EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, October 1, 1996

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[English]

The Chairman: Order, please.

From the Canadian Bankers Association we have: Gordon Feeney, the chairman of the executive council; Ray Protti, the president and chief executive officer; Doug Melville, the director of commercial and regulatory affairs; and, David Phillips, the vice-president of general counsel and secretary.

When you met with us two weeks ago at the start of our hearings you very kindly agreed you would be good enough to come back. We know you've had a very busy day. You've been before the Senate.

This is our last day of hearings.

Many issues have arisen since you appeared before us. We felt, first of all, that you might want the opportunity to respond to any of the particular charges levelled against the banks. I'm sure you would, and we think it only fair and proper that you have this right.

In much of the discussion that went on when you were not there, we felt totally hamstrung because you were not there to defend yourselves. That probably was not a proper forum in which to deal with these issues.

Secondly, what we would like to do is go through each of the recommendations in the white paper, or a vast majority of them anyway, where questions were raised on specifics and get your views on what you would like to see happen.

Mr. Feeney, if there are any general remarks or responses to charges made or whatever you'd like to address, we'd be very happy to hear those first.

Mr. Gordon Feeney (Chairman, Executive Council, Canadian Bankers Association): Thank you, Mr. Chairman, for the opportunity to be back with you.

You've heard a great deal of testimony from various stakeholders over the past couple of weeks, and we welcome the opportunity to provide some further views in response to the issues raised.

We have responded by letter to several questions posed to us during our testimony, and we'd be pleased to elaborate on any of those and other issues here this afternoon.

I'd like to make a few brief comments about those issues clearly outstanding from the testimony of the last couple of weeks. First, the issue of foreign bank branching is one you've specifically indicated you wished to hear our views on. We understood the government did not intend to address structural matters in this round of legislative revisions. Our industry was therefore silent on this point in our submission. But given that your committee is apparently here to proceed with the matter of foreign bank branching in order to increase competition in the wholesale market, we're pleased to offer our views.

The CBA supports foreign bank branching. We view this issue in much the same way as we view insurance distribution, auto leasing and the sale of annuities. Each offers an opportunity to increase competition in the Canadian marketplace for the benefit of consumers.

The committee should note what is meant by foreign bank branching and the implications for the Canadian consumer. Foreign bank branching will not mean more branches on street corners across Canada or more lending to consumers or small business. The foreign bank presence through direct branching will concentrate on the larger business lending activity. They will basically be wholesale banks.

Consumer banking, as is the case in the U.S., should continue to be conducted through a subsidiary where deposit insurance coverage under CDIC is available.

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Mr. Chairman, you asked us in our previous testimony about the access Canadian banks have to other jurisdictions. I wish to point out that the U.S. bank subsidiaries operating in Canada are able to compete coast to coast, something that is still denied to Canadian banks operating in the U.S., and indeed domestic U.S. banks, by the U.S. interstate banking rules.

The opening up of the U.S. market to national competition is a matter specifically incorporated into the NAFTA agreement under trade and financial services in article 1403.

If the committee is interested in examining structural changes that would increase competition for the benefit of Canadian consumers, we reiterate our view that there are other areas offering tremendous potential.

Given your interest in increasing competition in Canada by relaxing the restriction on foreign banks, the committee should note greater competition in the auto leasing market would introduce Canadian competition to a market currently dominated by U.S. multinationals and would improve disclosure practices currently imposed on Canadian consumers.

Greater competition in insurance distribution would lead to greater choice for consumers, more convenience, greater access for currently under-served markets, more innovation and lower distribution costs.

Greater competition in the sale of annuities would enable Canada's seniors to explore the full range of retirement financing options with the bank or trust company they've come to know and trust, therefore offering the choice and convenience available to seniors elsewhere. Arbitrarily forcing senior citizens to change their financial services provider when they turn 69 because of restrictive competition does not serve consumers' interests.

We feel all these areas offer the possibility of increased competition that will benefit Canada's consumers. We believe we can be competitive. We want the right to compete, and we seek your support in making the appropriate legislative changes.

Tied selling is another consumer issue that has been raised in testimony before this committee in the recent weeks. We agree with Minister Peters' statement in his testimony on the white paper that there is no evidence of any tied selling problem. Officials from the federal Competition Bureau echoed the same view in previous parliamentary testimony.

There has been some confusion evident between the cross-selling of products and services and anti-competitive tied selling, which is amply covered under the Competition Act. We feel the existing legislation, coupled with a highly competitive marketplace, provides solid protection for consumers in this particular area.

Several issues were raised with respect to privacy over the past two weeks. We reiterate our view that our industry has taken a leading role in self-regulation of privacy matters and that the recently revised CBA code, based on the Canadian Standards Association privacy code, will ensure Canadian consumers' privacy is appropriately protected.

The issue of concentration and competition was again raised by witnesses before your committee. As the government noted in the white paper, there is no concrete evidence suggesting the current level of concentration in the financial sector has had a negative impact on the state of competition. In fact, the reality of the Canadian marketplace is characterized by varying levels of concentration in various areas of activity and strong competition in almost every sector of financial activity.

Canada's four largest banks share 48% of total domestic financial institution assets. By this measure, banks compare favourably with other sectors in market share. The four largest life insurers, for example, control 52% of the total life insurance assets. The top three oil companies and automobile manufacturers control 60% of their respective markets.

Comparing bank size to the Canadian economy as a whole also provides an interesting result. Total assets for the six largest banks in Canada relative to gross domestic product is well below the average of industrialized countries such as Switzerland, the U.K. and France.

You've been inundated with figures about concentration or the lack of concentration. Surely the real issue here is that concentration is a concern only to the extent that it impacts on competition and the benefits of competition for consumers.

The Canadian financial services marketplace is very competitive. Canada's 55 chartered banks compete with 40 trust companies, 2,500 credit unions and caisses populaires, 150 life insurance companies and a large number of other financial services providers such as General Electric Capital Corporation, Ford Credit Canada Limited, AT&T Capital Canada and Newcourt Credit Group, among others.

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The high level of competition in the Canadian financial services market means better value for consumers. Lending rates and service fees in Canada are highly competitive. A study of comparable services offered by U.S. and Canadian banks found that, on average, U.S. banks charge 57% more for similar services.

Mr. Chairman, that concludes our comments and responses to some of the major issues that have been put on the table over the last couple of weeks. We look forward to answering your questions and discussing these matters further.

The Chairman: Thank you very much, Mr. Feeney.

Members, there are two ways in which we can proceed, so I'm in your hands. One is to deal with all of the suggestions for changes to the different provisions in the white paper, as made to us by the various witnesses. So one possibility would be to start with chapter 2, which deals with the privacy safeguards, and go right through it. There are about 15 to 17 such issues raised in the white paper. We could just indicate very briefly what the other witnesses suggested and then see if the banks and the CBA have any objections. The other possibility is to just open it up to questions. We'll then try to make sure that we've hit every area after all the individual questions are over and done with. So I leave it up to you as to how we proceed.

Mrs. Brushett (Cumberland - Colchester): Mr. Chair, we don't have a copy of the white paper with us at this end at this time. Is there one available so that we can follow along?

The Chairman: We have copies of the white paper available for you.

Mr. Grubel (Capilano - Howe Sound): I would prefer just ordinary questions. Some of the issues raised in that white paper never came up for discussion, and it would therefore sort of be a pedantic procedure. But maybe somebody could check whether we have hit the most important ones.

The Chairman: There are a number of issues that are not raised in the white paper - joint and several liability for accountants; what the task force would actually be looking into; the advisory committee on the payments system and some suggestions on that; and the costs that are borne by OSFI at present. Those are the ones that I've been able to come up with. I think the rest of the issues that we heard on from witnesses involved those areas under consumer protection, of which there are five; the regulatory burden, of which there were five; and the fine-tuning suggestions, of which there were four.

[Translation]

Mr. Bélisle.

Mr. Bélisle (La Prairie): I am going to let Mr Rocheleau have the floor first and then I will speak after the second series of witnesses.

Mr. Rocheleau (Trois-Rivières): We prefer the traditional method, where the opposition begins, then -

The Chairman: You can choose; we can follow the usual procedure or I could lead the discussion with reference to some 20 specific questions raised in the white paper.

Mr. Rocheleau: I would like to ask a few questions dealing primarily with consumer protection.

The Chairman: It is up to you to decide.

Mr. Rocheleau: I find it deplorable, since it is contrary to the spirit of the Official Languages Act, that an association as important as the Canadian Bankers Association does not have more respect for the spirit of the law and did not have the tact to submit a document to us in French, one of Canada's two official languages.

The Chairman: You are right on that point. But perhaps it is also our fault since we asked them to appear here on very short notice. As Chairman, I am responsible.

Mr. Raymond J. Protti (President and Chief Executive Officer, Canadian Bankers Association): It's also my fault. You are quite right, Mr Rocheleau. It is a mistake on our part, and it will not happen again.

Mr. Rocheleau: Thank you.

Your testimony centres on the fact that you have a deep faith in the laws of the marketplace and competition. However, when we take a closer look at the typical relations between the average citizen and the banking system... Would it not be possible to show a little more sensitivity towards the consumer, towards the citizen who works in other areas? Who works for a hospital, a steelworks, the federal government or a fish plant? He has to deal with a banker. Would it not be possible to take a totally compassionate approach and make it so that any attempt at an abuse of power - and I use the expression advisedly - that a banker might be guilty of would be prevented by a law protecting the weaker party?

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This does not, however, seem to be the type of sentiment that inspires you. I would like to know how you can, morally speaking, accept this obvious inequality between the two parties.

Mr. Protti: Thank you for your question. Allow me, please, to answer you in English, because I do not know enough technical vocabulary to do it in French.

[English]

We believe we have taken some very significant steps to improve the relationships between our banks and all our customers in the last few years. We have over 8,000 branches, millions of customers, and 175,000 employees. We believe we've put a remarkable degree of stress and emphasis on improving the relationship.

Are we perfect? No, we're not. Is there more we can and need to do with respect to the training and education of all our staffs? Absolutely, and we're committed to doing it. We have taken some very important steps.

One important issue has always been where customers can go if they do have a complaint. If a customer does have a problem with a bank, does that customer have some sort of dispute resolution mechanism available to him or her? Every chartered bank in this country now has established an ombudsman precisely for that purpose. In addition to that, prompted very much by members of Parliament, we've put in place a national ombudsman service. If an individual goes to a bank ombudsman and is not satisfied with what he or she has heard there, there is an appeal mechanism above and beyond that, and that is the national ombudsman.

The other very significant change and development is, of course, the privacy code that the banks have all signed onto. We believe this is a leader in terms of the financial services industry. We believe it's the best single code that exists. We believe it meets all of the standards of the CSA for a privacy code, and we believe it is a very important innovation in terms of improving customer relations.

[Translation]

Mr. Rocheleau: When we talk about these mechanisms, whether it is a code of ethics or an ombudsman's position, these are all internal measures that do not have anything to do with a legal framework that would regulate relations between consumers and bankers. In some areas, therefore, we would like to see a legal framework for relations between consumers and bankers. We must realize, Mr Chairman, that not all Canadians are able to deal with a banker competently. We have to recall that 30 per cent of Canadians do not know how to read or write. They nevertheless need money. So it is quite obvious that the legislator's role is to protect the weaker ones in society.

[English]

Mr. Protti: If I could, Mr. Chairman, I'd like to make one correction.

The national ombudsman service is not part of the internal procedure. The banks have their own internal ombudsmen, who are internal to the bank process. But there is an alternative available, and it is outside of the banking process, along with a separate avenue through which people can appeal.

We firmly believe that self-regulation is the best route to go. We note the government's intention in the white paper with respect to the collection and retention of information. We're comfortable with that, but we believe we have the single best code going in the financial services sector. We believe we should have a chance to make sure it works, and works effectively.

[Translation]

Mr. Rocheleau: One last question, Mr Chairman. We know how bankers like to spread their tentacles. We have seen this in the securities offices. We have also seen the aspirations of some in the area of automobile leasing.

Could we be given the assurance that the bankers will not come back to try and influence the legal framework, enabling them possibly to acquire fleets of vehicles, to the detriment of automobile dealers? Where are you in this regard and what sort of commitment could you make to reassure these people?

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[English]

Mr. Protti: Mr. Chairman, I believe I've understood the question, but if I haven't, please correct me.

The government has chosen to put off some important structural issues, which you have raised too, very important strategic questions associated with the distribution of powers between banks and other financial institutions in this country. It has instead created a task force on the future of the financial services sector. We anticipate that shortly the government will be announcing the terms of reference for that task force. Given that it is on the future of the financial services sector, we anticipate that the terms of reference will be comprehensive and all interested parties, and in particular Canadian consumers, will have an opportunity to voice to the task force their views on the nature of the financial services sector that we should have in this country over the course of the next fifteen to twenty years.

I think that is going to be a very comprehensive assessment, because what we're dealing with here is a strategic industry of enormous significance to Canadians in all walks of life and to the Canadian economy. I expect we'll deal with issues such as what sort of regulatory process should be put in place for the future. Indeed, should we continue to regulate on the basis of institutions? In the future, should we regulate on the basis of functions or products?

I expect the task force will look very seriously at the issues of competition and concentration, something we would very much welcome, because there's a bewildering array of statistics and comment. One solid analytical piece on this would be enormously helpful to the public debate.

I expect the task force will look at issues of taxation. Should a variety of different regimes be in place? Who, under what circumstances, should be subject to capital taxes? Should there be a capital tax regime?

I also think it will look at issues such as the structure of financial institutions in this country. What would be the best mechanism by which organizations could structure themselves?

I do expect it will look at the issue of the distribution of powers in this country. Who ought to offer what financial products, under what circumstances?

That's my sense of what the government will be asking the task force to do. We, of course, will be making contributions to that debate, as I know all the other players will be as well.

[Translation]

The Chairman: Thank you, Mr Rocheleau.

[English]

Mr. Grubel, please.

Mr. Grubel: Thank you, Mr. Chairman.

