FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, September 24, 1998

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call this meeting to order and welcome everyone here this afternoon. In accordance with its mandate under Standing Order 108(2), the committee resumes its study of the report of the Task Force on the Future of the Canadian Financial Services Sector.

Today we have the pleasure to have with us, from Standard Life Assurance Company, Mr. Claude Garcia, president and CEO; and from Industrielle Alliance, Yvon Charest, executive vice-president, head, exploration. Welcome.

In undertaking this study, we ask that the witnesses in their presentations kindly tell us what they are in agreement with in the MacKay task force and why, and perhaps what they disagree with and the reasons why. You have approximately 10 minutes to make your introductory remarks. Thereafter we will engage in a question and answer session.

We will begin with Mr. Claude Garcia from Standard Life Assurance Company. Welcome.

[Translation]

Mr. Claude Garcia (Chief Executive Officer, Standard Life Insurance): Thank you, Mr. Chairman.

[English]

I would like to start by telling you a bit about Standard Life. I am the president for Canada, but Standard Life is a multinational insurance corporation. We've been doing business in Canada since 1833 and we've had our head office for Canada in Montreal since 1846. We sell all life insurance products and annuities and pension products. We're also involved in the mutual fund business. We are part of a large group based in Edinburgh, and the company is doing business, apart from Canada, in the U.K., in Ireland, Germany, and Spain. We have opened two representative offices in China, but we don't yet have the right to sell business in China. We also hope to do business in India as soon as the market opens up in India.

We like to say we were the first company in Canada to offer a total customer satisfaction guarantee to our individual customers. We give them a six-month guarantee on the sales process of our product. It works like this. When we sell a contract we send our customer a welcome letter and we inform them of the steps that should have been taken by the salesperson, the broker or the agent, in selling the product. We give them six months. If within six months they're not happy with any of those steps in the sales process and they can identify which of the sales process initiatives has not been done properly, we reimburse every penny they have paid without asking any more questions than that.

In Montreal, we also have a mandate to manage, on behalf of Standard Life, the U.S. assets of Standard Life. This represents almost $5 billion of U.S. equities that are managed from Canada. It's a world mandate. This is the first year we've been doing this. People complain sometimes about Canadians doing business with foreign companies. In this case, it's a foreign company, yes, but doing some business in Canada on behalf of foreign clients of the company. We're very proud of that.

Overall, we must say that we at Standard Life are very pleased with the MacKay task force report. First of all, I think the commissioners should be congratulated for delivering the report on time. It hasn't happened often in the past and many study groups or commissions of inquiry have taken much more time and much more money to do their job. That's not what happened with the MacKay group, and I think they should be congratulated.

[Translation]

The report is generally very well-written. We feel that it is an extremely important document, one that can helpful to the House of Commons and the Senate. The Government of Canada has come up with legislation that is well suited to the challenges that lie ahead in the financial services sector.

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[English]

What we are most pleased with is the fact that for the first time in many moons an institution associated with the federal government has recognized the competitive inequities that exist in the financial services, including banks and insurance companies. These competitive inequities deal with deposit insurance and access to the payment system.

Deposit insurance is a very old grievance of our industry because the deposit insurance system put in place for the banks and trust companies enjoys the guarantee of Her Majesty's credit card. In the case of insurance companies we have put in place an organization called CompCorp, which is funded by the insurance companies themselves and whose purpose is to protect the policyholders of bankrupt insurance companies.

Clients have told us repeatedly that they prefer the guarantee offered by CDIC to the guarantee offered by CompCorp. In fact, a survey done by the CLHIA indicates that when a product is exactly similar, 75% of customers will choose a product guaranteed by CDIC to the same product offered with insurance backed by CompCorp.

If I were a consumer, I would do it, and I'll tell you why. When Confederation Life went under four years ago, Confederation Life had a subsidiary called Confederation Trust. In that subsidiary, of course, the clients were protected by CDIC. Within three weeks of the bankruptcy, the clients of Confederation Trust had access to their funds because CDIC sold the deposits to National Bank and wrote a big cheque with the federal government's money, our money, to create the liquidity necessary for the National Bank to give access to the funds.

The clients of Confederation Life have only had access to their funds, except on an emergency basis, for the last few months. The industry has provided a line of credit to CompCorp to enable them to do that. It has taken three years. A line of credit is such that we can only give access when the funds are maturing, and they will mature over five years. So some people will have had to wait eight years before they have access to their funds because we just don't have the same means.

If you were a client, and there were lots of clients at Confederation Life, how would you react between CDIC and CompCorp?

We are very pleased that the MacKay task force has recognized this competitive difference. They proposed two options, and I will go into the details later if you wish.

We at Standard Life were in competition last year for a fairly large new customer, a pharmaceutical company based in Montreal, which wanted to set up a group RRSP. We were expecting deposits in the order of $1.5 million a year. We were in competition against Canada Trust, which is a bank, except for the name.

The business went to Canada Trust, not because they had a better product, not because they had better this or better that, but simply because the deposits would be insured by CDIC rather than by CompCorp. It is very frustrating to do business when you have, on one hand, the government helping you, and on the other hand having to fight on your own with your own tools. So we urge you to implement the recommendations in the MacKay task force on that issue.

The payment system is also a long-standing grievance of the insurance industry. The banks control and dominate the payment system, and the legislation has been written in such a way that insurance companies don't have access to the payment system. We are not the only one asking for access. MacKay is recommending that other groups have access, and we don't have any problem with that.

Basically, it means that every time we pay one of our consumers, and we pay billions of dollars every year to our consumers, we in fact send the money to a competitor, a bank or a credit union or a caisse populaire. We don't keep the money ourselves, as we could, because we don't have access to the payment system and there is no way for us to make those payments available.

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In the past this was not an issue, but with technology it would be relatively easy to give us that access and at the same time allow us to offer different products, to modify our products slightly so that we could keep the relationship with the consumer in the same way the banks can do it.

The other consequence of that is that the banks have access also to very confidential information about our customers. Here is why. When we sell a life insurance contract many consumers elect to pay by monthly debit from their bank account. That means we send an order to the bank and we ask the bank to transfer the money to Standard Life or whatever other company is involved. So the bank has access to information about our consumer. The banks are asking you to let them compete with us.

I don't know any other industry that is forced to give a competitor access to its clients. If you know of one, please name it, but I don't know of any other. The banks have a tremendous advantage at the moment, and they want to keep it.

We also raised with the MacKay task force the issue of forced tied selling. The banks have argued that they don't do that. We are not going to tell you that they do it on a systematic basis, but we have evidence that they do it from time to time.

Last year we lost a small group RSP plan with a medium-sized firm in Ontario because the firm negotiated a line of credit—the lucky small business did get a line of credit from the bank—but the bank required them in return to transfer the group RSP plan that they had with us to them. We pointed out to the chief financial officer of that firm that this change was not in the interests of the employees of the employer. In our opinion, a group RSP does not belong to the employer but belongs to the employees, because the employees have invested most of the money in five-year GICs, and of course the money would be invested at lower rates with the banks simply because the rates have dropped. It's not that there was any conspiracy here, but it's simply because the market rate had changed and the employee would lose out.

We were accused by the treasurer of being obstructionists and being bad losers, so we let the money go out. But in this case what I think is unacceptable is that the employer has a fiduciary obligation to its employees to do what's best for the employees. The fact that there is no best advice legislation, no adequate protection.... To me it's totally unacceptable that the transfer of a group RSP should be tied with the provision of a loan for the firm. You're dealing with two different entities: you're dealing with the employees in one case and the employer and the firm in the other case. But it was done.

The banks have denied this, but the MacKay task force, on the basis I suppose of our testimony and other testimony, decided to go ahead and find out more about this. They asked Canadians, when they had a loan from a bank, whether or not they had the impression of being forced to take some other product from a bank. One Canadian out of six indicated that this was the case. So to me it's a fairly clear indication that this practice is certainly much more widespread than the banks would let us believe.

It seems to me that before giving new powers to the bank we should make sure that the banks behave properly in that area and that proper safeguards are in place.

Finally, I would like to talk about the right of privacy. I think we support the recommendation of the task force on that issue. We believe that there are lots of practices at the moment that are not acceptable. I can give you a couple of examples coming from my own experience.

Last year I decided that I wanted an Internet bank account, like many other Canadians, partly because of the convenience but also to find out what you could do there, so that I could use that knowledge with other products of the company. I was asked to fill out an application form. On that application form there was a paragraph that authorized the bank to exchange information about me and about the service I was buying from the bank with all the subsidiaries of the bank. I crossed out that paragraph.

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It took a month to hear from the bank about my application. A very polite young lady phoned me up and said, “Mr. Garcia, we cannot open your account”. I asked if there was anything wrong. She said “You crossed out this paragraph, and unless you remove this we cannot open your account”. I asked why, and she said “Those are the orders I have, and that's the way we proceed”. I asked her to confirm this in writing, and her answer was “We don't do this”. I asked to speak with her supervisor. She said yes, certainly. But I'm still hoping to hear back from the supervisor; he hasn't called me back yet.

I was able to get my Internet bank account open despite the fact that I did that, because the bank I'm dealing with in this case happens to be the bank of Standard Life. Not every customer has those powers.

I think this is an unacceptable practice of the banks. And this bank is not the only one doing it. When we were having the debate in Quebec about Bill 188, the CLHIA did a survey and we discovered that many banks do this, and some caisses populaires also do this.

Last month I asked for an increase in my line of credit at the bank. A woman phoned me, very polite again, and asked me for my social insurance number. I asked her why she wanted it. She said she needed it. I asked, “Why do you need my social insurance number? I'm doing a loan; therefore you're not going to pay me interest. You have no interest to declare to Revenue Canada, therefore you should not ask me for my social insurance number.” She said “I need your social insurance number because we use this to check your credit file.” I said “That's not legal. This is illegal. You're not allowed to do that.” I refused to give her my social insurance number, but she said “I don't mind; we have it on file anyway. I'll get it.”

This is another example. We at Standard Life, a few years ago, before I became president, were using social insurance numbers of our clients as a key to identifying them in our pension business. In pensions you have the social insurance number of everybody because people get a tax receipt at the end of the year. It was pointed out to us that this was illegal and we stopped doing it. We had to spend a lot of money to change our computer system to be able to do that. The social insurance number was a convenient tool, but when the privacy issue was raised we said okay, good point; let's change it. And we did change it.

Here we have banks who claim all these things and yet use a social insurance number for a purpose for which it is not legal to do so. It's totally illegal, and it's being done at the moment.

We say to you, before you give more powers to the banks, let's make sure that the banks obey the laws of this country, respect the privacy of consumers, and respect their consumers by not forcing them to buy other products from them.

Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Garcia, for a very thoughtful presentation, focusing essentially on two issues with particular attention to consumer interest. Perhaps during the question and answer session we can also focus on other issues of the very lengthy MacKay task force report.

Mr. Charest, you are next. Welcome.

[Translation]

Mr. Yvon Charest (Executive Vice President and Head of Operations, Industrielle Alliance): Thank you. In the next few minutes, I would like to explain to you why in my view, the MacKay Report seems overly favourable to large banks.

[English]

what I call a bank-friendly report.

[Translation]

I will also explain to you why, in my opinion, competition and competitiveness will not increase and consumers will not be empowered if all the report's recommendations are adopted.

[English]

I'm the executive vice-president and COO of Industrielle Alliance Life Insurance Company. Two mutual companies were merged back in 1987—Industrielle, whose head office was in Quebec, and Alliance, whose head office was in Montreal. We used to have two federally chartered life insurance subsidiaries, and since last week we have a third one, Seaboard Life.

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Mr. Garneau, the president of our company, is also a member of the Bank of Canada board, who are having a meeting in Newfoundland today, which is why I'm representing the company.

[Translation]

As I pointed out, we are a mutual insurance company. Our share of the Quebec market is approximately 10%, whereas nationally, we are ranked seventh or eighth in the industry.

[English]

A couple of days prior to the MacKay task force I was asked to put on the table a couple of scenarios, and I've put at least two of them. One was called the “banks-friendly” scenario, and the second one was called the “yes, but” scenario.

[Translation]

The third recommendation in the MacKay Report has to do with Canadian ownership of financial institutions. The task force recommends that the large financial institutions remain in Canadian hands. Of course, by large financial institutions, the report's authors mean the big banks. I can understand why the task force would make such a recommendation. However, it is fraught with consequences. It affords protection to the largest institutions. By allowing banks to merge and by recommending that they be allowed to sell insurance, you are giving incredible power to institutions which already control the financial services sector.

Although the MacKay task force states that its two objectives are to enhance competition and competitiveness and to empower consumers, financial institutions other than banks should also be given considerably more powers if a level playing field is to be achieved within this sector.

I say this for a number of reasons. First of all, let us consider the history of financial institutions in Canada. History shows us that there has been no increase in competition in this sector. On the contrary, we have witnessed increasing concentration. Ten or fifteen years ago, the Canadian banking industry was deregulated in the hopes that competition would increase. Today, trust companies and brokerage firms have been bought up by banks. Whereas the goal was to enhance competition, history reveals that quite the opposite has occurred. Not only has competition not increased, consumers have not been empowered either.

Today, we are told that banks have other competitors, notably mutual fund companies. However, as of December 31, 1997, banks controlled 30% of all mutual fund companies, and this percentage is increasing. Therefore, my assertion is based on facts. History shows that the measures taken to enhance competition have not had the desired effect.

The second reason is the Canadian payments system. Yes, insurers requested access to the Canadian payment system and were granted such access. I simply want to mention that there are three components to the Canadian payment system: access, rules of operation—who controls these rules?—and user costs. So far, the MacKay Report has discussed access. I mention this because history has also shown us that in Canada, financial powers have been concentrated in the hands of a small group. I suggest you wait until the rules of operation include insurance companies, until costs are reasonable and until measures are in place before giving banks more powers.

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Access to the Canadian payment system would certainly please us tremendously. However, there is still a way to go between access and reasonable user costs and any participation on our part in determining system operating rules.

The third reason why we believe financial institutions should be granted more powers and why we should wait for some results before granting banks additional powers relates to the globalization issue. Globalization is on everyone's mind, but one must understand that there are three very distinct categories of consumers: large corporations, SMEs and individual consumers. It is clear how globalization effects large corporations, but as for the other two categories of consumers, namely SMEs and individuals, the MacKay Report makes it very clear that we are dealing with a local market, not a global market. Given the MacKay Report's stated objective to empower consumers, it is clear that as far as the latter two markets are concerned, few measures are in place to enhance competition.

Ever since last year, there has been talk in the newspapers of new competitors on the way and of a shake-up in the industry. The three names we hear are always the same ones, the ones listed in the MacKay Report. The big banks' competitors on the retail market are not waiting on the other side of the door to break into the Canadian market. The three oft-cited examples are Wells Fargo & Co., the virtual bank of an insurance company belonging to the NN financial group and credit card companies.

In my opinion, the big banks are not facing as much competition as some might believe. It is true that MacKay theoretically supports the establishment of new financial institutions. It is true that theoretically, MacKay believes that the process of regulating these institutions should be tied to the size of the institutions, that is the smaller the institution, the more flexibility it should enjoy. All of these recommendations have one single objective in mind, that is to help new competitors. However, financial power is so heavily concentrated at present that few competitors are interested in coming to Canada where three, four or five institutions control 90% of the market. The higher the concentration in a particular industry sector, the fewer than number of competitors who are tempted to break into the sector and who believe they can turn a profit in the process.

Another reason is the handling of personal information and on this score, my views are consistent with those expressed by Mr. Garcia. Industrielle Alliance has 650,000 clients, 500,000 of whom pay monthly premiums through automatic deductions from bank checking accounts. There are 500,000 people who do business with Industrielle Alliance. In a move that surprised me somewhat, the McKay Report recommended not only that banks be allowed to sell insurance at their branches, but that they also be allowed to use the personal information they have on file on consumers in the course of their own operations.

This is tantamount to forcing insurance companies to disclose information on their own clients to a competitor. Again, it boils down to the difference between theory and practice.

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Theoretically, you can create separate computer files and argue that employees selling insurance will be physically separated from other employees of the financial institution. You can erect all kinds of barriers. However, in practice, in a bank branch, there may be 10 employees, two of whom sell insurance and must meet sales targets. These employees have lunch and spend eight hours of the day together. Despite the fact that theoretically, these functions will be separate, there is no way of being certain that personal information will really remain confidential.

On the subject of tied selling, I know that the federal government has examined this issue on several occasions. However, industry practices always evolve more quickly than regulations. There are very diverse and highly creative ways of marketing products. Technically speaking, these methods may not be tied selling. One company employee wrote to me about a financial institution offering mortgage loans that were not tied to any other kind of life insurance product. However, if a client of that institution wished to purchase disability or home insurance, there was a clause in his mortgage agreement which stipulated that he needed to purchase life insurance before he could purchase disability or home insurance.

Therefore, through this agreement, the bank is actually trying to market two products, namely a mortgage loan and disability insurance. There is no talk of life insurance. That comes later. The client who contracts a five-year mortgage loan is informed that conditions would be more favourable if he extended his mortgage loan to at least six years. The consumer is forced to renew his mortgage loan under the terms set by the bank if he wishes to maintain the insurance benefits that he has enjoyed for the past five years. Is this tied selling? Not according to current regulations.

[English]

Is it another type of sale that meets one of the other definitions you have already in the regulations? The answer is no, but it's a product that is available over there, and as soon as you try to change the regulation of tied sales in order to incorporate that type of product, one day later there will be another creative product out there and people will argue that they are meeting the regulations. All that is simply because you are giving additional power to institutions that have already a great market share in Canada.

To the extent that the customer will be doing business with an institution that will have only a 2% market share, and there's a lot of competition out there, the customer would say no immediately to such a deal. The only reason we are discussing tied selling and cross-selling is because the consumer lacks choices and is not able to refuse those deals.

I have mentioned to you a couple of reasons why I think that prior to giving additional power to the big banks you should focus on the other recommendations of the MacKay task force that are giving power to competitors, see the result, and make sure that in real life you have additional competition prior to giving additional power to banks.

I'd like to give some additional comments on two other subjects.

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The first one is consumer protection, CompCorp and CDIC. We do agree with the recommendation that there was a kind of unlevel playing field, and on that aspect clearly the MacKay task force is levelling the playing field.

The second comment refers to a recommendation dealing with provincial and federal jurisdictions.

[Translation]

Recommendation 115) (c) stipulates that if the federal government and provinces cannot come to an agreement on delegation, home-jurisdiction regulation must be recognized. Our company, Industrielle Alliance, includes provincially incorporated and federally incorporated companies. Recognition of home- jurisdiction regulation would greatly simplify our job. Even if the parent company is provincially incorporated, we are required to submit financial information to the federal supervisory authority on a regular basis. Recognition of home-jurisdiction regulation would mean that we would not have to deal with two different supervisory authorities.

[English]

As a final note, there is a recommendation concerning the disclosure of commissions, recommendation 62, that would force all institutions to disclose the exact amount of commissions. On that one, my suggestion would be to check with what has been done in Quebec in Bill 188, article 17. They have found a mid-term approach in terms of disclosure. They have asked the institutions to disclose the type of compensation that was given to the employer or the agent, whether salary or commission, to what extent there could be a share of commission, and to what extent there were additional fees to the agent. That system seems to have worked well because the customer has enough information to know the type of compensation. I do not think we have to go as far as to disclose the level of commissions per se.

That closes my remarks, Mr. Chairman.

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

We will now go to the question and answer session. We will begin with Mr. Harris.

Mr. Dick Harris (Prince George—Bulkley Valley, Ref.): Thank you, Mr. Chairman. I will be spending some time with Mr. Epp on the question.

Gentlemen, thank you for your presentation. I have some sympathies with your concerns.

I wanted to just get some sort of picture from you gentlemen as representing major insurance companies. If, for example, the government were to change regulations to say open up the payment clearing system to companies such as large life insurance companies, etc., and as well allow you to participate in the CDIC program, just how big of a rush would we see from life insurance companies to start to become more like banks and in fact provide competition to the banks?

Mr. Claude Garcia: You're asking us to disclose our strategic plans.

I think the CDIC issue is important. Certainly for us it's more important. Ninety percent of our business is in savings products. Of course today consumers prefer mutual fund products to deposits, but we still sell an awful lot of guaranteed products where deposit insurance is an issue. So levelling the playing field there will certainly help us deal with that.

The other concern is that it would also level the playing field in other ways, because at the moment we know that 50% of consumers believe—those who buy mutual funds in banks—that those mutual funds are insured by deposit insurance. We think this is bad news, but it's a fact of life. In business what counts is not what is true but what the consumer thinks, and when 50% of consumers think mutual funds sold by banks are insured, of course they'll be more likely to buy them from banks than from other institutions. Obviously, they'll be disappointed when there is a severe market crash and they discover this is not true. But the sale would have been made.

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Mr. Dick Harris: If I could just interrupt for a moment, I want to clarify something. It's my understanding that the deposit insurance does not cover things such as term deposits with maturity dates over five years, government bonds, treasury bills, and investments in mortgages, stocks and mutual funds. That appears to me to be a large part of your market. I'm trying to determine the huge benefit for a company like yours of the CDIC involvement.

Mr. Claude Garcia: I told you about the case we lost last year. Normally in a case like that maybe only one-third of the money would have gone into guaranteed savings and therefore would have been covered by the CDIC. But the fact of the matter is that we lose the whole account. Even if two-thirds of the money goes to investment funds that are not covered by CDIC, if the consumer decides to go, we lose the whole account. So it's not only the insured products that matter. When you sell a product to an employer for his employees, if you lose the account, then you lose everything.

What the CLHIA and the MacKay task force recommended is a bit ambivalent. If we limit CDIC coverage to products with maturity dates of over five years, it means a lot of products sold by insurance companies will not be covered. For example, long-term annuities would not be covered. But I presume that some coverage will have to be maintained, because at the moment there is coverage through CompCorp. So I think we'll have to figure out how this would work. But guaranteed products still represent a significant portion of our business.

For us it's very important that we're at least on a level playing field with the banks. We've been competing with the banks. The banks have been selling RRSPs and have had the advantage of CDIC coverage since the 1970s. We've been arguing since then that we have a competitive disadvantage, and nobody listened before MacKay did. We're very happy that MacKay listened, but we don't know why it took so long.

Now, if you asked me if we were going to become banks, I would answer that it's not our plan. But if we had access to the payment system, I could see many things we could be doing. For example, we at Standard Life have well over 100,000 annuitants, who receive a payment from us every month. Nothing would prevent us from offering these annuitants a debit card, which would allow them to draw their annuity directly from us rather than us sending the money directly to the bank and the bank issuing the money, which is the way we do it now. So this is just one example of the type of thing that is possible.

We would also have to find a way to get around the issue my colleague Yvon and I have raised with respect to the payment of cheques. I don't know how we could do that because we cannot force people who want to buy insurance from us to do their banking with us. Certainly, Standard Life is not planning to become a full-fledged bank. But we are in the savings business.

First of all, everybody in society needs a chequing account in order to pay bills, for example. Because the banks have this information and provide that service, they've asked the federal Parliament over time to give them more powers so they can use this information to offer other products. With time they've entered the fields of everybody else.

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The issue here is one of giving us some other powers so that at least we can see how we can bypass the bank. We will use our imagination. There are imaginative people in life insurance companies as well. We will be able to come up with products that will allow us to compete better with the banks, but we need some time to catch up. The banks have had the advantage for all these years because of public policy. It's been a long time.

Mr. Dick Harris: Thank you very much.

The Chairman: Mr. Epp.

Mr. Ken Epp (Elk Island, Ref.): Thank you.

First of all, I want to establish an understanding. In my question I don't want you to presuppose my position. In fact, I want to ask a question where I am just the opposite of what I'm asking, but I do want to know your answer to it.

This is the question. I can go to buy a car, and if I buy a radio and heated mirrors and all this stuff individually, that costs me $8,000. But they have a package and I can get the same stuff for $5,000. The same thing is true when I ask my roofer friend to fix my roof. If he just does part of the roof—because I have two different kinds of roofs—then it costs so much. But he says that while he's out there anyway he'll do the other part of the roof as well and I'll get a good buy on it. So I go for the deal.

Tell me, why is it wrong or disadvantageous to the consumer to be able to go to a financial institution and say that he or she will buy the mortgage there, where there's only one set of bookkeeping and only one evaluation or assessment on the house and where he or she can get the house insurance and the mortgage all at one institution? Surely that is going to be good for the consumer, so why should we be against it?

Mr. Yvon Charest: My point is simply that your example is good as long as you have a lot of choices from which to pick the best price for your car or the best price for your TV. To the extent that you allow a group of institutions that already control so much finance in this country, you might say that for the first few years you will have additional choices. But then, after a few years, you won't have that choice any more and you won't have that interesting price you were talking about.

If you look at history, you will see that you don't have a choice of a trust company interest rate any more and you don't have a choice of an independent broker charge any more. In this regulation you are saying that institutions with a capital base of over $5 billion should be widely held, but by definition those institutions may buy any type of institution at any level. That's what you have in MacKay.

In theory, your example of giving additional choices is rather good. But if you look at the level of concentration you have in Canada, you tell me how many institutions will be there when you try to choose between the different products in order to have the cheapest ones. That's simply my point. In theory you are right, but in practice, in this country, with the consolidation of financial moneys, it doesn't work.

Mr. Claude Garcia: May I simply say that packaging is good, except that when the banks advertise mortgage rates, they advertise the interest rate. I've never seen an advertisement of the insurance rates. So they sell the product on the basis of the interest rate, but if you look at where the profits are coming from, the most profitable insurance business in Canada—and by a long shot—is credit insurance. Ask the bank to provide you with information about it. It's extremely profitable and is probably more than 50% of the premiums. So if the banks want to do it, I am asking you if it is in the interests of the consumer or in the interests of the shareholders of the bank.

Mr. Ken Epp: I have a follow-up to this. If the banks that now give mortgages would offer life insurance and these other things, would the insurance companies turn around and also offer mortgage insurance packages? Would you be ready to compete directly with the banks if that were to happen?

Mr. Yvon Charest: First of all, you may be aware that banks already offer insurance together with the mortgage. And it's legal.

Mr. Ken Epp: Yes, and car insurance with a car loan.

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Mr. Yvon Charest: No. They offer life insurance with mortgages. I'm not sure they could offer car insurance.

Mr. Ken Epp: Well, I know of some people who have bought their car insurance from a bank.

Mr. Yvon Charest: It may not be—

Mr. Ken Epp: Maybe not directly.

Mr. Yvon Charest: What is clear is that when you sign for a mortgage, legally there is absolutely no problem for a banker to give you two sheets of paper. On the first one you agree to the mortgage; on the second sheet you either accept the insurance right away, or you sign that you refuse it. That's certain. It's already there. That's a market of at least $250 million in annual premiums that already exists.

Some life insurance companies are already selling mortgages. In our own organization we have $1.3 billion in mortgages, but that's peanuts compared to the overall market. But the banks are already permitted to do what you just mentioned. What the banks are saying is that instead of having permission for specific products like the one we just described, they'd like to have an overall availability of any insurance product.

The Chairman: Mr. Garcia.

Mr. Claude Garcia: I would just like to add that I don't know any banks that offer free insurance with a mortgage.

Mr. Ken Epp: I agree.

Mr. Claude Garcia: So if you talk about packaging, it's not packaging. Packaging is one price for everything. This is not packaging here. We don't have any problem with packaging; we have a problem with forced selling.

Since competition in the mortgage business is on the interest rate, everybody is forced to cut the price as low as possible to be able to compete. Because of that, nobody packages things with the mortgage. But they will jointly sell—they will add to it. And of course, the profits are in the add-ons, not in the basic product, which is the mortgage product. That's okay. At the end of the day, though, what we are against is tied selling, when you force people to take one product with another. All we are saying is that it's happening much more frequently than the banks will admit.

Mr. Ken Epp: And your definition of forced selling is “Your mortgage will not be approved if you don't take this”, as opposed to “Here's a mortgage and we'll give you a real good buy on insurance if you want to take it from us, but you don't have to.”

Mr. Claude Garcia: Another example of tied selling is “If you don't move your RRSP with us, we won't give you your mortgage.” When they apply for a loan at a financial institution, consumers are extremely dependent, because the loan is to buy a home. For most Canadians, the most important financial transaction in their lives is buying their own home. It's also the most common dream in Canada. But before you get a mortgage, you have to give an awful lot of information about your financial assets to the bank, or whoever provides you with the mortgage, so they have an awful lot of information about this. That's what the banks want—to use that information to sell other products.

The issue here is whether or not this is in the consumer's interest. What we're telling you is that the banks are using the powers they have now not necessarily in the public interest, and certainly not in the interest of the consumer. So the issue is whether we should give them additional power when they're not using their power correctly.

Mr. Yvon Charest: I'd like to add that the question here is when do you start to say that it's tied selling, and when is it only an expectation from the institution but you think you don't have a real choice?

I'm an insurance executive. I know I have a real choice. When I renewed my line of credit with my bank, they offered me some insurance. I told them right at the beginning that if we were to have a good relationship I didn't want them to talk insurance to me any more. They said “That's fine, Mr. Charest.” Two months later I got a call from someone else within the same organization, saying “Well, you have a line of credit with us.” I said yes. They said “But you don't have insurance.” I said yes and ended the conversation there. But the following morning I called the other guy and told him, “I told you I didn't want to hear about insurance.” He said “Yvon, I'm sorry. It's out of my control. Let's put something on the computer so it will be known to everyone.” Then he said “Oh, I'm sorry. That restriction on talking about insurance does not exist.”

• 1630

My point is the following: What will be the reaction of most Canadians when they receive that second call that they have a line of credit but no insurance? Will their reaction be “I know everything; I know no one will force me?” Or will their reaction be “Aha, perhaps I'd better get the insurance this time in order to have my line of credit renewed?” That's what the average Canadian will think.

We keep talking about the definition of tied selling, but let's think for a moment about how the average Canadian will react when they receive this call. That's my point. Where do you start tied selling, and what is persuasion?

The Chairman: Mr. Epp, I'm going to jump in, because it's an issue that's very important.

I really appreciate how consumer-sensitive you are, and perhaps on that note we can address one issue that refers to tied selling. As you probably already know, the finance committee has asked that section 459.1 of the Bank Act in fact be proclaimed.

What I found quite interesting in the report by Mr. MacKay is that I think he went even further than we did. As I was reading the recommendations—and with your permission I'd like to read it—it said:

There should be a specific legislative ban on coercive tied selling by banks and other financial institutions. With that aim, section 459.1 of the Bank Act should be proclaimed with amendments to broaden its scope to include all credit products, insurance and such other products or services as might be prescribed by regulation.

Even our committee was focused more on banks than other financial institutions, although we did ask Department of Finance officials if in fact that could be extended to insurance and all federally regulated financial institutions.

I don't know if this question is fair or not. I think it is. Why would Mr. MacKay go out of his way to include insurance companies and such other products or services as may be prescribed by regulation? Why didn't he just stop at banks?

Mr. Yvon Charest: The only reason I can think of is the question of a level playing field, because everywhere in his report he's saying that he is trying.... I think his starting point is that to the extent possible, he applies everything to all financial institutions. That's true for the ownership limits that apply to all types of institutions, and I guess it's true here. I have absolutely no problem with it, because the difference between us and the banks is that the banks control the credit of the consumer; I don't. So I sell life insurance and from time to time people agree to put an RRSP with me, but I don't have that type of control over whether or not someone will get credit.

So I have absolutely no problem with that, but I do think Mr. MacKay's starting point was: let's assume that I will try to apply a section to all financial institutions unless there is something to the contrary.

The Chairman: He would do this even though he would think that tied selling was not found.

Let me understand this: if there's no tied selling in the insurance industry, why would anybody want it included in the legislation?

Mr. Claude Garcia: The banks have raised that issue, that they don't want to be singled out.

We don't have any problem. As Yvon said, the source of tied selling is.... Who are the people most susceptible to be influenced by tied selling? It's the consumer and small business.

At Standard Life we do an awful lot of mortgage loans to small business, but we've never used that information to sell them insurance products. So we don't have any problem with this ban if that's a way to get the banks onside. Certainly, go ahead. We have been successful without using tied selling, and we don't intend to do this, because we respect our consumers.

The Chairman: I just mentioned it because you wanted to put the level playing field...and I guess people do that, right? They include insurance companies even though they're not involved in anything that speaks to tied selling or anything like that.

Mr. Claude Garcia: May I suggest, Mr. Chairman, that sometimes it's more that a consumer uses tied selling on us. They say if we don't give them that loan, they will take their insurance business somewhere else. My reaction to that is, sorry, that's not the way we do business around here.

• 1635

The Chairman: The reason I raise this is that the finance committee has dealt with this particular issue and the fact that Mr. MacKay would include insurance, and other products or services that might be described in the regulation, tells me that perhaps there's a reason above and beyond the level playing field that he's incorporating this thing.

Mr. Epp.

Mr. Ken Epp: I just remembered an experience I had with an insurance company. We're dealing here with life insurance basically, but I remember distinctly going to a place to buy motorcycle insurance when I bought a motorcycle a number of years ago and the agent asked me if I had a car. I said no, and they said “Well, then we can't sell you motorcycle insurance.” Actually I had a car, but as soon as she said that I thought, “I've got a problem here and I don't like it.” And so I asked, “Are you implying that I have to go and buy a car in order to insure my motorcycle, which is required by law?” Now, isn't that tied selling?

Mr. Yvon Charest: No. I guess what you refer to is that a P and C insurance company will have to measure the risk for every customer and obviously you cannot drive a car and a motorcycle at the same time.

Mr. Ken Epp: I was 35 years old.

Mr. Yvon Charest: So to the extent that you have both of them, the company will quantify the risks, saying that you cannot drive one or the other all the time.

The Chairman: Thank you, Mr. Epp.

Mr. Charest, I have a follow-up question. In the MacKay report he talks about basic minimum privacy standards, in recommendation 65, and he says:

The customer should be able to specify the relationship the customer seeks with the financial institution and information collected should be specific to that relationship.

He goes on, and there's (a), (b), (c), (d) and (e) that basically speak to the fact that if you're going to deal with the loan that's what you deal with, basically—nothing else.

Now let me ask you this question. If we were to implement the basic minimum privacy standards and all the other protections for consumers, then should banks be selling insurance? If your major issue is consumer protection, as I think it is—that's what you've been saying all along—if these things are implemented, then you should have no problems with banks selling insurance. Is that right?

Mr. Yvon Charest: Oh yes, we do have a problem.

The Chairman: Are you protecting the consumers or your business?

Mr. