauses every ten years. With the Insurance Companies Act and the Trust and Loan Companies Act, it was decades before they were changed. In 1992 the decision was made to have a five-year review, and we're doing that now.
The sunset clause is March 31, 1997. As you will all realize, that's a very close date. We'll have to get legislation in the House in the fall to meet that March 31 deadline. It has to pass both the House and the Senate and get royal approval by that date or we have to close down all the banks and insurance and trust companies in the country. I'm sure you wouldn't want that. So I am very appreciative of your committee's work on this.
The main points in the white paper are, first of all, items on consumer issues, and I went through those in the House so I won't repeat them. Secondly, there are issues that make some major adjustments to the financial institutions legislation in reaction to a number of items that have come up, and I think that's important. Thirdly, there is the setting up of a task force to look at what we need in this country for financial institutions regulation to get us an efficient, competitive, safe and sound financial system in the 21st century. In addition to that, we will have an advisory committee for the payments issues, which will be chaired by a group of specialists and will feed into the task force as well.
Mr. Chairman, those are my brief opening remarks. I would be happy to answer questions from the members.
The Chairman: Thank you very much, Mr. Minister.
[Translation]
We will begin with you, Mr. Loubier.
Mr. Loubier (Saint-Hyacinthe - Bagot): Mr. Secretary of State, I have a few technical points concerning the paper you tabled in the House yesterday.
.1610
On page 8 of the paper, at paragraphe 4 entitled "Tied Selling", you talk about strengthening consumer protection.
Could you elaborate and give us examples of tied selling in the present system - if you have some in mind - or in the system you are thinking of for the future.
[English]
Mr. Peters: I haven't any examples, but I have had a number of stakeholders mention to me that they have alleged that there were some abuses of tied selling.
First of all, to my knowledge tied selling is illegal under the Competition Act. I don't think any financial institution has been charged and convicted under that. There may be some, but I don't know of any instances. So I haven't any particular examples, but there have been suggestions by a number of stakeholders that tied selling exists.
To look at this question very carefully, there's a considerable difference between cross selling and tied selling. When you go in and buy a new suit and your tailor says he has a nice tie that will go with that suit, that's what might be called tied selling.
Some hon. members: Oh, oh!
Mr. Peters: I apologize. I don't know whether that will work in the translation or not. It's always a challenge to the translators when you use an English pun, I'm afraid.
Anyway, there's a question there of tied selling. The definition of it is extremely difficult to give. What is the coercion used? Well, we're going to look at that carefully, and I think that's the purpose of that section. We want to hear examples, and I'd be glad to have the input from this committee on what you might hear from other stakeholders on that issue.
[Translation]
Mr. Loubier: If I'm not mistaken, that concept of tied selling has often been raised as an argument against the possibility of allowing Canadian banks to offer insurance products right at their counters.
Is the inclusion of a section on tied selling a signal that the government considers allowing chartered banks, within the next few years, to sell insurance products at their counters, though under new provisions on tied selling? Was it put in there in an attempt to reassure those who are against the coming of banking institutions into that sector?
[English]
Mr. Peters: Well, it wasn't really put in there because of that particular issue. The people who were talking about the tied selling were the investment dealers, who were mentioning that the banks were offering RRSP loans but they wanted the RRSP business to go to their own brokerage firm. That was one of the items that was mentioned.
Now, whether that's tied selling or cross selling is a good question, but that was the one that was mentioned. I hadn't heard the question mentioned as far as insurance is concerned, but clearly if tied selling is in existence... It's not just the banks, I might add; the insurance companies may say we won't sell you car insurance unless we have your house insurance as well. If that were defined as tied selling, that would be a question that I'd like to see addressed as well.
[Translation]
Mr. Loubier: You will at least admit that if we could find a means to tighten regulations in that sector in order to limit tied selling as much as possible, one of the arguments of those who are opposed to the selling of insurance by banking institutions at their counters would no longer hold. If tied selling was regulated, the government would certainly feel somewhat freer to allow banks to offer insurance products.
.1615
Was it not your basic idea when, as Secretary of State, you developed measures to protect consumers against such pressure selling?
[English]
Mr. Peters: It wasn't my specific idea, no. The idea was more in response to -
[Translation]
Mr. Loubier: Maybe was it your colleague's or your constituents' idea...
[English]
Mr. Peters: Maybe I'll let you have it as your idea.
[Translation]
Mr. Loubier: No, it was not mine.
