[Recorded by Electronic Apparatus]
Wednesday, September 25, 1996
.1531 
[English]
The Chairman: Order. The House of Commons finance committee is reconvening its hearings on legislation affecting Canada's financial institutions.
Before we begin, I would like to recognize some important individuals in our crowd. We have with us this afternoon a delegation of top government officials from Kenya. We have with usMr. Murumba Werunga, the principal clerk assistant and leader of the group; Mr. Joseph M. Machanje, a Hansard editor; Ms Rosemary Nyanjom, senior principal personnel officer;Mr. Kiriinya Mukiira, principal finance and establishment officer; and Mr. Michael Ole Kirusua, the sergeant-at-arms.
We are honoured you can be with us. We hope your visit to Canada will be both enjoyable and fruitful.
Our first witnesses this afternoon are from the Norwest Financial Trans Canada Credit Corporation, Mr. John van Leeuwen, president; Mr. Nick Scarfo, assistant vice-president; and Steve Wagner, assistant general counsel. Did I miss someone?
Mr. Richard C. Owens (Norwest Financial Trans Canada Credit Corporation): I'm Richard Owens. I'm an outside counsel from the law firm of Smith Lyons.
The Chairman: Thank you very much, Richard Owens.
Mr. van Leeuwen, are you going to make the presentation?
Mr. John van Leeuwen (President, Norwest Financial Trans Canada Credit Corporation): Yes, I am, Mr. Chairman.
The Chairman: We look forward to your comments.
Mr. van Leeuwen: Thank you, Mr. Chairman.
First I'd like to thank the committee for giving us the opportunity to appear before you this afternoon. My colleagues are here with me to deal with some of the more technical issues that may arise during the question period later on.
We are here to discuss the proposals in the white paper dealing with the foreign bank access regime. As you know, these proposals would, for the first time, create a distinction between regulated foreign banks and so-called near-banks. As a result, Trans Canada Credit would have to convert to a full bank while our competitors would not. We consider this result to be unfair and the proposal itself to be ill-conceived from several perspectives.
Before elaborating on our concerns, let me tell you something about who we are and what we do. Trans Canada credit is one of a handful of consumer finance companies in Canada. We've provided Canadians with a range of consumer finance services through 150 branches across Canada, from Port au Choix, Newfoundland, to Campbell River, British Columbia. We're also the second-largest consumer branch network as far as branches are concerned.
Our main business is extending small personal loans that are used to buy consumer goods or to consolidate debts. As a company we have 229,000 customers, with an average balance of $3,200.
Our loan customer profile is as follows. They tend to be younger, with no credit history, no assets, security, or net worth. They've had some credit problems in the past, and they've been turned down by a bank or similar institution. We also purchase sales finance contracts, closed-end or revolving credit, from retailers such as Cohens Furniture, the Gest-Accor Group, Giant Carpet, Advanced Electronics, and Visions Electronics.
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We provide liquidity to a lot of small retailers through our innovative programs, thereby increasing their sales by offering special programs and revolving credit on an automated basis so they are able to compete with the larger retailers.
We've also introduced a new program. This new program is automobile financing through a secondary source. What I mean by this is we look for consumers who have been turned down by the franchise dealers' primary financing outlet. By doing so, of course, we help increase sales and put more cars on the roads today.
At the present time we're also looking to increase our expertise in the small business end of it. Since we've had approval now to get into small business loans, we're looking to get into this market also.
Our parent, Norwest Financial, is a major U.S. consumer company -
The Chairman: Are you all right, Mrs. Brushett?
Mrs. Brushett (Cumberland - Colchester): Yes. It's too big for me, I guess.
Mrs. Chamberlain (Guelph - Wellington): We need seat belts.
Some hon. members: Oh, oh!
The Chairman: I can tell, Mr. van Leeuwen, that you've had a very great impact onMrs. Brushett.
Some hon. members: Oh, oh!
Mr. van Leeuwen: That's good to see.
As I was saying, our parent, Norwest Financial, is a major U.S. consumer finance company in its own right. It purchased Trans Canada Credit's business in 1992 from the insolvent Central Guaranty Trustco group, thereby saving CDIC substantial money.
Like our competitors, Household, Avco, Beneficial Finance, Trans Canada Credit is not a regulated financial institution, although when raising capital we are, of course, bound by extensive provincial consumer protection legislation and security laws. Unlike banks and trust companies, we do not take retail deposits and are not a member of the Canadian payments system. So the absence of comprehensive regulation of our business is not surprising.
Nevertheless, and because our parent company is a foreign bank under the Bank Act, when Norwest Financial acquired Trans Canada Credit it had to obtain an order from the Governor in Council. In return for the order, Norwest Financial provided a certain undertaking regarding the extent of Trans Canada's activities in opposing minimum size limits on debt instruments we can issue.
The white paper proposes a dramatic change in the approach the federal government takes towards so-called foreign banks operating in Canada. For the first time, regulators have attempted to distinguish between regulated foreign banks on the one hand, and near-banks on the other. The basis of the distinction will be determined by whether the entity is regulated as a bank in its home jurisdiction or whether banking services constitute a large part of the operation.
If these criteria are met, then the Canadian operations of the regulated foreign bank must be operated through a fully regulated federal financial institution. If they are not, then the entity is a near-bank and the white paper proposes to eliminate the Canadian regulatory burden on those companies almost completely.
Based on our discussions with the Department of Finance and OSFI, it seems Norwest will be regarded as a regulated foreign bank while Trans Canada Credit's competitor would not. The distinction is based not on the services we provide but on the identity of the U.S. shareholder.
Very simply, for us to stay in business, we would have to become a schedule II bank with all this entails. Meanwhile virtually all of our competitors would face even less regulation than they do now. Quite apart from the fairly significant costs these changes create for Trans Canada Credit, we believe this regulation is wrong. The rest of my presentation will explain in more detail why we feel this way.
The history of regulatory policy in Canada clearly establishes that there are two main reasons to regulate a financial institution. The first is to protect the members of the public who deposit their savings with the institution and indirectly, of course, to protect the CDIC. The second reason is to ensure the stability of the payment system.
In the case of consumer finance companies like Trans Canada Credit, these reasons for regulation simply do not apply. We do not take deposits and we do not participate in the Canadian payment system. Our customers are borrowers, not savers. In our case there is no reason to regulate a financial institution in order to protect the public.
The government's longstanding policy has been to promote competition in the financial sector. Competition benefits consumers by reducing the cost of products and services, encouraging innovation and promoting efficiency.
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Trans Canada welcomes the white paper's attempt to ease the regulatory burden on near-banks. However, we believe that the result of the proposed distinction between regulated foreign banks and near-banks will be to reduce competition and possibly promote further concentration in the consumer finance area.
There's no question that the increased regulatory burden and the general impact on the market of us having to portray ourselves as a bank will severely impact on our competitiveness.
A further problem with the near-bank and real bank distinction is that it's unworkable in practice, at least without making the distinction arbitrarily.
What is the difference between Trans Canada Credit and Beneficial Finance or Household Finance? We're all consumer finance companies competing against each other for the same customers. We're all foreign owned. Each of us has foreign affiliates that are banks. We all raise our external funds in much the same fashion.
Simply put, how is it relevant from a regulatory standpoint whether we're owned by a bank, an industrial conglomerate, or a large number of individual shareholders? What should matter is the nature of our business, and on that basis everyone in the same business should be treated in the same way.
The foreign bank proposals also raise concerns having to do with the national treatment under the North American Free Trade Agreement and the reciprocity with our NAFTA partners. As you know, NAFTA requires Canada to provide investors from other member countries with treatment that's no less favourable than it provides to its own investors and their investments. In our view and in the opinion of our counsel, the foreign bank proposals would violate this commitment.
Moreover, U.S. and Mexican law would not require a Canadian bank to establish a separate fully regulated bank to offer consumer finance services in those countries.
We recommend that the federal government not move further away from this kind of reciprocity with our trading partners that our international policy normally seeks to achieve.
Norwest received its approval to acquire Trans Canada Credit four years ago. Since then, Trans Canada Credit has increased the number of its branches from 129 to 150 and increased the number of employees by almost 30%, to over 1,000. Our business volumes have gone from $481 million at the end of 1992 to $676 million at the end of last year, an increase of almost 40%. We've raised hundreds of millions of dollars in the Canadian debt market and we've expanded our scope of business too.
As recently as February of this year we received government approval to expand it to leasing and credit cards. Until the white paper was published in June, there was never any suggestion by OSFI or the Department of Finance that these rules would be changed for us so dramatically. Although we appreciate that government policies can and should change to suit the times, we now feel as though the rug has been pulled out from under us for no good reason.
As we see, the solution is to regulate financial services based on the types of services being provided in Canada. There are no prudential or competitive reasons why regulations should be based solely on the financial services that a Canadian company's affiliates offer outside of Canada.
Our approach would mean that regulations apply based on the activity that needs regulation, not based on a particular form of the institution.
In today's fast-changing global financial service marketplace, preconceived institutional classifications are, in our view, outmoded both as a means of carrying on business and as a rationale for regulations.
That is the end of my report, Mr. Chairman.
The Chairman: Thank you very much.
[Translation]
We will begin the questions. Mr. Bélisle, please.
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Mr. Bélisle (La Prairie): First, I would like to thank the representatives of Norwest Financial Trans Canada Credit Corporation for appearing before us to present their brief today. I've read it and found it very interesting.
I would like to refer to your document, page 11, paragraph 1.9, which deals with encouraging competition. In that paragraph, you state:
- Further, as a policy initiative, it seems absurd to subject a consumer finance company to full
regulation in Canada merely because a subsidiary of its ultimate shareholder conducts a fully
and adequately regulated financial services business elsewhere.
[English]
Mr. van Leeuwen: That's a very long question. First of all, by us becoming a schedule II bank, we're looking at some extremely heavy expense that we believe there is no reason for us to incur.
When someone looks at a bank and a finance company, different images come to mind. You see the bank, on the one hand, having low rates; you see the finance company having higher rates. We're in a completely different type of business. We're in a higher risk business. Subsequently, our rates are higher.
For us to be a bank, our customer base would expect rates similar to what the banks are presently offering. For us to be a bank whereby we would have to publicize our rates in the daily newspapers would make a very distinct comparison between ourselves and the bank. Obviously, we'd be at the very high end, and the banks would be at the very low end. I could also suggest that if the banks are at the low end, maybe they can raise their rates a little to get to the higher end. The customers who are doing business with us are not bank-type customers, so for us to change our whole image to become a bank is very detrimental.
Back in 1978-79 our parent company was Traders Group, which owned Guaranty Trust at that time, which later became Central Guaranty Trust when Central Capital purchased the company.
The trust company tried an experiment with four branches in Ontario. They took our customer base and opened some larger units to see if they could develop the base into a profitable, worthwhile operation. The end result was that they found out, not much to our surprise, as I said earlier, that our customers were borrowers, not savers. They don't have a lot of money to put into RRSPs and GICs. So the experiment was a miserable failure. Of course, the branches were closed or redeployed.
So what you are asking us to do here is to take our business and become another business. I know that when I started in the finance business with this company almost 25 years ago I never had any thoughts about becoming a bank. This is what this is leading toward. It's just contrary to everything we operate.
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We are secondary lenders. We supplement the bank in a very big way.
Consider especially the younger people today trying to get any kind of credit if they're under 25. If they tried to borrow $1,000 from one of the bank and credit institutions, I think they would be very surprised. If they have assets or co-signers, such as a parent, or whatever, of course there is no problem.
A lot of our customers started off in the smaller amounts, whether it was to purchase a television set, vacation loans or this type of thing. After a while, when they've established themselves, a lot of them tend to.... I won't say they graduate to the banks, but they move over there.
We're almost a source of business to the banks. We receive a lot of pay-outs on a daily or substantial monthly basis from banks with customers who have gone over to the other side. In a lot of cases, they come back to see us.
You might wonder why they would come back to see us. Our rates are so much higher. Well, first of all, we offer a lot of personal service. You talk to a person in our offices. We have people. We provide that service. When you go into a convenience store, you pay more than you would going into a regular grocery store. It's a convenience. We offer fast and friendly service. I think we service a market niche that the banks are not going after. They are not willing to take the risk.
Our risks are much greater. There are people who have had credit problems in the past. Here in Canada, since 1980, I think our bankruptcies have increased by 8% every year. A lot of people have gone bankrupt out there.
Someone who has gone bankrupt needs a car for work in a lot of cases if they're not living in a large metropolitan area with access to public transportation. We again provide a lot of service that way. We do have customers on our books, especially in the automotive end of it now, in the market we're going after who have been previously bankrupt. But they are good people. They had a problem in the past, and we look after them.
The Chairman: Could I interrupt for a moment? I'd like to talk to Mr. Richard Owens.Mr. Owens has indicated to me that the issue confronting us as members of Parliament for this witness and for the next witnesses who are scheduled to appear before us at 4:15 p.m. is precisely the same legal issue. They have slightly different factual situations to present to us. So I was wondering if members would wish to have perhaps the other witnesses at the table make a brief presentation to us outlining their factual situation. Then we could question both groups on the same issue.
[Translation]
Do you think that's a good idea? You can continue later, Mr. Bélisle. Thank you very much.
[English]
We now have Capital One Financial Corporation at the table with us. Mr. John Finneran Jr. is senior vice-president. David Willey is vice-president and treasurer. Welcome, gentlemen. Thank you for being with us.
Perhaps, Mr. Willey, you would like to go through an outline of your corporation's problems.
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Mr. David M. Willey (Vice-President and Treasurer, Capital One Financial Corporation): I have a very brief presentation, Mr. Chairman, that weighs out Capital One's particular situation, which, as you suggested, is a bit different on the facts from Norwest's but gets at the same issue on the white paper policy as outlined.
I too would like to thank you for having us here today and permitting us to speak before you.
Capital One Financial Corporation is a financial services company whose principal subsidiary, Capital One Bank, issues credit cards in the United States and in the United Kingdom. As of June 30, 1996, Capital One had approximately $11.2 billion U.S. of credit card receivables under management and 7.8 million customers. Capital One is one of the top ten issuers of MasterCard and VISA credit cards in the United States and that is our main line of business.
Six months ago Capital One Financial Corporation received approval from the Canadian government to incorporate a Canadian company which was not a regulated financial institution to offer MasterCard products in Canada. As we understand it, the Bank Act process requires foreign entrants to get the approval of the Office of the Superintendent of Financial Institutions and the Minister of Finance, and ultimately an Order in Council, before they commence operations in Canada. All necessary approvals were granted to Capital One in March of this year.
When the white paper was released, it came as a great shock to us to learn the government was proposing that we be required to set up a bank or trust company to offer credit cards in Canada, which was completely contrary to the process we had just completed. As a result of this announcement, several months of planning and dealing with government officials to obtain the necessary approval were lost. A considerable amount of planning goes into a decision like this to enter a new marketplace and it is not insignificant when a key factor, such as corporate form, changes, and changes suddenly. Our business plan and investment to this point have been predicated on this corporate form and this change of policy and its retroactive application have caused us to question seriously the viability and desirability of proceeding.
I'd like to focus on three areas for discussion: first, the benefits we think Capital One can bring to Canadian consumers if it's allowed to proceed as originally planned; second, the lack of a strong policy rational for the white paper policy; and last, an alternative approach that may better achieve the policy objectives of this aspect of the white paper.
Capital One is not simply another issuer of credit cards. In the late 1980s we saw that everyone was charging the same price for credit cards in the United States, about a 19.8% annual rate. The prevailing interest rate on credit cards was high to cover the costly default of a small percentage of customers because banks could not predict who would pay back their debt and who would default. In the end, low-risk customers were subsidizing higher-risk customers.
Not being bankers by training, we developed a different approach. We developed powerful statistical models to predict the default risk of individual customers. We also made it our business to learn what credit card futures various groups would find appealing. Because we focus mainly on this business we have become experts, and consumers have benefited dramatically.
In short, we developed customized products for each consumer. While many banks offer VISA or MasterCard in a few forms only, such as standard and gold versions, we have literally thousands of product offerings and can provide - in fact we strive to provide - the right product to the right person. We're also proud of the fact that our expertise has enabled us to offer our VISA and MasterCard products to many individuals who would not have qualified for those products under traditional bank lending standards.
From 1988, when we embarked on our current strategy, the average interest rate offered on new account solicitations for credit cards in the United States has fallen from over 19% to less than 10%, in large part because of the competitive pressure brought to bear by Capital One and several other card issuers who began to offer better pricing to the majority of consumers. U.S. consumers have benefited greatly by the increased competition brought to the market by Capital One and others through lower pricing and proved product attributes and greater availability of credit.
Allow me to turn for a minute to the rationale for the white paper policy as we understand it. Government policy makers seem to have concluded that because Capital One operates as bank in the U.S., it should operate as a bank in Canada. This conclusion misses out some key points. First, U.S. law does not require Capital One to operate as a bank in the U.S. It just happens that it makes sense for us to operate that way in the U.S.
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Our credit-card activity has not required regulation of the issuers of financial institutions in Canada, or in any other country, as far as we know, but many retailers have offered our credit cards for years. This is because when an organization issues a credit card to a consumer there are not present any of the risks that are typically addressed by regulation of financial institutions.
Canadian banks are regulated not because they issue credit cards, but because they take consumer deposits, which are insured by the CDIC and are part of the payment system as well. Requiring Capital One to be regulated as a bank in Canada is not necessary to protect consumer deposits, as Capital One cannot and will not accept deposits in Canada. Nor is that necessary to protect the payment system, as Capital One will not be a part of that system.
Regulating Capital One as a bank in Canada would bring no benefits to Canadian consumers and would simply result in more regulators being hired to serve no policy end.
The Chairman: Excuse me, Mr. Willey, could I just ask you to slow down a little bit. It's a little difficult to translate.
Mr. Willey: I certainly will.
The Chairman: Thank you.
Mr. Willey: It also raises the question of whether other card issuers in Canada such as Canadian Tire and Zeller's should be regulated as banks simply because they issue credit cards.
Capital One will be subject to the various rules regarding provision of credit to consumers. Capital One also has voluntarily submitted to the federal cost-of-borrowing disclosure of rules that apply to banks. Those rules are the body of regulation that addresses the risk to Canadian consumers of credit card lending activity.
At this point allow me to digress from my written testimony to discuss an alternative approach to the regulation proposed by the government in the white paper.
We understand that a significant policy objective of the foreign bank aspects of the white paper categorizes foreign-based financial services providers in such a way as to allow a simpler and clearer regulatory approach to these providers. We firmly believe that the existing proposal has the opposite effect.
Foreign banks are a very diverse group, subject to widely varying types and degrees of regulation. The result is that the minister will be forced to exercise a similarly large degree of discretion in this case in the process of categorizing financial institutions, thus defeating the policy objective in the first place.
We think that a better approach would be to regulate foreign banks based on their activities in Canada rather than how they may be regulated in their home countries for the activities they pursue there. If a foreign bank intends to take insured deposits in Canada, or have direct access to the payment system here, it may be appropriate to regulate it as a bank in Canada. However, if the foreign bank limits its activities in Canada to services that do not entail these activities, the foreign bank need not be regulated as a bank in Canada.
We believe that this functional approach would better achieve the underlying objective of the white paper and allow consumers to benefit from increased competition and at the same time avoid the inequitable and uncertain results of the proposed policy.
In conclusion, Capital One would very much like to begin operations in Canada. If we are successful, we believe we could provide benefits to Canadian consumers, not to mention new jobs for Canadians.
My colleagues and I will be pleased to respond to any questions that any of the committee members may have.
The Chairman: Thank you, Mr. Willey, and thank you, Mr. van Leeuwen.
[Translation]
Mr. Bélisle, do you wish to continue?
Mr. Bélisle: Yes. I have one quick question. On page 5 of your document, you state:
- we find it difficult to understand the rationale behind imposing this additional layer of
regulation on Capital One.
- Then, on page 6, you go on to say:
- The challenge is to develop a regulatory approach that encourages rather than inhibits
innovation and efficiency in our financial system while at the same time protecting the public.
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[English]
Mr. Willey: I think when we speak of regulation it's important to differentiate between those regulatory regimes that are designed for consumer protection and those regulatory regimes that are designed to guarantee the safety and soundness of financial institutions in Canada. The ones that accomplish the former task are typically the cost of borrowing, disclosure rules, and other provincial-level regulations that are designed to accomplish the consumer awareness and consumer protection aspects of the regulatory charge. The ones the white paper addresses are really about safety and soundness of insured depositor institutions and about the safety of the payments system in Canada, neither of which either we ourselves, certainly, or Norwest, in the guise of Trans Canada Financial, have any impact on. We don't take deposits - we don't want to be in that business - and in fact we don't have any access to the payment system either. So the whole safety and soundness regime here is not.... It doesn't make a lot of sense, given the business we're going to pursue.
I would argue the consumer protection goals of regulation are as sound as they ever were and are not addressed by the white paper, nor should they be. The competitiveness aspects, though.... The implications for competitiveness and the benefit to consumers inherent in the white paper policy are detrimental in the end. Anything that restricts the potential entry of new competitors such as Capital One doesn't accrue to the benefit of consumers.
[Translation]
Mr. Bélisle: Thank you.
[English]
The Chairman: Mr. Grubel, please.
Mr. Grubel (Capilano - Howe Sound): Thank you, Mr. Chairman.
I'm very much impressed, gentlemen, with both of your presentations. You have me totally persuaded that you are providing a service that will be benefiting Canadians and it would be a shame if, by the stroke of a pen, the government could either prevent you from opening your business or continuing your business. The only reason I can envisage why the government would do a thing like this is that maybe they've been pushed by your domestic competitors; or - and this is a remote possibility, since I know the quality of the people in the bureaucracy - they made a mistake.
What I would like to ask you is whether you have made presentations to the Department of Finance on this matter.
Mr. van Leeuwen: Yes.
Mr. Willey: Yes.
Mr. Grubel: Could you please inform this committee what arguments you were given for why your requests should be denied? Furthermore, is the Department of Finance aware that probably the owners of your companies in the United States could bring action against you under the trade laws?
Mr. Willey: We have had a series of discussions with OSFI and with Department of Finance, most recently yesterday. I think they have been open to our points and willing to engage on those points - increasingly open, in fact.
The arguments about the restrictiveness of trade.... I guess it would ultimately come under NAFTA. Those points are contained in a brief from Mr. Owens' firm, detailing all the legal analysis behind that. I believe those were submitted to Department of Finance and OSFI as well.
Mr. Nick Scarfo (Norwest Financial Trans Canada Credit Corporation): And they are studying those issues.
Mr. Grubel: How long ago did you make these representations?
Mr. Scarfo: Within the last month, I guess. The last meeting was last week.
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Mr. Grubel: Mr. Chairman, can you clarify this for me? If this presentation was made before the white paper actually went into print, is it possible that the Department of Finance would have changed its mind on that? Would you know that?
Mr. Campbell (St. Paul's): I can't speak for what officials may have said in their meetings, but I am aware that meetings have been ongoing, as the witnesses themselves have said. We're not at the end of that process yet.
Mr. Grubel: What was the argument given to you for not making an exception to the rule that you would have to form a bank?
Mr. Scarfo: As the regulators saw it, I think the policy was basically to ease the regulation for near-banks in introducing this concept. In producing this policy they sort of caught us.
Mr. Grubel: I would like to end my opportunity to intervene in this debate by suggesting that maybe this is one of those great cases where hearings produce some information that hopefully will influence government policy because of information that is so clearly supportive of change of what had been proposed. I hope that the report that the government will file on this subject will reflect this view, because I have not heard any argument that would suggest that anything other than a mistake was made by the Department of Finance when they wrote that white paper with respect to the treatment of the industry and those kinds of firms.
Mrs. Brushett: I too have found this to be an extremely interesting and informative hearing, and I certainly would like to compliment Mr. van Leeuwen. When he tells me that he's had 30% growth in job creation in this country, that's very significant, very impressive to hear.
One of the questions I have for Capital is that I understand from your brief that you did open a branch of a bank in Great Britain and ran your credit card business through that branch. Was this not a viable option for Canada?
Mr. Willey: It was not. Branching of U.S. banks is not permitted under current Canadian law.
Mrs. Brushett: So you could not have done this.
Mr. Willey: We couldn't do it, no. A branching alternative for the U.K. was the most desirable alternative. It simply wasn't available as a possibility for entry into this country.
Mrs. Brushett: May I follow up with one more question? How would you present this functional approach then, if you had the opportunity to present to Finance a functional approach to this near-banking rather than the institutional regulation?
Mr. Willey: In fact, in discussions as recent as yesterday I had an opportunity to start talking about this idea with the folks at OSFI and Finance. I think it's as plain or as simple as focusing on those risks that the regulatory regime is meant to manage, and there certainly are risks that need to be managed in the financial system.
Predominantly, the ones that are highest on my mind.... No doubt there are others, but the ones I think of when I think about this topic are the risk to insured deposits and the risk to the insurance fund that supports those deposits and the access to the payments system in Canada. No doubt there are others, but I think to compare the activities any company proposes to pursue in Canada against the risk that the regulatory regime is in place to manage and simply to compare whether these have any intersection and to use that sort of analysis when deciding whether to regulate this activity or this entity would seem to make good sense to me.
Mrs. Brushett: I have just a final comment then. I would like to go on the record to offer my support of our enhancing these discussions to review and seeing what opportunities there are if indeed we can in fact bring interest on credit cards down in this country to stimulate consumer spending one more time.
Thank you, Mr. Chairman.
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The Chairman: Thank you, Ms Brushett.
This is a very simple issue. Because you are owned by foreign banks, the proposed regulatory regime in Canada proposes to treat you as banks in Canada even though you're not conducting banking activities here.
Mr. Willey: That's correct.
The Chairman: So to carry this logic one step further, if a foreign bank were to operate a bus company in Canada, we would theoretically have to regulate it as a bank rather than as a bus company.
Mr. Willey: That would seem to follow.
Mr. van Leeuwen: That's very interesting.
The Chairman: Is this simply a theoretical problem for you or does it impose actual costs to you, and if it does impose added costs, could you tell us exactly what they would be in dollar terms, in terms of one-time costs to convert and on an ongoing basis?
Mr. van Leeuwen: I couldn't supply you with that dollar amount, Mr. Chairman. We could send it to you at a later time.
Obviously, as a finance company, if we operated as a bank, we'd have to set up a completely new corporate structure. The funding issue would have to be resolved - the way we raise money. Right now we're not a deposit-taking entity. Just the labour that's involved in operating a bank with directors, setting up quarterly meetings, name changes...you can go on and on.
Our offices would all have to be changed. Our average office size is about 1,500 square feet with five people.
The Chairman: Why would you have to change your offices? You'd just be working under a different legal structure as opposed to a different physical structure.
Mr. van Leeuwen: Well, if we become a bank, we're basically out of business, because, again, our customer does not see us as a bank. If they see us as a bank, they expect lower costs, so basically what's happening again is we're being forced into another line of business.
The Chairman: So you have to put the name ``bank'' on your storefront.
Can anybody give me some estimate of the one-time cost to convert and then the ongoing costs?
Mr. Willey: Let me speak to Capital One's answer to that particular question. It's a little bit different, since we are not in Canada yet.
Our particular business plan - the way we go about our business - is to test and try a lot of different things at a very low level before we expansively roll out a product. It's very important to our risk management and so forth to know what the results of a product offering to a particular consumer segment are going to be before we do it in large measure. That's part and parcel of the way we do business.
An entry strategy that had a minimum amount of investment was extremely appealing for that kind of business plan. So for Capital One's particular situation, it is the nature of the way we go about our business that less investment makes it a lot easier to commit to come in.
In light of the white paper, we did start to review what it would mean to be a schedule II bank and what that would mean to our business plan. We didn't have to get too far before we lost a lot of enthusiasm for it. Without going into expansive detail, there's a $10 million capital requirement, there are boards of directors, as John mentioned, and a lot of other overhead things that go with it.
The point I would draw, though, is if unnecessary regulations keep a single competitor out of the market, consumers are harmed at the end of the day. To me it's not so much a discussion of whether it costs $10 million or $5 million or however much it might cost, but rather what it does to the marketplace to impose any unnecessary cost to entry.
The Chairman: Thank you.
Mr. Steve Wagner (Assistant General Counsel, Norwest Financial Inc.): Maybe I could add a little bit from the Trans Canada perspective.
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We tried to ascertain some of these costs and we found that to be a very difficult, challenging thing to do. There appear to be requirements to have all of the data processing and accounting functions performed in Canada.
At the time that Norwest Financial acquired Trans Canada, it did not have those home office types of functions in place, so that home office function is now being handled in the U.S. It's hard to put a dollar cost on duplicating and rebuilding that structure in Canada. So as well as tangible costs, we found some very intangible costs that are really very difficult to quantify.
The Chairman: Mr. Fewchuk.
Mr. Fewchuk (Selkirk - Red River): I want a clarification here. Would a Canadian investor with $10 million or $20 million have the same problem as a U.S. person to form Capital One?
Mr. Willey: No, not at all. In fact, the way I understand the regulation, a domestic Canadian company could pursue the same strategy that we initially pursued here and issue a MasterCard into Canada, while we are expressly not able to do that because of the regulatory regime that our foreign parent is under in the U.S.
Mr. Fewchuk: I have another question for either one of you. When you're talking about buying cards from the bank, are you buying only their high-risk MasterCard? Is it the intention that the consumer has to pay 28% or 30%? When you buy these cards from banks or different companies, are you buying the high-risk cards?
Mr. Willey: I should have been more clear; we actually originate new accounts through direct mail solicitation. So we would not be purchasing accounts from anybody; this would be new business. The predominant mix of business in the United States today is much more at the low-risk end, in fact, where much lower rates are offered to people who deserve those rates and who should not have to pay the very high rates that were a fixture in the U.S. market five years ago.
One of the reasons we are attracted to the Canadian market, quite frankly, is that credit card rates generally are quite high, and that represents a national opportunity for us. In the United States we also develop customized products for higher-risk people. In fact, a similar approach there is that we're able to differentiate between those people who are high-risk and those who are not and to offer those folks who are lower-risk better products at that end as well.
Mr. Fewchuk: My other question is for both of you. You say you originally started back in the 1960s and 1970s. Have you changed your policy? You buy the higher risk where the banks don't take it. Say I had an appliance store and they turned me down and I went to you at 26% or 27%. Is that your clientele for both of you?
Mr. van Leeuwen: From our perspective it is. Going back to our business, we started back in 1940 as a company, so we've been around for a lot of years, but that's the type of customer we're talking about. As a company, Trans Canada is also introducing MasterCard in November, and our annual interest rate is going to be 19.8% to our customer base.
Mr. Fewchuk: What about Capital One?
Mr. Willey: We don't have any products with annual percentage rates that are that high, and that's not the strategy for Canada either. In the U.S. we do develop products for people of high risk, but the way we make the product available is not by putting a very high price on it. We alter other product attributes to make it a reasonable risk for us to take and an attractive product for the consumer at the same time.
Mr. Fewchuk: Thank you. That tells me something about the business. Back in the early 1970s I had a little part of that trader's finance. I was just wondering if you'd drifted away from some of your principles. That was the question I was getting at. Thank you.
The Chairman: Mr. Pillitteri.
Mr. Pillitteri (Niagara Falls): Thank you, Mr. Chairman.
Mr. Leeuwen, you made a nice presentation. I recall the type of people you serve and I recall that as a youngster I was one of those individuals going to a finance company and buying my first car, not being able to borrow the money from the banks. I had the loan from the finance company. I do also remember interest rates of anything between 16% and 29%. As a businessman, I deal in much lower interest rates today.
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The Chairman: Is that because of the prudent monetary and fiscal policies of the present government, Mr. Pillitteri?
Some hon. members: Oh, oh!
Mr. Pillitteri: Without a doubt, Mr. Chairman.
I'd like to ask Mr. Willey a question. You did make the remark that in United States you operate as a bank and that you're not required to operate as a bank in Canada. Before you answer that question, I would also like to remark about what has happened here in Canada, about how we keep bashing the banks about the amount of their profits and about how much they make, quarter after quarter.
Between the finance committee and the industry committee we have brought the banks in here quite regularly, and are trying to bring them into line as far as what they're doing for the consumer. We've also imposed the 12% surcharge - if I'm correct - on the banks. Even though it was temporary in the first year, it was carried on for the second year. Also, the vice-president of one of the large banks said they were not really sorry about paying this money.... And you could charge us again by not operating as a bank. Would that mean we would not be able to have a surcharge on the amounts you would be making? Is it better for you to not operate as a bank here in Canada?
Mr. Willey: No. To answer the first part of the question, we operate as a bank in the United States as a result of the particular aspects of the business case in the United States. That has a lot of different attributes to it. One important part of that, which I did not mention in the presentation, is that Capital One was actually spun off from a regional commercial bank in the U.S. in the mid-Atlantic region several years ago. It is a bit because of that product of our history that we are a bank today, at least to some extent.
I won't pretend to be a scholar of the full complexity of the Canadian banking system and its taxation aspects. I would anticipate that the power to tax corporations in Canada is as extensive as it is in the United States, and should the Department of Finance or other interested parties want to tax our activities I have no doubt that it could be accomplished.
Our business case, though, is not built at all on the notion of trying to evade that tax. In fact, before the white paper came out I was not even aware that there was such a tax. That isn't really what we're trying to accomplish.
Mr. Pillitteri: Thank you, Mr. Chairman. I have my answer.
The Chairman: Thank you, Mr. Pillitteri.
Mr. McCormick, excuse me. I forgot that Mr. Schmidt.... Would you please go ahead,Mr. Schmidt?
Mr. Schmidt (Okanagan Centre): I have a couple of questions. On the surface your case is a very powerful one, but I would like to ask you a couple of questions with regard to your capitalization structure and the corporate structure that exists between your parent organization and the subsidiary or independent company that you are in Canada, that you're contemplating setting up here. Could you give us some indication as to just how you generate your capital for the lending you do?
Mr. van Leeuwen: Yes. As a company we borrow our funds in the commercial market. I think I mentioned that our company's net outstandings are $670 million. We have $140 million in equity in our company. A lot of the profits we've made over the last few years have remained here in Canada. So we go on to the commercial market...and of course they have their own equity, which is the result of the profit generated.
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Mr. Wagner: Maybe I could add just a little bit. Much of the funding for Trans Canada comes through a commercial paper program that is managed by the investment banking subsidiaries of some schedule I banks in Canada, and also we use those investment banking firms to do some private placements of medium-term notes to institutional investors. Some of the other term debt funding comes from Euro market borrowings, term debt financings in the Euro market to issue Canadian dollar denominated debt securities in the Euro market.
With respect to the other aspect of your question, the actual corporate structure and how all of that fits together, the parent company is a Norwest corporation, a publicly traded financial services organization in the U.S. It has some commercial banking units on one side, and then it also owns Norwest Financial, which is the consumer finance unit of that business, which in turn owns Trans Canada Credit in Canada.
Mr. Schmidt: What liability does the parent company have with regard to the commercial paper that you acquire?
Mr. Wagner: It would be secondarily liable on the commercial paper.
Mr. Schmidt: So this means that if Capital One or, in your case, Norwest would have some difficulty, they would appeal to the parent company to make up the shortfall? Is that the situation?
Mr. Wagner: Yes.
Mr. Schmidt: So that means that if your parent company is a bank, in fact the liability rests with the bank, not with the finance or consumer arm that you have here?
Mr. Scarfo: [Inaudible - Editor].
Mr. Schmidt: I quite appreciate that, but secondarily it runs into the banking situation.
It seems to me that this is the very crux of the issue that we have to address here and the very reason why this particular proposal is in the white paper, because it seems to me that's precisely why branching by foreign banks wasn't allowed in Canada. I think that's exactly the reason why you went to England and formed a branch there, because that provision isn't there.
I'm wondering if we need to ask ourselves the question of just what is the long-term objective. I think I heard you say that you're getting into the lending to small businesses and you're also getting into a much broader field here. It would seem to me just a very logical extension that you could indeed become a rather significant financial institution in Canada, and you are indeed getting into the banking business. It's so close that it's hard to tell the difference.
Mr. van Leeuwen: Again, if you will go back to our customer profile you'll see a vast difference.
Mr. Schmidt: Oh, there is no question that's the case now.
Mr. van Leeuwen: That's true.
Mr. Schmidt: But what is your long-term plan?
Mr. Scarfo: A guarantee was required that when Central Guaranty Trustco failed and Norwest came in to purchase Trans Canada Credit, Trans Canada Credit had to raise funds. It couldn't raise funds on its own; it had just been through this wind-up or failure of the Trustco Group of Companies, so they stepped in and put in this guarantee in order that we could raise funds in the commercial market.
I assume that over a period of time, as we get on our feet, we will then release that guarantee, and I'm sure that their parent wants to get off that guarantee as well and raise their own funds.
Mr. Schmidt: I'm sure that's the intention. I have no doubt about that. I'm not worried about the intention; I'm worried about the stability of the financial system in Canada and the institutions that do business in Canada, because if the financial institution goes down, it's not in the interest of the consumer that does business with the bank in another area.
I'm sure that not the people who borrow from you but others.... In fact, the Euro bonds that are lent are lent on the strength of the stability of your institution and the consumers that will repay the debts they have incurred from you. That's the issue here.
If your case is so strong that it will guarantee stability - ``guarantee'' is a tough word - as secure as possible, then I might lend support to the position, but right now I need some more convincing.
Mr. van Leeuwen: If you go back to our company as an example, when we started in 1940 we were part of Traders Group of companies. Traders Finance used to do a lot of the automotive financing for Ford Motor Credit and other companies.
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Eventually, in part, maybe, due to competition, the trust company, which became a major player - Guaranty Trust, as it was called back in those days - decided to take the Traders Acceptance business and move it into the trust company. Trans Canada Credit continued to operate independently through the parent. We did retail financing, auto financing and some small loans.
Nothing has really changed. Our company operates much more effectively and efficiently because of the system supports we get from the parent and of course our secure funding. Traders Group did run into some difficulty in funding way back, but that's not the case with us here. Norwest Financial has been in business for over 100 years. As a matter of fact, we'll have been in business 100 years next year.
Mr. Schmidt: That's not the issue here.
Mr. Willey: I'll give you a different slant on it from Capital One's perspective. Capital One Financial Corporation owns Capital One Bank and a number of other subsidiaries, including what would be the Canadian subsidiary. Capital One Financial Corporation is not a bank. It is an industrial company, the same way as General Electric.
Mr. Schmidt: And it owns a banking company.
Mr. Willey: But it's not a bank holding company under U.S. regulatory regime.
Mr. Schmidt: No, I understand. It just happens to own a bank.
Mr. Willey: Right.
Mr. Schmidt: Under which one of those companies does Capital One come? Does it come under the bank part of the holding or is it held directly?
Mr. Willey: Capital One's Canadian subsidiary is a direct subsidiary of the holding company. The bank is in no way involved in the funding. The funding for our opportunity initially would be through borrowings from Canadian banks for -
Mr. Schmidt: So there's quite a difference between your operation and their operation.
Mr. van Leeuwen: Norwest Financial is a major U.S. finance company. Their business is in consumer lending. Norwest Financial in turn is owned by Norwest Corporation.
Mr. Schmidt: Right, but Norwest also owns a bank.
Mr. van Leeuwen: A small bank, yes.
Mr. Schmidt: But it's not in the line.
Mr. van Leeuwen: No.
Mr. Schmidt: Okay. That clarifies it very much. Thank you very much. That helps a lot.
The other point I'd like to raise, if I may, has to do with the situation where the lending practices are set just to put into jeopardy both the future viability, if you will, of the corporation and also those people who are actually supplying the capital for the re-lending you do through credit cards and half a dozen other different ways. How do you think that ought to be protected?
Mr. Scarfo: By prospectus, securities law, rating agencies that come in and look at our paper and study our business.... That's how they're protected.
Mr. Schmidt: In the same way as any other corporation.
Mr. Scarfo: Yes.
Mr. Schmidt: In other words, you really don't want to be treated as a banking institution. You don't want to be treated as a financial institution. You want to be treated as a corporation like Sears, The Bay or something like that?
Mr. Scarfo: That's correct.
Mr. Willey: Our business, our strategy, our success depends on finding those people who are going to pay us back at the end of the day. That's the focus of our particular strategy and no doubt Trans Canada's as well.
Mr. Schmidt: Your argument is that you are being forced into a situation that's untenable and really illogical.
Mr. Willey: Yes, sir, and it doesn't accrue any benefit either to the safety and soundness of the Canadian banking system or to Canadian consumers. It's not clear what goal is, at the end of the day, being accomplished by the regulation.
Mr. Schmidt: Would you ever want to get involved in the Canadian Payments Association?
Mr. Willey: Our business plan has nothing to do with direct access to the payment system. That isn't what we're about. We're about delivering value-added credit card products to consumers and making credit card products available to consumers who don't have access to that product. We're a marketing company in the end. We're not about direct access to the payment system.
Mr. Schmidt: You may wonder why I'm asking the question. I'm asking the question because insurance companies and investment dealers all would like access to the Canadian payment system, and there's a very good reason they want it. Why wouldn't you want it for exactly the same reason?
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Mr. Willey: I'm not immediately familiar with what the insurance companies' goal is.
Mr. Schmidt: They want to make money. Anybody would.
Mr. Willey: Our access to the payment system is through an arrangement with a Canadian bank and our activity is once removed from that.
Mr. Schmidt: Why wouldn't you want to do it directly? It costs you money to do it this way.
Mr. Willey: The strength of our company is really on the marketing side. A lot of the payment system access issues that I am familiar with have to do with being able to review a broad array of products one has with a bank or an insurance company, through an ABM, for example. We're about credit cards; we're not about offering all these other things. So there's no particular logic for us that leads us to direct access.
Mr. Schmidt: Is your answer the same?
Mr. van Leeuwen: It's close. Again, I don't know what the future will bring five or ten years from now. With our direction today, in any discussions I've had with our American parent we've never gotten into the direct payment discussion. We're concentrating strictly on a niche market where we feel there's lots of opportunity to enhance our viability as a customer and at the same time to the consumers. We're a niche player and that's basically how we see ourselves, with lots of potential. I believe we add a lot of value to the marketplace as we are.
Mr. Willey: It's just as well that it's a legitimate source of...[Inaudible - Editor]...access to the payment system. Should business plans change, one would expect that -
Mr. Schmidt: I don't think there's any question about that. I'm sure that's what you would like to do. After all, you work on a margin. We all do. It's a matter of pocketing the difference between the cost of borrowing the money and lending it to somebody else.
If you can have the direct access system without paying a third person, it just makes sense to me that you would want to do that. I'm sure that's not written down in your business plan now, but that's not our concern here. Our concern here is to set up a system that is stable, that creates a fair playing field for all the people who want to play on it, and that produces and increases competition. That's our concern. That's the reason for that question, Mr. Chairman.
The Chairman: Thank you.
Mr. McCormick, you've been very patient.
Mr. McCormick (Hastings - Frontenac - Lennox and Addington): Thank you very much, Mr. Chair, and thanks, gentlemen, for your presentation.
I have a question for Trans Canada. How many storefront credit corporations of your type are there in Canada today and how many are owned by U.S. interests? If they are, are they owned by a U.S. bank?
Mr. van Leeuwen: There are basically five companies in Canada: Avco, Household, Beneficial -
Mr. Scarfo: Well, Associates has come in and Transamerica is coming in as well.
Mr. van Leeuwen: Yes, and Ford, which is part of Ford Motor Company, and Superior Finance.
Mr. McCormick: Those are storefronts?
Mr. van Leeuwen: Yes. Superior Finance is the only one that's owned by a -
Mr. Scarfo: - British department store chain.
Mr. van Leeuwen: Yes. I believe it's Great Universal stores. The other company is owned by American companies, which I understand also have affiliates at our banks.
Mr. McCormick: We all talk about the consumer because that's the important person and that's who we want to represent. You talk about competitiveness and finding niche markets, and they're certainly there. Before we talk about how you could serve small business, I want to jump from one to the other.
You mentioned the high credit card costs in Canada, which I can read about in the newspaper if I didn't know about it. You mentioned that at Trans Canada you're going to issue MasterCard cards to your customers. I'm not asking you what the rate will be, but if you're going to issue a credit card, is it going to be at as high a rate as what you probably charge for most loans? I grant that those serve a very important purpose, but I wonder where you're going to fit your credit cards.
Mr. van Leeuwen: Actually, I did mention the rate. It was 19.8%. That's the rate for the card that will be introduced to our customer base in November.
Mr. McCormick: So it's for your customer base. Are these people still going to be prospects for loans from you when you give them a credit card that will let them access something for 19% versus a slightly higher rate?
Mr. van Leeuwen: Obviously there could be a little loss in the personal loan end of it, but I think there's also more opportunity because the customer will be using the MasterCard. In a lot of cases, where some of these customers have graduated to the banks, they'll still have our card and hopefully they'll use it and then come back to see us. In the long run, again we're adding service and we'll have more customers.
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Mr. Willey: I just want to go to two flavours, if you will, of a benefit to consumers. One is in lower price, and I think there's a lot of opportunity for Canadian consumers to enjoy that. Secondly - and I am thinking particularly of Trans Canada's case but also ours - it's simply availability.
In the States we have made credit cards available to a lot of consumers who were simply denied them by traditional banks for what at the end of the day were pretty poor reasons.
So I think there are a couple of ways to look at benefit, one of which is price, but to a lot of people, particularly in today's economy where credit card use is so endemic, availability is a significant benefit as well.
Mr. McCormick: That's probably going to bring the competition into your businessplace. We often like to acknowledge the excellent interest rates that are available, the prime rate and what many people pay at the banks.
The interest rates have gone down by 3.5% since a certain date to do with the ``R'' word. This makes a difference to consumers. Do you have enough competition that the rates for your loans have gone down at all in the last one year, three years, or five years?
Mr. van Leeuwen: As far as our loan rates are concerned, no, they have not, again because of the type of customer.
In our sales finance end, which is the retail financing, small merchants, our rates have gone down by about 300 basis points.
Mr. McCormick: So my question for both of you is that certainly with small business it's one of our horror stories, as we hear about how they're having a difficult time in getting financing, yet whether we're going to help them any by letting them get more financing at the highest rates....
How do you see yourselves servicing the market that's there from small business by use of loans and credit cards as you're changing your image and changing the service you're offering?
Mr. van Leeuwen: We see it basically for maybe some small ticket financing, some of the photocopiers and those types of things. Again, we're talking about small amounts of money.
We're not looking at $100,000 loans. We'd be talking in the area of $15,000 to $20,000 for these small business persons.
To acquire that expertise, some of those good people who have credit savvy who can make the sound credit decisions are very hard to come by and we're slowly getting into this. It's something we're looking at, but we haven't aggressively pursued it at this stage. But it's on the table to proceed with.
Mr. Willey: Capital One is purely a consumer lender. We don't engage in any kind of small business lending.
On the earlier point, there's really no better palliative for high rates than increased competition. That's certainly what we've seen in the United States.
Mr. McCormick: One market today is the people at the home businesses. You may be the lender of last resort for these people, good, bad, or otherwise, because they don't always have the assets to pledge. So when you say you're going to be heading for consumers, targeting them rather than small business, there's a bit of a cross-over on all of that.
Mr. van Leeuwen: Yes. We have quite a lot of consumers, for example in Newfoundland, that are basically business for self. They're operating their own boats or they are in business, carpenters and along that line. Of course we service that market and have for all those years we've been in business.
Mr. McCormick: Thank you, and I hope the competition will bring the rates down a bit for our consumers.
Mr. Malhi (Bramalea - Gore - Malton): As you're talking about the benefit to the consumer, I'm still not quite clear on how the consumer will get benefit out of that. Your interest rate will be the same as that of the banks.
Mr. Willey: Well, there are two forces, I guess. Let me give a concrete example of one.
Historically, in the U.S. bank credit card lenders would use a lot of criteria to lend, such as that if you do not make a particular level of income you simply are rejected out of hand. If your address is a post office box instead of a street address, you are rejected out of hand. If you're self-employed, you are rejected out of hand for a credit card.
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Capital One went and tested all those things and asked what really does matter; perhaps they have some logic to them, but let's really find out if this is a real indication of risk or not. What we found out is a lot of those things banks traditionally have used as rules of thumb to lend don't really have any sort of risk aspect or a risk predictability to them.
I think we all know people who may earn a lot of money but we would not consider them to be good credit risks. We all know people who don't earn a lot of money whom we would anticipate were good credit risks. So one source of benefit to consumers is in fact that more of them had this product available to them than would have in a less competitive situation.
As it relates to interest rates charged on a product, Capital One has historically in the U.S. been one of the lower rate providers. Certainly our rates are below industry average. In fact we led the decline in interest rates charged on credit cards in the industry. I think our average rate in fact declined quite precipitously from 1992 to 1995 as we became more and more aggressive in offering low rates to qualified consumers.
So I think benefit to consumers from increased competition can accrue in a number of ways.
Mr. Malhi: What will be the loss to the banks?
Mr. Willey: What will happen to the banks?
Mr. Malhi: Yes.
Mr. Willey: Well, in the U.S. they've had to be more competitive, again accruing yet more benefit for consumers.
Mr. van Leeuwen: Again, we're talking with the younger customer. The banks are not going to give them a credit card. They don't look at them. A lot of the decisions as to who gets credit and who doesn't are made by machines. We have systems in place looking at it this way, but we always have people who make the last decision. We're a lot more flexible and I think we get a lot more cards out there that way to people who qualify. Obviously, we're in business to make a profit, but we're experts in the field we're in.
Mr. Malhi: I have noticed over the past couple of years the banks have been very lenient with young people. You mentioned these young people. There are even some people who are getting cards by mail. When they filled out their applications they weren't asked any questions.
Mr. van Leeuwen: Some of the logic as to how they go about doing this escapes me. I think you'll see a change in this because they're not in the business to lose money either. So I think it's kind of a blip in the marketplace, if you want to call it that.
I know based on our own history that we're much more flexible and much more forgiving, so when people run into a difficult situation they can talk to us. A lot of our branch managers are local people. They're from a small town in Nova Scotia or Newfoundland or British Columbia or northern Ontario, so they know the local conditions. If there is a strike or a downsizing or something that really affects people, they're much more compassionate because their customers are their neighbours. We encourage this. We hire locally and try to promote from within.
Mr. Malhi: As you are talking about young people, I notice one thing. I know people who have a son. This young guy got a credit card and didn't make the payments. His parents came to me to say he's not paying the card and we do not want to incur more debt. I called the credit card company and they said they could not let me know what the problem was. I said look, because he lives with his parents, later on you're going to come back to the parents to pay the money, or the collection agency will do the same thing.
In other words, I think this is spoiling these young people. As you say, once they're not working, you are lenient with them. They don't want to work. They just use the credit card when they want.
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Mr. van Leeuwen: I can't relate to that specifically, because it may be a different situation. I know we as a company.... If you're talking about someone who has a credit card and lives at home, and we're going to talk to the parents and get them to pay, how could we possibly...? First of all, privacy gets into it. If the son or daughter is dead, the parents are not responsible. So I don't understand.
Mr. Malhi: That happened.
Mr. van Leeuwen: I think that's something that should be talked about, because several issues are involved here, and we as a company don't operate that way.
The Chairman: Maybe you could pursue that privately afterwards.
From what I've heard, you have a very compelling case. Of course we've not heard the counter-arguments, if any exist. We would welcome hearing them. But in the absence of counter-reasons as compelling as yours, I would be prepared to say your proposal to us has merit.
On behalf of all members, I thank you very much.
May we take a short break?
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.1704
The Chairman: Can we come to order?
Our next witnesses are the Canadian Bankers Association's schedule II foreign banks executive committee. The issue that we'll be hearing about today from these witnesses is somewhat similar to the issue raised by the previous witnesses. It involves how Canada should treat, deal with or regulate foreign financial institutions in Canada.
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We have with us Mr. Fred Buhler, chairman and chief executive officer of the Bank of America Canada; Willem Veger, president and chief executive officer of ABN AMRO Bank Canada; Osamu Okahashi, president and chief executive officer of Sumitomo Bank of Canada; and Marlene Buchanan, assistant vice-president of Deutsche Bank Canada.
We welcome you and look forward to your presentation.
Mr. Fred Buhler (Member, Schedule II Foreign Banks Executive Committee, Canadian Bankers Association): Thank you, Mr. Chairman, and thanks to the members of the committee for the opportunity to appear today.
Nine months ago I was asked to chair a committee representing the schedule II foreign bank subsidiaries in their discussions with the federal government during its review of the Bank Act. We are appearing today to represent the entire foreign bank community in Canada.
The white paper recognized that wholesale banking options that do not accept retail deposits should be allowed to opt out of the Canada Deposit Insurance Corporation. This proposal is important to the foreign bank community.
The foreign bank community also supports the proposals in the white paper to relax the current requirement that non-bank financial subsidiaries be held directly by the schedule II subsidiary of the foreign bank. These changes, while welcome, fail to address the issue of direct branching.
We have come here today to ask for your support in encouraging the federal government to permit international banks to establish direct branches for wholesale banking activities in Canada as part of the 1997 reform of the Bank Act. This will create a more competitive domestic banking environment, and the international banking community in Canada will make a more significant contribution to the Canadian economy.
At this point, Mr. Chairman, I'd like to introduce Mr. Okahashi, my colleague from Sumitomo Bank, who will talk about exactly who the foreign banks are in Canada and why they haven't been more successful.
Mr. Osamu Okahashi (Member, Schedule II Foreign Banks Executive Committee, Canadian Bankers Association): Thank you, Mr. Buhler.
Who are the foreign banks in Canada? Canada has 45 active schedule II foreign banks from all the world's major trading areas. Included are 17 European banks, 9 Japanese banks, 8 Asian banks and 10 American banks.
Some foreign banks have focused on Canadian communities with ties to their home countries. These banks typically supply a variety of personal and business banking services to individual consumers, as well as to small and medium-sized companies. Other foreign banks focus on corporate and investment banking services, including financing the international trade activities of Canadian companies.
Mr. Chairman, you might ask why the foreign banks haven't been more successful in Canada. It has been said that their lack of success is primarily due to not having a large branch network in Canada. While the existence of a national branch network may have some impact on a bank's ability to provide services to its retail customers, it has almost no relevance to its ability to service its business customers.
What is significant is that operating through a subsidiary adds costs and places unnecessary restrictions on us that limit our activities.
The 45 foreign banks operating in Canada today include a number of the world's largest and most successful financial institutions. Because of the subsidiary requirement, Canada in fact ends up with 45 small local banks owned by large international banks. These 45 small banks are significantly restricted in the size and scope of their activities in Canada. This would not be the case if these banks were allowed to operate as direct branches of their parents.
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Thank you. Now I would like to ask Mr. Veger to talk about some of the benefits of a strong international bank sector in Canada.
Mr. Willem Veger (Schedule II Foreign Banks Executive Committee, Canadian Bankers Association): Mr. Chairman, I've seen enormous changes in international banking over the last twenty years. When I started out in this business, foreign branches were established primarily to finance international trade flows. Driven by the globalization of financial markets, the role played by international banks today has changed dramatically. They deliver a far greater range of financial products. They facilitate the movement of capital between countries. They provide information and business contacts across the world.
In every major financial market, foreign banks play an important role in complementing the services provided by domestic banks. For example, foreign banks provide depth to the loans indication market by participating with Canadian banks in major corporate loans. Through international bank participation, domestic banks are able to better diversify credit risk. At the same time, competition helps to lower the cost of funds to borrowers.
In Canada today, however, the subsidiary requirement effectively limits international banks' ability to lend to Canadian corporations. Foreign banks provide significant trade finance services for Canadian exporters. According to the government's own figures, every billion dollars of Canadian exports adds roughly 11,000 jobs to the Canadian economy.
In particular, international banks facilitate the participation of Canadian companies in the rapidly growing, emerging markets of Asia, Latin America and the former East Bloc countries. Because of their global networks and their expertise and willingness to take risk in markets with little or no Canadian bank presence, international banks can offer trade services that otherwise would not be available to Canadian exporters.
Likewise, global banks can act as a source of expertise and financing for foreign direct investment in Canada. Their relationship with companies in their home markets and elsewhere provide them with opportunities to find investment partners or forge joint ventures to the ultimate benefit of Canadians.
Banks like ABN AMRO Bank, Deutsche Bank, and Bank of America have considerable experience in lending to small and medium-sized businesses in other parts of the world, including Europe, Asia, Latin America and the United States. However, Canada's subsidiary requirement acts as an effective barrier to the entry of international banks that would like to serve the SME market. The upfront capital requirements and additional operating expenses of a subsidiary discourage exploratory entry into these markets.
Finally, the international banking community provides jobs, occupies real estate, uses local goods and services and pays taxes.
With this, Mr. Chairman, I would like to ask Mr. Buhler to speak about the implications of the status quo.
Mr. Buhler: Thank you, Mr. Veger.
Financial institutions evaluate the performance of their operating units in order to reallocate scarce capital, other resources, and to better integrate their operations globally. The fact of the matter is that unless we in Canada can provide an environment in which international banks can prosper, resources will be redirected to those markets where such opportunities exist.
Over the past decade the number of international banks with a presence in Canada has fallen from a high of 59 to a current level of 45. We expect an additional two will close shortly. If the government delays action on the branching issue, we expect to see more foreign banks leave this market. Those remaining will continue to face difficulties in competing for resources within their respective companies.
Every major world financial centre has an international banking community that complements its strong domestic banking centre. A common thread found in each of those centres is the ability of international banks to choose the form of establishment or operation; in other words, to operate as a subsidiary or as a branch.
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Canada stands out as the only advanced economic power that does not allow international banks to operate through a branch structure. The most recent global survey of the Institute of International Bankers found that of forty countries responding, only Canada and Mexico require international banks to carry on their activities strictly through subsidiaries.
International banks have been urging the Canadian government to permit direct branching since before the 1980 amendments to the Bank Act. As noted earlier, the subsidiary requirement is a major reason why Canada does not have a more vibrant international bank community and why there is not more competition from foreign banks in the domestic banking sector.
Let me conclude by trying to anticipate a few of the questions you may have. You may say that while our concerns are well founded, the government does not want to deal with powers issues until after the task force has reported. With respect, this is not a question of new powers. International banks are saying to the government they simply need more flexibility to exercise their existing powers.
Second, you may be concerned that the branching proposal we are making is somehow controversial. In their testimony the CBA indicated that no bank in Canada needed or wanted continued protection from international bank competition. In addition, the change will be welcomed by Canadians who are concerned about competition in the banking sector. Finally, permitting international banks to establish direct branches for their wholesale banking activities will help Canadian banks abroad. For example, currently Canadian banks are unable to establish branches in Switzerland because Swiss banks cannot establish branches in Canada.
In any case, the essential issue is the impact of direct branching on Canada and Canadians. At the end of the day, this committee and the government need to ask this question: Is Canada really interested in increasing competition in the domestic banking sector and by so doing having a positive impact on jobs and growth in the Canadian economy? There is a clear way this committee can advance these goals: by recommending to the government that branching be part of the 1997 reforms.
Canada has a long history of excellence in financial services. Canadian banks are respected around the world. That having been said, foreign banks have a legitimate role and can make a greater contribution in Canada. To do that we need the ability to operate as direct branches.
This concludes our preliminary comments. My colleagues and I look forward to your comments and questions. I thank you for your attention.
The Chairman: Thank you, Mr. Buhler. I think you've made a compelling case. Subject to what the Canadian Bankers Association is prepared to say when they return before us, I think your proposals deserve our support.
[Translation]
Mr. Bélisle.
Mr. Bélisle: In your document, in the last paragraph on page 8, you point out something that I find very interesting. You state:
- Finally, permitting international banks to establish direct branches for their wholesale banking
activities will help Canadian banks abroad. For example, currently Canadian banks are unable
to establish branches in Switzerland because Swiss banks cannot establish branches in Canada.
I would like to know whether granting your request will allow Canadian banks to establish themselves more easily in Japan just as it will help Japanese banks break into Canada. Will this reciprocity come about automatically if we facilitate the entry of international banks? For example, if we facilitate the entry of Japanese banks in Canada, will Japan open up more easily to Canadian banks?
[English]
Mr. Okahashi: As for Japan, there is basically no restriction on the entry of foreign banks. For example, four Canadian banks have branch operations in Japan, and that applies to other countries as well. There is basically no restriction as far as a foreign bank's entry is concerned.
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Mr. Grubel: I fully support your request and I think you have a very good case for asking for the ability to open up branches rather than just operate a subsidiary. But I think you're not asking enough. I spent a semester doing research in Singapore and studying the success of that marvellous small country. One of the secrets of success has been that they have had huge expansion of multinational banking activities. They came from nothing to huge employment opportunities, tax revenue, and general huge benefits to the small country.
I looked into the secret of their success and what I found out was that the government called in the representatives of foreign banks, who were not even there yet, and asked them to make a wish-list of what regulation and policies you would like us to change in order for you to come and establish a presence in Singapore and make Singapore one of the premier centres for international finance in the world.
The banks came, they made their wish-list, the government consulted with academics and other experts and said that one was overstating their case, another was okay, and so on.
The banks came in. Some of the activities they wanted, like investment banking, they didn't get. They stayed in Hong Kong. The Government of Singapore called in everybody again and asked them what it was that prevented them from having investment banking in Singapore. They said ``We told you on our wish-list that taxation rules would have to be as follows, but you didn't believe us. Hong Kong is more profitable to us; we'll stay in Hong Kong.'' So the government said thank you very much, and a few weeks later the condition was removed and now they have lots of investment banking activity in Singapore.
I find there's a wonderful spirit -
The Chairman: Mr. Grubel, are you the honorary council for Singapore?
Mr. Grubel: No, but I find this to be a wonderful spirit of how one serves one's country as a whole by creating employment, tax revenue, all kinds of opportunities. I wrote papers saying that we should have done the same thing in Vancouver. We had a wonderful time zone advantage to have a multinational centre in Vancouver, but there's something about our government that does not take lessons from the success stories of other countries.
I would like to hear whether in your dealings with the Department of Finance there has been any change in attitude about welcoming you, about trying to do what can be done for Canadians, for Canada, maybe at the expense of some established banks, and without necessarily insisting that there be reciprocity. Singapore got all of that without getting reciprocity, as far as I know. It doesn't matter. They wanted lots and lots of employment and taxable profits in their country, and they got them.
Why can't Canada do this? Can you help me solve that puzzle?
Mr. Buhler: Thank you, Mr. Grubel. As usual, you ask an interesting question.
Singapore certainly was embarking at that stage of their history on an effort to build up their economy, and they have been terrifically successful, not only in becoming an entrepôt, but also in developing a banking centre that serves the ASEAN countries and other parts of the Asia-Pacific region.
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In Canada's case, what we're focusing on here is amending the law in a very minor way, which would significantly impact the performance of foreign banks in Canada and therefore would significantly impact their ability to provide assistance to the Canadian economy in generating both jobs and economic growth. It's really with a very narrow focus that we've been placing on this issue....
I've been in Canada for five years and I think it's fair to say that during this period I've seen a major shift on the part of various government departments and ministries as far as the willingness to discuss this issue and figure out ways to make this work. Have we seen attitudes shift in a positive direction? Absolutely. There's no question whatsoever about that. In fact, if nothing else, I and my colleagues throughout the foreign banking community have been terrifically impressed by the reception that we've received in Ottawa on our visits here, from members of Parliament on both sides of the aisle as well as from regulators and staff in ministries who discuss quite frankly the sorts of issues, problems and challenges we have, and who will work together with us toward a solution. We really feel quite good about that partnership.
Mr. Grubel: Thank you very much. I hope this will continue and translate into action.
Mr. Buhler: Thank you. So do we.
The Chairman: Mr. Grubel, I don't think you should take back anything you've said, because people recognize the fact that you're not the first member of the Reform Party who has looked to Singapore as the example for Canadian laws.
Some hon. members: Oh, oh!
Mr. Grubel: Actually, I was in that country and I was fighting those practices.
The Chairman: Thank you very much, Mr. Grubel. Mr. Campbell, please.
Mr. Campbell: Thank you, Mr. Chairman. I'm glad that Mr. Buhler concluded by recognizing the effective ongoing dialogue that the schedule II banks are having with officials as we try to evolve a system that will serve Canadians well. I think members of the committee recognize that increasing strength among the foreign banks operating in Canada would be good news - better news - for consumers in this country, although I think we should clarify something.
Would you clarify this for us? When we talk about branching, we're not talking about foreign banks that want to become your neighbourhood branch. The foreign banks don't want to compete with the Canadian chartered banks in their branch network. You're looking for the most part at a different level of business. You're looking at the wholesale level. Am I correct?
Mr. Buhler: Yes, Mr. Campbell, absolutely. The discussions we've held with the government so far - and more specifically with the regulators - have focused on the wholesale side of our business. If we were to provide retail services through the direct branch network, the question of how we would protect the retail depositor comes up. How do we maintain the sort of coverage that CDIC provides? We agreed early on in our discussions that what we're really talking about here is the wholesale side of the business. We're not talking about retail banking. We're not talking about putting deposits from consumers into this type of branch.
Mr. Campbell: But some foreign banks could choose to operate in that way, to have local branches and take deposits and compete in that business, isn't that so?
Mr. Buhler: Under our current discussions with the government, in an effort to protect the small depositor the idea is that only deposits that are over $100,000, I think, that exceed the CDIC coverage of $60,000, would be able to be taken by this kind of an operation.
Mr. Campbell: The wholesale business would still be good for Canadian business.
Mr. Buhler: Absolutely.
Mr. Campbell: Hence the presence of foreign banks in the wholesale business. Could you explain why?
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Mr. Buhler: The kinds of businesses we would be doing potentially could be broad-ranging. One of the challenges we have as a subsidiary is that the requirements to locally capitalize the subsidiary and the requirements for local corporate governance are such that it's not feasible to introduce a number of products that otherwise we might be prepared to introduce.
The classical contribution that foreign banks make in this type of market fall generally into large corporate or wholesale banking, and they provide a service that we think is very important for the economy. This is true in Canada, the United States, the United Kingdom - virtually every major market. There's a role for foreign banks to play, and that's in helping the large loan syndication market.
As companies grow and their requirements to raise capital increase, it's not unusual, in the marketplace today, to see requirements for $1 billion, $1.5 billion or $2 billion. For the soundness of the banking system, it's important that those amounts be underwritten by a large number of banks, so that if the loan should fail, that loss is spread amongst many institutions and does not therefore represent a potential loss for any one institution or two institutions. So that's a very important service that the foreign banks offer in this sort of market.
We also play a key role in adding liquidity to the capital markets area: foreign exchange trading, securities trading, money trading. Once again, it's important to have a number of players so you can spread the risk, and foreign banks play that role.
The third area we're very active in is helping Canadian companies finance their export programs. Specifically, if a company is selling their product to China, the Philippines, Colombia or Mexico, in many cases the Canadian banks do not have a presence in those markets, so the Canadian exporter turns to a foreign bank to provide financing. That's at the upper end of the market.
However, also in the middle market and in the lower end of the market, all of these banks, or many of these banks, are very experienced, as Mr. Veger said, in the SME area, for example, and it's reasonable to expect that banks will move in to under-served markets if there are attractive opportunities. That does not require a branch network.
Mr. Campbell: All that is exciting and interesting, and I think good news. Let me just ask this, though. How will you answer Canadians who will have a concern, as I know some will, about accountability, if you are not locally incorporated with a local board?
Also, in the case, unlikely as it may be, of bankruptcy, or a decision to close a branch, will the assets of the parent be available to satisfy the creditors of that operation in Canada, the depositors? How do you answer those concerns of accountability and the bankruptcy situation?
Mr. Buhler: There are two issues. The first issue is that even though foreign banks are hoping to operate as a branch, they will have regulatory supervision very similar to what we currently have.
I've worked in 14 or 15 countries in my career as an international banker, and we have always undergone close regulatory supervision. That doesn't change because the legal status changes. So there's an opportunity for the Canadian regulators to keep an eye on what we're doing and on the soundness of how we run our business.
Second, quite frankly, from a risk standpoint, having spent much of my life analysing credit risk, I would much rather lend to a branch than to a subsidiary. In the case of the Bank of America, for example, if I were lending money to the Bank of America Canada, I'd have $200 million in capital supporting that risk. If I were lending to a branch of the Bank of America NT&SA, our global operation, I'd have $26 billion in capital supporting it. That risk is certainly a much more attractive one.
Mr. Campbell: Thank you.
The Chairman: Mr. Fewchuk, you had a question.
Mr. Fewchuk: I will give my time to Ms Whelan.
The Chairman: Welcome.
Ms Whelan (Essex - Windsor): Thank you, Mr. Chairman. I apologize; I was speaking in the House.
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My colleague Ron Duhamel is also unable to be here today, and he asked that I raise the following on his behalf: What can a foreign bank branch service offer the Canadian financial sector and economy that a foreign bank subsidiary cannot, and what can foreign branch service offer that a Canadian bank cannot?
Mr. Buhler: Concerning a foreign bank subsidiary compared to a foreign bank branch, the branch has a cost advantage. Tomorrow you will hear testimony from our associate from Deutsche Bank that will talk in greater detail about a specific example they have. But the requirement that we fully capitalize a subsidiary adds significant costs to our operation that otherwise we wouldn't have.
In addition, there are corporate governance requirements. We are required to have an external board. We treat that very seriously. A lot of my time is devoted to making sure that the board is fully informed on actions that we're taking and has a chance to exercise their oversight responsibilities.
A variety of other legal requirements surface, because, as a subsidiary, every contract we do has to be executed with a Canadian subsidiary. So if we have a relationship with a customer and operate with them in more than one country, whereas we can do a general contract with them for all other countries, in the case of Canada we have to do a separate contract. That means additional legal expense for the customer and certainly takes a lot of their time in negotiating that contract.
Those are just a few examples of why the subsidiary is a lot more expensive for us to operate, and time-consuming.
I believe a foreign bank versus a Canadian bank was the second part of your question. That's an issue I covered briefly perhaps before you came in.
The Chairman: We have a vote. We'll have to leave here in less than five minutes.
Mrs. Brushett.
Mrs. Brushett: You've indicated that there would be positive impact on jobs and growth in our economy. Could you tell us how that would happen?
Mr. Buhler: I'll give you one concrete example. The government has said that for every billion dollars in exports, 11,000 jobs are created. My bank alone has financed over a billion dollars in the last 24 months, creating 11,000 jobs, and if I were to poll my associates, I'm sure that number would go up significantly.
Mr. Pillitteri: Because of time, I just wonder if my question should not be addressed toMr. Grubel. In his preamble to the question he advocated what the banks asked the Government of Singapore, and the question was answered: ``Hear us - no taxes''. Would he be advocating that we not charge taxes to the Canadian banks or to any foreign banks coming into Canada?
Mr. Grubel: It was just a bargaining position. If you charge 5% on a huge base, you might get infinitely more taxes than if you had 50% on a very small base. That's the issue.
Mr. Pillitteri: Surely this is not the position on this side.
Mr. Grubel: You don't want more money? You don't want more revenue to be raised?
The Chairman: Maybe we could continue this debate after the witnesses have left.
May I thank all members, and may I thank the witnesses? As I stated earlier, I think you made a compelling case for us to move very quickly and not wait for the task force to report on this. That will be my opinion, subject to evidence that we may hear subsequently, but I doubt there will be any that will override the case you've made before us. I thank you very much.
Members, we have to leave now for a vote.
I apologize to the Consumers' Association of Canada. If they would be good enough to wait until after the vote, we will come back as quickly as possible.
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The Chairman: Can we come to order?
Our last witnesses today are from the Consumers' Association of Canada: Marnie McCall, the director of policy research, and Dr. Robert Kerton, chair of the financial services committee. Thank you very much for being with us.
Dr. Robert Kerton (Chair, Financial Services Committee, Consumers' Association of Canada): We're very happy to be here, Mr. Chairman.
As you realize, these are both good times and bad times for consumers in Canada. I guess your committee is responsible for some of the good times. The last few changes that have been recommended by your committee have been very productive from the point of view of allowing consumers to have a better chance in the financial services marketplace, and the report that you issued last time was definitely a step forward.
As you know, we have consumers on the other side of the issue with record debt levels in Canada of 92% of personal disposable income. We also have bankruptcies at record levels this year, with perhaps 70,000 bankruptcies over the year among individual consumers. So the measures you take are important to us.
We have also done some research that's connected to the National Quality Institute on rating different service providers. From that evidence we have learned that people are not so happy about some of the areas in financial services. The paper you're considering from the Ministry of Finance is promising some steps forward in that regard.
The first issue we want to briefly outline is privacy. I'm going to ask Marnie McCall, the director of policy for the Consumers' Association of Canada, to address that issue.
Ms Marnie McCall (Director, Policy Research, Consumers' Association of Canada): Good evening, ladies and gentlemen. Thank you for giving us the opportunity to appear before you. I am going to keep my remarks very brief because I don't know how long my voice is going to hold up. I managed to catch whatever it is that's going around this year for the first time. I don't usually get it until the January version.
As you know, the Consumers' Association of Canada has been involved in privacy issues for quite some time. It's a major interest of ours in a variety of areas, not just in financial services.Dr. James Savary, who many of you may be familiar with, was a member of the Canadian Standards Association committee that developed the CSA model code of privacy, which the Canadian Bankers Association modelled their code after.
The Consumers' Association certainly applauds the statement in the white paper supporting the adoption of the provisions of the CSA model code. We believe it should go a step further and that those should be mandated as minimum standards. In addition, we believe the proposal should also be expanded by adding some sort of mechanism for auditing compliance with the code once they are in. It's all very well to have a code that people introduce and say they are going to follow, but simply reporting that you have complied with it without having some method of checking up on that we think does not provide sufficient protection.
We also think there should be some provision for sanction for failure to comply with privacy provisions. We haven't proposed any specific sanction, but there should be some provision.
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I'm going to digress just a little bit here. The last time I was in this building was in the summer of the announcement of the GST harmonization, and that was prior to the current security procedure that's now necessary to get into this place. I was quite unprepared for the level of security. I regret very much that such a level of security is seen to be required. I understand the need for it; however, I do not believe it is necessary to record people's identification once you've shown two or three pieces of picture ID that show who you are.
This is not the venue to take up privacy issues in general, but it is a big concern of the Consumers' Association and it is becoming a greater concern with increasing issues of security generally. Secure financial transactions, especially over the Internet, etc., are going to make issues of privacy exceedingly important. I just want to raise that to reinforce our recommendation that the provisions of the CSA model privacy code be made a mandatory minimum.
Dr. Kerton: Thanks, Marnie.
I'll say a few brief words about the cost of basic financial services. I don't think we mind if questions arise as we cover a topic rather than allowing politesse to let us finish.
On the basic financial services, we recommend a huge improvement in transparency, that is, allowing the customer to understand the documentation involved. The banking industry's made some progress on this over the last, say, six years, and it's certainly welcome progress. We feel the insurance and investment industries can make some similar progress on simplifying information about fees and charges.
But the whole industry could do far better by allowing the customer to see in advance what the charge is going to be. That would include charges at ATM machines and places like that.
Did you want to cover availability?
Ms McCall: Yes.
On the availability of financial services, these issues arise primarily around being able to establish identity for people to cash cheques. That's the context in which it usually arises. We are pleased that the white paper has recommended developing appropriate policies to enable people to open bank accounts or cash cheques.
Also - and again, this ties back to the privacy issue - some people prefer not to have an institutional account where they keep their money. We believe policies should also provide for those people to be able to cash their cheques without having to open a bank account. Partly this is raised because, as a matter of efficiency and cost-saving for many governments, from municipal right through to federal, direct deposit is becoming much more common, and in some cases required.
Some provinces, I believe, are requiring that any cheques issued by the government be received by direct deposit, and people who do not wish to have an account at a financial institution, such as a bank, a credit union or whatever, are therefore compelled to either do something they don't want to do or refuse to take money to which they're entitled, which is not a situation people ought to be in. So the flip side of making sure everyone has access is to make sure people aren't forced to have access if they don't wish to.
Again, this is not just confined to banks or credit unions. When we talk about basic financial services, financial institutions should consider including basic life insurance, disability insurance, economic security for retirement and those kinds of things. It's more than just being able to write and deposit cheques.
Dr. Kerton: The next issue I want to talk about I'm going to try to do in both languages. It's an issue that's very important to consumers.
[Translation]
I would like to discuss the harmonization of legislation on cost of credit disclosure in Canada and the annual percentage rate, or APR.
Regarding the issue of the annual percentage rate, the current situation is promising for consumers and borrowers in Canada.
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We strongly encourage an agreement between the provinces and the federal government, which will allow consumers to enjoy a comparable annual percentage rate evenly calculated for all leasing contracts. This would be a significant improvement for consumers.
The CAC will ask the committee to consider two other measures to improve disclosure in contracts: first of all, the use of plain language, and secondly, the use of large print to identify the annual percentage rate in contracts,
[English]
There's been quite an improvement lately in this agreement, as you realize. The harmonization effort among the provinces hasn't proceeded very well, and this signals that success is unusual and certainly welcome for consumers.
The agreement that's been reached thus far allows a method for calculating the annual percentage rate of interest. This is something we can be proud of, although it only brings us forward to the best international practice. It's been the case since 1971 in other countries that this type of information is available to consumers. It's important because if you get a contract that has three or four or five pages of densely written type, you can't understand what it is you're paying and how much the rate is for this loan.
The United States has used a method like this. It is important to have this done in plain language and to have the calculation in the largest type on the document. If you've ever seen one of these documents, usually the simplified version has only two sides. There's quite a bit of printing on that, with all the terms and conditions, but the largest type is the rate of interest, the amount you'll pay per year.
What that does is it allows the consumer to shop among different providers. The providers with the best service are likely to get more business that way and the market will succeed. We think that's important. We welcome the success that's achieved and we urge your committee to go a step further and ask for this to be in the largest type and in plain language as well.
The next issue I'd like to cover is tied selling. Tied selling is something that's been discussed here in different ways. I'd like you to think of it from the point of view of a customer in an office of any financial institution, perhaps in a situation that could make you a vulnerable consumer.
In one circumstance, if you don't have a familiar understanding of how the financial market works, you're sometimes faced with a decision that has several elements. You can't compare it to another situation because you're not in another office where you could be doing competitive business. So the very fact that you're in an office can put you in a vulnerable situation. You may receive an offer that's actually superior and not know it, or you may be receiving one part of the service that you went to buy at a good price and being sold something else at a bad price.
The thing that will make this a particular problem that will likely give you a lot of concern in the future is the selling and the commission scheme that will be employed in these offices. The person doing the selling of item one is going to be on a commission for the volume basis for how much of two and three and four, which are the high mark-up items, are sold.
That's a particular problem that's a little bit beyond the legalistic notion of tied selling. You know, if you don't give us this we won't offer you a good price on that. That's coercive retailing. But you see there's a problem even beyond that, which can only be clarified by much better language than we have so far.
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You can take it to the issue of one that concerns a few hundred million dollars and probably a lot of your time, with banks selling insurance and so on. Think of it this way. The Consumers' Association of Canada has always been in favour of banks selling insurance, but we've been in favour of them selling it somewhere else, not right in the bank where you have the vulnerable consumer tied up with whether his loan will be approved.
We rather like the cautious position the committee has taken in the past, which is to allow the competition from the new product to be introduced to the market without allowing that extra vulnerable situation where right in the bank branch you have a commissioned agent trying to sell the insurance. That's our position. We have been in favour of that competition.
Let me mention two other issues. One is foreign bank entry. We've always been in favour of it. I think that among organizations you heard it from us first. We wanted more competition and more players in all of these markets. The fact that the big five or six banks have 92% of the deposit market makes Canada unique and poses a special problem for us here, a problem that committees like yours in countries where they have 2,000 banks and a lot of competition don't have to deal with.
There's a special problem, and that's why it's worth any attention you can give to regimes that allow easier entry for foreign banks and electronic banks, for other players like insurance companies and for mutual funds. The lower you make those barriers against the new entrants, the more likely it is that the financial services market will serve Canadians. Banks won't disappear. They'll just compete more vigorously and do a good job for us.
On that same issue, I don't think you've yet discussed one of the frightening comments we've heard lately from the sector, which is that our banks should be allowed to merge, to get bigger. The reason behind this request is that Canadian banks have to be bigger to compete in the international market.
I think we can be very clear about two types of approaches to this merging. Method one is that banks serve Canadians admirably. They're so splendid that they grow and they succeed internationally too, by serving international consumers, depositors, whatever. That's terrific. That's fine.
The second strategy is sort of a carnivorous strategy, if you like. You have a captive market back in Canada. You allow these mergers, so you go from five banks to four banks to three banks, and you grow rich and fat with these high charges on Canadian customers in order to subsidize the business abroad. That type of merger - to grow big for big's sake - is certainly not in the interest of anybody in Canada, not the consumer who would have to pay the extra charges and not the small business who would have to pay the monopoly fees as well.
I'll conclude there, Marnie.
Ms McCall: I have just a couple of things to add. I believe everyone now has the written presentation, which has a summary of the recommendations at the beginning. I'd just like to highlight a couple.
We are recommending that the Bank Act be amended to prohibit coercive tied selling. As Professor Kerton said, there are certainly circumstances where consumers may benefit from getting more than one service from the same financial institution, and we have no intention of trying to prevent beneficial packaging of products in the consumer's interest, no intention at all. But we do think there are circumstances where people are coerced or pressured into taking products they might not want.
We think this is not just something that should be done in the Bank Act. This review is a review of the financial sector and we think those rules should apply to everyone in the interests of harmonization and having a level playing field where everybody has to follow the same rules.
We've also made a recommendation with reference to the prepayment rule on mortgages. We are encouraged that this is going to be looked at. We don't have a position on which direction it should take, but we do think the rule should be the same for all mortgages regardless of the term.
With regard to selling incentives for products, we recommend that any sales incentives that create a conflict of interest between the agent's own interest and the client's interest be prohibited. This is happening in other sectors. Compensation structures are being reconfigured to remove that conflict of interest between the agent and the consumer. We think that certainly this should not start coming into effect where it doesn't currently exist.
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Thank you very much.
The Chairman: Thank you very much. Could we please start the questions with Mr. Schmidt?
Mr. Schmidt: Thank you, Mr. Chairman.
I have a couple of questions. On the one hand, you seem to present the need for having non-bank services available by the banking community. Then, later on in the paper, you do present the business of commissions on non-banking activities. I'd like you to clarify for me what you understand to be banking services and non-banking services.
Dr. Kerton: Your question is quite good, because the financial sector, as you know, has now become pillarless, not pilloried.
Mr. Schmidt: I understand.
Dr. Kerton: It's true that whether you're making international cheque clearances or travellers cheques or whether you're just trying to patch over some short-term problem with either a loan or a VISA card, these transactions have kind of blended into one.
The issue that you ask about can be handled as follows. We're in favour of not just banks but insurance companies or anybody having extra competitors in the field. So however you want define a market, we'd like to have more players in it. It's a special problem in Canada that we have so few players in some of the markets. So that's the original position.
Say you go into a market with a conglomerate approach. Say you have a conglomerate with a partial monopoly in one sector trying to get an edge in a competitive sector with some joint activity in a market in which the customer rarely has all the alternatives clearly phrased. We think that medium-sized businesses have an expert on staff to make these calculations. Small businesses probably don't have this. Certainly the consumer....
If you remember the Cashion commission in Alberta, it pointed out that there are so many new product introductions every year - ``a bewildering array of new product introductions'' were the words they used - that they are beyond the understanding of anyone but the most sophisticated financial agent.
So this is the world in which you live, where these bells and whistles are getting introduced. Some of them are worthwhile product improvements. The rest are little bells and whistles on something that already exists, not necessarily an improvement. It turns out to be generating noise that prevents you from finding the thing you're actually looking for.
Ms McCall: I think the other way we use it is if we're talking about banks that are deposit-taking institutions giving chequing and writing privileges and doing loans. We would call those things banking activities, whereas the sale of mutual funds, life insurance, or property and casualty insurance would be non-banking activities within that institution. Another way of looking at it might be with the primary activity of the institution and the ancillary things they do.
Mr. Schmidt: So does that mean that you would also object to a bank manager being paid a bonus if the particular branch met a certain quota?
Dr. Kerton: The ideal circumstance would be when the poor unfortunate client in the vulnerable situation in front of the bank manager saw a sign over the bank manager's head that said the manager got a special bonus if the manager switched you to this program. That would be the ideal.
The problem of the principle of trying to induce the people out in the branches to behave in one way or another is really that the customer doesn't know the incentive system. The system has been invented in order to reward activity that works for the seller. If you have a transparent method of realizing.... Let's say this mutual fund gives a larger kickback at the end of the year, such as a volume bonus or something like that, then I can decide to purchase that in spite of the fact that I know this agent is selling me something he or she gets a personal advantage from.
Mr. Schmidt: You want the incentive system fully transparent?
Dr. Kerton: Yes.
Mr. Schmidt: Is this for all aspects of the bank's operation?
Dr. Kerton: That would be ideal.
Mr. Schmidt: No, I'm asking you: what do you want?
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Dr. Kerton: If it's impossible to make it transparent, then you might be forced into a situation in which you say that maybe we shouldn't allow that type of thing to be sold in that circumstance.
Mr. Schmidt: This very interesting. If the incentive system is to be totally transparent for every aspect of the detail - this is what I think I'm reading from your statement so far - then how does that square with your position on preserving the privacy of the consumer?
Dr. Kerton: Look at the incentive system that's facing the customer. The customer is in a financial institution, with an insurance company, mutual funds, or whatever, and the seller is getting payments by one mutual fund at a higher level, if you reach a certain volume, than that of another mutual fund. If that payment system were known to the customer, the customer could decide maybe to make the bad choice that enriches the seller in spite of the circumstance. But the normal assumption by the buyer is that there is no secret kickback. There is no incentive system invented to try to twist sales one way or another.
This hasn't got any implication for privacy. The fact that I, as a buyer, know that there's a reward system in place doesn't in the least compromise the fact that I'm in there making a loan. You're not going to tell that to someone else. That's the privacy issue about which we're concerned.
Mr. Schmidt: I understand what you're saying. I think there's some difficulty in carrying yours to a conclusion, but I think the principle is a good one. I don't dispute the principle of what you're trying to do, but I think there are some practical difficulties in going as far as I think you want to go. In the whole world of competition, the greater the volume, the greater the incentive to do more business, because there's more profit involved. That's always just going to be there.
The important thing you've forced on us here is the disclosure of how certain kinds of profits are generated and how certain kinds of costs are calculated in terms of the customer going into the bank to compare one institution to another. While on the one hand we have tremendous transparency laws now, they do not compare accurately. Even though I may understand that this is what's happening in this institution, when I compare it with that institution, they are not directly comparable. Is that another one of your concerns?
Dr. Kerton: Yes, that's a significant concern, but it's further complicated by the fact that some of the contracts that exist in Canada are not up to the world standard. We still have contracts in this country that allow the seller to change the contract without the permission of the buyer. When you sign a VISA card, you're agreeing to allow some of those changes. In the European Community they have a directive that requires all the countries to rule out that type of contract. In other words, you have to get the permission of both parties before you can change it.
So when you talk about transparency, we've made significant progress. I'm surprised actually at the progress we've made in the last six or eight years. But we've got a long way to go to get to the best international practice.
Mr. Schmidt: I agree. How do you deal with this? What about the self-dealing of directors of the bank and almost mirror directors of another financial institution, and lending by one to another? Does that concern you at all? I've heard that a lot of your consumer stuff here is for the small borrower or small transaction, but consumers are those who have larger transactions too. Consider the whole business of self-dealing. You mentioned here that you like what's in there. How do you consider dealing with that matter?
Dr. Kerton: We faced that issue before. The solution that was being proposed two governments ago was Chinese walls. It's the idea that if you put a Chinese wall between some of this, then self-dealing won't be known. One part of your corporate empire won't know what the other part is doing.
We had no faith whatsoever in that. It flies right in the face of economic incentives. The organization is trying to succeed and grow and earn profits and so on.
So the issue of self-dealing is still with us. It may be worse in Canada than anywhere else that I know of. Perhaps Germany might have a comparable problem. You can ask some people tomorrow.
In the U.S., for example, the brokerage industry is not allowed to be owned by banks. In Canada, in a bank with its own broker and making its own transactions, you can never tell whether those transactions were all necessary or whether they were done at true market prices or not.
So the Canadian system, by taking away the competitive thrust between banks and let's say underwriters, investment firms and so on, takes away the competitive thrust. It takes away any efficiency gains that could have been garnered by that more competitive sector.
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Then, over and above that, you have the fact that the bank is dealing in bonds and so on with one of its other companies. If you're running one of these companies, that looks terrific. You've brought into the fold one more activity. But the country as a whole might not be better off if you've lost the efficiency gains from the second competitive sector in the investment sector. So there are some serious problems with self-dealing.
You asked more directly about bank executives and self-dealing. We had lots of problems like that through the 1980s, didn't we? Every year two or three or four trust companies would collapse. In 1986 we went and invented the Office of the Superintendent of Financial Institutions, which I think made a significant improvement in that situation. We haven't seen the same type of self-dealing since then that we saw before.
Some of the provinces also deserve credit for improvements they made in obliging people to report self-dealing. I think in 1996 we're substantially better off on that than we were in 1985, for example, but it's not a problem that's going to go away because people still see opportunities to get very rich by making self-dealing arrangements.
The Chairman: Mr. Campbell.
Mr. Campbell: Thank you, Mr. Chairman.
I'm always pleased to hear from the Consumers' Association. You always do very fine work, and today's presentation is no exception. I was pleased to hear your comments about the possibility of insurance being sold in the banks as opposed to outside the banks and that you had an opinion and a position on that.
Members will know from their experience, because we sit around this table a great deal, that often we have representatives of one part of the financial services sector appear here and then we have representatives of another part of the sector. Of course, they each tell us that what they want in powers or what they want to prevent someone else from getting in powers is good for consumers. We hear too little from organizations such as yours about what is in the consumer's interest as you see it, as you define it, as your research indicates.
So as MPs and as members of this committee we're sometimes left with evidence before us that's diametrically opposite, depending on who's providing it. For instance, leasing and insurance are two areas in which people indicated to us where the consumer's best interest was.
My question really is about how much work you are doing on the bigger questions of powers and the impact on consumers, rather than these smaller questions you've dealt with today, which are no less important, I might add. Are you doing empirical work on behalf of consumers, those interests you represent, in the powers area generally?
Dr. Kerton: I think you can separate two types of issues we have to deal with. We're largely a volunteer organization, but it's remarkable what good help we can get if we go to a company president and say we would like to know from your point of view what you think we should be saying. Sometimes we get a really candid answer. The person doesn't want to be seen serving the public interest, but people are willing to do that.
We have two types of issues. We surveyed consumers at our annual meeting about what they're upset about. Health care was number one in Canada. That's a big issue, isn't it? That's a broadly defined issue. But if you go to more narrowly defined issues, we had bank fees as one. It wasn't anywhere near as high as the general issue, but there's an indication that people who are consumer activists are getting some feedback and resourcing on that.
What do you have to do if you're a national consumer organization? You have to represent people who are upset right now about bank fees. Then you have to try to do some research on the long run to tell what the next big issue will be that's going to crush you, the big roller coaster that's going to roll right over and flatten you, and that may not be the issue people are upset about right at the moment.
Mr. Campbell: But surely you're not indifferent to the consumer interests being represented to members of Parliament and to this committee by witnesses who have a vested interest in telling us that the consumer interest just happens to coincide with what they'd like us to do for them.
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Dr. Kerton: I know the committee members here are prudent enough to see that it might be one selection of part of the argument rather than all of it.
You asked us if we do research. The answer probably is no. We have absolutely no real funding for fundamental research. So what do we do? We ask people to survey the research that's already been done. I have some here with me.
For example, look at the Federal Reserve Bank's research on bank mergers. They studied 114 bank mergers through the 1980s, each one over $1 billion, so they weren't small mergers. They were medium-sized mergers. The researchers were unable to find any advantages for consumers out of all those mergers. The evidence doesn't show it. The people doing the research thought they'd be able to find some economies of scale passed on to customers and so on, but there are two major research pieces now that cannot find that bigger is necessarily better for customers, for small firms and consumers.
That's the long-run type of research that we try to do. We try to ask what these major issues are. You asked about leasing. We've asked some people in the leasing business, and we've tried to look at that research. Some of the participants who are involved are very big players in the leasing business, so they don't need protection from a weak consumers' organization of regular people. They can look after themselves.
But what would we want? We would want more competition, and if banks can compete with these big players, that might be a big gain for us. There are some small Canadian players that might get squashed, or maybe they'd find a niche and serve market needs quite effectively. So there's a case of a longer-run situation. Right now most consumers at home aren't worried about leasing and the national legislation that involves who would be allowed to do leasing, but that is in fact an issue that affects everyone later on when it actually comes to making a lease.
Mr. Campbell: I thank you for that explanation. I appreciate that it's hard to know what you should be working on when you have limited resources. Setting priorities is extremely important. Indeed, it's a challenge we face every day here in government. You'll not be surprised to hear that, but I am just a little concerned. Not too much reliance should be placed on extrapolating from foreign research or on not doing research on the Canadian scene on these bigger questions.
I urge you to be aware and to tune in to these hearings and other hearings that go on from time to time. When people purport to represent the consumer interest to us I hope you will be here saying ``it ain't so'' or ``it is so'' or ``the research hasn't been done''. That would be tremendous.
Dr. Kerton: Let me try a more direct answer. Many of these people phone us up. We have them phoning the national office where only four or five people are at work trying to handle it. They phone me as chairman of the economic issues committee. If they have an organized presentation, the minimum we get is their brief. That's the ideal thing for us to evaluate, in the same way that you do.
So in fact we do get those. They make it their business to be sure that we receive their information, so it's not true that we don't know what they're saying. And when they talk about looking after consumers, sometimes it really amounts to wolves pretending that they're going to look after sheep, and other times the argument's quite sound.
Mr. Campbell: Either way, I think this MP - and I trust I'm joined by a number of my colleagues on all sides - would welcome hearing from you and would welcome you telling us when it's the wolf and when a case has been made.
Dr. Kerton: Right. So what you want is a little product test. We'll put everybody's brief against it and we'll test the briefs for truthfulness, accuracy, public spiritedness, and some other things....
Mr. Campbell: In fairness, Professor Kerton, I'm not looking for a Good Housekeeping seal of approval on anyone's brief. I am looking for a more effective and regular voice from consumers on behalf of consumers rather than one from people who, understandably, have a particular viewpoint and want us to believe that the consumers' interests coincide with their business interests. They're in business to serve consumers. They believe what they're telling us. I just think it would enhance the debate immeasurably if you didn't only monitor those briefs, but if you came back to see us and told us what you thought.
Dr. Kerton: Thank you.
Mr. Grubel: There is a respectable philosophical and economic opinion which says that this is not possible. The economic process itself is there and the only way to discover some fact.... It's Hayek. If we could determine in advance what product innovation or what institutional innovation was necessarily going to succeed and improve human welfare, there would be no problem. It is the essence. The Soviet Union would have succeeded, communism would have succeeded. In the innovation process, the process of competition itself provides the information that cannot be provided in any other way - the classical article by Nobel laureate Friedrich von Hayek. You're asking too much of these gentlemen.
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Mr. Campbell: Thank you, Mr. Grubel. I was asking the gentlemen and the lady who are with us today to just enlighten us with their viewpoints so that we can make our minds up while having the best information possible in the circumstances.
Thank you, Mr. Chairman.
The Chairman: Mr. Solberg.
Mr. Solberg (Medicine Hat): Thank you very much, Mr. Chairman.
I really have just a brief question. You people have suggested that, for instance, bank fees be displayed prominently when people walk into banks. I wonder if you'd be willing to go a step further. One of the things that happen when you recommend all the changes and proposals you are making is that it costs money for banks or any financial institution or any business to implement them. I wonder if you think it would be a good idea if, when they listed the fees, they put down the amount of that dedicated to taxes, the amount that is dedicated to regulation - because what you are recommending is of course going to cost money - and the amount that adds up on the bottom line.
Dr. Kerton: Let me try two answers. Answer one is that we would like to be a more active, public body, but the public good doesn't have funding to serve the public interest. It's economically impossible to do everything. And on the deregulation issue, the second point, we're actually much in favour of deregulation.
One of my favourite examples concerns short carrots. You have agricultural inspectors on the border who are paid to make sure that carrots coming into Canada have a certain length. Wait a minute, you say, I don't remember the consumers out on the streets shouting that they want to be saved from the attack of short carrots. Why do we have regulations against short carrots? Well, the carrot producers wanted to have short carrots off the market so that the Canadian short carrots can thrive without competition. And I think if you look at regulations, you'll find that the larger part of them are of the short carrot variety. They've been introduced by someone who pretends to look after the consumers, which is the issue our colleague was on already.
So, in general, we're in favour of deregulation, and for precisely the reason you posed: they cost something and they don't do much good.
There are other regulations. When we ask for transparency, information that will allow the customer to decide that this financial deal is bad and this one is good, we're actually asking for the basic minimum that would allow a customer to make an intelligent decision and reward the seller with a superior product. So we're 100% in favour of that much regulation if you want to say that by regulation a seller has to tell the truth. We think that if you say it weighs a kilo, it should weigh a kilo.
Mr. Grubel: What about the cost? Isn't that a question of cost versus benefit? Does that never enter into those calculations?
Dr. Kerton: I have no problem with using a benefit-cost analysis to see whether truth in presentation - let's say truth in the financial marketplace - is worth while.
Mr. Grubel: Well, that's the question he asked. Have you thought it through? Do you have any evidence?
Dr. Kerton: My response was that for many of those regulations introduced to protect producers, there is no public benefit to it. So it can't pass the test you're posing.
Mr. Solberg: You're suggesting these things be applied without knowing that. Isn't that imprudent? If people are going to be bearing much greater cost than the benefits they accrue, then it's really quite counter-productive.
Ms McCall: One of the things that banks and all financial institutions do on a regular basis is revise their forms. There's not necessarily any additional cost that would be imposed on people by asking them to add this piece of information or rewrite this sentence the next time they revise their forms. Many are moving towards plain language, so there is a cost of overhauling those forms anyway. I therefore think we would see this as part of an ongoing development of better customer service, because that's what it is. If you want to -
Dr. Kerton: We're prepared to accept the point you're after. We think the Canada Deposit Insurance Corporation costs about one-ninth of what the U.S. system costs per dollar saved, so it seems to be very efficient compared to that.
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I don't really agree with the objection to us using international comparisons. I think you really have to look outside of Canada too in order to see what the best international practice is in all these kinds of things.
The Chairman: Singapore.
Dr. Kerton: I believe this is part of our duty to try to get Canadian law towards the frontier of the best practice.
Mr. Campbell: Mr. Chairman, if I could just clarify something very quickly, I didn't reject the use of international perspectives. I suggested that it might not be appropriate to simply extrapolate from foreign experience rather than comparing it - I think that's what I said - to the Canadian experience.
Dr. Kerton: Certainly you're right on that. We have, for example, a financial market that's highly concentrated, so you wouldn't want to extrapolate from a very competitive market and say much about it on that type of comparison.
The Chairman: Ms Whelan, please.
Ms Whelan: Thank you, Mr. Chairman.
I have a couple of brief questions. The first has to do with the right to prepay mortgages. I would agree with your recommendation that the prepayment rights and terms have to be clearly disclosed at the time. I'm a bit concerned, though, about the standardized approach for calculating penalties.
In your brief you talk about how the current regime that limits the prepayment penalty for mortgages longer than five years has effectively eliminated mortgages of greater than five years. So are you concerned at all that if we go to a standardized approach we're going to end up with less choice for consumers? I understand that some banks right now are offering more and more choices for mortgages, and are doing so on a daily basis. I'm just concerned, and I'm wondering if you're concerned.
Dr. Kerton: No, I think you may have misunderstood our position. We are in favour of more choices too, and in this point we probably agree with the bankers: the reason some of these things disappeared from the market was the regulation. So we should take a look at seeing how we could allow more choices to work in the marketplace.
Personally, I have some concern that the standard method of calculation will be beyond the understanding of most customers. So what you might want to have it result in is a dollar cost, or something like that, so that the customer knows he can get out for $4,000 or something like that. If you stipulate that this is how we're going to calculate it, though, you have to be a pretty good mathematician to go through the process.
Ms Whelan: Would you be suggesting something similar to what they have in the United States, where you pay up front - the prepayment type of penalty - so that you can get out at any time?
Dr. Kerton: It does have an advantage. You have a choice of this type of instrument that you can get out of and it has a higher price, and this one you can't get out of and it has a lower price. It seems to me that after that, the customer is his or her own victim. It probably would be better than allowing people to go to their calculators.
Ms Whelan: Okay.
I just have another quick question. In one of your letters in February you talked about life annuities. You saw no particular reason to prevent banks from handling life annuities. I'm just concerned - or I guess I'm questioning this - that you're talking about coercive tied selling. When you talk about annuities, are you certain this wouldn't enter into the picture?
Dr. Kerton: I see your question, and I think I agree with your concern. It could. It needs more definition to decide whether or not the new product is being sold in a market that allows you to buy other things or is being sold in a coercive situation. As I indicated earlier, we're worried about the vulnerable person not being allowed to get out and shop around.
Ms Whelan: You're suggesting that with regard to annuities it's a question of ability of choice. You're trying to offer consumers a greater choice.
Dr. Kerton: Yes, we'd like to see it on the marketplace as an extra choice, not as a sort of tied-in sale that is restricting existing choices.
Ms Whelan: And you've heard from consumers that this is what they would like.
Dr. Kerton: Well, this is a difficult issue. On this one, you have all the big financial players saying here's a new choice that everybody wants. But as a public interest group, we really don't have the money to go around surveying consumers. We have a survey that we do at the National Quality Institute, and we find out when we do this survey that people are upset about one or another thing that's going on, or that they're very satisfied with it. In fact, people are expressing high satisfaction with the personnel they meet in financial institutions. They like that. They don't like some other things, but we can do that amount afterwards.
But you're right. It's quite impossible for a public interest group to survey every item in the economy - not only that, but every potential item that might be offered - and say something definitive about it.
Ms Whelan: Thank you.
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The Chairman: Are there further questions or commentary?
Where does the Consumers' Association of Canada get its funding?
Ms McCall: We get our funding from three primary sources: membership fees paid by individual Canadians, donations from individuals, and grants from government. At one point, the former Department of Consumer and Corporate Affairs provided a core operating grant to the Consumers' Association, which allowed us to investigate many of the questions that you would like us to be doing now.
Sustaining grants have pretty much all disappeared and most of the funding that's available is available only on a project basis. Our ability to respond on the fly, as it were, has been severely curtailed because of the shift to project funding because that response depends on our memberships and donations.
In the national office, we have three professional staff members and two support staff members. I'm the director of policy research. I have one researcher. At the moment, we are carrying five projects that have been funded through the office of consumer affairs of Industry Canada and two other projects. One is through the literacy secretariat of Human Resources Development Canada. We're also just finalizing a project with the office of food inspection systems of Agriculture and Agri-Food Canada.
As you know, it's been an extremely busy time this summer and fall. There are a lot of issues coming up that affect consumers. We simply aren't able.... We would love to have somebody sitting here at these hearings all the time. It's the same with the Senate next week. It's just simply beyond our capabilities.
We think that we provide a valuable service, but it's much more attractive to people to support a single issue or more narrowly focused group. When you're trying to represent the very broad public interest of all consumers at all levels across the entire country, in some ways it just seems too far away from the average consumer. They don't see a direct benefit, except in the occasional instance in which we can get on an issue about which people are really concerned.
I think you are going to find fairly soon that credit card interest rates are coming back. Bank service fees and credit card interest rates were the hottest topic at our annual meeting. Those are the things about which people are getting really hot under the collar. That can often sometimes start a snowball effect. The coming thing in financial services may be credit card interest rates.
Dr. Kerton: Many countries finance a national consumer organization. Germany does this. They started financing it in 1965. It's a thriving operation. Hong Kong does this, as do many countries. Then other countries, like the U.S., work only with Consumer Reports, which is a magazine that's sold. It earns a lot of revenue. It earns revenue in Canada. It does so well that it makes it hard for us to produce another magazine that tests tires. Again, you see, it does it less well than they do. In fact they're quite public-spirited about it. They give us an insert in their magazine. So we reach well over 200,000 Canadians with the American magazine, which has a Canadian insert in it. That's the sort of consumer movement or notion of public service that's involved there.
For my economics committee, I think the official budget's been zero, zero, zero, zero if you go back a few years. We prefer it if people phone us, rather than us having to return calls.
The Chairman: Dr. Kerton, you've been appearing before our committee for the last three years, and probably before that time as well.
Dr. Kerton: Yes.
The Chairman: You have put thousands of hours of volunteer time into being available to advise government bodies, including our committee.
Dr. Kerton: Yes, that's true.
The Chairman: It's critical to us that we have the resources to look at the impact of the policies we make for consumers. If we did not have you before us here today, there would be probably no one speaking directly for the people we are elected to serve, really. I, for one, bemoan the fact that you are scratching for support and that you don't have the resources to do the job we are really asking and rely on you to do.
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On behalf of all members of our committee, I want to thank you very much for another very valuable contribution.
The meeting is adjourned.