[Recorded by Electronic Apparatus]
Wednesday, August 16, 1995
.0930 
[English]
The Chair: Order, please. The finance committee is continuing its hearings on Bill C-100, an act to amend and repeal certain laws dealing with Canada's financial institutions.
Our first witness this morning is the Canadian Bankers Association: Helen Sinclair, president; Mark Weseluck, director of operations; and Joe Milstone, adviser, financial services policy.
Ms Sinclair, we look forward to your presentation. Thank you for being with us.
Ms Helen K. Sinclair (President, Canadian Bankers Association): Good morning,Mr. Chairman and members of the committee. Thank you for the invitation to appear this morning. I do have some brief opening comments.
I'd like to say at the outset, Mr. Chairman, that we are here to address a set of changes that are designed to strengthen the regulatory system, and in particular its effectiveness, but I do have a few higher-level comments about the nature of the bill and the context in which it's being addressed.
What I'd like to do at the outset, I think, is express some disappointment that this bill avoids the one big issue where we had a real opportunity to make some concrete improvements and some large improvements to the safety and soundness of the Canadian financial institutions, and that is the issue of co-insurance itself. Instead of addressing the issue of co-insurance, what the bill has done is make some regulatory changes. In fact, it has increased to some extent the regulatory burden on financial institutions, and to that extent it operates at the edges of what might have been achieved if we had gone at it full-scale.
We continue to believe that 100% deposit insurance coverage creates an incentive to place funds with high-risk institutions, and that in so doing we undermine the solvency of the system and we effectively over time pass on the costs of insolvencies to consumers.
This is a reality that has been recognized repeatedly. The Senate has issued four reports in recent times that have advocated co-insurance on the basis I've just alluded to. There's a wide acceptance of the principle in the academic community, and just in the last month there has been a study by a group by the name of the Public Interest Advocacy Centre, which indicates as its mandate to represent ordinary citizens. In fact, they refer more specifically to citizens at the lower end of the socio-economic scale, and they too come to the realization that what deposit insurance has actually done over time is serve the needs of sophisticated depositors who play the system and look for the highest rates regardless of the prudential practices of those institutions and thereby create costs that are borne by those who are less sophisticated.
Now, instead of recognizing the merits of co-insurance, the white paper has advocated the adoption of risk-based premiums. We've indicated that we will in principle lend support to this proposal. We'll have to see the details, of course. But we do caution government that the same forces that were at play to defeat co-insurance are still at play when it comes to risk-based premiums, and at the political level I am not convinced that risk-based premiums have a tremendous chance of getting through the system. I don't really think they do. There's a tremendous uphill battle that we face - a number of specific problems, for instance, around the disclosure of ratings.
But the bigger problem is that bringing market discipline into the system is going to be felt by the less sound members of the system to undermine their existence. So you're going to get the same resistance to this particular proposal as you got to co-insurance, and it's going to be a very, very tough fight.
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On the question of regulatory burden, the proposals do effectively, when you add them up, add to that burden, and as I've already said, they increase the cost not just to the institutions but ultimately to the public in general.
I want to give you just three examples in my opening comments of where that occurs. Of course, you have to look at these not as ``one ofs''; you have to look at them incrementally, relative to each other and relative to the regulatory burdens that are already faced by institutions, which are already very, very substantial.
We don't think these changes are going to prevent failure in the future. They will increase costs. They will increase the regulatory burden.
One example of this burden comes with the stipulation in the bill that the Canada Deposit Insurance Corporation will no longer borrow from the consolidated revenue fund but will borrow from the market with a government guarantee. We have inquired as to why a government guarantee should be absolutely required, why it should be written into the bill. We haven't received a satisfactory answer. We're prepared to see the CDIC funded in the market. We think the time is right. But why would you require a government guarantee and the costs that guarantee will entail for the deposit insurance system?
That's the first point. The second point is corporate governance.
Our organization has always questioned the merit of the unaffiliated directors rule. The chairman may remember that this rule was introduced at the time of the last Bank Act. It was proposed, by an institution that subsequently failed, to deal with the political concern - and it was a well-founded concern - about the dominance on its board of directors from related institutions, in particular from its holding company. It said, well, what we will do is put in a rule; we'll propose to you a rule whereby a certain percentage of our board should have to be independent of the holding company.
Now, that may have been a good way to go to deal with closely held institutions, but there was a view at the time - and I think it's a view you continue to see in the regulatory system - that went to the tune of if we're doing it for the closely held institutions, we have to find a way of imposing the same burden on widely held institutions. Widely held institutions did not have any directors from holding companies to put on their boards, but of course they did have customers. So the rule was extended to a completely different set of circumstances and over time has led to a regulatory system that is, number one, I think, unique in the world and, secondly, really undermines principles of good corporate governance.
What the rules now stipulate is that if you are a director of a financial institution at the same time as your company borrows from that financial institution in a substantial way, those borrowings constitute related-party transactions, which must be approved by the board as a whole. Now, it's quite appropriate in corporate governance to have policies approved by the board. It is not generally accepted in corporate governance that you would have actual transactions approved by boards of governance.
But as we went down that slippery slope on the affiliated directors rule, we fell into the trap of stipulating that transactions themselves had to be approved by boards. That is a real undermining of good corporate governance, and it's leading to a principle of micro-managing of financial institutions by their boards of directors and a real confusion, Mr. Chairman, between the mandate of a board and the mandate of management and the accountability of the board and the accountability of management. It has been a very, very bad precedent to set in corporate governance.
That's the first problem.
Now, since then the Toronto Stock Exchange has picked up on the principle of unaffiliated directors and they institute a principle called unrelated directors - a different definition, different threshold, different reporting requirement, but yes, they impose it on banks as well as on other publicly held companies. So there is another layer of regulation, maybe similarly motivated, not with the similar related-party transaction rules but with a lot of reporting requirements from a separate body.
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Now, in this bill, Mr. Chairman, there's a further twist, and that is that even where the particular definition does not apply, the superintendent may deem you to be an affiliated director. He doesn't have the reverse authority, to deem that you're not affiliated even though the rules might say that you are, but he has the authority to say that you are affiliated even though the rules say that you aren't.
So this is just an example, I think, of creeping regulation and added complexity being imposed on financial institutions, which are well managed, and again, regulatory costs, which are passed on to our customers.
The third example I wanted to refer to falls in the field of disclosure. I raise it because internationally our system today, the Canadian banking system, is recognized by those who compare us against others to be probably the best system in the world from a disclosure standpoint. Lafferty International ranks the Canadian banks as having the best disclosure in their annual reports, among Australia, Great Britain, United States, and Canada. KPMG has listed the Royal Bank, one of our banks, as being the best bank in its entire North American survey from the standpoint of disclosure. We are not laggards in the disclosure area.
Yet, again because I think there was a sense that in the trust industry disclosure has been a problem - and indeed it has been a problem - we had to build up the disclosure regime for trust companies, and somehow, come hell or high water, we were also going to pass parts of that regime on to the banking system. When you look, for example, at the requirement for deconsolidated reporting, that's exactly what's happened.
Another example of a disclosure that adds tremendously to regulatory burden, not on the big banks because it's already there for the big banks but on the smaller institutions - which I think the political world has always wanted to encourage - is this requirement for executive compensation disclosure.
Why would you require disclosure of executive compensation of closely held companies? Their shareholders surely know what their executives are being paid. That's generally the purpose for executive compensation disclosure, but their shareholders already know.
What the purpose is is never stated in the bill. It imposes a tremendous burden on those institutions because they don't face that requirement anywhere else in the world. If you're a schedule II bank in Canada today, this is the one jurisdiction in which your executives are going to be forced to reveal their compensation, and you can imagine the internal pressures that's going to put on those institutions throughout the rest of their world network. It's a completely unnecessary requirement, which again increases the burden on, in this case, a subset of financial institutions.
I mention the schedule II banks because this is the only area where they, in a sense, get singled out in the bill, where they get left out in the bill.
The other area where we were surprised at, effectively, the lack of a reference in the bill was the provision for an opt-out for schedule II banks from the Canada Deposit Insurance Corporation membership requirements. This is something that had been proposed a couple of years ago. It has been supported by the financial community generally. It has been made more urgent because of the new standards adopted by the CDIC and the very extensive reporting requirements around those standards, the cost of which fall disproportionately on the schedule IIs.
The point is that in the United States they try to get the wholesale banks out of the deposit insurance system, and in Canada somehow we feel we have to keep them in. So, Mr. Chairman, my last comment is that we should let the schedule II banks out, and we would very much hope that this committee would see it that way.
I should clarify my point in one way: I'm not just talking of the schedule II banks, I'm talking of institutions that deal in wholesale amounts; i.e., they deal with sophisticated customers. They don't deal with the public at large; they deal with people who are in a position to make judgments about the solvency of the institution. So it could be virtually any deposit institution. It does tend in practice to be a subset of the schedule II banks.
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Thank you very much, Mr. Chairman.
The Chair: Thank you.
On that latter point, how would you define the wholesale banking industry so that we could exclude them from deposit insurance?
Ms Sinclair: What the U.S. does is look at the taking of deposits in excess of their insurable limits. In the U.S. it's $100,000, and in Canada it's $60,000. So if you take deposits only in excess of that limit -
The Chair: Are there any institutions in Canada that will limit themselves to that size of deposit?
Ms Sinclair: There are, Mr. Chairman. It's not all of them. You would find a subset of the schedule IIs that actually does deal in smaller amounts. The Hong Kong Bank is an obvious example.
The Chair: Exactly.
Ms Sinclair: Some of the ethnically based banks are another example. But there are a number of them that deal exclusively in wholesale markets.
The Chair: So you would propose a $100,000 or a $60,000 cut-off?
Ms Sinclair: I'd propose $60,000, that's right.
The Chair: Thank you.
[Translation]
We shall begin the questions with Mr. Loubier.
Mr. Loubier (Saint-Hyacinthe - Bagot): Thank you so much, Mr. Milstone andMr. Weseluck. I apologize for my pronunciation; I am not sure it is correct.
I am delighted that the Canadian Bankers Association is appearing and that we are welcoming you this morning to the Standing Committee on Finance.
On reading your brief, which is very well done in general, I found some aspects refreshing, others a little disappointing. It is possible to consider a brief very well done and very well documented without, however, approving of it in its entirety. But I do share your point of view about the bill's ineffectiveness.
You mentioned earlier that a particular sector was being made more regulated, more cumbersome and more complex, when what should have been done was to try to alleviate the regulatory burden and reduce the time required to process the various financial market and monetary market transactions.
I am also a little disappointed that you do not pursue the logic of your analysis a little further when, on pages 29 and 30 of your brief, you discuss the new powers being given to the Bank of Canada.
You probably know, as everyone here now knows, that the new powers being given to the Bank of Canada under the Payment Clearing and Settlement Act are strangely similar to the powers for controlling systemic risk that have long been given to the provinces under Canada's Constitution and are exercised by the securities commissions.
Excuse me. The Chair is speaking a little louder than I am this morning; probably he is not aware of that. Mr. Chair, you are disturbing me; please.
The Chair: Excuse me. I am terribly sorry.
Mr. Loubier: The new powers being given to the Bank of Canada, which are listed in the schedule to the bill, are exercised at present by each province, particularly Quebec and Ontario; they are exercised by Quebec's Commission des valeurs mobilières and in some cases by Quebec's Inspector General of Financial Institutions.
You fail to mention the fact that to these powers of control is being added a power that is already being exercised perfectly adequately by the securities commissions and other provincial institutions. You do not apply your arguments against bureaucracy and over-regulation to the powers of the Bank of Canada. Is that because, where the Bank of Canada is concerned, this situation suits you, but where, say, 100% deposit insurance is concerned, it relieves you of a few clients that turn instead to certain small institutions that may be riskier than your own institutions? I ask you.
.0950
Ms Sinclair: No, Mr. Loubier, that is not our reason. We support the measures recommended concerning review or clarification of the Bank of Canada's mandate. We note that, firstly, one aspect of the securities commissions' mandate is to protect investors. Historically, where the control of financial institutions' prudential practices or of systemic risk is concerned, they have not exercised that mandate.
Secondly, everywhere else in the world, the control of systemic risk is a responsibility of the central bank. So what this bill does is to make clear that in Canada, too, that control is a responsibility of the central bank.
Mr. Loubier: You will allow me to differ with you once again.
Not two months ago, while addressing the Canadian Payments Association in Montreal, the Governor of the Bank of Canada said that he congratulated the initiative of that association and its members for the improvement it intended to make to the system for high-value payments. He said that improving the system for high-value payments would not only reduce but eliminate the systemic risk present in our current operations. Yesterday, the Governor of the Bank of Canada said that was not quite what he meant. Eventually he said that he was thinking about the future, and that the financial system really had to be made 150% safe.