In the section about easing the regulatory burden on financial institutions, you mention, concerning overlap and duplication between federal and provincial regulations, that the government is prepared to work with provinces in order to achieve further progress in a number of areas with regard to the elimination of such duplication and overlap. What do you mean by that? Which specific areas are you aiming at?
I ask you that because what can be read in that paper raises some concerns, since every time this government talked about eliminating duplication and overlap, it looked more into provincial jurisdictions than into its own. They often attempted to move into areas of provincial exclusive competence.
[English]
Mr. Peters: There are a number of situations where a province may have, say, only one depositing institution. There are a couple of instances. The province may indeed ask the federal superintendent to regulate or to examine that one, because the federal government has a degree of expertise in that. The superintendent has a staff that can do it much more efficiently than a province that would have, say, just one institution, and that has been the case.
We want to examine those situations carefully. Sometimes, however, the superintendent is caught on the particular issue with applying both federal and provincial regulations to the one institution. That may or may not be appropriate.
We're trying to get a system that would regularize that particular thing if the provinces wished us to do so. In many cases, especially with deposit-taking institutions, where some of the smaller provinces particularly do not have the staffing or the number of institutions to do it, they have asked the federal government to do that. It's not moving into a provincial jurisdiction. We respect their jurisdiction. It's only if we were asked to look at it.
[Translation]
Mr. Loubier: You probably guessed, Mr. Secretary of State, that I was going to get to page 19, where the issue of Canadian securities is discussed. It is in fact rather strange that in the last paragraph of that page, in Chapter 3, entitled "Easing the Regulatory Burden of Financial Institutions", where reference is made to the elimination of duplication and overlap, we can read the following:
- Another area of interest is Canadian securities regulation. At present, Canadian securities
markets are subject to thirteen regulatory jurisdictions. The government is prepared to work
with interested provinces towards the development of a Canadian Securities Commission.
[English]
Mr. Peters: I think we've had this conversation before.
The answer has always been that the initiation of a Canadian securities commission was with the provinces and you can opt in or opt out of the securities commission. It would be going forward only if a large group of provinces really requested that the federal government handle it on their behalf. It wouldn't be a federal institution exactly; it would be that the provinces requested it. I think we've had this -
.1620
[Translation]
Mr. Loubier: Mr. Secretary of State, by creating that Pan-Canadian Commission, you are already superseding provincial jurisdictions. In other words, the Canadian Securities Commission which will be set up is going to gradually replace, through moral pressure, all of the provincial securities commissions. Within a few years, the importance of the provincial securities commissions and the essential role provinces are now playing in that field will have been minimized, even though that's a role which is theirs by right because it is an area of exclusive provincial jurisdiction.
[English]
Mr. Peters: Quite clearly, it's an area of provincial jurisdiction. We would only do this if we had the delegated authority from the particular province to go ahead with it. The provinces will be quite clearly required to delegate to the federal government the authority to handle their securities issues on their behalf. That would include the regional offices of a securities commission and other items.
The Chairman: Thank you, Mr. Loubier.
Mr. Grubel, please.
Mr. Grubel (Capilano - Howe Sound): Thank you, Mr. Chairman.
Mr. Peters, I have a series of questions that all sort of follow from each other. The first one is this. Could you please clarify for me the role of a white paper in the legislative process?
Mr. Peters: I'm not sure I can. It is an announcement of government policy in an area. It is put out to the public for consultations to receive comments. This particular forum of the House of Commons finance committee is clearly the forum in which those consultations take place so people will be free to write to me or to the Department of Finance on that.
After those consultations and the report of this committee, if the Senate committee looks at it, after their report, we will then bring forward legislation based on the white paper and on the consultations that have taken place since then.
Mr. Grubel: What was the process that underlaid the determination of what actually is written down in the white paper?
Mr. Peters: How did I get this?
Mr. Grubel: Yes.
Mr. Peters: What is the process? It's like writing any other paper. You've written a large number of papers. You probably wrote out a first draft. You probably gave it to a few friends and colleagues to look over. They probably sent their comments back. You may have presented it at a meeting, and you got a few comments back from various people at those meetings. Then you probably made some changes in the paper that you thought were right. As for some of your colleagues who you thought were wrong, you ignored them. Maybe you finally published the paper, and you got peer review before you got it published.
We go through much the same process, only it's in the department. The department prepares a paper. They present it to the rest of the members in the department internally. Then they may bring it up to the minister and the minister's staff. We look at that carefully and make some comments. We tell them to go back and do this again and that again. Then they go back and they bring it back again maybe two or three times.
Mr. Grubel: Where does public opinion come in on this?
Mr. Peters: The public's opinion is always there. Before we wrote a white paper, I gave notice a year ago, I think it was March, that I would be asked for comments on the issues, and I called for papers. I received 30 papers from various people to comment on it. Those went into the process of preparing the white paper.
Mr. Grubel: What I am wondering about is clearly the issue that has been reported in the media. How was it decided to include certain topics and exclude others? Of course, the exclusions of great concern among the banks in Canada are such topics as further deregulation of the business they're allowed to engage in, the possibility of changing ownership rules, or allowing mergers amongst banks - subjects of this type.
.1625
I just wonder, in the process that leads from a white paper to legislation, if the issue of banks' restricted activities is not broached in the white paper does that mean the finance committee is restricted from calling witnesses on this particular subject?
Mr. Peters: I would be foolish if I said a minister could restrict a finance committee in any way whatsoever, in the calling of any witness or in considering any item at all. Certainly not. It is in your hands as to which witnesses you call, what subjects you look at and what things you do.
Mr. Grubel: Do you intend to send a signal to us and to the public by excluding discussion of the subject of restrictions on banking activities?
Mr. Peters: Yes, of course. The white paper is clearly a signal. It is a signal as to what items I want to discuss. What this committee discusses may be entirely different. Your report is your report. It is not mine. These are some of the items I would like you to consider, yes. This is what the white paper is there for.
Mr. Grubel: I don't want to leave the impression that I want to reopen the subject of banks, but there are lots of other topics in there, while others are excluded. Does it suggest that what is in there and what is out sets the government's legislative agenda? To what extent can hearings and witnesses we bring in determine what will be in the forthcoming legislation in, I think, January 1, 1997?
Mr. Peters: I would give you Bill C-15 as an example. On a number of amendments to that particular legislation this committee did a fine job. Certainly the previous hearings on Bill C-100 by this committee produced a lot of very good suggestions.
No, I'm not trying to limit your committee in any of its considerations. I think what we have said is that these are the items the government finds important; these are the items we would like you to look at. But that certainly isn't limiting you in any way.
Mr. Grubel: I'm glad I had this clarification about the role of the white paper and the government in setting the finance committee agenda, the legislative agenda and so on.
Mr. Peters: Let me tell you, if you'd like to make me happy, Herb, I'd be very happy if you looked at these items. If you want to look at anything more than that, that's up to you.
Mr. Grubel: It's the first time I've encountered this. I'm just trying to understand the process. I think there will be plenty of time to go into the details of the substance of what, really, was just mentioned rather than our taking positions on these issues.
I would be happy to surrender the floor to the next questioner.
The Chairman: Thank you very much, Mr. Grubel.
Ms Whelan, please.
Ms Whelan (Essex - Windsor): I do have one brief question, Mr. Chairman.
Maybe the minister can just explain something in terms of the task force that's going to be set up after the 1997 legislation. Does this committee have any input or any directions from our review of the white paper that we could perhaps ask them to look at as well? I don't know if you've decided already on what the make-up of that task force will be, or what the timeframe will be.
We know there'll be review after five years, after the 1997 legislation is passed. I'm just wondering if that task force is going to continue for four years, or for one year, or if any of those decisions have been made yet.
Mr. Peters: It's our intention to look at the mandate and composition of the task force this summer and to make announcements in the fall about the mandate and so on.
.1630
I expect the task force to take no longer than 18 months to report, and I expect that the report would provide an excellent opportunity for the public and for this committee, for example, to consider those changes that they suggest will be needed to bring the financial sector of the economy into a fit state for the 21st century.
Ms Whelan: Thank you.
The Chairman: Thank you, Ms Whelan.
Mr. St. Denis, please.
Mr. St. Denis (Algoma): Thank you, Mr. Chairman. Thank you, Mr. Minister, for coming here today.
There are two areas... The first issue is bank service charges, but before I get into that, let me say that I think you've done an excellent job with this paper. I believe it will be received very positively, and it already has been. I even saw a warm reception for this report from the Canadian Bankers Association, notwithstanding their feeling that they may have lost on a couple of fronts.
On the issue of bank service charges, I see that one of the initiatives will be to work with the industry to do something about simplifying and improving the dissemination of information about fees. Is it your view that creating a greater transparency on fees may in fact be sufficient to ameliorate much of the public concern about fees?
There are things that are of concern. For example, many of the brochures are very difficult to read. They're not user-friendly. There's still a high rate of illiteracy in this country, sadly, so many people couldn't read even the best brochures.
I know we're bordering on the area of ethics when it comes to disclosure. Are you confident that these measures, taken in concert with the industry, can lead to a greater transparency and to greater ease for consumers with respect to bank service charges?
Mr. Peters: I hope so. I think that is one matter you might want this committee to pursue with the financial institutions that come in front of the committee. It's not just the banks; it's the trust companies and the insurance companies that come in front of the committee. Ask them about the transparency of their fees and what they could do to make it clearer.
I would appreciate any advice your committee could give me on that.
Mr. St. Denis: We certainly look forward to that.
On the second area, Mr. Chairman, on the prepayment of mortgages, this is an area that has been of great interest to the real estate industry. Many people have faced this dilemma of having to sell a house and buy another one. If you couldn't transfer the mortgage you were often faced with extra costs on top of moving costs and legal fees and so on.
This is similar to my first question. Maybe just the discussion itself will lead the industry to open new doors with respect to the prepayment of mortgages. Do you have a sense of where that might go, without precluding the outcome?
Mr. Peters: Let me tell you that we've been looking at this for a long time. It's an issue that is a very difficult one because you have to balance the availability of mortgages with the right to prepay.
We now have a three-month prepayment maximum period for mortgages over five years. That has brought the mortgage market in Canada to five years, so the financial institutions or anybody who would have to supply funds for it were going to limit it to five years.
Look, if you want ten-year mortgages, you'd better have some form of limitation that is fair to both the borrower and the lender, because if you're going to lend money for ten years, you're going to have to borrow money for ten years. If you make a commitment to borrow money for ten years, in order to lend it out for ten years, as any financial institution would, then how do you make sure that...? Say you have only a three-month penalty. Somebody prepays your mortgage in five years and at that point interest rates have fallen and you're committed to paying those high interest rates on the other side of the question for ten years.
.1635
We have to find some system that is fair to both the borrower and the lender so you don't have what we have now. We have a stultified mortgage market that runs just the five years.
Now, maybe we'll look at this and say this is the best we can do. Maybe this is a better system, because if you had locked in your mortgage for twenty years in 1982, when mortgage rates were 19%, and you were still paying 19% on your mortgage at this point and you had no prepayment privileges, you would be in a very difficult state. I might add that there were some financial institutions in the United States, particularly the S and Ls, for example, that had very short-term deposits that were very variable. In other words, they had a prepayment privilege on their deposit side and on their loan side loans were out for twenty-five or thirty years. They all went broke and they cost the U.S. federal government about one year's GNP for Canada.
So I would suggest these are difficult decisions to make on the mortgage prepayments. It is a balance that has to be achieved between the borrower and the lender.
The Chairman: Mr. Campbell, please.
Mr. Campbell (St. Paul's): Thank you, Mr. Chairman.
Two questions. In your paper you refer to the state of competition in the financial services sector, and indeed many of us on all sides of this table hear from our constituents, hear from Canadians, and they share with us their perception of the state of competition and concentration. I wonder if you might elaborate on the statement about competition in your paper.
Mr. Peters: Some concern has been expressed about competition. In the course of our consultations competition in the financial sector was mentioned, and yes, a number of very large institutions have taken over...the banks, for example; a lot of trust companies have been taken over by the banks. A number of securities firms have been taken over by the banks too.
If you look back at those times and the reasons for that, the securities firms in this country were lacking in capital at the time and were unable to handle many of the securities deals that were available at that time. Indeed, we would have or we could have lost a major part of our securities business to firms outside the country, business that is very important to Montreal and Toronto, where the securities business is largely located, and also to Vancouver and Calgary. Among the trust companies, many of them were in difficulties, and that was the reason for their being taken over by the banks.
When you're looking at competition you have to look at the price of services, and we've done that. The price of typical financial services, banking services, if you like, depositing institution service charges, is much lower in Canada than it is in the United States, for example. The spread in interest rates between borrowing and lending in Canada is much lower. The U.S. prime rate today is 8 1/4%. The Canadian prime rate is 6 1/2%. That means 1 3/4% lower interest rates. The old rule of thumb a few years back was that Canadian prime rates were much more generally available than U.S. prime rates, so a Canadian prime rate 1/2% to 1% higher than the U.S. rate would be about the same. So you can see the difference is a good 2 percentage points cheaper on the loan side in Canada, whereas the cost-of-funds differences are very small, maybe 1/2%.
If we look at those particular aspects, I think we have a very competitive financial system in Canada.
.1640
Mr. Campbell: One more question, very quickly, if I might.
You make reference in the paper and in your opening remarks to further study ahead, to dealing with the challenges the sector will face in the next century. Would you care to elaborate on what challenges you think the sector faces in the years ahead? I appreciate, as you've said to us, the actual parameters for the group in -
Mr. Peters: I'm not about to write the task force report for them. If I really knew what the challenges were, I wouldn't have the task force looking at them.
Mr. Campbell: I thought you might not know the answers but you might have a sense of some of the challenges.
Mr. Peters: I have a number of questions. I would look at these questions. What regulatory environment will give you the best financial services sector that will give you job creation and economic growth?
How can you get the regulatory environment right? That's the major question I'd ask. In particular, what is the payment system going to look like in the 21st century? In the last few years we have had Internet questions and now there are so-called ``virtual banks''. What about the unregulated section of the financial services sector? There's a huge unregulated financial services sector that we don't talk about because it's not regulated, of course, but it's major... Where does that fit into the financial sector?
So all of these are questions that would be raised. And where do we get an innovative, efficient, competitive financial sector considering all those items? Those are some of the questions I have for the task force, but we'll be putting a much more particular mandate out to them by the fall.
Mr. Campbell: Thank you, Mr. Chairman.
The Chairman: Thank you, Mr. Campbell.
Mr. Pomerleau, s'il vous plaît.
[Translation]
Mr. Pomerleau (Anjou - Rivière-des-Prairies): First of all, I would like to ask a short question on a technical point concerning the easing of the regulatory burden which is refered to on page 9 of the English version, probably page 8 in French. At paragraph 3), "Subsidiary Requirements", we can read:
- In order to reduce their operational costs, the government proposes to permit financial
institutions to carry on both information processing and specialized financing activities
in-house,...
- They were probably not allowed to do it before.
- ... rather than through subsidiary operations.
[English]
Mr. Peters: The present regulations require that certain particular financial ancillary activities have to be carried on through a subsidiary of the financial institution, for the reason that it was an ancillary activity of the institution, not the main activity, and should therefore be separated out.
It costs money to do that and the -
Mr. Pomerleau: But why were they not allowed to do it directly before?
Mr. Peters: They were not allowed to do it in-house.
Mr. Pomerleau: Why?
Mr. Peters: Because it was an activity that I guess the government at the time thought would be of a nature that was not appropriate for the bank or trust company or insurance company to have in-house. Now I can't think of any... Maybe if you could give me an example, it would be...
Ms Martine Doyon (Chief, Policy Development, Department of Finance): If I could expand on that, the changes we're proposing are really activities that are fully new. For example, in the case of information processing, the idea back in 1992 was to take a fully cautious approach. In that context, it's been reviewed and considered appropriate to allow the activities to be carried out in-house.
Mr. Peters: Yes. This is really an evolution of the system. What was originally proposed was that information processing, as an example, was not something that the banks should be doing in-house but should be doing as a separate subsidiary.
It has now been looked at very carefully. That's really not necessary. Let's let them do it in-house; there's no danger here. It was just a process to go through.
.1645
[Translation]
Mr. Pomerleau: The Bank Act will come into force in March 1997, I think. A number of working groups will issue their reports within 18 months from now. We know that the next review of the act will take place in 2002. Does that mean that those task force reports will not be used until 2002, or will they be integrated into the legislative process in the meantime?
[English]
Mr. Peters: It would be our purpose, and I think it's stated quite clearly in here, to put in the legislation some time before March 31 that it would expire five years after that legislation came into effect. That is our intent.
When you put in legislation, any piece of legislation, even one like that with a sunset clause on it, your intention is that it should be there for five years. But that doesn't always happen.
[Translation]
Mr. Loubier: My colleague's question was about the two processes which were initiated in your white paper. The first one concerns the review of the Bank Act before March 1997, when the new legislation must come into force.
The second concerns the creation of working groups mandated to look into other aspects of the financial sector and to suggest solutions to attune the regulations to the needs of the years 1990 and 2000.
The working groups will submit their reports, and the government will deliberate upon them and propose appropriate legislative measures. Will we have to wait until the next revision of the Bank Act in 2002 to apply those measures? As it is often not easy to bring into line old and new laws, a delay, if any, would be detrimental to the good functioning of the Canadian financial sector.
[English]
Mr. Peters: Maybe I was giving too long an answer. I was getting to that. When you do put in legislation like that, it is intended for five years. But then again, if something comes up in the meantime or the task force reports things that need to be done, we'd certainly...
The people who did the changes in 1992 certainly didn't see ahead of them the failure of the trust companies, the failure of Confederation Life, and so on happening. When those things happened, we brought forth a bill, C-100, first of all, and then C-15, to correct some of those things that we felt had to be done right away. But it certainly wasn't the intention of the people who drafted the financial institutions legislation in 1992 to have a change in the... They couldn't see everything ahead.
It's exactly the same thing here. We're not saying we can't...and no government can say your legislation won't change or something won't come up in the meantime, and the task force report would clearly be a question that would have to be considered.
[Translation]
Mr. Bélisle (La Prairie): Mr. Secretary of State, I have two short questions. On page 21, in the paragraph concerning deposit insurance opting-out, we can read that some financial institutions have asked the government to allow them to apply for exemption from the CDIC coverage. This could be done on the basis of the size of the deposit (e.g., over $200,000), the type of depositor(e.g., non-residents' corporation), or some combination of these two criteria.
Should the government agree to such a request, aren't you afraid it might open the door to further requests from retail deposit-taking institutions wishing to opt-out? What is your position on that?
[English]
Mr. Peters: Yes, it might lead to that. But we had hoped to limit it to those institutions, probably schedule II banks, that would deal with wholesale business. None of the major banks in Canada that have a huge retail business would be eligible under any of these circumstances.
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I don't suppose it would be impossible to consider some other financial institution set-up that would be dealing in that way; that might require that. But certainly if you're going to deal with the retail public, if you're going to be dealing in an area where there is systemic risk, where there is a question, then you'll have to come into the deposit insurance scheme. I think that's only reasonable.
[Translation]
Mr. Bélisle: On page 18, under the heading "Right to Prepay Mortgages", it is mentioned that financial institutions could set penalties exceeding three months for terms of more than five years. Does this suggest that for terms of less than five years, we might have penalties of less than three months based on a decreasing scale?
I presume that as the term decreases, the length of the penalty would also decrease. Is it what you have in mind?
[English]
Mr. Peters: Look, it's a balance that's required between the financial institution that's doing the lending and the borrower. There has to be a balance. A financial institution that commits itself for four years on the GIC... In 1982, if you had a GIC and got 16% or 17% on that for four years and the mortgage on which somebody else borrowed the money was at 18% or 19%... You have to have some balance between those two items.
There are ways of doing that. We're asking this committee and others to let us have their views on the subject. How can we get this so there is a balance?
If you make it so you can prepay a mortgage without any penalty at any time, I know what you're going to have. You're going to have one-day mortgages, and you're going to have a daily interest on them. If you want 10-year mortgages or 25-year mortgages, you're going to have to find some way of balancing the borrowing and lending operation.
I don't have an answer to the question. There are ways of looking at it. You can look at it as balancing the cost of funds, the equivalent cost of funds, for example. That's one way of looking at it. If you would like more details, my colleague from the Department of Finance, Frank Swedlove, has been looking at it for ten or fifteen years, and he's an expert on it.
There are a lot of questions here, but the big one is finding some balance.
[Translation]
Mr. Bélisle: I would like to get an opinion on that shortly.
[English]
Mr. Frank Swedlove (Director, Financial Sector Policy Branch, Department of Finance): For mortgages of less than five years there are no specific requirements in the Interest Act. There are no provisions dealing with mortgages under five years. Consequently the mortgagees could charge a three-month penalty, or they could charge some kind of present-value calculation, or they could not permit any right to prepaid mortgages.
What has been suggested here as a possibility would be establishment of the right to prepay mortgages and the possibility of establishing some kind of present-value calculation. That might mean you would have a prepayment penalty that could be less than three months. It could be more than three months. It would be dependent on the differences that would occur in the interest rates and the term of the mortgage.
But you're correct when you say the shorter the term, generally the less the penalty would be, if there were to be a penalty. What would be guaranteed if this were to be adopted but does not exist in the existing act would be the right to prepay the mortgage.
[Translation]
The Chairman: Thank you, Mr. Bélisle and Mr. Pomerleau.
[English]
Ms Brushett, please.
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Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chairman, and thank you, Minister, for being here today. I will be brief.
One question, so it is on the record, and as it is so prominent in citizen's minds: the items that we have left out of this discussion paper - are we to understand that they cannot and will not be brought before legislation until the year 2002?
Mr. Peters: No. There's no guarantee that any legislation you put forward in the House cannot be changed by a future House. Circumstances do change. It is our intention, however, that whenever we do bring in legislation and that legislation is passed and becomes the law, that legislation would have a sunset clause of five years and we would intend it to be for that period of five years. But I can't look that far ahead and tell you that there isn't going to be anything happening in that period that might give us cause for concern.
As I said, just as the 1992 legislation was done, it would be four or five years. But we had to bring in Bill C-100, which became Bill C-15, because we needed some major changes. Those were important changes that this committee considered and had a big input into. It was necessary to do that at the time. It may be - I can't tell you that it won't be - in the next five years. I wish I could, but we don't have that much certainty in this.
Mrs. Brushett: May I come to the point of joint venture arrangements. Is this intended for the possibility of a bank joining with an insurance company for a joint financial venture, or is the intention to possibly enable deposit-taking institutions to amalgamate, to become a larger deposit-taking institution, and if this is the case, how does that give the customer greater confidence and greater protection?
Mr. Peters: The joint venture arrangements are largely in response to... There are a set of rules called the ten-fifty rules, whereby you either own less than 10% or more than 50% of a joint venture. That's been restrictive in the case of banks, insurance companies and other financial institutions. It's particularly difficult when they deal with foreign institutions. For example, you could not go to a country like Singapore or Malaysia or a place where they have policies that say you can only own 49% of a financial institution. The Canadian banks are left with the option of only having less than 10%, because they can't have over 50%. Under the law of the other country they can't have 50%; they have to have less than 50%. There may be times when some of the financial institutions want to have 30% or 40% or 49%, and under our legislation at present they can't do that. We're thinking that that's not a rule that makes any sense any more, so we are proposing to make some changes, but it's largely with foreign institutions.
Mrs. Brushett: On the relationship to a foreign person's domestic... Thank you.
The Chairman: Thank you, Mrs. Brushett.
Mr. Pillitteri, please.
Mr. Pillitteri (Niagara Falls): Mr. Chairman, I think we skirted around a lot of the questions. Nobody from either the opposition or our own members wanted to mention the words ``insurance companies'' or ``auto leasing''. You might as well put it clearly. It means that whatever was put in the legislation in adopting the finance minister's budget is only for one year, actually. Nothing will stop the banks in the future from trying to get into insurance selling and auto leasing - by bringing legislation for that. Or is it every year that the finance minister has to make that decision?
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Mr. Peters: I think the finance minister has been quite clear that it was his intention in the budget that this review would not include the networking of insurance by the deposit-taking institutions. I'd remind you that the deposit-taking institutions can own insurance companies and can sell insurance; it's just that they can't use their branches. The networking provisions are part of the regulations as well. So that's clear. I think he was clear that it would not be part of this.
Again, the intention is clear that any legislation we bring in this time would be intended for a five-year term. If something comes up during that five-year term we may have to change it, but the intention is clear that it will be for five years.
Mr. Pillitteri: Thank you.
The Chairman: Are there other questions? Y a-t-il d'autres questions?
Could I ask you just a couple of brief questions? Minister, on page 16, dealing with the privacy issues and strengthening consumer protection, you are urging our financial institutions to use the CSA code as a minimum standard in formulating their codes of conduct to ensure privacy of information supplied by depositors or users of the institutions. Do most institutions already adhere to those CSA standards?
Mr. Peters: I'm not able to answer that question. I would suggest that would be a question for the institutions. I would presume that they are very careful. I have had very few questions from my officials on privacy issues, so I would presume that the general public is relatively satisfied with the privacy issue as it stands.
The Chairman: Secondly, you've raised a very interesting issue on the same page in your white paper about working with consumer and advocacy and community groups and financial institutions to help improve access to financial services for low-income Canadians. Although this will have many challenges, to me it seems like an extremely worthwhile project. Have you had any representations on this so far?
Mr. Peters: We have talked to a number of financial institutions on this and there are a number of them that have what you might call a plain vanilla type of account. I think this committee, if you happen to be talking to financial institutions, would be doing a great service to ask them what it is they have in that way so that they can do that.
It's not just the account; it's the identification process. It is the ability to get a welfare cheque cashed, not at one of the cheque cashing facilities that charge a huge fee but rather at a bank or institution, and to define some way of working with the financial institutions to make sure you have the identification question and the account question. I think your committee would do a great service by asking about those things.
The Chairman: In terms of reviewing the payment system, on page 26 you refer to the possibility that where you have the system known as payable through drafts, if the ultimate payer is a non-member of the payment system and an unregulated entity, there could be problems affecting the credibility of the financial system. Say we were to have, for example, a mutual fund company whose fund was invested entirely in Government of Canada bonds but they were to use this payable-through-draft system using a bank. The bank could issue 100 cheques in a day as opposed to having to establish a single account for every mutual fund holder. Would there be a risk to the payment system in that type of situation?
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Mr. Peters: It's not just the risk to the payment system. Again, it depends on how the thing... It wasn't our intention to make a...
What we were saying to the users of the payable-through-drafts really was this. We were considering changes to that particular system. You're on notice that we're looking at that particular one. I think it was useful to give them an advisory and put them on notice that those changes were there.
Payable-through-drafts goes back a long way. I won't bore the whole committee with my banking experience of thirty or forty years ago -
The Chairman: One of the most exciting careers we've ever witnessed in our lives, sir.
Mr. Peters: - but it is a question. Where they become part of the payment system for major payments or things like that they could become a question, because they are not regulated entities and they are part of the payment system in being an unregulated entity in the payment system. You do get questions of security of payment, or certainty of payment, and those issues do crop up.
So I would hope the payment system advisory committee would look at that particular question and see if there is a problem there. If there is, we would have to make some changes. But I wouldn't say now that changes are necessarily needed.
The Chairman: Thank you.
One item that was not mentioned in your white paper but that has come to the attention of several members of this committee, if not the whole committee, is the problem raised by the Canadian Institute of Chartered Accountants, the problem of joint and several liability. Let me put it as succinctly as I can.
If accountants for a major financial institution render an audited report and comment on the report and it turns out to be wrong, maybe it's only 1% the fault of the accountants, maybe it's 99% the fault of management, who gave them the wrong information on which to rely. Nevertheless, where a loss occurs, the entire loss can be attributed to the CA firm. Often the directors or management have long since disappeared into the woodwork and can't be found or don't have very deep pockets. When you have a large accounting firm based in Canada, all of its members or partners worldwide are liable for that loss, even though it was maybe only 1% their fault. They have unlimited liability.
They have suggested this makes it very difficult for accountants to want to audit large financial institutions, particularly in difficult times, when there may be bankruptcies. They have suggested that in other countries these provisions for joint and several liability do not apply and the unlimited liability of partners does not necessarily apply.
I don't know whether you've given any consideration to this, but since it has come to our attention, perhaps it is something we will have to report on.
Mr. Peters: It's a difficult question, and I recognize the problem. I think we did mention in our section on corporate governance that a number of these questions are being looked at by other groups, and I think that is more appropriately done there, because it's not just a question of financial institutions. You can be auditing Inco or any company, and there can indeed be liabilities for law firms as well. That's another question. I think it's much more appropriate to be dealt with where the general concerns are looked at, not just the particular concerns of financial institutions. We have a very sound financial system in Canada, where I'm sure the auditing firms would not come under any liability, especially with the large...
The Chairman: I think that's true since you took over, Minister.
[Translation]
Are there any other questions?
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[English]
I then conclude by thanking you, Minister. Thank you, Ms Doyon, Mr. Swedlove andMr. Hamilton.
We're entering into a very important series of consultations as the finance committee of the House of Commons. I'm not sure Canadians realize that our financial institutions are one of our largest and most important industries, employing over 500,000 Canadians, being a major exporter from Canada, and being the face of Canada in just about every other country in the world.
We have a very difficult role balancing the somewhat schizophrenic nature of these institutions. After all, they are granted by governments, monopolies, to do certain things such as sell certain products or take deposits from the public. But their concomitant responsibility is to serve consumers, depositors, borrowers, small business and big business. In weighing the need of this magnificent Canadian industrial sector to expand, we as legislators also have to take into consideration the needs of the people who use these institutions.
We will look forward to receiving representations from the public, from affected persons and persons who have an interest in these critical issues. If you do, we urge you to phone, fax or write our clerk here in Ottawa so that we can take your views into consideration.
Let me mention in conclusion, Minister, the process you have followed for Bill C-100 and Bill C-15 whereby you issued proposals, had public hearings through our committee and others, listened to the public and then went back to the drawing table. Together we worked at trying to make that legislation as good and solid as we could. It was a collective effort, with no heels dug in and no vested interests other than having the best law we could.
I commend you for that process because I think it has set a new standard for collaboration with the private sector, with consumers and with Parliament and the government. That is the process you have adopted in this white paper, and I look forward to working under this type of process you have established. I hope we can live up to your expectations. We will sure try. Thank you very much.
We will adjourn to the call of the chair.