I have questions in two areas. One of them concerns testimony we have received from several sources. They are foreign-owned, non-bank financial intermediaries, companies that essentially are providing services in Canada for which there is a market niche. They are successful. The demand is there. They are supplying this demand.

For people who have not been present, allow me to give one example: a company that takes on high-risk lending to people who have nothing but troubles getting it elsewhere. They charge high interest rates, but they get their money from commercial borrowing, sometimes from banks, and then lend at higher rates. There's a demand for that, and it seems to work well.

In the white paper there's a proposal that companies who engage in this type of business will be required, if they are owned by foreign banks, to establish a bank branch in Canada. We heard that this is an extremely onerous requirement, one that will put some of them out of business, I think to the detriment of consumers. Secondly, it seems to me inappropriate that this type of business should be subjected to the type of regulation reserved for banks, because they are not engaging in the banking activity that is being regulated, namely deposit taking and the provision of chequing accounts, which add to the money supply and for which, for reasons of fiscal stability, we need those regulations.

My question to you is this. Is your association actively backing this? Have you been involved in designing that part of the white paper? Generally, what is your view on this subject?

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Mr. Feeney: I think I'll break it into two different types of companies. First, let's deal with the foreign banks that wish to have branching extended into Canada. I think that's very separate.

Mr. Grubel: That's completely separate. That's not what I'm talking about.

Mr. Feeney: Okay. In terms of what are termed ``near-banks'' for the purpose of this discussion, our view is that if a firm is in the business of banking, it should be regulated, banking being an intermediary lending money to Canadian businesses and consumers. This is to protect the consumer, number one, which is the most important part of anything in the white paper or any of the regulation. An unregulated lender to Canadian consumers is not in the interest of Canadian consumers.

Mr. Grubel: Could you elaborate on that? I don't understand that.

Mr. Feeney: Our view is very simple. If banks, who have been in the business of lending to Canadians for 125 or 130 years, need regulation, we would be of the view that foreign-owned companies coming in to do the same business should also be regulated.

Mr. Grubel: I beg your pardon. I'm talking about the consumer.

Mr. Feeney: Yes.

Mr. Grubel: You speak very highly of the consumer.

Mr. Feeney: Yes.

Mr. Grubel: If I have just borrowed from one of those companies and they go bankrupt, why do I care?

Mr. Feeney: Well, you don't.

Mr. Grubel: Who cares?

Mr. Feeney: I won't get into the high interest rates that you referred to. If -

Mr. Grubel: Mr. Feeney, are you talking about the consumer? I'd like an answer to my question about the consumer.

Mr. Feeney: If the basic premise was only to be able to borrow money, at very high interest rates as you refer, on the assumption that they might go broke and you wouldn't have to pay them back, I suppose.... How can I say who would care? It certainly wouldn't be the person who owed them the money. But I think it's a much more complex subject than just that.

Mr. Grubel: I'm listening. Where does the consumer come in?

Mr. Feeney: The consumer comes in because obviously from what you've said they're paying exorbitant interest rates.

Mr. Grubel: No, they're doing this voluntarily. They can't get money elsewhere.

Since when are the banks in the business of preventing people from borrowing wherever they can?

Mr. Feeney: We're not.

Mr. Grubel: So you're just protecting them. They get no money from you, they go to these kinds of agencies and they get money, they are prepared to pay this interest, and you say we should have a regulation preventing them from going to the place where they can get money?

Mr. Feeney: No.

Mr. Grubel: I don't understand your argument.

Mr. Feeney: I'm sorry, I wasn't saying we'd prevent them from going there. All I'm saying is companies in the financial services business in this country should be regulated, as they are in every other country.

Mr. Grubel: Where does the consumer come in?

Mr. Feeney: Well, the consumer in this case comes in because, from what you've said, I assume the rates are exorbitantly high. If they wish to pay them, then fine.

Mr. Grubel: They are high. These people wish to pay them. So why do we need regulation protecting them?

Mr. Feeney: I can't argue that you should put in regulation to protect somebody from paying high interest rates.

Mr. Grubel: So this regulation, then, is not in order to protect the consumer. Why are you supporting it?

Mr. Feeney: The regulation we're talking about is of foreign-owned companies, unregulated companies, who are in businesses here quite separate from this very small niche that you seem to be referring to.

We can take leasing, for example. They should be regulated.

Mr. Grubel: Why?

Mr. Feeney: Because with regard to the disclosure in leasing, it's become evident in various documents that this is not well explained to consumers, and we think it should be regulated. But more importantly, we think other financial institutions, Canadian financial institutions, should be allowed in that same business to provide the competition. There is no competition.

Mr. Grubel: I would like to talk about those people - there are three of them here - who are facing the regulation that you support in the name of the protection of the consumer.

You have not explained to me even in leasing how such regulation, forcing them to open a bank in Canada, serves the consumer if they are driven out of the market after they have been successful commercially and have been able to find lenders and borrowers without coercion.

Mr. Feeney: I think we're moving around now to the leasing issue as well.

Mr. Grubel: I don't wish to talk about the leasing. I wish to talk about a regulation that says a company owned by an American bank that comes in here, finds money, lends out money to risks and people who would not get money otherwise, would be forced out of business because of a regulation that you say protects the consumer. I don't understand that reasoning. Please explain it to me.

Mr. Feeney: I'm not sure why they would be forced out of business.

Mr. Grubel: It would be because of the costs of having to have a bank, all the costs associated with it. We were given this as testimony. They may have lied to us, but I have the feeling there's an onerous requirement that you can, for example, market MasterCard accounts only if you are a subsidiary of an American bank located in Canada. I do not understand why potential regulation requires this regulation.

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Mr. Protti: Let me try. Can I approach this, Mr. Chairman, from a more generic perspective?

For better or for worse we have built in this country a regulatory system that is not based on product line but is based on institutions. The federal government regulates banks; provinces regulate caisse populaires and the credit union movement. So we don't regulate on a basis of product; we regulate on the basis of institutions.

Historically, what we've done in this country is if you're going to be in the business of banking, you're going to be regulated according to the same principles that have been laid down for the banking community.

Mr. Grubel: Can I follow up?

Mr. Protti: The issue you are raising is a fascinating issue because it raises the very significant question, have we the right regulatory system now in place in this country? We may not.

Mr. Grubel: Well -

Mr. Protti: If I can finish my answer, it may be that what we need in this country is not a regulatory system based on institutions but a regulatory system, if one is required to protect the consumer, based on product or function. If that is the case - this is my last point,Mr. Chairman - what we would be saying is if you're going to allow foreign institutions to be regulated on the basis of product and not as a bank, then we'd like the same thing.

Mr. Grubel: As a student of finance, let me tell you simply that everyone knows that because of the systemic risk associated with bank failure, there is a case for bank regulation. It is based on the fact that the banks are responsible for managing a significant part - 60% or 70% - of the money supply. The money supply is defined as the M1 or M2, namely assets deposited with the banks, which people, consumers, can use as a means of payment.

The financial intermediaries who came here and complained about this regulation quite clearly are not at all engaged in an activity that involves the payment system, that involves M1 and M2, or even M10, because unlike you, they do not get their sources from deposits. That is a monopoly granted to you by the government, and in return for that you accept those kinds of regulations.

The business they're talking about is far removed from whatever I understand was the theory behind the regulation of banks.

Mr. Protti: I'm not suggesting that in the retail banking aspects there be a change in regulation. But if there's a product or function of banking unrelated to the retail banking function that these financial institutions would like to take part in, and they want to set up without the regulatory oversight associated with the retail banking function - and we agree, let's say, it's not a banking function - and we're actively involved in that same area of business, then give us the flexibility to separate out our functional line of business so that we can compete head-on on the same terms and conditions and the same playing field as them, separate from the retail banking function. That's what functional regulation means.

Mr. Grubel: In conclusion, implicitly, you must be a lawyer. You came out saying that we want to have -

The Chairman: Please, don't insult the gentleman.

Mr. Grubel: Yes, I knew I was.

It is all on the basis of, here are rules and regulations and we all want to be treated equally.

But, you see, Mr. Feeney started off with this thing we always hear: we do this for the consumer.

Let's look beyond the regulatory framework. The regulatory framework is also for the consumer, and you have not been able to prove to me that the Canadian public will be better off by forcing out of business successful enterprises that have come in here and have offered services that your institutions have not been able to offer.

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I fully agree with you. I suggested to you when you were here last time that instead of negating the development of future competition, which would benefit the consumer, you should be encouraging, in fact probably suggesting, regulation of this sort. You should be on the offensive, saying you would like to have the opportunity to have subsidiaries that can offer the same kind of business as they do. That's the way in which I would suggest you go, rather than hurting the consumer.

Mr. Feeney: That's precisely what Mr. Protti was trying to say.

Mr. Protti: I don't say it as effectively.

Mr. Feeney: You've covered it off -

Mr. Grubel: I actually have a lot of time to think about it.

The Chairman: You've just been hired by the CBA.

Mr. Feeney: The functional regulation is really what you're talking about, and we agree. If it's functional regulation, then let it apply to all the players. We agree with you.

The Chairman: Would you mind if I piggyback, Mr. Grubel?

Mr. Grubel: Thank you for your indulgence.

The Chairman: Thank you very much. This is a critical issue that we need you to help us with.

We had four witnesses before us. We were in a sort of a non-bank, near-bank distinction: Norwest, foreign, doing consumer loans up to about $5,000, no other activities in Canada - that's not banking.

I think you mentioned that this was banking, but it's certainly not regulated as such today, nor are consumer loans. Household Financial is not regulated as a near-bank, is it?

Mr. Feeney: No, not as a bank.

The Chairman: No, but Norwest would be required to be so because it is owned by a foreign bank.

We have to deal with this distinction. Are you saying that we should regulate Household Financial because it is performing some type of quasi-banking or financial function, or are you saying we shouldn't regulate it, therefore Norwest, just because it's owned by a foreign bank, should be in the same position?

Mr. Protti: I think Household Financial is governed under the Trust and Loan Companies Act. It's regulated as a trust company.

The Chairman: Is that true?

If it weren't owned by a trust company, there are other consumer financial companies that are not regulated as banks that are offering loans to consumers, if HFC isn't one of them.

Are you suggesting that to have symmetry under the system we should bring HFC under the Bank Act and regulate it as a bank or a near-bank?

Mr. Feeney: No.

The Chairman: Okay. Are you saying that Norwest, because it is owned by a foreign bank, should be brought under the Bank Act?

Mr. Feeney: We're basically saying that a subsidiary of a foreign bank should be either regulated as an institution or as a functional provider. If in Canada we decided to change the regulatory environment so that we did regulate services rather than institutions, then many Canadian providers would probably want to go under that same regulatory environment. It would seem to be only an even, fair thing to do.

The Chairman: I'm not sure I understand what you're suggesting we should do. Our problem is we have to respond to Norwest. We have to respond to Capital One, which wants to come in here - it's owned by a foreign bank - and issue credit cards, that's all, to low-end consumers.

We have to respond to Congress, which is now doing equipment leasing. Because it's owned by a fifth-tier subsidiary in the U.S., it's a bank, and it would now be brought under the Bank Act regime. Do you want that under the Bank Act or not? Do you agree with that provision to bring Congress and their equipment under it?

Do you agree that Congress, because it's doing paper processing and it's owned by a bank, should be brought under the Bank Act? Do you believe that Wells Fargo, which doesn't want to set up a bank here but wants to do small business loans, should be brought under the Bank Act?

Could you respond to each of these different companies? I'll take you through them. Norwest and consumer loans...should it be brought under the Bank Act or not, as the white paper proposes that it will?

Mr. Feeney: We believe that as long as the regulatory environment in this country is by institution, they should be brought under the act.

The Chairman: Simply because they're owned by a foreign bank?

Mr. Feeney: Right.

The Chairman: And Capital One's credit card is the same thing?

Mr. Feeney: Yes.

The Chairman: And Congress should be brought under because it's owned by a fifth-tier bank down the road?

Mr. Feeney: Yes.

The Chairman: And the paper processing should be brought under banking regulation, even though it has nothing to do with banking?

Mr. Feeney: Yes, if they're subsidiaries of foreign banks.

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The Chairman: Okay. Any subsidiary of a foreign bank operating in Canada, regardless of its function, must be brought under the Bank Act.

Mr. Feeney: Under today's regulations.

The Chairman: You support this.

Mr. Feeney: Right.

The Chairman: If we have a foreign bank that owns a school bus company in Nepean, it should be brought under the Bank Act?

Mr. Feeney: No.

The Chairman: I'm sorry, that's just what you said.

Mr. Feeney: No. It's if they're in the business of providing financial services.

The Chairman: But you said the paper processing company should be brought under it too. That's not banking.

Mr. Feeney: I thought you said the leasing of commercial equipment.

The Chairman: No, I said the paper processing company that's owned by Congress should be brought under the Bank Act.

Mr. Feeney: I mean if they're providing financial services.

The Chairman: Any type of financial services.

Mr. Feeney: Any type of financial services through a subsidiary of a U.S. bank, or any foreign bank.

The Chairman: I understand what you're saying.

Mr. Douglas Melville (Director, Commercial and Regulatory Affairs, Canadian Bankers Association): One extra point to be made is that any foreign institution like this that's looking to set up a business in Canada has to make its case to the existing regulator. So the type of business and the business case they put together is going to be evaluated in terms of its service to the Canadian consumer within the ambit of the financial services sector. I think the test you're looking for is already in place.

I think what Mr. Protti and Mr. Feeney have alluded to though is that under that existing structure, those that get approval by the minister to come into Canada should play by the same rules and be regulated in the same way as all other providers of financial services.

The Chairman: Okay. Because Norwest would be doing consumer loans, therefore we should bring Household Financial under it, or any other similar company that may not be owned by a trust company or regulated financial institution?

Mr. Melville: I think you have to look at it on a case-by-case basis. Household Financial is regulated under the Trust and Loan Companies Act.

The Chairman: What about XYZ Commercial Credit, which issues loans in denominations of $100 to consumers on paydays or something?