So why does everyone, or nearly everyone - including the Governor of the Bank of Canada, not two months ago - , agree that, where the financial markets are concerned, there is no need to give the Bank of Canada new powers that resemble the powers of the securities commissions, particularly in Ontario and Quebec? We do not need that.
All we need is to improve the system for high-value payments by setting up an electronic payment system that will ensure that payments are final at the time of the transaction and that clearance is possible, perhaps not immediately and de facto, but the same day.
In fact, that was one recommendation by the group of 30 - an internationally renowned group with which you are probably familiar - , which said, in a series of recommendations going back to 1988 or 1989, that it was the responsibility of the Canadian Payments Association and the Bank of Canada to set up this electronic system.
But, in order to respond to the recommendations of the group of 30, we do not need to encroach upon areas of jurisdiction already exercised by the provincial legislatures through the securities commissions or inspectors of financial institutions. So why, over the past two months, has it become urgent to give the Bank of Canada new powers, in close consultation with Canada's Minister of Finance? Why has greater centralization become so pressing and so urgent, on the pretext of reducing systemic risk? We know perfectly well that we do not need it; and we certainly do not need one existing stakeholder in financial circles to be given considerable new powers.
Yesterday, Mr. Thiessen - with all due respect for him and his credibility - said he did not have any new powers. But that is not quite true; I would even say it is false.
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When you look at the wording of the bill, these are extraordinary powers: issuing directives not only to clearing houses, but also to participant institutions. So why, today, have we reached this situation that is unnecessary, increases bureaucracy and uncertainty and, in particular, increases constitutional friction - which, these days, we could do without?
Ms Sinclair: Mr. Loubier, at present we are the only country in the developed world without a system for high-value payments. We are building one, but we do not yet have one.
Mr. Loubier: In order to do that, Madam, you do not need to give the Bank of Canada extraordinary powers. We must not confuse things.
Ms Sinclair: Excuse me, sir; could I please conclude my response?
Mr. Loubier: Yes; I am sorry.
Ms Sinclair: In building the system, we must determine where the risk lies and who will be responsible for it if it materializes.
The main purpose, as you yourself said, is to make the system for high-value payments safe so that the Bank of Canada and the Canadian public do not bear that risk. That is the main purpose; but we must not forget, Mr. Loubier, that the Bank of Canada is the lender of last resort. There will always be some risk.
Referring to a speech by Mr. Thiessen to a large audience is not the same thing as referring to a specific bill and all its technical aspects. There is always risk in the system, and the Bank of Canada assumes that risk. So, as Mr. Thiessen explained to you yesterday, it is important to define, through legislation, who will be responsible for controlling that risk.
The Chair: Thank you, Mr. Loubier.
[English]
Mr. St. Denis, please.
Mr. St. Denis (Algoma): Thank you, Mr. Chairman.
Thank you for being here this morning. Your presentation was very complete and very thorough in terms of its detailed response to Bill C-100.
I'd like to pick up, though, Ms Sinclair, at least initially on your comments and disappointment over the bill's avoidance of co-insurance and the move instead to risk-based insurance. You just covered that in a superficial way in your opening remarks. I wonder if you could go into greater detail on what the association sees as an acceptable regime in the co-insurance world and, more specifically, the main points within the risk-based plan that are problems for you.
Ms Sinclair: We have been supporters of co-insurance for quite some time, Mr. St. Denis. I suppose what made us supporters of that system as opposed to risk-based premiums at the outset was our judgment that from a political standpoint it would be an easier system to have accepted. That judgment flowed largely from our view that you didn't need to have a huge degree of co-insurance in order to have people think twice about where they place money. If people were to do the simple thing of thinking twice about where they place money, you would have a huge degree of market discipline in the system which you don't have today.
So we saw a relatively modest degree of co-insurance. We advocated 5%. We were prepared to accept the view that you could even have a threshold at which that co-insurance started, because we don't see unsophisticated savers as people who are causing the problems. They're not the ones who are shopping around looking for the absolute top rate. They are safety and security minded. They do go to institutions that are prudentially managed. The people our proposal was out to address are people who systematically shop the market for the very best rate, regardless of what the institution is and what it's doing, and in fact they couldn't care less.
.1000
Effectively, what you can observe over time is that it's those institutions that are paying the very highest rates that are probably not being managed as well. The fact that they need to pay the higher rate is a good indicator that otherwise people wouldn't leave their money with them.
For instance, if you look at what rates were being offered by Seaway Trust before it failed in the early 1980s, they were substantially higher - I think something in the range of 200 basis points higher - than what was generally being paid in the market. It is that kind of practice that we think a modest degree of co-insurance would help us avoid.
Mr. St. Denis: As for risk-based, what are the main problems you see for the industry?
Ms Sinclair: I think the devil is in the detail on the risk-based premiums. One of the things I was struck by when I sat on the deposit insurance task force, which was set up about three years ago and reported about a year ago, was the view of several people in the insurance industry, for example, that we didn't have an actuarial sample in Canada that was large enough to really allow you to set the premiums. They said this isn't the United States, where you have 10,000 institutions and where you can actually establish some probability distributions around their failures and therefore around their premiums.
I don't know if that judgment is accurate or not. I'd be prepared to rely more on their view than on mine. But it did say to me that there was going to be an awful lot more discussion around the detail than there needs to be in co-insurance. It would be a much more difficult one.
The issue of disclosure has been difficult for all of us, I think, as well, and I'd just like to highlight it. There may be a fix for it. The point is that if you have a regime of risk-adjusted premiums, our judgment is that an institution that is paying the higher premium would be duty-bound to disclose that fact to a securities commission because it would be a material issue related to its financial condition. In disclosing that fact to the securities commission, the question would be, are you automatically doing that institution in? Are you going to provoke a run on its deposits?
One way one could look at fixing the problem is to mandate, in federal law, non-disclosure. I believe, although I'm not absolutely certain, that this is what the Americans do. If we are going to go down that path, it's definitely an issue that has to be looked at.
The Chair: Mr. Williams.
Mr. Williams (St. Albert): Welcome, ladies and gentlemen.
Ms Sinclair, we've just been talking about the co-insurance, and it seems to me that the CBA are referring to co-insurance with a flat-rate premium rather than the risk-related premium that is being proposed by the bill. You've just explained that you feel there are difficulties, but don't you think the market will adjust? If we get out into the marketplace, the fact that there is a variation in premiums paid by different financial institutions, that these financial institutions have been around for a long time, that the marketplace will readily absorb that information...and by getting the premiums out into the marketplace and into the public domain, we can work at getting OSFI's decisions - not its internal analyses but its decisions - out into the public domain when it has a concern about the deterioration of a financial institution. Do you feel that getting the premiums out in public could be a first step to making OSFI a more transparent organization?
.1005
Ms Sinclair: No, in fact, I would not want to see the question of the premium disclosure linked to questions of disclosure of the financial condition of financial institutions generally. OSFI is under a very heavy duty of confidentiality relative to the examinations it does with financial institutions and the various judgments it's formed, the various directives it's given, and that is entirely appropriate in our view.
What we think is equally appropriate, however, is that once an institution has failed, that information could and should enter the public domain. So when OSFI appears before your committee after the failure of a financial institution to talk about what happened, we no longer see a need for that confidentiality.
But in the case of ongoing concerns, confidentiality is an extremely important principle if you are concerned, as I think we all should be, about public confidence. You cannot start to reveal the minutae about financial institutions and expect those that are in anything less than pristine health to survive. It's a very, very important principle, and I would urge you against any move in the other direction.
I'm not really speaking from my members' standpoint, because I think we would be the last ones to be affected. But again, if you're out to encourage a financial system that is fairly diverse and in which institutions that may not be in pristine health are given a chance to return to health, you can't be putting the ins and outs of their financial condition out into the market.
Mr. Williams: But by trying to keep it confidential - and I emphasize the word ``trying'', because we have heard again this morning the securities commission.... If they become aware of a higher risk within a financial institution, does that become a material aspect that has to show up on a prospectus? Do accountants have to disclose it in a financial statement? Does a director have to disclose it at an annual meeting if asked by a shareholder?
All these opportunities to not maintain the confidentiality of a risk-based premium or a higher risk by a financial institution or some comments by OSFI...cannot be kept totally and completely secret with a guarantee. Therefore, if the emphasis is to try to keep it secret, surely you are passing the risk on to the government and its regulators rather than allowing the marketplace to recognize that there are risks and it should be governed accordingly. I can't quite understand your total commitment to secrecy just because you're a financial institution.
Ms Sinclair: I've already indicated that I'm not totally committed to secrecy. We believe in disclosure. We're already recognized in the banking system as having the best disclosure in the world. So I'm not advocating secrecy, but neither am I advocating a world in which every last piece of information about financial institutions is out in the market. We're trying to find a balance somewhere in the middle, Mr. Williams.
I suppose if one wanted to venture further down the path of disclosure, I don't think I'd put the fact of a higher deposit insurance premium at the top of my list, because that's something that's tremendously visible to the public. It's going to be seen as a very, very clear warning signal to anybody who's risk averse.
Mr. Williams: But isn't a CDIC premium not that much different from a bond rating?
Ms Sinclair: That's an interesting question. I hope you'll let me pause and think about it.
One proposal we had for a.... It is different. Let me tell you why it's different.
A bond rating is a judgment of the market. A deposit insurance premium is a judgment of a regulator; it's a single person's judgment in an imperfect world. So, yes, it is different to that extent, very much so.
We had actually advocated at one point in time looking at a system where every deposit institution would have to float debt, and of course that debt would be rated, and then depositors would be free to look at those ratings and form their own judgments about deposit institutions. The only reason, in my view, that system has not been adopted is that it would be very burdensome again on small institutions that don't want to float debt, that don't really have the size to do it economically.
.1010
The Chair: I have four more questioners on my list and we have about three or four minutes, so I would urge people to be concise.
Mr. Campbell, please.
Mr. Campbell (St. Paul's): Welcome to our representatives from the Canadian Bankers Association. I commend you on your brief and your presentation this morning.
You've raised some interesting points. I want to ask you about one specific recommendation in a moment, but before that I just want to point out that once again today the member opposite,Mr. Loubier, has talked about provincial securities commissions and suggested that in Quebec, which he presumes to know about, and in Ontario, which he suggests he knows about, they object to the enhanced powers contained in Bill C-100.
I suggest that he doesn't know the situation in Ontario, and I would like to put on the,Mr. Chairman - and indeed, we could only refer, if you wish, to this morning's Globe and Mail, where the chairman of the Ontario Securities Commission states that he supports moves to enhance the Bank of Canada's role in supporting the financial infrastructure and protecting it from systemic risk. Not only does the OSC not feel threatened by it, but they've been working closely with the Bank of Canada towards it. I suggest that Mr. Waitzer understands, as perhaps the member opposite doesn't, the different role that a central bank plays compared to a securities commission and how important it is that the bank have these powers in order to ensure against systemic risk.
[Translation]
Mr. Loubier: Come on!
[English]
Mr. Campbell: It's ironic that it only appears that the Bloc Québécois are separatists who profess an interest in belonging to the Bank of Canada, but every time additional powers are suggested to enhance the role of that bank and its international responsibilities they object.
[Translation]
Mr. Loubier: Come on! Do not confuse things.
[English]
Mr. Campbell: My question concerns the taking control of assets recommendation in your brief. Are you suggesting that the committee require OSFI to appear before the committee when they have seized a problem institution? We have the power to summon officials before this committee. It's within our mandate. Would you elaborate on that recommendation?
Ms Sinclair: I'd be pleased to, and I would also ask either one of my colleagues, if I trip up, to pick me up.
I think we have differentiated, Mr. Chairman, between two situations. One is where there is a seizure of assets, which would tend to be a more temporary situation, and another where there's actually a seizure of the institution, presumably for purposes of winding it up. In the latter situation, yes, we do see that the accountability regime in law should be such that the regulator after the fact, not at the time but after the fact, should be prepared to appear before your committee and explain the reasons that led to the seizing of the institution.
In the instance where there has been a seizure of assets, presumably for the purpose of trying to find a way out of a problem, we think the primary thing is to give the regulator the freedom of speed of action.
I'm assuming that the institution remains a going concern after the fact. Maybe it doesn't; maybe CDIC moves in with a FIRP. But if it remains a going concern, then clearly we don't see the regulator appearing before the committee, because again the regulator has an inventory of confidential information that shouldn't be in the public domain.
Mr. Campbell: [Inaudible - Editor] ...before the committee, the goal would be to shed light to bring some transparency to the actions of the regulator so that the public would have the benefit of understanding -
Ms Sinclair: Following the winding up of an institution, yes.
Mr. Campbell: And this you would regard, on behalf of the industry you represent, as a good check on the powers of those regulators.
Ms Sinclair: We would regard it as part of a system of accountability.
The Chair: Mrs. Stewart, please.
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Mrs. Stewart (Brant): I'd like to start by asking you to respond to the comments in the preamble of the bill that suggest that a financial institution is a privilege, not a right, and particularly perhaps in reference to your comment about disclosure around certain aspects of things, particularly the pay of executive members of the board, information about small business loans, as we've been seeing in the press recently, and the fact that the public does more and more want our world of financial institutions to think that way - that in fact they exist as a privilege of the people, not as a right, and that they do want more and more detailed information.
Ms Sinclair: If you don't mind, Mr. Chairman, because this is a bill about strengthening the financial system, I'll confine my remarks to that as opposed to the small business issue, which is a whole different discussion, in a sense. It's a good discussion, but it's a different one.
This is a principle we endorse, and it's the basis on which the bill and the regulatory system now contemplate the possibility of the closing of an institution before it's technically insolvent. The traditional right of the shareholder, in a sense, in this bill is subsumed or takes second place to the rights of depositors and the public as a whole. It's the basis for the early action system. It would also be the basis for a FIRP, and it's one that we quite frankly support.
Mrs. Stewart: I was interested in and quite admire your response to Mr. Williams' asking if the risk-rating premium isn't just like a bond rating. We've had several bond organizations before us, Canadian ones, that have talked about their frustration in terms of getting information so they can do the work they are paid to do, that sort of thing.
From your perspective, who should take the responsibility to make sure the public has the information they need to make the determinations that they have to make when they're making investments? Should it be the private sector? Should it be the government through OSFI? Should it be the banks themselves? What's the balance there that works for you folks?
Ms Sinclair: We'd love it to be the market, but as long as you have 100% insurance, the market has no incentive to produce the information. If you brought in 5% co-insurance, there would be a market for the bond-rating agencies as opposed to OSFI, Mr. Williams, to get out there and rate the deposits of financial institutions. You would have a market for that information. In a world where nobody can be hurt, there's no market for the information.
That's the reason I was saying in my opening comments, Ms Stewart, that we have been forced into this losing game of continuously trying to buttress the regulatory system and to increase disclosure requirements in law rather than let the market work the way it is known to work well.
Mrs. Stewart: That takes me to my final, brief question, which is about the CDIC. The notion we were talking about yesterday was that there are some members in the community who think that the access banks have to consolidated revenue funds puts them in an unfairly preferred position, that the consumer says, well, they're backed by the government so I'm going to put my money there. What you're saying is that you don't accept that premise and in fact you'd be just as glad not to have access to that facility.
Ms Sinclair: We'd be just as glad not to have access to the government guarantee. We'd be glad to have the system that the insurance industry has. We would be glad to see deposit insurance go, in the best of all worlds. Now, we recognize that in the political world that's not likely to happen, and that's the reason for our recommendation for a modest amount of co-insurance.
But we would be prepared to see the deposit insurance privatized, Ms Stewart. We'd also be prepared to see the government guarantee removed. We're not terribly keen on being forced to take it and then being told we have to pay for it.
[Translation]
The Chair: One very brief question, Mr. Loubier.
Mr. Loubier: I would remind my colleague Mr. Campbell that, mere weeks ago, Ontario Securities Commission Chairman Edward Waitzer shared Quebec's point of view on the securities sector. So Mr. Campbell, too, can refer to Mr. Waitzer.
.1020
I have the impression that there are quite flagrant communication problems between your government and . . . , unless this is collusion, a claim I prefer not to make.
I have one last question, Ms Sinclair. You represent the Canadian Bankers Association, and I have followed your arguments for a long time. You support effectiveness, non-ambiguity, and certainty - or at least the search for certainty - on the financial markets and elsewhere.
I look at the list of powers being given to the Governor of the Bank of Canada in proposed section 6, on page 118 of the bill:
- 6. (1) . . . the Governor [of the Bank] may issue a directive in writing to the clearing house
or participant requiring it to
- (d) cease or refrain from engaging in the act, omission or course of conduct, and
- (e) perform such acts as in the opinion of the Governor are necessary to remedy the
situation.
Ms Sinclair: I do not quite agree, Mr. Loubier. If there is a clearing house, the central bank refers to the clearing house, not to the participant institutions of the clearing house.
Mr. Loubier: Look. You read, as I do:
- 6. (1) . . . the Governor [of the Bank] may issue a directive in writing to the clearing house
or participant . . .
- Not only the clearing house, but the financial institution as well. The Governor has the
right to order it to take measures; that person may issue directives to the participant institution;
because the wording is very open, those directives could extend to setting a different standard
for capitalization.
The Chair: Just a moment, please.
Mr. Loubier: Quebec's Commission des valeurs mobilières could find itself faced with a Governor of the Bank of Canada who exercises the same powers as its own, but is issuing a different directive from its own, in its own area of jurisdiction. What are you doing then? What kind of additional certainty or stability are you providing on the financial markets? You support this bill. You should be opposing those broader powers.
Ms Sinclair: Mr. Loubier, I shall ask Mr. Weseluck to answer your question but, on the basis of our discussions with the Bank of Canada, I do not think that the Bank would ask an institution to structure its capital differently than as directed by . . .
Mr. Loubier: Madam, it could ask an institution to change its standard for capitalization at any time.
The Chair: Order. Thank you, Mr. Loubier.
[English]
Mr. Walker, please.
[Translation]
Ms Sinclair: Excuse me, Mr. Chair; I wanted to give Mr. Weseluck an opportunity to answer the question, please.
The Chair: All right. We do not have much time left.
[English]
Mr. Mark Weseluck (Director, Operations, Canadian Bankers Association): Just briefly, it has not been capital, it's been collateral, and it's been on the basis of the clearing-house approach, not a participant approach. The Bank of Canada has distinguished between the clearing-house, which is a systemic approach, and the individual participants. They've left the individual participants and capitalization to the primary regulators. That's not been their case in the oversight -
Mr. Loubier: In this project, where could you find it -
[Translation]
The Chair: Please, Mr. Loubier.
[English]
Mr. Weseluck: [Inaudible - Editor] ...on the basis of systemic risk, in the definition of systemic risk, it's that one can cause the default of another.
[Translation]
Mr. Loubier: No.
The Chair: Thank you, Mr. Loubier.
[English]
Mr. Walker, please.
Mr. Walker (Winnipeg North Centre): Very quickly, I want to go back to the question of the risk insurance and the setting of risk premiums and the release of that information. Do you think a financial institution is obliged to respond to a question from a shareholder or a policyholder as to the risk level assigned to it by the CDIC?
.1025
Ms Sinclair: We think there would be a significant risk, yes, of having to respond if the risk level fell from the top level to one level below.
Mr. Walker: If somebody writes a letter asking what their risk level is as assigned by the CDIC, does that letter have to be responded to?
Ms Sinclair: That could well be looked on as a material fact, and one of the discussions we've actually had with OSFI was to point that out to them. It's not to say to them that they shouldn't have the risk-rating system, but to point out to them that the day they give institutions their risk ratings there may well be an onus of disclosure on those institutions. It's a very sensitive point.
Mr. Walker: It seemed to me that on the one hand if the CEO refused to respond, for whatever reasons, there would be a really interesting issue arising if there were a failure. Secondly, if OSFI or the CDIC came in front of the finance committee two weeks after a failure and indicated that it had communicated to the company this risk of failure, what would be the liability of the government in such a case?
Ms Sinclair: That's an interesting question. Of course, there would also be the question of what would be the liability of the officers and directors if they had received the information and hadn't disclosed it? That's the source of our concern around the risk-rated premiums, because in a sense they're a proxy for risk rating itself. I assume there would be a one-on-one correspondence between a risk rating and the premiums paid by the institution.
If you know you're paying a premium that is above the standard premium paid by the well managed institutions, then you know you have a risk rating that is less than those institutions' risk ratings, and we see there being an onus of disclosure on the institution as a result.
The Chair: May I make a prediction - and I could be wrong. But it's my suspicion that from now until the referendum is held, every bit of federal legislation will be scrutinized in minutae in order to create the impression that it's an attack on a particular province of Canada. Maybe I'm wrong, and I hope I am.
Ms Sinclair, as always, you've made a very clear presentation and some very compelling arguments. Thank you very much.
Ms Sinclair: Thank you, Mr. Chairman.
The Chair: Our next witness is Mr. Grant Reuber.
[Translation]
Mr. Loubier: I would like to rise on a point of order. If you want to conduct a referendum campaign, say so clearly. If you want to start the referendum campaign here, say so clearly. I am doing my job as a representative of the Official Opposition. There are problems with this bill. There were problems when Quebec's Premier was Daniel Johnson, a good federalist and a good Liberal who even bows down before you, kneels before you, gives you what you want. So if you want to start the referendum campaign here, say so right away. We'll start it. We won't even bother about the bill. We'll conduct the referendum campaign, Mr. Chairman. Is that what you want?
The Chair: I do not want to conduct the referendum campaign because we have many things to discuss; I would like to continue with the witnesses.
Mr. Loubier: Then stop saying just anything. Stop talking like your Finance Minister was talking yesterday. He's trigger-happy about the referendum these days.
The Chair: Thank you, Mr. Loubier.
[English]
Mr. Grant Reuber, Canada Deposit Insurance Corporation, is our next witness.
Welcome, Mr. Reuber. You have a formidable task. The Canadian Bankers Association and yesterday Jack Carr, a professor in Toronto, suggested that the CDIC should not be part of the Canadian financial system.
We look forward to your presentation.
.1030
Mr. Grant Reuber (Chairman of the Board, Canada Deposit Insurance Corporation): Thank you, Mr. Chairman. With a welcome like that, I can only say that I'm pleased to be here.
The Chair: Is this your first appearance before our committee since your appointment as the head of the CDIC?
Mr. Reuber: That's right. It's my first appearance, and I believe it is the first appearance for Mr. Sabourin, who is the president of the CDIC, although he has been in the trenches for many years and has experienced all the ups and downs over many years.
The Chair: Perhaps you would permit me to add that Dr. Reuber comes to us having had a very distinguished career in academe and in the banking world.
We welcome you.
Mr. Reuber: I've circulated an outline on which I'll speak; I don't have a written text. I propose to take about ten minutes to go through what I want to say, as a starter, and then, if you agree, we'll proceed with discussion.
We've also circulated to members of this committee copies of our annual reports for both this year and last year. I know that reading material is not something you're short of, but the first portions of each of those reports give a fairly extensive explanation of what we're all about, how we do our business, and some of the issues about which we're particularly concerned at this time. I think it's valuable reading, at least as a background, and I hope you've had an opportunity to look at it.
For the purpose of getting this discussion going, I've included a summary of the proposed legislation, Bill C-100, as it affects CDIC in the appendix attached to my outline.
Essentially, at least from my perspective, this bill has four major aspects. The first is that there are three major changes in the act, which I'll come to. Second, there are some changes in other types of legislation that indirectly affect CDIC. Third, we have a series of housekeeping changes that, with experience, we've collected over the years, and those are summarized in the appendix table. The fourth issue is the question of deposit insurance, and the approach I wish to take is to ask what this legislation does for the cost of insurance, which is one of the questions that I know are of concern.
Let me turn first to the major changes in the act. There are essentially three. One is the question of risk-rated premiums. The second is the changes in the so-called FIRP legislation. FIRP is an odd acronym, but it means financial institutions restructuring program. The third is not really a legislative change, although there are permissive changes in the legislation to allow us to do it; it is the way in which we finance our cash requirements.
On the question of risk-rated premiums, I was here for the tail-end of the earlier discussion. I think we'll come back to that, because I'd prefer to leave it, but let me tell you that we've had risk-rated systems, so this is not a particularly new thing for either the CDIC or the OSFI. However, under the impulse of these changes, we're obviously having to review our risk-rating system and to improve it. We hope to have it reasonably well developed by this fall.
At this juncture, we have essentially eight factors that we think are important from this perspective. One is the organizational structure of the deposit-taking institution; that is to say, is it part of a holding company, is it a stand-alone operation, and considerations of that sort.
The second is its profitability, not just today but yesterday and its likely profitability tomorrow.
The third is the question of capital: the amount of capital, the quality of capital, and, frequently forgotten but in my judgment very important, access to capital. There's quite a difference between a large bank that has access to capital and a small trust and loan company that has virtually no access to capital beyond the small group of owners.
.1035
The fourth item is assets. Here we're worried about the quality of the assets and, I want to emphasize again, the diversity of assets.
One of the major problems that has arisen in the past is overconcentration in particular asset classes, which means that the whole business of managing the risk of these institutions is increased. If you can diversify those risks, then you might have trouble on a certain class of assets but less trouble on other classes. In many cases it's the overconcentration as much as the quality of assets that's a problem.
A fifth item is the financial strength of the institution - here we're talking about things such as the capital-to-asset ratio - sixth, regulatory compliance; seventh, quality of the management; and, eighth, what I call street gossip. What is the market? What do you hear on the street? We're frequently accused of being the last to know. Everybody tells you after the event that they knew about it six months or a year ago, so why didn't we know about it. I'm not sure how justified that is, but there's probably a little bit in it, and I think we should at least try to take that into account as best we can.
I've mentioned regulatory compliance.
We will also take into account the ratings of other people, by OSFI, securities houses, and rating agencies.
One important thing to recognize, though, is that many of our small institutions are not rated by anybody. They're small trust or loan companies and they don't issue securities in the market. They're owned by a very small group of people. So the whole question of getting external ratings through Dominion Bond Rating or another agency is really not an issue. Obviously, OSFI will rate only federal institutions, whereas we have to deal with both federal and provincial ones. We think it's only useful if we have a common system for both types of institutions.
I want to emphasize, too, that in developing this thing OSFI and ourselves will be using the same information. Our material will be available without any constraints at all, but the judgments applied will be our judgments, as recognized by the board of directors of the CDIC.
At this juncture I know that the question of disclosure is one about which the committee is concerned. We will certainly disclose to each institution what its rating is, but we have no plans to disclose to the general public. In other words, we're not going to issue a catalogue with the ratings of all institutions in the country. If the institution, on its own or because of some legal requirement, puts forward its rating, then that's fine with us. We have no interest in restricting them in what they disclose. On the other hand, I think it's appropriate for them to disclose the rating, but not for us to do it.
There are questions relating to that to which I don't know the answer but that I'm sure you'll be looking at. One is what the accounting profession will require from institutions that have audited financial statements. I don't know whether you'll be meeting with the CICA - I'm sure you have access to them - but that's a question I would like to have clarified. I think even private institutions have audited financial statements, so that's an interesting question.
The Chair: Your presentation will be followed by that of the CICA.
Mr. Reuber: The second question is whether security regulators will require disclosure. Of course that applies only to those who actually do security transactions. A lot of small trust and loan companies don't have any outstanding securities in the public market, so they presumably are not subject to that.
.1040
That sort of covers where we are on risk-rated premiums.
The second feature is FIRP. It is a measure that was instituted to deal with very unusual and difficult circumstances when we have to try to.... It's a way of transferring assets or companies from one owner to another when, for example, there's a delay because shareholders have to approve it, or there might be other very special circumstances. J.-P. Sabourin can discuss it at any length you like.
First, we have to get a letter from the superintendent saying that this is not a viable institution and he has within his powers no means of fixing it. We then look at it and so on, and if it meets certain requirements, it has to be approved by our board of directors. It has to be approved by the Minister of Finance, again subject to certain conditions, and eventually it has to be approved by the cabinet. So this isn't an arbitrary decision by somebody. It's one that has many catch points in it, and there is scope in this process for representations if such are wanted by the people or by the company that's being addressed.
Thirdly, let me go to cash financing. Under the proposed new act we will be permitted to borrow in the private market. We've not been permitted to do this. I was probably the person who initiated that, because one of the difficulties we have now is simply that through cash management we can't have an overnight bank loan, which is a complicated way of running our activities. It seemed to me that if we could open that door, then this would be a way of simply facilitating day-to-day activity.
That grew, and now we're being asked to pay a special so-called.... I don't what you want to call it. I call it a guarantee fee. The government still remains a source of funds sort of in the last resort, but we also can borrow from the private sector.
Do we need the government guarantee? That takes you back to the whole point of having deposit insurance. The rationale for deposit insurance is to make sure that the money in your wallet is exactly the same as the money in your bank, and the money in the wallet is guaranteed by the Government of Canada. The money in the bank, at least under this system we have, up to a limit, in the end is subject to borrowing through a government guarantee to support it. That's the reason for having it for deposits but not for other savings types of instruments.
I realize that in the course of history that principle has been somewhat amended, because we've now guaranteed five-year savings deposits, which aren't very different from a five-year annuity. I know that whole story, but the basic point is essentially to guarantee the payments system through a government guarantee. That's the justification for that.
The Chair: Do you need that government guarantee? The Canadian Bankers Association said that you shouldn't have it, that it's just an added administrative burden and cost.
Mr. Reuber: Do you need a government guarantee for the currency?
The Chair: I'm asking the question. I don't know.
Mr. Reuber: The same principle applies. If you think you don't need it for demand deposits in a bank, then you certainly don't need it for currency.
The Chair: So?
Mr. Reuber: In terms of consistency.... I suppose there's no need to be consistent. Lots of things aren't very consistent. But I'm trying to explain the rationale. Would it work without a guarantee? I expect that it would, but the rationale for it is that it's a guarantee to ensure the payments system so that the cash in the bank is the same as the cash in your pocket.
It has been compromised, and if you look at appendix 1 in this year's annual report, I spend a page and a half expounding on this issue, which, frankly, is an important one that at times hasn't been very widely understood.
.1045
In any event, we're developing a system for financing our cash requirements and there will be an additional cost to the CDIC, and ultimately to the banks, that arises because of the special fee that's being asked on these borrowings. But I should also emphasize that this applies only to new borrowings and not to past borrowings, to what's on the stocks now. So we hope that if we ever get over the present amount of borrowing, we won't have another build-up, as we did in the late 1980s, of this amount.
Let me go on to the third part of my outline, changes in legislation indirectly affecting CDIC. Again, this is stuff that you've looked at with others and that I don't propose to pursue very far.
The Chair: Do you have any problems with any of these changes?
Mr. Reuber: None.
The housekeeping changes are word changes, and so forth. We're willing to talk about any of them. I'm simply going to pass over them.
On the cost of deposit insurance, I've singled out two elements of cost here. One of those that are within our powers, that we can actually do something about, is insisting on high standards of performance, improving our intervention system through earlier interventions, through an aggressive claims and recovery approach, all of which is outlined in the annual report, and our administrative intervention costs. They've actually been going down. In any event, they're a very small part of the total.
Outside our powers is the whole question of co-insurance. I won't say another word on that unless I'm asked, because probably you've heard more than you want to hear on that subject.
Another option, presumably, would be for the government to say that it's going to insure deposits only for, say, a term shorter than five years. I'm not advocating that, but there are ways in which you can reduce the cost of insurance by reducing the benefits emanating from the insurance. Those are not within our powers. What we can do is try to run what is within our powers more effectively.
The Chair: But you would certainly not be personally opposed to co-insurance of some sort?
Mr. Reuber: Personally, I think it would be a good idea.
The Chair: Thank you very much.
[Translation]
We shall begin the questions with Mr. Loubier, please.
Mr. Loubier: Thank you, Mr. Chair. Mr. Reuber and Mr. Sabourin, good morning.
My first question is as follows. At present, how do you calculate the premiums paid to CDIC?
[English]
Mr. Reuber: The premiums are now calculated on the basis of one-sixth of 1% of all insured deposits.
[Translation]
Mr. Loubier: If I have understood correctly, the bill adds to that premium.
[English]
Mr. Reuber: Sorry. Go ahead.
[Translation]
Mr. Loubier: The bill provides for an additional, risk-dependent criterion for calculating the premium paid to CDIC. I would like to know how you will rate a financial institution's risk in calculating that premium.
[English]
Mr. Reuber: It's a kind of three-step process. We have the risk-rating system that I've outlined with the eight or nine factors that we would take into account. We haven't quite worked the range out yet, but we think it will be a rating scale running from one to ten.
.1050
You are aware of the schedule for intervention that has been worked out between OSFI and ourselves. There are four steps in that schedule, which is reproduced in our annual report for this year in appendix 2. Those steps are zero to four, so we will link our risk rating to those intervention steps, which describe what happens as you go from one to two to three to four.
On the premiums, I don't want to give you the impression that this is all sealed, signed, and delivered, but the general idea we're thinking about is something like this. If you were at stage zero, then you'd pay the normal premium. Under the law as proposed, you can double the premiums. So stage zero would be whatever it is, 100% of the premium. Stage one would be 125%; stage two, 150%; stage three, 175%; and stage four, double. Stage four isn't going to last very long. You would be lucky if you collected the double, because that's the point at which the company is headed for the waterfall.
[Translation]
Mr. Loubier: Could that method of calculating the premium not favour greater concentration on the financial markets since, from the outset, small and medium-sized institutions in those markets are considered riskier than large ones? So could that method not have the effect of intensifying the rather high concentration on the financial markets?
[English]
Mr. Reuber: It's conceivable that it might. It's also conceivable that it would not, in the sense that small institutions that are well run, if they wish, can say that they have a clean bill of health and, from the point of view of attracting deposits and doing business in the community, may be more credible than they are now, when there's no particular indicator. It's for them to decide how they want to use it.
To the extent that weak institutions are weeded out through this system, I guess it will have your kind of result, but I don't think that's inevitable. In any event, it kind of goes with the principle underlying this, which is (a) to provide an incentive for institutions to be more prudent and less vulnerable to risk and ultimately a cost to the community and (b) the proposition that if you provide such an incentive, then management and everybody in the institution have a big stake in making sure they follow prudent policies.
I listened to the industry committee and the bankers' appearances there. While I can't profess to understand all that discussion, I guess because I'm too simple a fellow, the general emphasis was that if you did it right, you could do a lot of very profitable lending for small business. So I don't think your conclusion necessarily follows, but it could.
[Translation]
Mr. Loubier: Earlier you mentioned the confidentiality of the rating. Where does the bill refer to the confidentiality of the risk rating to be established by CDIC? You yourself referred earlier to gossip on the financial markets. Gossip travels fast, as they say. It is hard to keep a risk rating established by your agency confidential.
Mr. Chair, if you will allow me, I might have one last question.
I shall take Quebec, which I know best, as an example. How would the rating be established for Desjardins Trust with, say, 80% of its deposits in Quebec and 5% in Canada? Unless the institution's confidentiality is absolutely airtight, might the rating you establish for the 5% of its deposits not be based on all its activities, despite the very low 5% of its activities in Canada?
.1055
[English]
Mr. Reuber: It's conceivable. Confidentiality in these matters is fairly important, because you don't want a system that is actually self-generating expectations.
So if you put out some risk rating - say a person has a four and he's under some obligation to fix it up - you don't want to make things worse, because then the public takes a scunner to him and suddenly he is no longer a four, but he's a six. From our point of view, that is why we would not want to be in a position of putting out a risk rating.
There might also be legal reasons for not doing that, and Mr. Sabourin will discuss that.
Putting that aside, if, say, an institution is in trouble because of some failure internationally rather than domestically, obviously we're going to have to risk-rate the entire institution. We can't risk-rate just the parts that look good - or bad, for that matter.
So that's not a very big problem, because 90% of the institutions we're dealing with don't have any international operations, or none of great consequence.
[Translation]
Mr. Jean-Pierre Sabourin (President and Chief Executive Officer, CDIC): I just wanted to mention that the bill already contains confidentiality provisions limiting disclosure; they are the same as the provisions in the legislation on financial institutions, and are found in clause 45(2) of the bill, which prevents CDIC from disclosing information about member institutions.
[English]
Mr. Williams: Mr. Reuber, I noted that your personal preference is to go for co-insurance and that you have no real concern about the marketplace knowing what the ratings would be. I think the more the marketplace has that information the better off we are, yet OSFI seems to have a paranoia and wants to work totally within secrecy.
Mr. Reuber: Let me be clear. There are dangers in an official body making that information available, a sort of catalogue of ratings, because it tends to be self-generating expectations and creates all kinds of problems. So I agree entirely with OSFI on that point.
If, on the other hand, institutions decide, for whatever reason, that they want to reveal the information, then, first, I'm not sure we have the power to prevent them from doing so, and second, I'm not altogether opposed to that.
Let's face it - if that happened, then presumably the ones who revealed it would be those with the better ratings and the ones with the weaker ratings wouldn't be revealing them. That in itself generates some very powerful incentives.
Mr. Williams: I'm not saying that you would publish it yourself, but that the marketplace would find it out sooner or later and therefore it would become part and parcel of public knowledge.
My preference is that the market should have as much information as it possibly can - perhaps not absolutely everything, but certainly enough to make quantitative decision-making as to where to put money.
I talked about bond ratings, for example, with the Canadian Bankers Association, where we recognize that there are different levels of risk in different institutions, yet all of them can raise money and some may pay a premium accordingly.
You have laid out eight different criteria that you would use to rate and judge an institution. Presumably you must be doing that today to try to determine whether an institution is healthy or unhealthy, and OSFI is doing that today.
Mr. Reuber: We are doing it, but perhaps less systematically and less thoroughly than we will have to do it if we attach specific risk ratings. We'll have to justify them to ourselves, to our board, as well as to the institutions in question.
Mr. Williams: Wouldn't you agree that if this information is out in the public domain, not necessarily from your own sources, then surely it is a change in the rating that would cause market concern rather than a specific rating of a financial institution at any particular time. If it had a stable rating, albeit a five out of ten, then as long as it was stable it would continue to operate in its particular market niche without any jeopardy of a deposit run.
.1100
Mr. Reuber: It depends on circumstances. I don't accept that proposition. I think that a stable rating with unstable circumstances will give rise to market adjustments.
Mr. Williams: I'm sorry. Did you say a stable rating with unstable circumstances?
Mr. Reuber: You might be willing to bank with a five institution when times are good, but you might not be willing to bank with an institution of the same quality when times are bad.
Mr. Williams: If the systemic risk were to increase, one might move -
Mr. Reuber: So I think that just having a constant rating is not a satisfactory frame.
Speaking as a customer, I would take a different view of that. It also depends very much on the price paid. In principle at least, if you have a weaker rating then you should have to pay more for your deposits and presumably you should have to work harder to get the loans.
I want to make the point, though, that for the people we are dealing with, the deposits we are dealing with, which are insured up to $60,000 under the present system, as long as you stay inside those limits disclosure and additional information are not of great consequence, because you are guaranteed.
Mr. Williams: You said that you share information right across the board with OSFI, which of course wants to ensure that it operates in secrecy and that its decisions and deliberations remain that way. Yet you fully expect that if you apply a rating system, then that information could become public.
Therefore, knowing that you, as CDIC, have raised the rating on a particular institution, knowing the OSFI use exactly the same information - albeit they are entitled to come to their own conclusions, if the information is there, there's a great likelihood that their thinking would not be very dissimilar to yours - wouldn't that cause the marketplace to be more concerned if OSFI wasn't making any particular statements or was allowed to be totally secretive?
Mr. Reuber: First, I am not sure about how widely known these things will be. I have had a little bit of experience with this in the past. When I was with the Bank of Montreal, we had a system in the United States that was same-day clearing settlement. We all got ratings on that, and it didn't leak out.
I can't predict what will happen under this new arrangement, but if what you say happens, then it seems to me it provides an additional incentive for everybody in the system.
It also means that we have to be very concerned about the accuracy or at least reasonableness -
Mr. Williams: Quality.
Mr. Reuber: - of our rating system.
This is a matter of judgment. This is not a precise science, by any means. While the data may be common with that of OSFI and so on, clearly there will be different judgments. So it doesn't make life any simpler, but who said it should?
The Chair: On that grand philosophical note, thank you very much.
Mrs. Stewart, can you match that?
Mrs. Stewart: I, too, have a philosophical question and then a practical one. The philosophical one follows on the line of questioning you began, which follows my questioning of the Canadian Bankers Association.
Mr. Reuber: Right.
Mrs. Stewart: It was indicated that they felt that no insurance was preferable, that in fact competition could do the job to protect and serve the customer, and that with competition there would be free and open disclosure of all the information a customer may require in order to make a determination. Philosophically, as someone who has worked in this line of business, has looked at other systems around the world - and I guess I'm asking for an opinion here - do you think the consumer is better served by, strictly, a system of competition and no insurance?
Mr. Reuber: I don't think I argued that there should be no insurance. I was asked whether I -
Mrs. Stewart: I am asking you.
Mr. Reuber: There might be some, but I certainly don't know of any system that has no insurance. Even before we had deposit insurance, we had an informal system that patched things up as it went along, prior to 1967. The idea that you let the chips fall where they may and everybody stands back is not really one that is very viable in any jurisdiction that I know of.
.1105
The question is whether you can design a system that somehow is going to reduce the costs relative to the benefits of having it. Those who argue for a 5% co-insurance, or a 2% one or whatever you want to call it, are essentially saying that with a little bit of incentive on the part of the customer you might be able to save a fair amount yet have 90% or -
Mrs. Stewart: Do you think the customer is prepared at this point to take responsibility as an individual versus collectively as the taxpayer for this kind of support? Do you think this is what the consumer would want?
Mr. Reuber: The first point is that it doesn't come out of the taxpayer; it comes out of the consumer banking services essentially, because that's who pays for the deposit insurance.
Mrs. Stewart: That's the consumer ultimately, then.
Mr. Reuber: Right.
Secondly, putting the argument as you have is sort of putting it backwards. I like to think of it in these terms. If you have some kind of system of co-insurance - and I am not one who advocates 100%, I am talking about small margins - then you put the onus on the management and on the directors of institutions to demonstrate to the customer that they are an appropriate organization for him to put his money in.
When I was growing up in southwestern Ontario, for example, Canada Trust was always seen as a sound institution because of the way it ran and all those things. Whether it was or not nobody knew. Nobody read the financial statement - I don't even know if there was one - but it had that reputation. I agree with you that those can be deceptive.
Let me say that if I was starting with a clean page of paper and had to do this - and I don't think I'd want to be in that position - then I might be tempted to insure 100% of the capital value of the deposit but to insure less than 100% of the interest. It seems to me that from the point of view of the customer, it's one thing to say that you get your money back, but because the institution has failed, you don't get all the interest back. I know that in principle it doesn't make any difference, but I think that from a perception point of view it does.
Mrs. Stewart: Specifically, then, you're thinking that the financial institution would respond more directly to the request of an individual consumer for information and data than it does to the government: CDIC, OSFI, or whomever?
Mr. Reuber: The customer is king if you want him to come in and give you his money.
Mrs. Stewart: I have one more practical question that has to do with the notion of risk rating. We talk about how financial institutions must operate with sufficient incentives to solve their problems in a timely manner. In terms of identifying the timeframe for a change in a premium rate, given the structure that we've looked at in terms of identifying stage one, stage two, stage three, and stage four institutions, and understanding that institutions can move through those stages very rapidly, practically speaking, will this initiative, this ``incentive'', be doable?
Mr. Reuber: You have put your finger on a very important point. The world doesn't roll out as smoothly as all of this suggests. We've had institutions that are not on anybody's watch list go very quickly. You suddenly discover that they're in the basket. So you've touched a very important point.
I have no answer to you.
What you say is true. We could hope that improving our risk-rating system and so on will diminish the importance of that question. The standards we've imposed also have a very important impact on that. They are not just asking companies what their ratio of capital to assets is and so on, but it goes beyond that to look at the process and the procedure.
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There are essentially three questions: have you got a system, in your judgment is your system any good, and do you apply it? That has to be signed off by the board of directors and by the senior management of each deposit-taking institution.
That was introduced this year for the first time, and for the first time a lot of boards of directors, and even senior management I think, are being informed about what actually happens. I think it has had a salutary effect, not necessarily on the large institutions but on many institutions, in terms of improving the quality of management and the responsibility. I say this because in the end you really want as much as possible to put the onus on the management of the board to ensure that they remain safe and sound. I agree 100% with John Palmer on this.
Mrs. Stewart: I guess what we don't want to do is what we in fact have seen the banks do to many small businesses, where they pull the plug just at the time of need. Certainly we wouldn't want to be imposing significantly higher premiums in a particularly risky time.
Mr. Reuber: That's another good point, but I don't know how to deal with it. If you have a high-risk institution and the premium goes up as you go up the scale, then when you're about to go over the waterfall your premium's going to be as high as we can get it. That just goes with the design of what is in the bill. I don't know how you can avoid that.
The Chair: Are you saying that pyromaniacs should pay more for fire insurance?
Mr. Reuber: That sounds about right.
Some hon. members: Oh, oh!
Mrs. Brushett (Cumberland - Colchester): That's a wise comment.
To follow up somewhat on Mrs. Stewart's comments, we've just heard from the CBA and they're really apprehensive that disclosure and risk assessment or assignment will be the death-knell for many institutions. I guess I would say that we have hospital accreditation disclosures and they shape up or ship out. We have these kinds of things virtually through most institutions in our society.
If we look at financial institutions, is there not another side to the picture? From your broad experience, wouldn't there be positive advantages from which perhaps small business would benefit?
You mentioned Canada Trust. I'm familiar with Montreal Trust and the early days of Central Guaranty Trust. Those institutions were very positive in community economic development, in supporting community endeavours.
Is there not perhaps an opportunity here for these, as you say, institutions, whose lending, or the majority of it, is domestic, is not international, with a $60,000 loan guarantee, to service our communities much better in small business support through this legislation?
Mr. Reuber: Generally, running a safe and sound system is basic to having the economy run well, and to the extent that this contributes to that, it will be helpful.
You should recognize that the larger financial institutions are already subject to rating by the Canadian security ratings, the Canadian Bond Rating and Dominion Bond Rating systems, Standard & Poor's, and Moody's. They're also subject to reviews by investment dealers, who advise customers of their view of the profitability and so on of the bank and whether their stock.... So for the larger institutions that are in the security markets, I don't know whether a CDIC risk-rating system adds very much that isn't already out there. It might have a bit more authority because it's seen that we have perhaps more information; but, generally speaking, for those institutions this is not a new development.
It is for smaller institutions that aren't in securities, that don't sell bonds in the market and so on.
I can't predict how it would work, but from the point of view of containing or restraining the cost of deposit insurance and from the point of view of essentially having a sounder system, I think it's helpful.
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English
Mr. Campbell: Mr. Reuber, I don't know if you were in the room during the presentation by the Canadian Bankers Association, but among the recommendations they discussed with us was the possibility of exempting certain institutions from the requirement of part of the CDIC system, suggesting that for those institutions that in essence don't have retail operations but are principally wholesale, perhaps the rule could be that any institution that doesn't take deposits below $60,000, the CDIC limit, would be exempt. Do you have any reaction to that suggestion?
Mr. Reuber: Yes. In fact, I think I had a role in opening that discussion. I don't think we're quite ready to.... It didn't get into this round of the legislation that you're talking about at the moment, but conceivably it could come up in the course of the next few weeks.
I have to say that under certain conditions I agree with it. The conditions are these. First, there would be an upper limit. Instead of once times the amount insured, I would make it twice times the amount insured. The CBA proposal has in it provisions for employees and so on. I would eliminate all those. I would say that if your employees have to do banking, there are banks around the corner, and either you're in or you're out. Third, it would have to provide that it covers all arms of the institution in the sense that affiliates, subsidiaries, and so on would all come under the umbrella. In other words, they couldn't take a subsidiary and do retail business in one part of an institution and wholesale business in the other.
Given a reasonable set of conditions somewhat along those lines, although I can't profess that we've really worked out the details, I would be favour of that. It would save a lot of paper on the part of a lot of institutions, and certainly on our part. They would still be subject to OSFI.
As I think is fairly clear, deposit insurance is really intended to protect small retail depositors. By ``small'' I mean not so small. Actually they get pretty high, but it's not intended to deal with wholesale banks particularly.
I think it's fully in the spirit of what we're trying to do and I would support that very strongly.
The Chair: Professor Carr told us yesterday that before we had deposit insurance, which came in in the 1960s, we had very few bank failures. We've had far more since it came in. He said that the reason is very simple: you encourage terribly irresponsible banking behaviour when you can attract funds, pay any amount of money for them, and they are guaranteed to depositors. There's no accountability whatsoever. In other words, he was saying that we should get rid of the CDIC in order to have a much sounder, saner financial system.
Do you agree?
Mr. Reuber: It's a hypothetical possibility. I don't agree that you should get rid of the system. If he's talking about getting rid of 100%, I guess there's a lot of evidence that would question whether his judgment between pre- and post-1967 is very valid. John Evans has written a couple of papers questioning that.
The Chair: Is that John Evans formerly of the Trust Companies Association?
Mr. Reuber: Right.
I think the situation is that if I put my money in the bank, then I expect to get it back. It's when it gets into the savings end of the thing, with GICs and so on, that this question gets a bit muddled, because you're no longer talking about -
The Chair: Demand deposits.
Mr. Reuber: - demand deposits.
I should also like to point out that there now are alternatives with 100% guarantees by the government for any amount you want to invest. One is mutual funds based on treasury bills. You can buy as much as you like and it's all based on government treasury bills.
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Secondly, you can buy a load of government bonds without any constraint on supply, and of course they're all fully guaranteed.
So the question of providing this facility for term types of deposits is more open to question. But when you're talking about the payments system, that changes the question quite a lot.
I know Jack Carr very well. He's from the University of Chicago. He should be reminded that his great mentor, Milton Friedman, thought it was one of the greatest interventions in monetary reform in the thirties.
The Chair: Great minds always agree.
Dr. Reuber, thank you very much for an important presentation.
We shall take a two-minute break before the next witnesses come.
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The Chair: Order.
Our next witnesses are from the Canadian Institute of Chartered Accountants: Graeme Rutledge, chair of the CICA Financial Institutions Reform Study Group; and John Carchrae, assistant director, accounting standards.
Gentlemen, a lot of questions have been raised by other witnesses that we want to ask you. We look forward to your brief presentation.
Mr. Graeme K. Rutledge (Chair, Financial Institutions Reform Study Group, Canadian Institute of Chartered Accountants): Good morning, Mr. Chairman and members of the committee. You've already made the introductions, Mr. Chairman, so I won't reiterate those.
You've invited the Canadian Institute of Chartered Accountants to appear before you today to participate in your review of Bill C-100, and we're pleased to have the opportunity to do so.
I have a brief presentation, and then I'll be happy to address any questions you might have.
My presentation will provide a summary of the CICA's role and how it relates to financial institutions. I will then comment specifically on certain aspects of Bill C-100. In particular, I want to emphasize the need for certain issues that are touched upon in Bill C-100 to be developed further in the run-up to the 1997 review of existing financial institutions legislation.
First I'll say a few words about the standard-setting process, followed by words about the Canadian Institute of Chartered Accountants with respect to Canadian entities.
One of the CICA's key roles is to develop, for the benefit of the Canadian public, the accounting and auditing standards published in the CICA handbook. These standards, which are recognized and respected internationally, are developed through an extensive due process of research and consultation, including opportunities for public input.
The standards have gained general acceptance and for some years have been recognized in federal and provincial corporations and securities legislation. More recently, the 1992 federal financial institutions legislation established a requirement for the preparation of financial statements to be in accordance with generally accepted accounting principles except as otherwise specified by the Superintendent of Financial Institutions. The legislation also required the financial statements to be audited in accordance with generally accepted auditing standards.
The CICA Handbook was established in this legislation as the primary source of generally accepted accounting principles and generally accepted auditing standards.
In addition to our long-established role in setting accounting and auditing standards, the CICA has more recently committed significant resources to developing guidance to assist entities in addressing certain aspects of their corporate governance responsibilities. Specifically, I'm referring to the responsibility for establishing control systems and evaluating their effectiveness. In the complex environment in which financial institutions operate today, this is a critical aspect of effective risk management.
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Thus, our areas of specific interest and expertise with respect to financial institutions relate to financial reporting, standards, auditing standards, and corporate governance.
Let me say a couple of words about our role in legislation and regulation.
With respect to financial institutions legislation, we participated in the consultative process throughout the development of the 1992 legislation. More recently, we've continued our participation by appearing before the Senate banking, trade and commerce committee in its review of developments in the Canadian financial system. We also responded to the government's white paper on enhancing the safety and soundness of the Canadian financial system. Our comments, which we've also discussed with the OSFI, focused primarily on the financial disclosure proposals.
On an ongoing basis we also maintain a close working relationship with the Office of the Superintendent of Financial Institutions to ensure that we understand its needs as they relate to financial reporting and the role of the auditor.
Turning now to Bill C-100, we understand that its purpose is to refine and strengthen the regulatory system rather than to address more fundamental questions that will be re-examined in the lead-up to the comprehensive 1997 review, and we support this objective.
Although there is little in Bill C-100 that deals directly with financial reporting, auditing, or corporate governance, the proposed legislation embodies some important principles to which we subscribe. Those principles relate to the need for transparency and accountability throughout the regulatory and corporate governance framework.
A word about transparency and accountability.
The bill proposes to establish a mandate for the OSFI that will clarify its roles and responsibilities and contribute to increasing the transparency and accountability of the regulatory process. We support this and believe that similar principles need to be applied to other parties involved with governance of financial institutions.
In our submission to the Senate committee we noted that the parties involved in corporate governance - namely, management, directors, and auditors - need to have a clear understanding of their responsibilities to each of the different stakeholders. We noted that the classic governance model embodied in the legislation focuses on protecting the rights of owners of the corporation, primarily shareholders and, in the case of certain insurance corporations, participating policyholders. The rights of depositors and various other classes of policyholders are less clearly defined, even though protecting the interests of these stakeholders is a stated public policy objective.
Our submission recommended that legislation should explicitly address the interests of depositors and other classes of policyholders. We also recommended that a study be undertaken to define the information needs of these stakeholders, with a view to enhancing accountability to them. Such a study will contribute to giving parties involved with corporate governance a clearer understanding of their responsibilities to the different stakeholders. We believe the output of such a study will also provide a framework to assist in implementing the enhanced disclosure provisions of Bill C-100.
Turning briefly to the payment clearing -
The Chair: Excuse me. Has the CICA set up a committee that might undertake this type of study? Does it come within your competence?
Mr. Rutledge: We certainly have abilities in this area. This study relates to legislation requirements. Certainly I would expect that such a study would have significant leadership provided by government, but other bodies that are involved in the corporate governance process also should be involved in such a study. I can think of the CICA, the regulators, and the investment community, and there are many other parties.
Our due process of standards setting, which seeks large input from the public, would also be valuable to this.
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The Chair: Thank you.
Mr. Rutledge: Coming back to my opening comments, turning briefly to the Payment Clearing and Settlement Act, we'd like to bring one matter to your attention. We believe one provision is particularly significant. It gives the Bank of Canada the power to obtain information that will assist in determining whether the clearing and settlement system poses a systemic risk.
While we're not suggesting any changes to the bill, we wish to point out that control systems can play an important role in providing adequate protection against disruption in the clearing and settlement system.
I'd like to make a few comments about the process the CICA is following with regard to developing criteria of control.
CICA guidance, which is in the course of being developed with regard to control systems, has the potential to provide the Bank of Canada with tools to assist in meeting its objectives with respect to monitoring and evaluating systemic risk. In fact, we believe such guidance will provide valuable tools to all parties involved with governance of financial institutions in assessing where their objectives relating to control are being met.
In the long term the guidance on criteria of control is designed to assist managers to improve the efficiency and effectiveness of their organizations and to demonstrate how they have done so; to assist owners, investors, lenders, and others in making decisions about organizations in which they have an interest; and to assist internal and external auditors in conducting their own work.
The Chair: May I ask you the same question. Obviously you're working on this guidance system now. When will that be ready?
Mr. Rutledge: That guidance is in several stages. The first stage, which deals with the actual set of the criteria of control, is about to be released. We have to go through some final processes of dotting is and crossing ts.
I shall ask Mr. Carchrae for the timetable on the secondary document.
Mr. John A. Carchrae (Assistant Director, Accounting Standards, Canadian Institute of Chartered Accountants): The secondary document is being developed to provide guidance to boards of directors on how they might discharge their responsibilities with respect to evaluating control systems and exercising their responsibility for oversight of management. It is a document that has been exposed for comment. The comment period ended in mid-July, and the directors advisory group that is providing input to us on this has met twice to consider the comments and will be recommending a final document to a meeting of our criteria of control committee that will take place next week.
The Chair: We would be very grateful to receive any of these documents as soon as possible. I believe they could be helpful to us in our deliberations. Thank you.
Mr. Rutledge: I will just conclude. We believe that Bill C-100 makes some useful mid-course adjustments that we support. More importantly, though, we see Bill C-100 as a catalyst for beginning a comprehensive re-examination and refinement of the roles and responsibilities of the key parties involved with the corporate governance framework.
We look forward to contributing to the process of better defining this framework and hence enhancing accountability and transparency during the run-up to the 1997 review of financial institution legislation. We believe this will have a positive effect on the safety and soundness of the financial system for the benefit of all Canadians.
Thank you for your attention, Mr. Chairman.
The Chair: Thank you, Mr. Rutledge.
Mr. Williams.
Mr. Williams: We've talked about OSFI and CDIC. Now the CICA of course has a very definite role in keeping the stakeholders informed of the viability and the financial health of financial institutions through the auditors' report and the external auditors' work that you and your organizations do in every financial institution.
OSFI has a definite role to play and it wants to stay behind the veil of secrecy. CDIC says that it recognizes that there's a chance that this information, its decisions and observations, could become public, and obviously your audited financial statements are public.
You're all dealing somewhat with the same information. You're all dealing with the same broader role of informing the general public of your opinion on the health of the financial institutions.
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Where do you see your role, or do you have any specific guidelines developed as the CICA for informing the public if you see an increase in the level of risk in a financial institution?
Mr. Rutledge: That's an excellent question. What we do with regard to the setting of accounting standards is quite relevant in this area.
We work hard from the point of view of disseminating information, ascertaining what the required needs are to be disseminated and included in financial statements that will provide the user of those financial statements with a picture of what the financial position and the results of operations of the organization are at a point in time.
In doing so, we are continuing to move down the road of providing information that helps the reader to determine the extent of risk involved, the risk elements involved in the financial assets and financial liabilities of the organization.
That is primarily our role of trying to lay out the facts as they are put forward by management and lend credibility to management's assertions. We have to remember that the financial statements are prepared by management, first of all. Management is responsible for the management of the organization and running the organization.
Our role as auditors is basically to report on whether management's portrayal is in fact credible. We do this through that audit process.
In setting out some of these risks, we are talking about what information should be provided relative to, for example, the loan portfolio of an organization, the degree of concentration, the term, the interest rates - the sort of information that a user of those statements might take into consideration in making their decision.
What you've also got to bear in mind here, and what I referred to in my opening remarks, is that there are a lot of stakeholders. A whole range of stakeholders use these financial statements, and their needs can be different. I am not certain that we can answer all needs in one set of financial statements as such.
As I said earlier, a study is quite important of the needs of users of the financial statements, the various stakeholders, what information they should have, who should provide that information, and when it should be provided. It is a complex area and there are some conflicts within it.
Mr. Williams: In your opening remarks you stated that corporate governance is very much part and parcel, and evaluation of risk of a financial institution, which is an opinion, which is not facts and figures of total liabilities, total assets. It's a subjective analysis of corporate governance against a plan or pattern or developed principles.
Mr. Rutledge: Right.
Mr. Williams: We have found that the stakeholders - depositors, for example - pay little attention, or it is assumed that they pay little attention because they have a complete guarantee up to $60,000 through CDIC. Do you feel we should introduce a system of co-insurance or, as proposed in the bill, graded insurance risk, which would likely become public knowledge, even if it were not published by CDIC? Which would you prefer, if any, and do you feel that either co-insurance or graded risk would educate the consumer so they would start to pay attention to the fact that financial institutions are not iron-clad and government-guaranteed - as safe as the Bank of Canada as a concept?
Mr. Rutledge: That's a very complex question.
What we're into is the whole subject of risk and reward. In much of what we do in our day-to-day life as individuals, we are continually making decisions as to a risk we will take and the commensurate reward we hope to receive. It doesn't always work out in the way we expect.
Coming back to that question, I guess I ask myself questions as to how much consumers would read financial statements. How much would investors read financial statements? It depends on the sophistication of the individual, and it depends a great deal on how important that decision is to the individual.
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Mr. Williams: We are putting far too much emphasis on the fact that we would expect the retail depositor to read financial statements. I use the bond rating system as an example, where the bond raters rate a particular company and, by that, the marketplace sets its interest rates - and the rating therefore is public knowledge - and, just by asking for the credit rating, tells an educated investor how much return he would expect to find. The marketplace takes over. It doesn't require every investor to read a financial statement to find out and to make his own decision.
Don't you think that by introducing an element of responsibility on the consumer, through either co-insurance or graded risk, the marketplace would take over and adjust the rates accordingly to reflect that?
My question was, will you prefer co-insurance or a rate of premium?
Mr. Rutledge: The CICA has done no study that would support me to be able to answer that question in one way or another.
Mr. St. Denis: We can't overestimate the importance of what you do in this area in helping to maintain the strength of our entire financial system.
I will ask a couple of questions in the same area that Mr. Williams was endeavouring to pursue. There might be a little bit of overlap.
An earlier witness wondered, as we were discussing the pros and cons of the risk-based deposit insurance system versus the co-insurance system, about the problem with disclosure and what might be the impact on the marketplace vis-à-vis a particular firm if the risk evaluation of that firm was known to the public.
From your vantage point now, do you see that you would have to or that you should report in your annual statement the deposit risk evaluation for a firm?
Mr. Rutledge: Currently, today, within generally accepted accounting principles, there's no requirement for that information to be disclosed in the notes to the financial statements. I am aware that there are requirements by the securities commissions for corporations to report material-change events. Whether the securities commissions would deem the change in such a rating for insurance purposes to be a material event and reportable is for them to decide.
Coming back to your question in a broader sense, one also has to ask the question as to what that rating means to a consumer. I was sitting in the audience here listening to Mr. Reuber's testimony and was thinking, fine, if he has that rating scale, how does one interpret a two, a three, a four, etc.? What are the criteria that the consumer is going to use to interpret it?
I was also asking myself the question that there seemed to be no point gained for being better than the norm. It's all on the other side.
We've got to be conscious that today in business you take a risk and you hope to get ``commensurated'' for the risk you take.
In the world of finance, you often look at it as an opportunity to gain an extra 25 basis points of interest or an extra half-point base of interest. People don't give things away for nothing. There's a reason why you're offering to pay more.
I often hear business people who are actively involved in the money markets on a day-to-day, hour-to-hour, minute-to-minute basis say that they can detect pretty quickly when things start to erode, because of the action that is being taken in the money market. Organizations are saying, wait a minute, no, we will not buy at that price, and that's because they've heard something or they see something coming along. That's the market system, and I don't know that a consumer would have the sophistication to be able to interpret it in that way.
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Mr. St. Denis: So at this point, looking ahead to a risk-based system, there is no requirement to report that in your current reporting rules?
Mr. Rutledge: There's definitely no requirement.
Mr. St. Denis: But there could be a point in time at which your associations deem it to be a material statistic and reporting would be required?
Mr. Rutledge: Right.
Mr. St. Denis: I suppose that's always open.
Mr. Rutledge: Our standards require us basically to give what is referred to as a clean auditor's report. There are no qualifications, no exceptions that are being reported - provided the financial statements disclose the information they should disclose. That's in the basic rules.
When an organization gets into very serious trouble, the auditor has the tremendously difficult task of determining whether what we refer to as the going-concern concept - the concept that the organization will continue to exist, continue to pay its bills, and continue to collect its debts - is no longer relevant. If that principle of going concern is no longer relevant, then the assets and the liabilities have to be basically measured on a different basis. Some refer to it as a fire-sale basis.
Mr. St. Denis: The game has changed.
Mr. Rutledge: The game has changed.
Now, when you cross that threshold is a very, very difficult determination, and I think in the previous testimony we heard comments about how quickly it can happen in a financial institution.
The Chair: I welcome your offer to provide us with the two reports that are on the verge of being completed, and all of us look forward to your ongoing work with this committee to try to make sure our financial institutions are very sound. Thank you very much. We appreciate it.
Mr. Rutledge: Thank you, indeed.
The Chair: We'll take a two-minute break while our next witnesses come forward.
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The Chair: Order.
Our next witnesses are from the Canadian Life and Health Insurance Association, Mr. Mark Daniels, president, and Mr. Alan Morson, president of the Canadian Life and Health Insurance Compensation Corporation, assisted by counsel, J.P. Bernier.
We look forward to your presentation to us.
Mr. Mark R. Daniels (President, Canadian Life and Health Insurance Association): Thank you very much, Mr. Chairman.
You've introduced my colleagues and myself. I'll spare you that page of my notes and go on to say that since members of the committee have already received our written submission, Mr. Morson and I propose to review briefly one or two points contained in the document. Mr. Morson will begin with some comments on section 4 of the submission, which deals with the protection of policyholders of life and health insurance companies. After Mr. Morson's remarks, I'll follow with a few comments of my own.
Mr. Alan Morson (President, Canadian Life and Health Insurance Compensation Corporation): Mr. Chairman, I propose to provide you and your committee members with a very brief history of CompCorp, including the main points of the recent strengthening exercise, and then to make very brief comments on CompCorp's perspectives on the early intervention policy.
The Canadian Life and Health Insurance Compensation Corporation, which is known as CompCorp, is federally incorporated. It is a private company established in 1989 to administer the consumer protection plan for the life and health insurance industry in Canada.
The objective of CompCorp is to protect, within limits, Canadian policyholders against loss of benefits or unpaid claims under their life, annuity, or accident and sickness contracts should a member of CompCorp become insolvent.
Membership was initially voluntary, but most jurisdictions have taken legislative action to make membership in CompCorp mandatory as a condition of licensing for companies writing life or accident and sickness business. Membership may not be terminated as long as a licence is in force.
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CompCorp receives information about the financial health of its members on an annual basis, directly from the companies, and works closely with federal and provincial regulators whose job is to monitor the insurance industry.
There are currently 198 member companies, representing well over 99% of the life and health insurance business in Canada.
The CompCorp protection limits per person are currently $200,000 for death benefits on a life insurance policy, $60,000 for non-registered money-accumulation products, including cash values of life insurance policies, and then $60,000 for registered plans, such as RRSPs and RRIFs. In addition, $2,000 per month is guaranteed for disability annuities and for retirement income benefits. The fifth category we have is other health insurance benefits, for $60,000.
CompCorp has played a vital role in protecting policyholders in the three life insurance company failures that have occurred over the last 100 years. Les Coopérants was placed in wind-up in January 1992 and, with CompCorp's involvement, no policyholder lost any money whatsoever as a result of the insolvency.
In December 1992 Sovereign Life entered a control period, and it was placed in wind-up in January 1993. In this liquidation, over 96% of policyholders received their full coverage or benefits and the remaining 4% who did not receive full coverage lost no more than 10%.
Most recently, and notably, in August 1994 Confederation Life was put in liquidation. While it is premature to know what policyholder losses will be, CompCorp will be very disappointed if, at the end of the liquidation, any policyholder receives less than 90¢ on the dollar. Regardless of the losses, in excess of 90% of policyholders will receive their full coverage.
In less than a year, since Confederation Life went into liquidation, all of the Canadian group and individual insurance policyholders have had their contracts placed with another insurer and are receiving ongoing coverage and benefits. It is expected that a new home will be found in the near future for the accumulation business, and that includes all annuitants.
In the three insolvencies to date, then, CompCorp's obligations to consumers have been effectively discharged in liquidation. However, questions have arisen as to the need for earlier involvement and as to future financial capacity.
CompCorp has undergone two strengthening exercises. The first, in 1993, included two components: the addition of three independent directors to the board, bringing to five the complement of directors who could deal with confidential information, and the creation of a lending agreement so CompCorp could borrow funds from its members, thereby providing additional liquidity. The second strengthening exercise was completed by late June of this year and was stimulated in part by recommendations of the Senate banking committee and in the white paper.
The white paper set out proposals for a policyholder protection board that would have replaced CompCorp. The industry agreed with the key objectives of the PPB, but believed that if government financial backing was not available, then the planned improvements in policyholder protection could be attained more effectively, more efficiently, and more quickly by strengthening CompCorp.
As a result, the industry proceeded with four major enhancements designed to respond to the conditions cited by Minister Peters for withdrawal of the PPB proposals; namely, first, revising the structure of CompCorp's board of directors so that all directors are now independent of the industry; second, increasing CompCorp's compulsory borrowing powers from 1% of covered premiums, which gave access to $200 million, to 3%.... This increased the borrowing limit by $400 million, up to a total of $600 million, from our member institutions, and that's in addition to the assessment capacity.
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The third change was giving CompCorp a mandate to participate in going-concern solutions, otherwise referred to as restructuring or soft landings, when this is the most cost-effective way of dealing with a failing financial institution or a failing insurance company.
The fourth change was giving CompCorp supplementary assessment powers that would enable it, under exceptional circumstances, to speedily increase assessments by up to 70% for up to seven years, which would then increase our assessment capacity from $100 million a year to $170 million a year for that period.
CompCorp members endorsed the first two items on April 26 and the last two on June 27 of this year. Final regulatory approval for these measures was obtained from all jurisdictions on July 13.
The Chair: Do you know of any opposition to CompCorp as agreed to by you and as set forth in this proposed legislation, Bill C-100?
Mr. Morson: Excuse me, Mr. Chairman? Any opposition to...?
The Chair: To the concept of CompCorp as established in Bill C-100 and as agreed to by the industry.
Mr. Morson: CompCorp is not in Bill C-100, and I understand that yesterday the minister announced that he will not be proceeding with the PPB.
The Chair: Technically you're quite right. Do you know of any opposition to CompCorp as re-established in accordance with the agreement you arrived at?
Mr. Morson: I'm not aware of any. Perhaps Mr. Daniels is.
Mr. Daniels: Not that I've heard of.
The Chair: In other words, this is a fait accompli. It has been agreed to by the minister, as expressed in the legislation not going ahead with the PPB, and it's an example of a wonderfully successful negotiated settlement.
Mr. Daniels: Absolutely.
The Chair: It's a private sector solution to a difficult problem: protecting policyholders. I congratulate you for it.
Mr. Morson: Thank you, Mr. Chairman.
The Chair: In other words, we don't have to be concerned about it as a committee; there's no opposition to what has happened. Okay?
Mr. Morson: Yes. That's a very good point.
To get on to other areas, CompCorp has worked closely with the Department of Finance in developing changes to the Winding-up Act that would allow for greater flexibility and efficiency in dealing with insurance companies that have failed. By clarifying the existing legislation for insurance companies, by codifying procedures that have been used successfully in the three insolvencies to date, and by including measures that could lead to more creative and expeditious solutions, the industry and regulators will be in a much better position to ensure that liquidations will be handled effectively in the future.
If the costly and traumatic effects of liquidation are to be avoided, however, earlier intervention will be necessary. This has also been provided for in Bill C-100.
The Chair: Do you agree with what has been provided in Bill C-100 in that area?
Mr. Morson: Yes.
Legislation is the starting point but will not in itself produce results. Work is now going on between OSFI and CompCorp to document the relationship in the proposed intervention regime. This has already been done between CDIC and OSFI.
The powers of CDIC and CompCorp, however, are different. For this reason, the full cooperation of OSFI and CompCorp in developing an effective intervention regime is critical to achieving the government's objectives for financially troubled insurers.
We also trust that in due course legislation similar to the rehabilitation legislation in the United States will be developed, thereby enabling a standstill during which restructuring can be openly effected without declaring a company insolvent.
CompCorp therefore looks forward to a close and productive relationship based on full cooperation with the regulators as we pursue these common goals.
Mr. Daniels: I'd like to spend a moment or two on a couple of other items in the submission. As you know, each section of our submission examines the objectives of the white paper, outlines the industry's response to the white paper proposals, identifies a particular section of the bill that implements the white paper objectives, and then provides the industry's views or suggestions about the proposed amendment. In that respect the paper speaks for itself, but perhaps you'll give me an opportunity to make just a point or two on a couple of items in the submission.
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With respect to the early intervention policy, our submission raises some potential concerns regarding recourse to the minister and to the courts in relation to the expanded powers of the superintendent.
Since the submission was printed, we have had additional consultations with legal counsel from Finance and OSFI. In light of new information that has come to our attention, we are pursuing some legal work on these matters, which are directly relevant to our views on these issues.
When our investigations will be complete, we will want to follow up with a letter to the committee in order further to qualify our views. It is a tough balancing act between -
The Chair: When could we have that letter, Mr. Daniels?
Mr. Daniels: I would think in no more than two weeks. I have seen a draft of it, but we have to do more work. It is a balancing act between accountability on the one hand and not wishing, through an appeal process, to put impediments in the way of the orderly wind-up process. That is the balancing act you face, and we would like to say a few more things about it.
The Chair: We need all the help we can get in drawing this difficult line.
Mr. Daniels: It is a tough issue. That's why we want to take another whack at it. After our consultations, we realize that we need to revisit it.
With respect to the disclosure of financial data, I want to make clear that the industry recognizes and supports the move toward greater disclosure.
We accept the bill's proposed amendments, but we would add that it would be on the understanding given in the white paper that consultation will take place in order to ensure that appropriate account is taken of costs associated with enhanced disclosure, realistic timeframes, and so forth. But those consultations have already started with OSFI and are going well. Knowing the committee's interest in the subject, I wanted to underscore that point.
With respect to developing a stronger prudential framework for federal financial institutions, again we strongly support the measures contained in the paper. There are a couple of areas in which we believe there can be improvements to Bill C-100. In my remarks here I want to focus on just one of them, the restrictions on corporate roles that could be played by the appointed actuary of the company.
I understand that you have already heard about this issue from the Canadian Institute of Actuaries, and I do not propose to dwell too long on the matter.
The Chair: And from Gordon Dowsley, as well.
Mr. Daniels: In that respect, given your time schedule, I want to say just that we are very much where the CIA and Mr. Dowsley are. We do not feel restrictions should be placed on the appointed actuary and the chief investment officer - and of course not with respect to the CEO or the COO. We are completely in agreement with that. I want to make it clear: where it makes sense for a particular company to designate the CFO and the appointed actuary as the same person, we simply see no reason to prevent it in legislation or regulation.
The Chair: Would you require that where that situation exists there should be an independent actuarial report?
Mr. Daniels: I don't think so. Within the Insurance Companies Act, again following the Canadian Institute of Actuaries brief, within their own professional requirements there is more than adequate protection.
With respect to section 6 of our submission, we put forward a suggestion for additional provisions that would contribute to access to capital for mutual companies. Clearly, to the extent that financial institutions are strongly capitalized, their safety and soundness are improved without any requirement for regulatory intervention or involvement.
In today's marketplace, where all financial institutions have to compete aggressively in order to survive, the need for a substantial capital base has never been greater.
In 1992 Parliament granted mutual companies measures that would allow them to raise equity capital by issuing preferred shares. Due to some technical and operational challenges that were not foreseen at the time, mutual companies have been unable to take effective advantage of these measures. Bill C-100 provides an excellent opportunity to correct these anomalies.
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Again, I am not going to go through the points I wish to make. I think they are clear in the brief. It is just important to say that the problem that is created can be corrected by a very simple amendment that would permit mutual companies to constrain any single person or entity from acquiring a significant interest in any class of shares.
This would in turn prevent the possibility that a holder of a significant block of even preferred shares could come in on selected items and, in voting, override the wishes of the majority of policyholders.
It is a serious issue for mutual companies. We have had extensive discussions with officials on this matter, and one of the arguments they use is that this issue should be held in abeyance and addressed in the 1997 review.
I need to make clear that in our view such a delay would be a mistake. The significant structural change that is occurring in the industry today is going on right now, and access to capital is a key and critical element of managing that adjustment process.
The changes were made in 1992. Due to a technical oversight, they are not working right, and we urge you to consider this relatively simple change now. Two years from now there will have been a lot of water under the bridge in the financial services businesses. That has been only too clear from what has been happening around this table.
I will be happy to spend any amount of time on this subject. I am just glossing over it on the grounds our brief has.
Section 7 of our submission deals with some provisions of Bill C-100 that flow from other proposals in the white paper. The industry makes several suggestions for improving the bill. I want to focus on just one of these here; namely, a provision prohibiting federally regulated financial institutions from being affiliated with non-financial institutions that use ``trustco'' or other words, including ``lifeco'', ``insurance'', and ``assurance'', in their corporate names.
Let me clarify that the industry has no comment on the prohibition of the use of the word ``trustco''. We understand that based on past events, the government might well be concerned about the use of this term in corporate names. We understand the genesis of the problem. However, there has not been a problem with companies using the name ``lifeco'' or ``insurance'' or ``assurance''. Correspondingly, we see no reason for prohibiting the use of these names.
The proposed prohibition would affect a number of insurance companies. The committee should be aware that the negative implications are numerous and significant.
For example, valuable goodwill has been acquired in current corporate names and a mandatory change of corporate name amounts to an expropriation of this corporate asset.
In addition, use of a selected corporate name is a key method for achieving investor recognition for a public corporation listed on Canadian and foreign capital markets. The forced change of name would penalize existing investors and confuse potential ones.
Still another negative effect could result from the fact that the corporate name will have been used by the corporation on a range of documents, national and international contracts, and a variety of securities, resulting in excessive costs if a name change were forced on it by the government.
We submit that the terms ``lifeco'', ``insurance'', and ``assurance'' have posed no particular problems to date and a mandatory change would impose costs and hardship on several companies. Therefore we hope that federally regulated financial institutions will be able to continue being affiliated with non-financial institutions that use the word ``lifeco'', ``insurance'', or ``assurance'' in their corporate name.
I should add that the option is open at least to grandfather existing companies that violate this proposed provision if the government persists in proceeding with the amendment, although I guess we are putting a question mark beside that too.
Let me conclude by saying again that the Canadian life and health insurance industry believes that the white paper's commendable policy objectives of improving supervisory and regulatory systems of federally regulated financial institutions have in general been well reflected in Bill C-100.
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The industry supports the proposed amendments to the Insurance Companies Act, the OSFI Act, and the Winding-up Act and believes that our suggested amendments to the bill will further contribute to the policy objectives first outlined in the white paper.
We appreciate the opportunity to present our views to the House of Commons Standing Committee on Finance and look forward to further consultations with the committee during the remaining phases of the legislative process leading to the passage of Bill C-100.
Could I also say, Mr. Chairman, that we are delighted to see you and your colleagues actively engaged in key issues of relevance to the financial services industry in Canada. We know the demands on your time are extensive, and we genuinely appreciate the attention. Thank you.
The Chair: Thank you, Mr. Daniels.
Mr. Williams.
Mr. Williams: Mr. Daniels, you have an excellent brief here, but unfortunately I have not had time to go through it in detail at this point.
CompCorp is being set up as a private-sector-insurance, made-for-insurance solution to insurance companies in difficulty with OSFI and CDIC, or banking and trust companies on the other side. CDIC of course now will be rating their premiums on a scale. Do you plan to do the same for CompCorp to apply a rating premium to its members?
Mr. Daniels: I will give you my answer and then ask Mr. Morson to respond from his point of view.
We are certainly looking at the possibility of a risk-adjusted premium, but it is a difficult area. There are quite a number of problems connected with it. We have had a task force looking at the subject for six or eight months now and will continue to do so.
We are not opposed to the notion in principle, if a way can be found to get it to work. But it is a tricky subject.
Mr. Morson: One of the things we are doing in preparation for this possibility is the standards of sound business practice, which CDIC has had for a number of years but the life insurance industry has not had. We have a task force working on that now to come up with ten standards similar to the eight standards that CDIC has.
If in the future we are able to have a risk-based assessment, this could form a basis for it.
Mr. Williams: So you are taking advantage of the knowledge base already developed by OSFI and CDIC.
Mr. Morson: Yes.
Mr. Williams: I was concerned about the fact that you were objecting to the requirement that the chief actuary be separated from the chief executive officer or chief operating officer. I would have thought it would be transparent, prudent management to maintain the separation of the day-to-day management of the company by the CEO and the COO and the assessment of liability and risk by the chief actuary.
I wonder why you feel that this would be detrimental to the management of life insurance companies, when it seems to me to be prudent for them to maintain the separation.
Mr. Daniels: Many companies decide, for organizational reasons or whatever, that they want to keep these posts separate, but others decide, for purposes of efficiency and better access to information on the part of the actuary, to marry the two functions.
We have looked pretty carefully at this, and we just do not see that there is any built-in trap. The CFO has broad responsibilities, but not executive responsibilities in the same way as the COO and the CEO have.
Frankly, an efficiency question also comes into play here, because not all companies have access to that many people, so they have to break up two specialized positions like that. In some cases, just from an efficiency point of view, it makes sense for them to be brought together.
Mr. Williams: Thank you, Mr. Chairman.
Mr. Walker: How many companies do you think would be affected by the name change proposal? Do you have any idea of the scale of this?
Mr. Daniels: There may be others, but there are certainly four large companies that this is going to have a significant effect on.
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Mr. Walker: A second series of questions deals with the risk management question and the risk premiums. It's a question I have asked of other witnesses. What do you think the responsibility of a CEO is if a policyholder writes in asking what the risk premium is?
Mr. Daniels: That is a tricky question. There is no question about the risk premium issue juxtaposed to the information disclosure question, even in capital markets. If the risk premium changes, is that a material change as far as capital markets are concerned, and by OSC rules, security commission rules, might it have to be disclosed?
You raise a good question, but I can't give you a bottom-line answer.
Mr. Walker: It is essential for us, in defining what our rules should be, to make sure, if we set in motion a system, we say that this is a private assessment by the CDIC known by OSFI and so forth and by the companies that receive the letter. What are the obligations on behalf of the companies that receive these letters?
Mr. Daniels: We're in the middle of this issue right now. That's what we're trying to look at. We are addressing the same questions internally in the industry. If I could give you a definitive answer, then I would, but we don't have one.
If a company finds itself in a position of having to pay a risk premium because its capital performance is below some threshold, then in some respects that's a material fact, but if it's made public, then it could exacerbate the company's situation.
Mr. Morson: The only thing I would add is that the existence of the structure itself makes it less likely that companies will require the assessment. The very fact that they know it is not just something that OSFI has set down as guidelines but, rather, something that they might eventually have to disclose and pay a premium on makes them pay more attention to it than otherwise would be the case.
Mr. Walker: Any assistance you can give us in the coming weeks on this issue from your own internal deliberations would be greatly appreciated.
Mr. Daniels: Mr. Chairman, we were actually looking at it in the other way. We were hoping to get some.
Mr. Walker: It's quite easy for us to give you an answer, because we don't have to write the letters.
Mr. Daniels: Exactly.
The Chair: We will have all the answers for you, for sure.
Mrs. Stewart.
Mrs. Stewart: Mr. Daniels, I am particularly interested in, and concerned about, the issue of access to capital for your mutuals, the fact that demutualization doesn't seem to be an appropriate or effective strategy, the concern about the inability or the confusion, the details that don't allow the equity shares to be issued.
Can you articulate what you believe to be the message from the minister's office in terms of delaying the review until 1997? Can you also suggest or explain to us the down side of not making those changes earlier than 1997? I expect that it would actually be beyond that.
Mr. Daniels: Let me make it clear that the message was not from the minister's office; it was from officials. So I am not sure what the minister's view on the matter is. This was just in conversation.
I am not quite sure what the answer is. It's probably tied up with the whole question of widely held ownership. This has been such a debate over the years in financial services that it may be felt by officials that this issue touches on the widely held ownership issue in a way that is more substantive than what we're saying, that it is essentially a technical fix designed to make the 1992 law work in the way it was supposed to.
I've been on that other side of the table, and I can actually see myself getting up and saying that kind of thing, even if I couldn't see a direct response.
However, what I tried to say in my remarks was that it would probably be all right if there weren't a time pressure here, but this is now. Two years in this industry, financial services generally, at this time, with the kind of limitation on what was intended to be broader access to capital, is a very big item.
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Mrs. Stewart: Can you specify some of the risk here?
Mr. Daniels: The risk is simply that as the industries are involved in consolidation and amalgamation, more capital is going to be needed, both on that front and to broaden the business base. If the only access to capital the mutuals continue to have is through earnings, then they are disadvantaged tremendously as against our major competitors. By that I don't mean just the stock companies in the business; I mean other players in the financial services industry.
We think the way to change this is pretty benign. It is not affecting a broad base of issues at all. It deals simply with this one corner. It would make quite a difference.
Mrs. Brushett: My question was again on the urgency of this access to capital and the sense of urgency, to elaborate on it and who is affected by the negative impact. It has pretty well been answered, unless you care to elaborate more. This is our concern.
Mr. Daniels: No, not at all. I could simply say that in any list of factors that are driving change in this business right now, access to capital is absolutely at the top, along with competition and technological change. Those are the three major matters.
The Chair: Just to go back, maybe you could for the record, because this is a public hearing, explain to Canadians what the extent of your industry is: how big it is, how many policyholders it has, how it compares to other corporations around the world.
Mr. Daniels: I would be pleased to.
The life and health industry in Canada is a major international player. That's probably not as well understood as it should be. As an industry, to compare it with another familiar industry in total asset terms, we'd be about a quarter of the size of the banks. However, we employ all together about 100,000 Canadians from coast to coast. It is an industry that generates over 40% of its premium income from exports.
I am not aware of another country in the world that has a larger proportion of its indigenous insurance industry devoted to exports. Compared to the British, who are big at 20%, and the U.S., at 5%, it is a major international industry. It is extremely competitive.
I have to stress that, because a lot of times we bandy this word around, but the great news for Canadians in the insurance industry is that no company has a dominant position in any market in any part of the country. The fact of the matter is that if shoppers go out and seek information on prices, they can be pretty sure that those prices are the result of a lot of competitive forces.
It is a major international player and a very large industry. It's extremely well capitalized, and it is a well-regulated industry. Over the years it has performed extremely well. Even with the spectre of some insolvencies in recent years, as Mr. Morson has said, I believe the industry has handled those well, and we believe we can continue to do that in this period of change.
I put it in this way: this industry is a winner. From an industrial policy point of view, it's worth nurturing and worth preserving. It has never been a recipient of any kind of subsidies or government programs or anything of that kind. It's quite comfortable to stay that way.
I am glad you asked the question. I should add, just parenthetically, that in our submission there is a profile of the industry, in the appendix. If members want to look at it, it will bring it up to date.
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The Chair: May I congratulate you for your response to the white paper dealing with changes to CompCorp, an industry institution that protects policyholders and has in the past. You've responded to concerns expressed and worked out an arrangement that to my knowledge - and you've indicated that's true - has the full support of Canadians at this point. We have not heard any criticism of it. So we congratulate you for having entered into this process and for the results you have achieved.
By comparison, there are still some other minor changes that you feel are important. You've expressed them very well, and we will continue to look at them, as we know you will. We know you will be in touch with our committee.
I want to thank you all very much for your presentation to us today.
Mr. Daniels: Thank you.
The Chair: We stand adjourned until 1:15 p.m.