Mr. Melville: I think the point that's being made here explicitly is that anyone engaged in the business of banking within Canada under the current regulatory regime -

The Chairman: Is making a loan considered banking? I'm trying to get a rationale here. I don't see a consistency in your position. I don't see a consistency in the white paper position. Is there consistency anywhere?

Mr. Grubel: Could you just go on record and tell me what the essence of banking is? What makes your activities different from anybody else's in the country?

Mr. Protti: There's no definition in the Bank Act of banking. A bank is what a bank does. It has evolved over 125 years. It's been, I'm told, an enormously thorny problem, because it is very, very difficult to give you two sentences that say this is what a bank is. A bank is what a bank does. That has been the whole philosophy for 125 years. Why have we got a Bank Act that's now over 500 pages?

The Chairman: Mr. Campbell, on the same point?

Mr. Campbell (St. Paul's): Yes, it's much on the same point.

Mr. Protti, I regret that this sounded a little like something out of Forrest Gump.

Some hon. members: Oh, oh!

Mr. Campbell: All kidding aside, you have touched on something I have been anxious to add to this discussion. I think the situation you're finding yourselves in here is a little unfair, because what you say is exactly the case. There is no definition in the Bank Act of the business of banking.

Mr. Grubel, for his purposes in this debate - quite fairly, it's an interesting question he raises and an interesting discussion - has chosen to say that as long as somebody is doing something in this country and the consumer is prepared to pay for it - I'll assume Mr. Grubel means the consumer has full information and knows what they're getting themselves into and is fully informed, but that's a whole other issue - and as long as that entity offering that loan or that business line does not take deposits, then it should not be regulated as the chartered banks are regulated.

The problem is that the Bank Act, as it is currently structured, doesn't require you to take deposits in order to be engaged in banking business and doing things that banks do. That may be a problem with the structure of the Bank Act. Indeed, some of this may have to - indeed it should - be looked at in the context of the task force that will look at the structure of the whole sector in industry for the years ahead.

But we do have a regime in this country that does not define the business of banking as taking deposits and making consumer loans. I think, in fairness, Mr. Chairman, that this may be a mistaken impression that some of us may have.

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The Chairman: Didn't the Supreme Court of Canada in some early cases involving constitutional issues decide that trust companies were not in the business of banking whereas banks were? They were because of the very fact that they took deposits, which became their property and became a liability on their balance sheets.

Mr. Campbell: I think that's true, Mr. Chairman, but I don't think it changes the point. We do have entities here engaged in activities that chartered banks are engaged in throughout this country. Therefore they find themselves entangled in this regime, which is there for historical reasons. It may not be the right one. It may well be one that will be looked at in the context of the task force, but for the time being we're dealing with the sort of structure I have described, as I understand it. I just wanted to clarify that point.

Mr. Grubel: Mr. Chairman, I would like to make a political remark. I believe that if the banks insist on forcing out of business companies that have come before us - and I take their word for it - that are providing loans for small business and for risky people who are engaging in activity that is likely to lower the interest charge on credit cards, when that gets out it will not help your reputation as an industry serving consumers. As banks, with all the troubles you are having with public relations, when it gets out that you are pushing for the elimination of those industries it will not help your fight for the public minds of Canadians. I don't think the return that is in it for your organizations, for your banks, from getting that through is worth the extra public relations cost. Consider this as political advice.

Mr. Protti: Could I make one comment with respect to one of the interveners, Capital One and its Consumer's Best Card? It's 14.9%, three and a half percentage points higher than the lowest Canadian cards. The annual fee is $40, which is 75% higher than the average Canadian product. They levy a $15 late payment fee and an $18 over-limit fee, and there are no such fees on Canadian credit cards.

Mr. Grubel: I would be assured that Canadians, if this happened, would tell them to go back where they came from. They would not be an expanding business. I don't think you should be afraid of that competition, especially if they are as bad as you make them out to be.

The Chairman: On that point, do we have any regulations now in Canada that would preclude a bank from charging those fees or those rates of interest? If they came under your regime, we could not deal with that ill, which you think is -

Mr. Feeney: No, but as you know, on a fairly regular basis there are inquiries into interest rates on credit cards in Canada. The banks and trust companies and others in the business are brought before a group to defend why they're more than x percentage points above prime or whatever. But the straight answer is no. There is no regulation saying they can't charge those fees.

The Chairman: You see the dilemma we have here. Should we bring a whole bunch of new industries that are not caught by the Bank Act under the net, even though they're not taking deposits and all they're doing is providing so-called financial services to creditors?

Mr. Protti: Can I try one more stab at this? It truly is a dilemma.

The Chairman: It is for us too. I'm not saying it's easy.

Mr. Protti: It's a dilemma for everybody involved in the business. The reason it's a dilemma is that we're seeing such an enormously rapid change in the nature of the financial services business in the course of not just years but in the last few months. We're going to be seeing, Mr. Chairman, a proliferation of these types of institutions across the entire financial services sector. The only caution I would make - and this is why we were so pleased that the task force had been created - is that we're dealing here with nothing less than a fundamental change in the regulatory approach the Government of Canada has historically taken. It may be right to change it, and I want to make -

The Chairman: The white paper proposes change immediately. It looks like this will help the task force.

Mr. Protti: That's what the Government of Canada and you as parliamentarians need to think through. Do we understand enough about the implications of these changes?

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We're saying that it may be that we ought to change the regulatory framework in this country, but please give us the opportunity to change with it as well, because we want to be able to compete successfully against any institution that's prepared to come into this country. We just don't want an unlevel playing field.

But these are big stakes, Mr. Chairman.

The Chairman: Why can't you compete against Capital One?

Mr. Protti: We can, but if they have a different regulatory regime, one that doesn't impose the same degree of costs as ours currently does, then they have an immediate competitive advantage. That's what we're saying.

The Chairman: I guess the trade-off is that you can take deposits and you have deposit insurance to aid and abet that type of fund-raising, whereas they can't. I suspect that they have to go to the market with commercial paper to raise their capital. Is that correct?

Mr. Grubel: I also see a very interesting conflict in what was said. It would be okay for these intermediaries to continue their business if banks had the right to do it on the same terms. That's what you said.

The Chairman: Yes. That's what -

Mr. Grubel: Mr. Feeney said that the reason why we need this regulation of attachment to a bank is in order to protect the consumer. Now, either we have those intermediaries and they're doing a good job or they can't be had because the consumer needs to be protected.

Mr. Feeney: I would suggest that we not go down the road again of the institutional versus functional, but protection of the consumer.... Other matters that have come before the committee have been on privacy and to protect consumers, which is a very important part of this debate being brought to the table by various groups.

The same consumer needs protection of their privacy whether it's one of these companies you're referring to or it's a chartered bank or a trust company. Those same consumer issues are on the table and they need to be protected. That's my only point. Consumer protection is more than lending money and paying it back or not paying it back. It's privacy. It's all the other issues that governments around the world legislate on.

Mr. Grubel: That can be had without forcing these near-banks to open a subsidiary in this country, with all the accompanying costs and regulatory burdens.

The Chairman: Am I right in thinking that the major cost of coming under the Bank Act regime is that you have to have a minimum capital of $10 million?

Mr. Feeney: I don't know if $10 million is the right number.

The Chairman: Is it $10 million?

Mr. Feeney: Yes.

The Chairman: So I guess that's the major barrier to new financial institutions that are near-banks that want to do this type of lending.

Mr. Duhamel.

Mr. Duhamel (St. Boniface): Are there any definitions of banks or banking that might be useful to the debate we've just had?

Secondly, the lending rates and service fees in Canada are highly competitive. A particular study that was coded indicates that for comparable services the U.S. might be charging 57% more.I wonder if we could be given the benefit of that analysis, not necessarily today. Intuitively, it seems to be very high, so I'd like to see how that conclusion was reached.

Mr. Feeney: Absolutely. It was done by a third party about two years ago.

Mr. Duhamel: With respect to privacy, I'd like some comment as to how well we compare with other countries. Are we more or less stringent? I was under the impression that we were very much less.

Finally, according to your paper, on page 4, U.S. bank subsidiaries operating in Canada are able to compete from coast to coast, something that is still denied to Canadian banks operating in the U.S., even though there appear to be provisions under NAFTA article 1403 to do so. Why is that so?

Mr. Feeney: Why is it so that it hasn't happened?

Mr. Duhamel: Yes.

Mr. Feeney: I can't answer that, quite frankly, because it's between two governments, not between banks and the U.S. government. Somebody from Finance might be able to answer that or bring you up to date on it, but I can't answer the NAFTA part of it.

Mr. Duhamel: And the privacy?

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Mr. Protti: I have two comments. One is that not long ago the Government of Canada took our privacy code to the OECD as a leading-edge example of effective self-regulation in the financial services sector.

I haven't done the analysis on the European directive, but I understand - I need to check this and I'll get back to you and the committee - that it leaves a fair amount of discretion to the member states of the European Union with respect to exactly the type of system they will put in place. It leaves the flexibility to the member states. I don't know the specifics inside Europe and I'll get back to you on that.

Mr. Duhamel: The privacy commissioner voiced some real concerns, as you well know, and suggested - assuming I interpreted his remarks correctly - that it was much more demanding in other countries. Perhaps that should be checked out.

Mr. Protti: That's not my sense of it, sir, but I will check it out.

Mr. Duhamel: Thank you.

The Chairman: Mrs. Brushett and then Mr. Schmidt.

Mrs. Brushett: Thank you, Mr. Chairman. I have three points.

I'd like to return to the previous discussion about a company issuing credit cards in this country. It is your belief that they should be regulated like a schedule II bank. Are you suggesting that a ladies' boutique with headquarters in Los Angeles that sells clothes in rural Nova Scotia should be regulated under the Bank Act because they gave me a credit card?

Mr. Feeney: No.

Mrs. Brushett: Wouldn't your theory encompass all such things?

Mr. Feeney: No. We're saying the subsidiaries of banks from any country operating in our environment in Canada should be regulated under the Bank Act.

Mrs. Brushett: There were several that were not subsidiaries. They were near-banks. They weren't even governed by banks.

Mr. Feeney: No.

Mr. Melville: If I may, Mr. Chairman, that particular example of a boutique in a rural community offering that kind of credit for purchase in their establishment is quite different from the type of credit card that is offering you credit to be purchased anywhere within the financial system in Canada. That carries with it all kinds of systemic risks and clearance and settlement aspects that, quite frankly, go beyond -

Mrs. Brushett: If you could see me spend money, you would think those risks were pretty inherent in the boutique -

Some hon. members: Oh, oh!

Mr. Melville: Those risks are to that one institution that has chosen to grant you credit in exchange for purchasing those goods and services at that one institution.

That's how I would distinguish between those two types of things. One carries the risk to you and that one institution. The other carries a systemic risk for the whole structure, which we need to be concerned about.

Mrs. Brushett: My second point concerns the prepayment of -

Go ahead, Jim. Take the floor.

The Chairman: How do you have a systemic risk with a company that is lending up to, say, a $5,000 maximum to a small business or to low-end consumers on a credit card there, as opposed to Mrs. Brushett's credit card issuer?

A voice: It's a personal payment system.

Mr. Feeney: Basically, these cards would be acceptable by merchants across Canada, in all communities. If anything goes wrong at a certain point in the value chain, things collapse. There could be a number of small merchants with outstanding chits looking for funds from a company that just went bankrupt. There's no capital in the country to back up the lending operation and the merchants are left high and dry.

It's not just the consumer -

The Chairman: Then we have the same problem with Eaton's, don't we, because there are Eaton's stores right across the country -

Mr. Feeney: Yes, but it's just their card for their stores and there's no other merchant.

The Chairman: So?

Mr. Feeney: It's the other merchants -

The Chairman: Just a second. Eaton's goes under -

Mr. Feeney: But any credit owing to the Eaton's card is owed to Eaton's. In the case of another card issuer, it could be merchants anywhere in the country with debts owing to them. It's very different from Eaton's.

Eaton's is like the small store in Ecum Secum, Nova Scotia, but a company issuing credit cards for use in the clearing system leaves a debt with various merchants every hour of the day as those cards are used. If the music stops, there are always too few chairs. That's the systemic risk of credit cards.

Mr. Grubel: The systemic risk refers to the collapse of the entire payment system.

Mr. Feeney: No, it just refers to the collapse of any member of any size.

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Mr. Grubel: The reason we brought in regulation is the contamination that took place from banks, bringing down the entire system. You tell me how the entire payments system is going to be endangered in Canada if a subsidiary of an American bank that issues special kinds of credit cards somehow, somewhere along the way, breaks down. Why does the Canadian banking system break down?

Mr. Feeney: It doesn't. The Canadian payments system doesn't.

Mr. Grubel: That's a systemic risk.

Mr. Feeney: No, a systemic risk is at any point when there's no finality of payment. If I'm running a store over here on the corner and I have accepted that company's credit card in payment for goods this morning and they're not there to meet their obligations tomorrow, then as the small business operator on the corner of Goose and Spruce I can't get my money. The person who used the card is gone with my goods.

That's the systemic. It's finality of payment that's very important. It's the merchant.

Mr. Grubel: That is not the definition used in financial classes for the definition of ``systemic risk''. ``Systemic risk'' refers to the breakdown of the entire system. Banks have played an important role in this because of the deposits they have taken. This is not analytically equivalent to somebody who has been extended credit through the credit card going bankrupt.

Mr. Feeney: We can put another term on it, but the practicalities of it are that a small business operator will be out money when that company goes broke.

Mr. Grubel: He will be out money if he has accepted a cheque from a customer and it doesn't clear.

Mr. Feeney: Exactly. In a credit card system, merchants accept these as part of an overall worldwide system. They're just as acceptable as cash is.

The Chairman: Has American Express, which issues plastic in Canada, always been treated as a bank in Canada?

Mr. Feeney: I can't answer whether they have always been treated as a bank. They have a banking licence.

The Chairman: But it should be. It issues a credit card.

Mr. Protti: They have a banking licence.

The Chairman: Which they got in very suspicious circumstances in 1988. Before that they were issuing plastic in Canada without having a bank here, correct? But you're saying you could not support that kind of regime. Anybody issuing plastic or a credit card in Canada for third-party financial services must be brought into the bank regime.

Mr. Feeney: They issued a charge card, which was not a credit card in the normal terms of credit. Each month you had to pay off American Express. There was no credit extension. It was a country club kind of billing.

The Chairman: Does that mean I don't have to pay my Visa? That's great news.

Mr. Feeney: No, we only make money when you don't pay your Visa, on a regular basis.

The Chairman: So you're saying American Express could easily forgo their bank licence, but they would have to be brought under the banking act to have their card here. That's your point.

Mr. Feeney: They have two cards now. They have both a charge card and a credit card. But that's very recent - two years.

The Chairman: Do both have to be regulated under the Bank Act, or just one?

Mr. Feeney: No, the charge card was never regulated.

The Chairman: And it shouldn't have to be. A charge card is very different from a credit card.

Mr. Feeney: Very different from a credit card.

The Chairman: Ms Brushett.

Mrs. Brushett: Could you elaborate on the difference between a charge card and a credit card, so the Canadian people might know the difference?

Mr. Feeney: Yes. If you have an American Express charge card, when you get your bill, you pay it all off, or you're supposed to pay it all off. There's no credit in that contract. It's designed to be paid off.

Ms Brushett: Is MasterCard the same?

Mr. Feeney: No. You want to get one of those American Express ones.

Ms Brushett: How can you use charge cards so lucratively if they are different -

Mr. Feeney: From a credit card?

Ms Brushett: Yes.

Mr. Feeney: The design of that product - and it's a product of some history. That's why they're going into the credit card business as such.

The Chairman: There's still systemic risk, according to your definition. The third party has to be paid off.

Mr. Feeney: No, it's all an individual agreement between the merchant and them.

You have to understand the system. In the credit card system the merchant can be our client, as a Visa customer. If somebody is issuing a Visa or a MasterCard, it's within that system. The American Express card is quite outside of that system. It's a direct relationship between the merchant and American Express, not the merchant and their bank.

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The Chairman: I'm trying to understand this. If a non-regulated Amex issuing a charge card were to go belly up, there'd be people out there who wouldn't get paid?

Mr. Feeney: Right.

The Chairman: Is that what you call systemic risk? Therefore, even if it's a charge card, they should be brought under schedule II bank regulations? That's what you said earlier.

Mr. Feeney: I would say no, but in the case of the credit cards, the customers have a relationship with a bank or a trust company here in Canada and they deposit the stuff there. In the case of the American Express charge card, they send their chits directly to American Express; they don't deposit them in their bank. The relationship is very different.

The Chairman: There's still this risk.

What do you call systemic risk? It was your justification for bringing all of these institutions under the Bank Act.

Mr. Feeney: No, it's very different in that the American Express - I'm not picking on that company or that card - has a relationship strictly with the merchant. For the other credit cards - Visa and MasterCard - the relationship of the merchant is with their bank or trust company, and they deposit those within those banks.

The Chairman: So now the rationale is not systemic risk; the rationale is the relationship.

Mr. Feeney: It's systemic to us because it's within the banking system, within the credit payments system. The other is outside of the payments system.

Mr. Grubel: So the MasterCard that wants to do the same thing is also out of the system.

Mr. Feeney: No, it isn't.

Mr. Grubel: They want to keep it out of the system.

Mr. Feeney: Well, they can't keep it out, because the merchants have a relationship. It's not possible to keep it out. That's why the system works on a worldwide basis.

The Chairman: Capital One is outside the banking system, anyway.

Mr. Grubel: That's what they told us.

Mrs. Chamberlain (Guelph - Wellington): But does it not go back to the chairman's point that you have to deposit? One is a depository and the other is not. Isn't that really the crux of the whole issue?

The Chairman: I thought I knew so much about our financial services sector until we started these hearings.

Mrs. Brushett, continue.

Mrs. Brushett: Thank you, Mr. Chairman. As I understood, too, Capital One was outside of the deposits and payments system. Therefore they're outside of the systemic risk, if this is the problem.

Mr. Campbell: Let me ask a question. If Capital One issues a Visa card, where does the merchant take his receipts?

Mr. Feeney: To his or her bank or trust company or credit union. They take it to some financial institution and get their money.

Mr. Campbell: Thank you.

Mr. Grubel: So how can the merchant ever be stuck not getting his money?

Mr. Feeney: Because when we go to collect it, if the company isn't there to back it up -

Mr. Campbell: They shift the risk onto the bank.

Mr. Grubel: What is written on that MasterCard? MasterCard Bank or something? Associated with what? I don't quite understand.

I didn't understand when they were giving us the report on how their business functions, but it seemed to me as if they were borrowing money in the capital market as a unit that they used to finance their operation. They were not drawing on banks.

It sounded a lot to me as though you thought American Express was okay.

Mr. Campbell: Maybe we should invite them back to find out, because we're not clear, obviously, after their testimony. Do they use the system as the medium for payment or not?

Mr. Protti: Can I just make one other process suggestion along with Mr. Campbell? You may wish to have the chairman of the Canadian Payments Association here to take the committee through the mechanics of the payment system and how this particular proposal would relate to it.

He's a very senior official at the Bank of Canada. He speaks on behalf of not the banking community but the 145 players in the Canadian payment system. This is a pretty fundamental point, because the real issue is who's going to get stuck if somebody fails. That's really what's at issue here. I simply make that suggestion because they speak on behalf of all the players.

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The Chairman: Okay.

Mr. Schmidt (Okanagan Centre): I think, Mr. Chairman, it leads right into the question I was going to ask.

What's conspicuous in its absence from this presentation you made was the Canadian payment system. There was no reference made to it at all, except maybe obliquely. I think this ties right into what we're up to, and that's the Canadian payment system. When the Credit Association of Canada was before us, they said they wanted some input at least into the Canadian payment system and the way in which it operates, particularly in terms of direct payments out of an account and so on.

Could you address that question?

Mr. Feeney: When we were here a couple of weeks ago, one of the issues that we put on the table was the matter of access to the Canadian payment system. Basically, we put on the record that we felt access should be opened up to more players. We welcomed the idea of having the government set up a committee that had as many players as possible participating, as long as the government was satisfied with the systemic risk aspect and the finality of payment.

Mr. Schmidt: But right now, have you not just changed the definition of ``systemic risk''?

Mr. Feeney: No.

Mr. Schmidt: It seems to me that you just did. You've now made it an institutional issue, whereas before it was a particular business issue. I think that's a fundamental difference.

Mr. Feeney: It wasn't the intent to change it.

Mr. Schmidt: I can understand systemic risk as you used it now. I have no trouble with that meaning. I did, however, have a lot of trouble understanding the earlier one.

If you have this access to the payment system, what does this do to the differentiation between a deposit-taking institution and a financial services institution that does not take deposits? It seems to me there is a fundamental difference now.

Mr. Feeney: Today, under current rules, it is for deposit-taking institutions.

Mr. Schmidt: Only.

Mr. Feeney: Yes, only.

We're basically saying that these do not necessarily need to be the rules that the government might wish to put around it as long as they're satisfied that there is finality of payment and that the system is secure and stable. One of the things that we have in our banking system in Canada - and in our financial system in general - that others envy is the speed of our payment system and the security of our payment system.

Mr. Schmidt: Yes, although I think there's more to it than that.

Go ahead.

Mr. Protti: I was just wondering if I might try my hand at putting on the table the importance of this payment system issue.

As my chairman has indicated, we're wholeheartedly engaged with all of the players in the industry, with the Bank of Canada and with the Department of Finance, in looking at what we ought to do with the payment system in the future. But if there's one issue that is just enormously vital to Canadians, it's this one, and it's vital for two reasons.

One is that on average, $165 billion a day floats around this country through this system. Right now the system has 145 players. The caisses are involved, the trust companies are involved, all the credit unions are involved, trust movements are involved, and the banks are involved. Just imagine that there are 145 dominoes around this table, 145 players in the payment system. The rules and regulations around that system are designed to make sure that if one of those dominoes falls over, the other 144 dominoes don't fall over at the same time, because then we'd have a massive catastrophe. That's what it would be - nothing less than a massive catastrophe.

The second reason we have this system in place is that if one of the dominoes falls, and we've structured it correctly and the other 144 don't fall down, we know who's going to get stuck for the bill associated with the one that fell down. We do that because all of the institutions that I named and who are involved in this system right now are regulated in one fashion or another. Somebody is keeping an eye on whether or not they're financially sound. Somebody has ensured that they have sufficient liquidity to allow them to play in the system.

This is big stakes stuff, and thank goodness it's under review. It's among the most critical issues that this committee is going to have to deal with at some point, because there are going to be reports coming back.

Mr. Schmidt: Just to review this, you are in favour of opening access to the Canadian payment system?

Mr. Protti: Yes.

Mr. Schmidt: Would you go so far as to say that any financial services institution, provided it's financially solvent, should be able to access the payment system?

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Mr. Protti: If you can answer those two questions I put on the table.... If we had a 146th domino, is that domino in a position to play in the same regulatory and capital and liquidity environment that the other 145 play in? What's at issue here is whether everything is going to fall down and who's going to be stuck with the bill.

Mr. Feeney: But the short answer is yes, given rules around prudential issues so that all players follow the same rules. We've always been portrayed as wanting to keep a closed shop and we're trying to dispel that notion.

Mr. Schmidt: You certainly have been portrayed that way. I think you have closed the shop too, whatever the reasons. My question now is how you would actually determine whether an aspirant to participate was in a position to play.

Mr. Protti: That's what the seasoned officials in the Bank of Canada and the Department of Finance are going to be struggling with over the next several months. If you want a department store to be a direct player in the system, what should the rules be for a department store? Should they be any different from what they are for the current 145? I don't have the answer to that question yet, but that's very much at the heart of the discussion.

Mr. Schmidt: I thought that being in the banking business as you are, being part of the big system that's operating now, you would have some indication of the point at which this thing begins to break down and at what time it functions smoothly. Surely you're not exactly unaware.

Mr. Feeney: The current rules of the game include those deposit-taking institutions that have deposit insurance under CDIC. That's the umbrella that regulators have seen proper to put around it at this stage. If there's another umbrella and other rules that provide everybody with a secure feeling, then they may change the CDIC requirement. But today those are the rules. They're not rules written by banks. They're rules we have to play by. There are 145 members. The chairman of the CPA is not a banker in the sense of chartered banks in Canada, and the majority of the board members are not from Canadian chartered banks.

So the framework is there. The Canadian Payments Association has been up and running for ten or twelve years, if not more. It may be twenty by now. Many of the gaps and pitfalls are known and it's just a matter of regulating around them. We are in favour of opening it up.

The Chairman: I'd like to follow up on that. You said you would be prepared to open it up, and the criterion you would impose is that there be no way the bankruptcy of that new entrant to the payment system could cause any type of systemic problem or risk. I think that's basically what you said.

Mr. Protti: I'm saying that we've built in this country an enormously stable and secure system.

The Chairman: Right, and you want to preserve it.

Mr. Protti: And we will. I think all Canadians are interested -

The Chairman: Of course, but I think the criterion you said was that you would want to make absolutely sure that the bankruptcy of any new entrant could not cause any of the other dominoes to fall.

Mr. Protti: Right.

The Chairman: If that was the only criterion you were imposing - and you might want to add other criteria - you would be compelled to admit Trimark immediately for its money market funds, which could never go bankrupt unless the Government of Canada went under.

Mr. Protti: The current rules are deposit-taking institutions -

The Chairman: I understand that. Trimark has come before us and wants immediate access. They're saying that they impose no risk whatsoever simply because they would do it for money market funds and people could issue cheques on that immediately. If I put $10,000 into a money market fund, there would be absolutely no risk if I wanted to issue cheques on it because it could never go bankrupt. The Government of Canada is the guarantor.

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I'm not sure you want to go that far. I'm just trying to follow through for these other questions, which we have to answer because people come before us. On that criterion we would have to recommend that Trimark be admitted immediately.

Mr. Protti: What I was doing, Mr. Chairman, was explaining the significance of what underlay the work that is going on in a working group on the future of the payments system in this country.I tried to do that by explaining what was at stake. I did it by choosing to underline two very important criteria. Are there others? Absolutely. This system that runs $164 billion a day in and around the country has quite a variety of rules and regulations. So it would be a bit facile for me to say right now, today, that's it, that's fine, it's only the two. There's a lot more to it than that. But those are the two very fundamental ones.

The Chairman: Mr. Protti, when you talked about such high figures going through the Interac system, the payments system, $165 billion, I could see Mr. Grubel was salivating. He can hardly wait to get his hands on that.

Mr. Grubel: Just one-tenth of 1%.

Historically, systems broke down because one agent became bankrupt and then the system was contaminated by fear and people trying to get into liquidity that didn't exist.

There are two very simple rules that, even though I've been out of university for two or three years, I still remember. One of them is that, for example, a company of the sort we have been talking to could be required.... It has never had a float larger than $30 million. That could be established. They would be willing to put security down worth $30 million. It wouldn't cost them anything, because the interest would still go back to them. It's just security the system can get the moment they go bankrupt. They would be willing to do that. It's just that they can't use it for other purposes.

Alternatively, and in supplement, suggestions have been made that all participants in the payments system commit themselves as a matter of contingency that they would make availablex percent of their deposits to prevent a panic. Chances are that if everybody knows people will be bailed out, nobody will take a run. So it will never take place. That is a very simple legal proposition, for all the participants to back the system with their own money, and it would be stable.

I believe the instrument to deal with whatever small problem there is exists, and I'm not even convinced it exists in the case of the company that spoke to us. It could be dealt with by fairly simple institutional innovations. The sort you are proposing, insisting they can operate only if they own and operate a schedule II bank in Canada, to me looks like going after a fly with a shotgun.

Mr. Feeney: No, we're saying as we go forward, and as we mentioned a week or two ago when we were here, that the task force studying the payment system will obviously come out with new rules. It will probably have nothing to do with being a subsidiary of a bank. It's hard to tell what the criteria would be. We're saying get some new criteria and open it to other players so it takes away this cloud of a closed shop. It has been for a long time that we've been through that.

Mr. Grubel: There is a second topic I never got around to. It has to do with somethingMr. Duhamel brought up. I'm very much on the bank side of this case, if you heard the discussion last night.

There is a privacy commissioner here in Canada who believes that if we have regulations that can never be enforced and lead to censure of the person who transgresses these regulations, then they're not worth anything. He believes what we need in Canada is a code of privacy that, if it is violated, can be brought to court and the transgressors can be punished.

You read the testimony from last night. I said before we do this, I'd like to have an economic and social cost-benefit analysis. What is your position on this? Has your organization ever made an estimate of the cost of having such an enforceable privacy code?

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Mr. Feeney: I suspect the answer to that is no, no specific dollar cost, but -

Mr. Grubel: Then why are you opposing it?

Mr. Protti: In the three and a half months I've been there we have not done an estimate of what it would cost to have put in place a regulatory regime of the sort you've just described.

What we've said is that we are leaders in the financial services industry in this country. I believe we are probably world leaders, and I'll follow up on the request that was made.

We want to give our system a chance to work. We would like to have a chance to make sure that what we have put in place in fact responds to any concerns that may exist with respect to privacy positions, and we believe that this is the best approach.

Is a legislated system with an enforcement, audit, and compliance mechanism of the sort you describe costly? Yes.

Do we agree that before governments move in the regulatory field they should in fact provide a cost-benefit analysis? I agree with you entirely.

Mr. Grubel: Again, this is unsolicited advice. I hope you will find the resources to give to people like me ammunition on what the benefits would be, how many complaints there are, how serious these complaints are - these are the benefits that would be created - and on the cost side.

Would you expect that every one of the six big banks would have to hire one more person or ten more persons or a hundred more persons? Would you have to hire lawyers? What else would you have to do in order to satisfy something of the sort that Mr. Phillips was talking about last night? Please provide this for a future finance committee meeting.

Mr. Protti: Yes, sir.

The Chairman: I have on my list a few more members who have not yet spoken. We've been very loose and easy in our approach here, but after that we will have about 20 questions arising from the white paper and ancillary things that have not been touched on.

Maybe we could go to Ms Whelan, followed by Mr. Pillitteri, and maybe you too,Ms Chamberlain, who have been extremely patient today.

Ms Whelan (Essex - Windsor): In your opening statement you talked about how comparing the bank size to the Canadian economy as a whole provides an interesting result. It was the total assets of the six largest banks in Canada relative to the gross domestic product, if it's well below the average of industrialized countries. I'm just not sure what the point of that was and I'm trying to understand it.

Mr. Feeney: It's just that the notion of concentration conjures up the idea that you're very large and you control and you're powerful and disproportionate to the economy. The basic in that particular paragraph in the opening statement is just to point out that the large banks in Canada, in terms relative to the economy, are not, relative to other countries, heavily concentrated. That's the only point of it.

Ms Whelan: But you are more profitable than the banks of Switzerland, the U.K., and France in most cases.

Mr. Feeney: We're more profitable than some banks in some countries, yes.

Ms Whelan: The argument that has often been put forward by the CBA and a number of banks is that you need to be able to compete but you're not large enough. Until yesterday I'd heard only about the numbers and the rankings that put Royal Bank at 49 and CIBC at 61, but when you look at the reality of the profits as a percentage of revenues and assets, you're actually in the top 20.

Mr. Feeney: In asset size in the world, we are, say, 59th in our case, 61st in that of the Commerce; it is that kind of relativity.

But it also depends on the nature of the business you're in. Some of the banks you would compare us to in other jurisdictions wouldn't be in the securities business and the trust business to the degree that some Canadian banks are. So it has a big bearing on the revenue, because they're businesses that up until 1987 were sort of non-traditional in the banking business.

Ms Whelan: The only reason why I'm asking is that you drew this comparison to our attention today. When you compare yourself to the other banks from those very same countries, you are much more profitable.

Mr. Feeney: Yes. We work very hard at being profitable.

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Ms Whelan: I'm not denying that you do.

Mr. Feeney: But that's true.

Ms Whelan: I have another question. Earlier, you raised a point about regulation. Are we regulating the wrong things in the banking industry? Should we be regulating the activities instead of the institutions?

Mr. Feeney: If we had to come down on one side or the other we would say no. It should be the institution. But if the decision were taken.... Our view is that you have to be one or the other. You can't do products for some people and institutions for others. You have to have a level playing field in that regard.

Ms Whelan: In the case of the examples that the chairman referred to earlier, if we were to say that they do not fall under the Bank Act, there's nothing that would stop a Canadian bank from having a subsidiary company doing the same thing.

Mr. Feeney: Yes. And that's what we're suggesting we would want to do.

Ms Whelan: My long-range point is, I guess, does that threaten the very basis of the branch network we have in Canada?

Mr. Feeney: No. I don't think the activities that would fall under that kind of a structure would have any bearing on the network in Canada. I think the notion - from some people and in some reports you read - that the banking network or the bank branches of banks in Canada will disappear over a medium or short term is exaggerated far beyond what it should be. The consumer will decide. As a matter of fact, there are 1,000 more branches of banks in Canada today than there were ten years ago.

I think some of the reports that we all read - and they bother our employees as well - about the branch network disappearing are quite inaccurate, quite frankly.

Ms Whelan: Thank you, Mr. Chairman.

The Chairman: Thank you, Ms Whelan.

Mr. Pillitteri.

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

Earlier on some questions were asked, and of course they did not get an answer. I'm not in any way trying to go to the defence of the banks. They are surely big enough to defend themselves. I am a businessman, and if you take a look at what's happening today and what has happened in the last decade in the business world, it's incredible.

As far as the credit cards go.... I don't know if any of you have been behind the counter when somebody has come up with a wallet and tried to give you half a dozen credit cards in order to see which one goes through. If you're not up to date and if the read-out doesn't come out to you...if that's valid or not valid...you'd be surprised how much you would be stuck with in non-payment on those cards.

As a matter of fact, I think I had three or four different spots, and we had to make sure they were all automated and make sure that we got paid by all of them. We put it through a system. Yes, there's money in that -

In the old system, I got stuck with quite a few of them. A lot of times, as a businessman, when you want a sale, you really don't take a look. You see, we discarded the cheques. All right, we know they were phoney. Now we're discarding the credit cards. We must have some kind of balance as to which of them are valid.

We have to protect the Ma and Pa corner store somehow. If we take away that card - the differential - no longer are we protecting that consumer, because ultimately we're not protecting that business person.

On the other hand, a question was asked about why some parts of the states or some other countries don't comply. I recall that when we entered free trade, the first rule of free trade was that we all should have complied, and of course in Canada we changed a lot of laws to comply with the free trade agreement with the United States. But I can tell you that in different commodities the United States has not complied with the free trade, now NAFTA. It's still in contravention of the free trade agreement and of NAFTA.

My question to you is this - and I don't want to mention what commodity it is -

The Chairman: It's wine.

Some hon. members: Oh, oh!

The Chairman: Probably one of the finest wines you will enjoy, of Canadian origin -

Mr. Pillitteri: And let me tell you, 42 states of the United States are in contravention of GATT and the free trade agreement for that commodity. Have they done anything to fix it? No. Will they do anything to fix it? No. Because they lost their jurisdiction over it at the time of prohibition and they could no longer fix it.

It's the same thing with some banking institutions. It was regulated by the States and they can no longer fix it.

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My question to you is this. I recall years ago we had all kinds of lending institutions here. We've cleaned up some of them through the Bank Act and so on. How many operations do you have as a banking institution outside of Canada the same as schedule II banks or those quasi-banks that are not regulated and don't have to operate under the Bank Act?

Mr. Feeney: In general, for the large banks in Canada, between 30% and 40% of their profits come from outside Canada. They operate in different ways in different countries. In the case of several of the large banks, in the Caribbean we operate as indigenous retail banks, because we were there before we were in Montreal or Toronto, for a hundred years. In other countries you operate as the equivalent to a schedule II bank, where you can do only certain things, up to a certain amount of your capital. Different countries have different rules.

Mr. Pillitteri: The reason why you're operating there is that the profits are higher.

Mr. Feeney: The reason is mainly that you have to go with your Canadian customers - in many cases the business customers - and provide certain services. Also, you have to diversify. You get recessions in one part of the world or another and sometimes it's your offshore that keeps you afloat when you're having a tough time at home, and vice versa. Not everything is great offshore, as was learned a few years ago in Latin America. So it's a case of diversification and following the Canadian customer.

More and more, because of the high ratio of exports by Canadian manufacturers, we have to be in these countries to provide letters of credit and various other credit facilities and payment facilities.

Finally, this is a relatively small market in the world, with 30 million people.

So we're there for several reasons.

Mr. Pillitteri: I would add that you make quite a bit on letters of credit. That's a venue I would like to see studied a bit more.

Mr. Feeney: I knew there was going to be a catch.

The Chairman: Mrs. Chamberlain.

Mrs. Chamberlain: I want to refer you specifically to page 6, for the moment. You talk about tied selling. You feel the existing legislation, coupled with a highly competitive marketplace, provides solid protection for consumers in this area. Obviously cross-selling and tied selling are very similar, and to an untrained eye they could be confused, I think it would be fair to say. Tell me exactly what competition you're referring to here that will prevent tied selling.

Mr. Feeney: You try to keep overview comments condensed.

First I'd like to agree that there is a great difference between cross-selling and tied selling. They're sometimes used interchangeably by people.

In the competition among the banks, the trust companies, other financial institutions, the consumer has many choices. Nobody can be forced to buy anything from any provider, whether it be a clothing store or a bank. There's always another choice down the street. That's what we mean about competition keeping that very sharp. Consumers, or business people, don't have to buy a product from a bank or a trust company or any other financial service provider.

Actually, I believe, as I mentioned, Minister Peters has testified that he has not had any examples of tied selling brought to his attention. The federal Competition Bureau officials are not aware of specific instances of tied selling. So I believe it's somewhat of a red herring when it's put on the table by some groups, because it has just never been an issue.

As a matter of fact, customers themselves create the situation where they come to you, more and more in recent years, and say, look, I want a better price than you've offered me on my loan or my deposit, and they say, I will bring $150,000 to your company, your bank, but I expect a better price than you're giving me for the $50,000 I have now. Well, some people would put on the table that that's tied selling. That isn't. That's just good negotiation by a client. In fact, four or five years ago most deposit-taking financial institutions introduced a product for term deposits that had a step scale. The larger the amount, the higher the interest rate.

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There are many activities that get slightly confused with tied selling. We think the competition out there today really keeps that very clean.

Mrs. Chamberlain: Obviously, the groups that did come, one of them being the independent investment dealers, had a position that if people came for loans they may be asked to bring over their RRSPs. That sort of practice never, ever goes on. Is that right?

Mr. Feeney: No. I think there's a difference between being asked and being refused a loan. We train our people in every bank and every institution, including the good institutions that come before you. Our employees and their employees make their living by trying to be better salespeople, so they will always take an opportunity to ask if there is something else they can sell you. But there has not been any specific evidence provided of people being turned down for credit because they wouldn't move their RRSP over. I think it's an easy thing to talk about, and I've heard the same discussion in debates and panels that I've been on, but there are never any specifics around it.

Mrs. Chamberlain: Again, with your statement here, coupled with a highly competitive marketplace, I still have questions around that, how that fixes the tied selling. I don't understand that.

Mr. Feeney: My basic point there is if I want to borrow $5,000 from you in your bank and you say to me, ``I'll give you the $5,000 but you've got to bring your credit card over or I want your RRSP''.... Unless I see an advantage, rate-wise or some way, I can say to you, ``I don't want it then; I'll go to the supplier next door''. With the competition that's out there to build business today, you've always got another choice. That's what we meant by those words. Nobody is tied to any given financial institution to get their services.

Mrs. Chamberlain: I'd like to ask you a political question, as Mr. Grubel calls it. On page 4 and 5, referring to your structural changes and talking about the entry into auto leasing and insurance - and obviously we're not specifically going into this portion of the paper, but I would ask you this as a general question. First of all, I'd ask you to comment on it. The public perception out there...I have heard things, for instance, from constituents that banks are too big, banks are making record profits, banks already have enough. How would you respond to those types of perceptions? Further down the road, if it were deemed that by entering those markets it would make it better for consumers - because that is our whole focus, consumers, consumers, consumers - how do you deal with the perception of people out there who are very nervous of the banks taking more of the market share?

Mr. Feeney: Not very well over recent years, given the image. That's one thing Mr. Protti and I have made a pact with each other about, that we will try to turn that around. I believe there are about four myths that prevail. One is the -

The Chairman: Mr. Feeney, do you mind if I interrupt? I'm sorry.

Just for the benefit of members, we will be voting at 5:45 p.m., in 15 minutes, on Bill C-44, the Canada Marine Act. It is a motion to refer to committee for study prior to second reading, a very important motion, and Bill C-53, a motion for second reading on the Prisons and Reformatories Act.

[Translation]

I get the feeling that the Bloc québécois would like to vote.

[English]

That means we will not pair and be able to continue our testimony.

Before you finish responding, I'd like to get the feeling of members and witnesses as to whether we should reconvene after the vote. We still have about 20 questions we have to go through that have not been raised. Do you want to do it tonight? You may have commitments. You may be extremely tired. I know you were before the Senate this morning. How do members feel about continuing with the review?

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Mrs. Chamberlain: Could we at least do another hour after the vote and see how we make out?

Mr. Feeney: If you're asking for our view, we would like to continue when you come back, because we know you're anxious to deal with the matter.

The Chairman: Finance can come back, but I suspect most of these issues are being resolved by the CBA.

Mr. Feeney: There may be some issues in the list you gave us that, to save you time, we can respond to in writing under each heading. It's your pleasure. We can do it either way.

[Translation]

The Chairman: Could the Bloc québécois come back after the vote for an hour at the outside?

Mr. Rocheleau: Yes. Would that include the time when our friends from the Department of Finance appear?

The Chairman: Yes. They will answer our questions.

[English]

We'll try to have you out of here within an hour to an hour and a half maximum after we return from the two votes.

Mr. Feeney: Sure.

The Chairman: That's very kind of you. We know you've had a busy day.

Mr. Feeney: That's fine.

The Chairman: Did you want to continue with Mrs. Chamberlain?

Mr. Feeney: I think people want to go and make it to the House. I'll pick it up later.

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The Chairman: Could we come to order again?

I have about 19 questions here. Members, feel free to intervene at any moment. We'll just be very informal. If we get through these, at least from my point of view we will have covered what we have to. Other issues might arise.

The first one is privacy safeguards. I'll be following the order in the book. What information can be passed now from one bank subsidiary to another or from a bank subsidiary to a parent in terms of customer information? Are there any rules in effect at the moment that preclude you from going into a subsidiary and getting consumer information?

Mr. Protti: Absolutely none. You can't pass any.

The Chairman: You can't pass any?

Mr. Feeney: Insurance brokerage -

The Chairman: It's prohibited by law.

Mr. Feeney: Right.

The Chairman: All right.

Number two is cost of financial services. We had suggestions that the Interest Act be amended to provide uniform annual compounding of interest rates to avoid confusion. That came from CREA, the ACEF of Montreal and the Consumers' Association. Is this a problem?

Mr. Melville: From our perspective, yes, it is. We see it restricting our ability to differentiate ourselves competitively as an industry, as well as from other providers of mortgages in the marketplace.

The Chairman: Such as? You would state a half-yearly rate as opposed to a yearly rate?

Mr. Melville: What you want to be able to do is have people choose different options to suit their own needs and have different institutions offer the kinds of mortgages that suit the individualized needs of specific consumers.

What we do agree on with respect to the Interest Act, though, is that every mortgage should clearly state particulars such as whether it can be prepaid, the lender's maximum charge for prepayment, the interest rate calculation, etc.

The Chairman: There is a suggestion that we adopt the U.S. framework of having bold type on the first page showing the actual annual interest rate.

Mr. Melville: We've seen suggestions like that before in the context of plain language in our disclosure documents. That particular description doesn't seem to be that offensive.

The Chairman: It should certainly apply to lenders other than banks as well.

Mr. Melville: Absolutely.

The Chairman: I'm not sure I understand why you shouldn't be required to provide uniform annual compounding of interest rates. I'm not sure exactly what the suggestion was from CREA on this account.

Mr. Melville: Perhaps I should qualify my answer, then, and suggest that what I was responding to was the presumption that they wanted to have things done one particular way in the marketplace in terms of how the interest rate will be compounded, whether it will be monthly, every six months, every year or whatever.

The Chairman: Oh, I see. So you would be against any requirement for uniformity in that area.

Mr. Melville: Yes, that's right.

The Chairman: But you have absolutely no problem disclosing what the effect of your different compounding would be in terms of an annual interest rate.

Mr. Melville: No, that's fine.

The Chairman: Full disclosure.

Thank you. That's two, three and four.

Are there any questions as we go along, members?

Number five is this question of access to banking services for the poor or défavorisés. I know you're consulting with Finance right now on how we deal with this issue.

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Mr. Protti: Yes, Mr. Chairman, we have a variety of discussions under way with both Finance and consumer groups. We have some pilot projects in Montreal and in the Jane-Finch area in Toronto, and we have discussions going with the Ontario and Quebec governments with respect to the whole issue of electronic deposits. We have quite a variety of initiatives under way because we're all searching for a solution to these issues. That's probably going to vary across the country.

The Chairman: That sounds healthy to me.

I wouldn't want to see banks having to compete vigorously in a market that can sustain only one branch. Maybe it's collusion, maybe it's against the Competition Act, but if you have to get together to say that you'll limit yourselves to one branch in an area that can support only one branch -

Mr. Feeney: The marketplace normally takes care of that. These pilot projects and partnerships don't lean that way. They're basically partnerships with a city in terms of how they make the payments, etc. The marketplace in Canada levels out over time.

The Chairman: Some banker told me you need about 3,000 clients for a branch to be viable.

Mr. Feeney: In years past those kinds of figures would be valid. Today, where customers have their accounts and where they really do the transactions.... Sometimes you close a branch and find out that 90% of the customers really don't deal at that branch; they use ATMs, they use phones, they go to another branch. But you're right, it used to be that 3,000 clients was a base.

The Chairman: If it meant that two banks couldn't compete in a community of 3,000, that the community could take only one, then if CIBC could put one in that community and the Bank of Nova Scotia could put one in another community through a nice type of collusion, I think it would be in the interest of consumers.

Mr. Feeney: On occasion there are branches sold because you're going to move out of town.

The Chairman: That's a big concern to us, making sure that -

Mr. Feeney: That there is a bank left.

The Chairman: ...that there are banks left and the poor do have access to these services.

Mr. Feeney: Absolutely.

The Chairman: In spite of what you might think of us, we think your services are pretty important.

Number 6, tied selling - the recommendation is that subsection 416(5) of the Bank Act, which currently prohibits banks from using pressure to force customers to buy insurance, be expanded beyond just insurance to be prohibited from using force to get customers to buy any financial service. That was a suggestion made to us by the independent investment dealers.

Mr. Feeney: I covered that a bit, and I'll ask David to go into a little more detail on it.

Mr. David Phillips (Vice-President, General Counsel and Secretary, Canadian Bankers Association): This proposal is really an example of how a proposed tied-selling restriction really operates as a cross-selling restriction. We are not in support of this in any way.

When you strip it right down, it's saying that no bank shall pressure a customer to purchase any financial service, and the term ``pressure'' is not defined. There's no sense of undueness, and any selling activity, it can argued, involves a degree of pressure, even a minimal degree. This amendment would be quite unworkable for any financial institution.

The issue of tied selling takes you back to the Competition Act and the provision there. One has to inquire, what is the inadequacy of the existing provision? We certainly haven't seen any evidence that the existing provision is inadequate.

The Chairman: If it's good enough to preclude you from using pressure to sell insurance, why wouldn't we expand it to include any type of financial service? The alternative would be that it has no place in the Bank Act and we should repeal it.

Mr. Phillips: The provision as it's drafted right now is inadequate for the very same reason. The problem is inherent in the drafting of the provision. You just magnify it by the change suggested.

The Chairman: Are you suggesting amendments to subsection 416(5) of the Bank Act?

Mr. Phillips: If you're opening up section 416 of the Bank Act, the section that deals with insurance distribution, we have a lot of amendments to suggest.

The Chairman: Let me count the ways.... Okay, thank you.

The Consumers' Association of Canada recommended that the Bank Act be amended to prohibit coercive tied selling, and I'm not sure exactly what they meant by that. I assume your answer to that is the same as the above.

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Mr. Feeney: Same as the above.

The Chairman: Going back to access, particularly for the poor, can a welfare cheque that is deposited in a bank account now be seized by creditors?

Mr. Phillips: I haven't made a survey of this, but most social assistance payments, I believe, cannot be garnisheed, so they would not be seizable.

The Chairman: By the bank itself?

Mr. Phillips: By any creditor. It's usually stipulated in the legislation that sets up the social assistance scheme that the payments are not exigible or cannot be garnisheed.

The Chairman: Are they exigible in any province you know of?

Mr. Phillips: You have to look at the specific legislation that sets up the social assistance scheme.

The Chairman: I haven't examined it. Have you examined it?

Mr. Phillips: You'd have to do quite a considerable survey.

The Chairman: There are only 12 jurisdictions.

Mr. Feeney: The general answer to the question is that they cannot be garnisheed.

The Chairman: And you have no problem with that?

Mr. Feeney: No.

The Chairman: If there is an uncertainty -

Mr. Feeney: No, we have no problem with that.

The Chairman: So we could amend the Bank Act to make sure that welfare cheques cannot be garnisheed.

Mr. Feeney: I don't know if it was in the Bank Act, but they're covered off in the legislation in the provinces. I don't think it's covered in the Bank Act.

Mr. Phillips: Actually, the Bank Act is the place where that would be dealt with. I guess you'd have to decide whether or not that was something that needed to be done in light of whether or not these payments are exigible anyway. This is something we can look into.

The Chairman: That's why we're exploring this with you.

Mr. Phillips: But the problem is - Mr. Protti alluded to this - when it's a direct deposit. You don't know what the source of that funds is. In some cases, it's easy to determine when the payment is a welfare cheque.

I know in the case of Ontario there's no discretion in the bank to make a selection as to which amounts are exigible and which are not. In other words, the rules of the court in Ontario say that the funds in the account have to be returned to the sheriff. There's no authorization for the bank to make an inquiry to investigate a source of funds to decide which amount should be termed exigible.

The Chairman: So in other words, in Ontario, welfare cheques are exigible.

Mr. Phillips: That's the general rule of court. You'd have to look at the -

The Chairman: We've got to do some work in this area. Are we all agreed with the principle that welfare cheques should not be exigible by creditors?

Mrs. Brushett: Agreed.

Mr. Grubel: I have another complication. For example, let's say there was a rule that says it's acceptable for someone who receives welfare to have up to $2,000 in assets in a bank account before they lose eligibility. Isn't there always some asset test? Aren't there asset tests on the eligibility of welfare? Right? Yes, I know there are asset tests.

Say that suddenly $700 comes in. Well, the asset test for eligibility may now be exceeded.

The Chairman: Would the bank have the obligation to report this?

Mr. Grubel: The bank wouldn't know. Money is money. Therefore, the only way to protect that would be to have a special account into which welfare cheques are going so that they don't get contaminated by other deposits. I would see that as a complication, but I'm not sure.

The Chairman: Suppose we were to recommend that the banks pursue ways with the government and consumer groups to protect people on welfare from seizure. Is that fair?

Mr. Protti: That's correct.

The Chairman: Number eight. You do not like the idea, I take it, that we should have a standardized formula for the prepayment of mortgages under five years.

Mr. Melville: You are correct.

The Chairman: Okay.

Mr. Melville: It's the same rationale pretty much as the previous response in terms of when we talked about the value of disclosure. If you legislate how those prepayments will happen, you're limiting the ability of various financial institutions, banks and others, in terms of competing on the very basis of that penalty.

Mrs. Brushett: I think the banks do have the opportunity to compete through their interest rates. Consumers have come before us with prepayment penalties that are very obnoxious and unclearly defined, and they can't negotiate. They want a standardized, spelled-out prepayment formula. You have the opportunity to compete through your interest rates, not through the prepayment penalty.

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Mr. Melville: In fact, the prepayment penalty is there because part of the cost of offering mortgages is the cost to us of matching assets and liabilities effectively. This is the term of the mortgage and the terms of our assets and liabilities in our portfolios.

If you fix that, then what's going to happen? One of the things we were concerned about is the kind of customers that are most likely to make use of mortgage prepayments. If you close off that ability for financial institutions to differentiate themselves competitively, then it shows up somewhere else, for example, in higher interest rates.

Ms Brushett: Yes, I would agree.

Mr. Melville: So you have a problem with those who are able to prepay, perhaps higher-income individuals or those with access to other assets in fact being subsidized by those who do not have the financial resources at their disposal to pay off earlier, because they're paying for that in terms of higher interest rates over the full term of the mortgage. Those were some of the issues that came up for us when we were looking at this suggestion.

The Chairman: Suppose the legislation were to state a maximum that could be charged. Therefore, you could compete on the down side.

Mr. Melville: If you set a maximum, again, you are limiting the ability for people to make those trade-offs in terms of what they want in a mortgage product and what a financial institution is willing and able to offer.

Mr. Pillitteri: On that same note, why can't it be put on the same as when one sees how much he is paying for interest up front. Give him the option on the interest. Give him the option also on the prepayment, and put it in bold letters, the same as you do for interest.

Mr. Melville: In fact, I think that's an excellent suggestion. One of the things we'd suggest to the committee, with a focus on clear disclosure and plain language to the extent possible in our documentation, is that we can probably get to most of the concerns that I think you have.

Mr. Pillitteri: As you have it right now, it's according to the amounts you're paying out. It should be up front.

A voice: We would agree with that.

The Chairman: So if we recommended that you have to work out a very clear statement, which is as clear as anybody could ever imagine, that would indicate right up front what the prepayment provisions will be, that's no problem for you?

Mr. Feeney: No problem.

The Chairman: Good. Do you have a problem right now with not having mortgages that go beyond five years because of the three-month penalty for prepayment? Does this preclude banks from getting into longer-term mortgages -

Mr. Feeney: Basically you'll find - this is not at all institutions, all banks - that there are seven- and ten-year mortgages. Consumers have become very professional in their shopping and very few take long-term mortgages.

We've had a ten-year product in our company for five years, but very few people would take it. What you find is that when people read newspapers and they get the idea that rates are going down, then 30% of your new mortgages are for six-month terms. If they get the idea from people they talk to that rates are going up, then it's three- and five-year mortgages. At any given point, your new mortgages switch like that.

The Chairman: Are you using a lot of mortgages with variable interest rates?

Mr. Feeney: The variable ones are limited. A lot of people got caught in the early 1990s. They want to lock in and make sure they know what the monthly payment is going to be.

Ms Brushett: Back to social welfare payments and the prepayment of mortgages. Looking at your consumers, it has been brought before this committee repeatedly that the lower-class person, who finds things less affordable, is losing access to the banking system. Branches are being closed or moved out of a ``social service'' neighbourhood or a lower-income neighbourhood. Those are being removed, so they have a greater distance to get the services.

Second, if they can get a cheque cashed, you might then know whether you're going to have a garnishee of payment or not, but most of them can't even get an account. The complaints are coming here.

So this a major problem in our Canadian society today that needs to be looked at as you look at a garnishee of any of those payments or accounts -

.1835

Mr. Feeney: That's what has led to these pilots, these discussions, these focus groups, particularly in certain neighbourhoods in the major cities, because of that very issue.

As we mentioned when we were here ten days ago, it is the intention to meet with all levels of government across the country to try to work out this problem, because this causes a problem for the municipality or the city, it causes a major problem for financial institutions, from an image standpoint, from our employees' standpoint.... We're trying to come to grips with access for the less-advantaged in Canada, recognizing that it's a major problem.

Mr. Protti: To add a footnote to that, one of the interesting ideas that's being discussed with provincial governments and some municipalities is using technology to address this issue.

Under some circumstances it may be possible to provide a basic access to an account with an ABM card and permit virtually free access to that account three or four times a month. That depends on sorting out some identification issues that we're working on with the provincial governments and also encouraging people increasingly to use electronic deposit. There are some possibilities there that look quite promising.

That's one idea; we're looking at several others.

The Chairman: The Insurance Brokers Association of Canada has recommended the creation of an insurance harmonization working group to get the federal and provincial laws streamlined and harmonized, ending duplication. Do you see any role for the bankers in this type of process, in getting the regulatory burden off you and Canadians?

Mr. Protti: That was, I think, a very specific proposal that related to the industry. If we can do anything to contribute to the harmonization between federal and provincial responsibilities in this area, we'll be delighted to join in and offer whatever assistance we can.

The Chairman: I accept your offer, and I expect that you'll have Mike Harris harmonizing the GST with the PST very soon. Thank you very much for that undertaking.

Some hon. members: Oh, oh!

The Chairman: Do you want to comment on suggestions made to us by the Co-operative Credit Association, Credit Union Central, and stuff like that for amendments that they want to see dealing with the regulatory burden? For example, the Credit Union Central of Canada is opposed to any proposals in the white paper that prevent the regional councils from being incorporated federally. None of this stuff is -

Mr. Protti: No.

The Chairman: That will save us some time.

You're now working with the department on the self-dealing regime?

Mr. Phillips: That's right.

The Chairman: I assume discussions are being worked out there. The 1992 legislation was a little bit too onerous. So you're generally satisfied -

Mr. Phillips: We're streamlining the process right now. It is to streamline it.

The Chairman: As far as you're concerned you're satisfied with the way that process is going?

Mr. Phillips: Yes.

The Chairman: One of the issues raised was that subsidiaries of federally regulated financial institutions will no longer be considered to be related parties. That will apply to you and will get you out of some difficult situations you're in that were not intended, but will this benefit apply to schedule II banks where we don't regulate the foreigner? Also, should we consider extending these related-party or non-related-party provisions to them as well?

Mr. Phillips: The proposal is that transactions between subsidiaries would not be considered to be related-party transactions. We note the concerns of the schedule II banks. We represent the schedule II banks as well, and we hope that their concerns can be addressed as we work on the details of the proposal.

The Chairman: Okay. Good enough. That's number 12.

Number 13 is the foreign bank entry regime. There are three headings under that. Do we want to revisit this, or do you want to get back to us in writing?

Mr. Feeney: For a couple of particular specifics we will definitely come back.

Mr. Protti: We will come back to you in writing before the end of the week.

The Chairman: Maybe before Thursday?

Mr. Feeney: Before Thursday.

The Chairman: Did you say ``Tomorrow''?

.1840

Some hon. members: Oh, oh!

Mr. Feeney: Well, we'll catch the plane tonight, first.

The Chairman: We got Friday night from you, and then Mr. Feeney said Thursday night, so we thought -

Mr. Feeney: We're flexible.

The Chairman: It's been put to us that we should allow foreign branching and not wait for the task force to report, that we could do it without any harm to the system. If we did that, there would be only one other country in the world that did not allow it, which is Mexico. We should therefore not wait for the white paper; we should allow foreign branching immediately. Would you support that recommendation?

Mr. Feeney: I believe it's one of those issues that, being dealt with without looking at the total regulatory regime, might be out of step. But I wouldn't want to say yes or no. We hadn't thought of that being a possibility or a potential development.

The Chairman: It certainly wasn't when you came before us, because it wasn't in the white paper.

Mr. Feeney: Yes.

Mr. Protti: We have given it some consideration. As my chairman indicated, it was not an issue. The government seemed to have taken all of the structural issues off the table.

The Chairman: You're right.

Mr. Protti: Our bottom line in this is we're prepared to compete. If the government view is that it would be desirable from the public policy perspective to move on this now, we're comfortable - no conditions, and so on. Go.

There are a couple of points we'd make. Number one, the government ought to make sure it understands the regulatory implications. We know some work has been done on this particular issue, but there are some fairly significant regulatory implications. If you can do that now and understand it and are comfortable with the concepts, then fine.

Number two, it clearly has some tax implications.

The Chairman: There would be tax benefits to the -

Mr. Protti: It depends. I'll defer to the experts sitting behind you to explore this in more detail, but I simply raise the fact that the government will have to consider the tax implications.

The Chairman: We were told there would be benefits to the foreign banks.

Mr. Protti: It depends.

The Chairman: Maybe the other way?

Mr. Protti: Maybe; it depends.

I want to be clear. Our bottom line here is that if from a public policy perspective you want to go ahead and move now and you've assessed it carefully, go ahead; we're ready.

I would make one other point, too, because there is sometimes a tiny bit of confusion around what branching means. I want to make sure we're all clear. Branching means wholesale banks. This is really to larger-size customers, and it's in the wholesale market. We're not talking about branching across the country.

The Chairman: I agree with you and I think some of the conditions I've heard bandied about would be that the foreign bank would be regulated as a bank in a very prudent way in its own home jurisdiction, that it might have a certain asset size, and that it probably could not get into retail banking even here.

Mr. Protti: Well -

Mr. Schmidt: That was exactly my question. Does this actually change, then, the schedule II banks?

The Chairman: They could still be schedule II if they wanted.

Mr. Schmidt: Okay.

The Chairman: They would have the option.

Mr. Schmidt: So if they were a schedule II bank, they would not be branching; they would then be a subsidiary.

The Chairman: They could convert into a branch if they wanted to.

Mr. Schmidt: But then they would change their schedule II operation as a retail banking operation into a wholesale operation. That would be -

The Chairman: No. If you're to be in retail banking, the proposal, as I understood it - and it's a very good question - would be that you would have to keep your schedule II bank if you wanted to stay retail.

A voice: What is the justification for this?

Mr. Schmidt: I think we really have to be clear that this changes it from retail to wholesale.

The Chairman: But they would have the option of keeping their retail operation through their subsidiary and use their -

.1845

Mr. Schmidt: The same holding company can have a schedule II bank and a branching operation in Canada.

The Chairman: But it couldn't sell insurance.

Mr. Schmidt: Good try, Mr. Chairman.

The Chairman: I'm not the expert. Your position is that the appropriate regulatory regime should be worked out to protect those people who deserve protection.

Mr. Protti: Exactly. But if the government feels it can do it now -

The Chairman: I can't ask you for a clearer statement.

Mr. Grubel: I want to check another idea I understand the Bank of England has done. As part of the conditions of a branch being opened up in England there is an undertaking or a promise - I don't know how legally binding it can be made - that, say, First City of New York will stand behind its branch in England.

The Chairman: As well.

Mr. Grubel: That is a sort of gentlemen's agreement. I don't know how the jurisdiction can be extended. We heard from some bankers here that they would rather deal with a branch than with a subsidiary, because with those large banks the parent abroad is more likely to bail out the branch than it would be to bail out a subsidiary.

The Chairman: Let's be very clear. If you have a branch, you put in a minimum of $10 million capital and there are no guarantees from the foreign parent. You're saying you would want a subsidiary guarantee.

Mr. Grubel: No, the other way around. If you have a subsidiary, then it has to have a$10 million capital base. But a branch wouldn't have to have that.

The Chairman: No, because it would have the capital of the parent. The branch is in effect the whole company. I agree with you.

So you will get back to us on the question of - and I don't know whether you can do it through the specific applicants who came before us, Norwest, Capital One, Congress and their two operations in Wells Fargo; those near-bank issues.... We won't go back into that.

Mr. Feeney: Yes.

The Chairman: Okay, this is really fast.

Item 16, about joint-venture arrangements. Again, we won't ask you about this. That's not your concern.

Item 17 and other recommendations in the white paper. One is joint and several liability for chartered accountants. Are you familiar with the issue?

Mr. Phillips: We don't really have a position on that as yet. We can consider it and get back with some more -

The Chairman: I'm very inclined to recommend this and go ahead with it. I see absolutely no reason why we shouldn't, unless you people come back with some horrific things it would do to you in dealing with your accountants.

Item 18, the advisory committee on the payments system. Again, we've had a number of people, the Retail Council, Trimark, and the insurance companies, who want immediate access to the payments system before the advisory committee reports back. I guess we covered that to a certain extent. I assume your response is that we had better wait and do a major study before we open it up for anybody.

Mr. Feeney: That would be our basic position, that a process has been put in place, it's to be thorough, it's to be open to debate, and we should let it take its course.

The Chairman: Would you be prepared to go along with a two-phase type of reporting system whereby we could deal with some questions and get them out of the way quickly, such as Trimark's request to have access to money market funds, where there's no question of risk whatsoever?

Mr. Protti: We can't speak on behalf of the Canadian Payments Association, because we're a member but not the only member. Anything we can do to expedite the review of these issues, we'll be there.

The Chairman: Good.

Lastly, the Insurance Bureau of Canada feels it bears a disproportionate cost of OSFI. Its member companies pay about 22% of OSFI's budget while the sector accounts for only 3% of financial assets. Do you think insurance companies are really getting a bad deal out of OSFI and that maybe you'd be prepared to assume a greater portion of the costs?

.1850

Some hon. members: Oh, oh!

Mr. Grubel: Yes or no?

The Chairman: Or would you be prepared to open up the issue and discuss it further?

Mr. Feeney: I can't be sure about the numbers. Whether they're saying of the total cost of OSFI or a certain segment of OSFI, it seems like a high number, but I don't know.

The Chairman: Anyway, you're remaining agnostic on that issue at the moment -

Mr. Feeney: We know the bills are high. That's about as far as I go on that one.

The Chairman: So that we can get through this meeting quickly, will you take this question under advisement and discuss it with the appropriate people?

Mr. Feeney: Yes, we will.

The Chairman: Do members have any other questions?

I must say that when approaching these issues I think we have to bear in mind not only our obligation to our constituents, who are your clients, but also our obligation to you, one of our major industries in the country.

I must say that one of the most difficult issues is dealing with the foreign banks coming in here. You've been very generous in the way you've said we can open up competition. I'm not sure it's good for you. I'm not sure it creates more jobs in Canada, but if the answers we were asked to come up with in this area were simple, we would have arrived at them a long time ago. It's a very difficult balancing act.

I think you will have appreciated from being with us around this table that every member takes this role very seriously and is struggling with what I think we're all struggling with, which is how we can, first of all, take our system of financial services in Canada into the next century in such a way that we can be world leaders and world beaters, and open up to the rest of the world the tremendous expertise that you have brought to the system here in Canada, the stability that our system has enjoyed -

We have a great deal to offer, and you're in the vanguard of this type of important outreach, where we concentrate less on fighting among ourselves for what is really a small pie here in our own country and use what we've learned to really take on the world market. We look forward to working with you in the future. We want to thank you -

Herb.

Mr. Grubel: If it's possible, I just wanted to associate myself with your remarks. I took the information provided by the Royal Bank on the performance of the banking system in Canada that showed the spreads are much better and more favourable to consumers than they are in the United States and that bank charges are not out of line with respect to international competition -

The Chairman: Much lower than real estate.

Mr. Grubel: The rate of return is equal. I'm basically very much in favour of the way the banking system works. I associate myself with Mr. Peterson's remarks with respect to your performance. You have done a great thing for the country, and I just urge you.... On some of the issues, it would be much better for your own public relations if instead of constantly saying no, you had a positive program of cooperation. You have indicated it a couple of times.

I have one last unsolicited suggestion. When my constituents hear about another billion dollar profit for a bank, they just go ballistic, because a billion dollars is really beyond comprehension. But why can't you say your return for bank X was a billion dollars, which comes to 3.5% on invested capital or book value, or whatever the number might be, and remind people that this number is right in the middle of the rate of return earned by all industries.

Whenever there is an announcement, it ought not to be just a billion dollars, but 3.5%, or whatever it might be. I think you would do yourself a great service, and it wouldn't cost very much.

Mr. Feeney: Thank you for those comments. The ironic part of it is that every quarter, when we issue a press release, we do precisely that, but the press only picks up the billion or the whatever -

Mrs. Chamberlain: I can't believe it.

.1855

Mr. Feeney: Return on equity has become a standard thing we've tried to use to compare with other industries, and our industry in other countries. We're going to continue to try to communicate that a billion sounds like a lot, but it seems to sound like more if it's a bank rather than a telephone company. That part I've never been able to figure out, but we'll keep working on communicating.

Mr. Grubel: Maybe you can get away with just putting the rate of return and let them figure out what the billion -

Mr. Feeney: I kind of like that one.

Mr. Grubel: It would be a real test of the media.

The Chairman: You recognize that as members of Parliament our first duty is to our electors, and they are your customers, but you also are our electors because you provide jobs. We will go about that difficult task in working with you in the future, and if we don't get it right this time, we'll work with you to make sure we will get it right.

On behalf of all members, I want to thank you very much for being with us.

Mr. Feeney: Thank you very much. It's our pleasure.

The Chairman: Our next witnesses are Department of Finance officials. Do members have any questions for them?

I have no questions to ask you.

[Translation]

Mr. Rocheleau, could you begin?

Mr. Rocheleau: My questions are of a constitutional nature. This may surprise you. We are of the opinion that, in general, the proposals contained in the white paper are an intrusion by the federal government into an area of exclusive provincial jurisdiction. To give an example, I refer to the insurance and trust companies, which, under the terms of the 1967 Constitution, fall within provincial jurisdiction even if the federal government has the power to incorporate insurance and trust companies.

I would like to have your opinion on this, but I think that, even if the federal government can incorporate insurance companies, it does not have the jurisdiction to regulate their activities, govern their creditworthiness and oversee their operations. This is our position and we would like to know the position of the senior officials of the Department of Finance on the constitutionality of the matter.

[English]

Mr. Bob Hamilton (Assistant Deputy Minister, Financial Sector Division, Department of Finance): Not being a constitutional lawyer, I really can't respond to your question. Unless one of my colleagues here feels that they can provide you with an opinion, I'm afraid that we're not going to be of much help today and we will have to try to get back to you on that. My basic premise is that there was not a constitutional issue here, but I am not a lawyer and I can't respond to you or explain to you the intricacies of it. So I will have to undertake to get back to you on that issue. I'm sorry, but I just can't offer any insight on that question.

The Chairman: Mr. Pillitteri, maybe you could enlighten us on the constitutional implications.

Mr. Pillitteri: Mr. Chairman, by not having the translation on, I did not understand the question.

[Translation]

Mr. Rocheleau: This is a good illustration of the ambiguity of the situation. If we work on the assumption that this is provincial jurisdiction, it is deplorable that the federal government did not have the consideration, the sensitivity or the intelligence to consult the provinces. This is a good illustration of the Canadian federalism we live in.

If we assume that it is a shared jurisdiction, since the federal government has the power to incorporate insurance companies, how can it be claimed that the legislation is being streamlined when actually new rules, new criteria are being added and are going to be applied to undertakings that must already comply with provincial legislation?

.1900

[English]

Mr. Hamilton: The only thing I can say in response to that is -

[Translation]

Mr. Rocheleau: To make quite sure I am understood, I would like to say that the document claims to streamline by avoiding overlapping when in fact new rules are being added in an area that is already regulated by the provinces. How can it be said that this is just a desire to streamline and simplify things?

[English]

Mr. Hamilton: I'd say two things in response to that.

One, as we develop proposals, we are very conscious of talking to our provincial colleagues and making sure there's consultation. In a number of areas in the white paper, or referenced in the white paper, there has been quite a bit of dialogue. Indeed, I point to the area of cost of credit disclosure, where it was very much a joint federal-provincial exercise that led to the agreement recently.

As well, we have pointed to the areas in the paper - whether it's a trust and loan or a credit union, whether we would regulate the provincial centrals or not, and in the area of securities regulation - where we've indicated we're willing to try to reduce federal-provincial overlap and do whatever we can.

Indeed a big section of this paper is designed towards streamlining the regulations: looking for areas where perhaps the regulations are not necessary or are not worth the costs they impose and finding ways to streamline them. So we very much are making an effort to streamline and reduce overlap and duplication where we can.

That doesn't go at your basic question about federal and provincial roles and responsibilities, but we are searching, within the context of the legislative framework we have now, to find areas where we can make improvements and streamline.

[Translation]

Mr. Rocheleau: One last question concerning overlapping and duplication. On page 19 of the English version, the following may be read in the middle of the page:

The government continues to support reducing overlap and duplication in Canadian financial sector regulation, and is prepared to take action to meet this objective.

I would like to know what that means, since that is what we read in the official document. This is not an interpretation. Could that mean that the federal government plans simply to withdraw from this area of jurisdiction, from this field of regulation?

[English]

Mr. Hamilton: I believe the area you're speaking about is in the regulation of credit unions.

Three areas are identified in the paper. One is trust and loan, where we have undertaken to work together with the provinces. The second is the area of securities regulation, where again we are having discussions with the provinces to see what's possible.

In the third area of credit unions, we have a situation now where we regulate federally the Credit Union Central of Canada, the provinces regulate the local credit unions, and at the provincial central level it's both. We regulate in six provinces.

In this paper we've put an offer on the table to say we're willing to discuss with provinces whether we should in fact be regulating those institutions. It's not a proposal in a specific sense, but it is an offer to say ``Here's an area where it may not be necessary for both parties to be there. Can we work together to try to find a way?'' And it might involve us backing out.

There are issues that need to be talked about, but yes, the implication is that if a way could be found, the federal government would be willing to not regulate in those areas of the provincial centrals.

[Translation]

Mr. Rocheleau: Does this mean that all the credit unions, in the mind of the federal government, could now answer to Ottawa? This is very important information for Quebeckers.

[English]

The Chairman: Just before you answer, I was very neglectful and I took you for granted. I failed to introduce all of you to us.

Mr. Bob Hamilton is the assistant deputy minister of the financial sector policy branch;Mr. Frank Swedlove is the director of the finance sector division; Mr. André Brossard is the director of the legislation and precedents division of OSFI; and Annette Gibbons is the policy analyst of the financial sector division in Finance.

I'm sorry.

Mr. Frank Swedlove (Director, Financial Sector Division, Department of Finance): With respect to your question, there are six provinces in which the federal government and the provincial government regulate the provincial centrals. Those six governments are the four western provinces, Ontario and Nova Scotia. In Quebec, for example, the federal government does not regulate any credit union operations now. This proposal suggests that we get out of regulation of those six provincial centrals, so there is no implication that we would get involved in any Quebec credit union activity.

.1905

The Chairman: But the credit unions themselves said they want the federal government to continue to regulate those credit union centrals.

Mr. Swedlove: I believe it was the CUCC that made that statement.

The Chairman: So here we have a case where the credit unions want us to maintain our role and not withdraw from it. Should we listen to them?

Mr. Hamilton: That's been the view of the central for Canada. I think we should listen to them, but we should also talk and make sure everyone understands the issues and the implications. Maybe through further dialogue they would actually change that position or others would be able to convince us of the other side. But we should definitely listen to them because they raise the need to be fully understood.

The Chairman: Is it still an open question, then, as far as you're concerned?

A witness: Yes.

The Chairman: Mr. Grubel.

Mr. Grubel: It's very late, gentlemen, and I'm sorry it took so long, but I would like to hear the department's rationale for suggesting that non-financial intermediaries that are subsidiaries of foreign banks would have to become subsidiaries of branches specifically established in Canada, at these great costs. Explain to me especially how the department sees this as being in the interest of consumers.

Mr. Hamilton: I'll start and my colleagues can add or subtract, as the case may be, from what I say. We are talking about the issue that you were pressing the banks about earlier.

The way we approached this in coming up with the changes outlined in the paper was to look at it as trying to address an inequity in the system between how you treat a domestic institution, like a bank, versus a foreign institution that comes in and carries on those activities. Without getting into the very basic question of why one regulates, we really felt, faced with this, that it would restore a level playing field between the institution that comes in and provides these financial services, that is a subsidiary of a parent that is a bank in its own home jurisdiction.... It is a bank, it comes in and operates in Canada, and we say it should operate as a bank. That would in a sense level the playing field and address the situation between the domestic banks and the foreign institution that comes in.

What we've heard in the criticisms since this came up, to some extent before but certainly since, is that this is fine, but there is the other case of institutions in Canada that can carry on that basic activity without being regulated. So in trying to fix it up, we are very much trying to work within the current parameters of the regulatory system to say, here's an opportunity where we really should fix up this inequity, so let's do it. We're not looking at the most basic question, which the previous witnesses tried to raise, which is whether you should be doing it on a functional or an institutional basis. We are taking the existing framework and trying to work with it.

Some of the issues that have been raised by the foreign non-banks are interesting ones. They are causing us to scratch our heads a bit and make sure we fully understand the implications of what we have here. But that was the motivation for why we wanted to make that change at the moment. We were leaving all of the issues of basic, fundamental regulatory philosophy to the task force and beyond.

In no way was there any intent to preclude companies from doing this business. In fact, once one is regulated, I guess we can look at ideas as to how one gets regulated and understand the costs and the implications of that. But it wasn't to preclude them; it was really just to say that if they're going to come in and carry on that business, and their parent is a bank in its home jurisdiction, then they have to operate as a bank. That's the same rule the domestic banks have to operate under, so it takes the institutional approach that is embedded in the regime now.

.1910

Mr. Grubel: So it's a very legalistic thing levelling the playing field.

Was there any indication that the Canadian public was harmed by the way the regulations were at the moment?

Mr. Hamilton: I'm not sure it was the case that we felt the Canadian public was harmed. It was really trying to find a consistent policy for us in this area, which had not been reviewed. Without going and attacking its very basic tenets, we saw an opportunity where maybe we needed to make a change to have a consistent policy rationale based on the framework. But I'm not aware of any concerns that came up to us that said consumers are being harmed by this situation.

Mr. Grubel: Have you considered as the alternative levelling the playing field by giving the Canadian banks the same privilege to deal at arm's length with all the specialized enterprises that these firms have? If you have an interest of the consumer in mind, then that would seem to me to have been the way to go, rather than to restrict consumer choice by forcing this regulatory burden on successful businesses.

Mr. Hamilton: From my perspective it's an interesting question. I really don't know the right answer.

The way we looked at it was to say that really raises some very fundamental issues about how one regulates and that's probably something we would want to leave for the task force to assess. If we were going to make that kind of what I would see as probably a fundamental change in how we regulate banks, then probably we would want to make sure that we would have the broad framework right and that it would be addressed in that context.

I don't think we would be ready right now to try to make the change you suggested and would feel comfortable that we fully understood all of the implications and ramifications.

Mr. Grubel: Thank you, Mr. Hamilton. I appreciate those answers.

Mr. Schmidt: I'd like to move to another area. It has to do with the subsidiary requirements that we have of banks now and the recommendation that's in the paper.

The government proposes to permit financial institutions to carry on both information processing and specialized financing activities in-house. It talks about venture capital in particular. I'd like to zero in on that venture capital one.

One, what effect would this have on the bank operation? Two, what regulatory implications would this have? Three, what role in particular would the Office of the Superintendent of Financial Institutions have with regard to the investments a subsidiary might make, in particular venture capital projects?

Mr. Hamilton: Perhaps again I'll start on that and then let my colleague finish.

On the subsidiary requirement there were two areas, information processing and specialized financing corporations, the venture capital area. The idea was that now they can do that in a subsidiary context, and the question put to us was: is it necessary that it be put in a subsidiary, or are we comfortable enough from a regulatory perspective that it can be brought in-house and this would allow the institutions to perform this activity in a lower-cost manner?

We also made a change. We now have a rule that says the investments must be sold within10 years. We extended that to 13 years, because the institutions told us that for some of these investments it's really on a 10-year timeframe that they start to make a profit. So that was really impinging on their ability to make a profit out of this. If we extend it to 13 years, then it gives that opportunity.

So it really was very much just to ease their burden in dealing with it in an area where we didn't feel we had any regulatory or prudential concerns, and we did make this extension to 13 years.

I don't know if André from the OSFI side or Frank want to add to that. I think there was a third part.

Mr. André Brossard (Director, Legislation and Precedents, Office of the Superintendent of Financial Institutions): I think from OSFI's standpoint we share the position Mr. Hamilton expressed that there are no particular regulatory concerns about providing to our banking systems the ability to offer these services in the most efficient fashion.

By the way, that would apply also to trust companies and loan companies.

If in some circumstances there is a good business reason to set up a separate subsidiary to perform their business, that would continue to be allowed, but it will also provide increased flexibility if a bank prefers to do this out of, for instance, a division of the bank and works within the internal resources of the bank.

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Mr. Schmidt: Okay, but if it was a subsidiary or otherwise, there would also be a difference in terms of the direct or indirect liability to the parent company, depending upon the proportion of the equity that it took in this particular enterprise.

Mr. Brossard: The proposal is that the types of investments that would be allowed would not change. The participations in which the institutions could partake would still basically be of the equity type.

Mr. Schmidt: What about the proportion of ownership now?

Mr. Brossard: The proportion of ownership would not change either. There'd be a fair amount of flexibility there again in terms of the proportion of ownership.

Mr. Schmidt: Is there a maximum?

Mr. Brossard: No, the only sort of meaningful quantitative limit is an overall limit on how much such investments can represent in the total portfolio of a financial institution. As was mentioned earlier, however, there would be a certain timeframe for maintaining these types of investments, and it would be extended from 10 years to 13 years.

Mr. Schmidt: That's the maximum in this sort of composite picture, but what about a particular enterprise? Is there a limit there as to how much this subsidiary or division might take in a particular enterprise? Is it 50%, 55%, 95%?

Mr. Brossard: That's what this type of limited activity that could be done at the division entails. It frees the institutions from the types of constraints that you're referring to. They could take whatever percentage of participation they wish in another company. It's because they have that freedom that there's an overall cap or an overall limit.

Mr. Schmidt: Would this apply not only to banks but also to other financial institutions?

Mr. Brossard: That's true. This is not only for banks.

Mr. Schmidt: How, then, would this affect the prudence of a particular portfolio?

Mr. Brossard: From the provincial standpoint we rely on the overall cap that is put on the total exposure that the financial institution can have to the companies in which it invests like this.

Mr. Schmidt: So there would be a regulatory application then. It would increase your workload considerably if this was expanded.

Mr. Brossard: No, it would be dealt with in exactly the same way as it is dealt with now. The only difference is that it could be done, as I say, both internally within the financial institutions or through a subsidiary. But the nature of the business and the extent of the business would remain the same.

Mr. Schmidt: Merci.

The Chairman: Thanks, Mr. Schmidt.

Are there any other questions? If not, this brings to an end our two weeks of very intensive hearings on a very complicated and important part of the law. We have had incredible support from our staff at all levels and could not have done it without their great help to us. On behalf of all members, I want to pay a special thanks to them. I would also like to thank the Department of Finance, which has worked with us very closely, and to all the witnesses who have come before us with almost no notice.

We couldn't have dragged these hearings out because we have other things coming before us as a finance committee. Those things begin on October 9, with Mr. Martin's statement, and we also have our pre-budget consultations, plus all the legislation and other issues.

So the witnesses have cooperated with us splendidly to help make our job easier. For this, we're grateful to all of you. I thank you.

We'll adjourn now to the call of the chair.

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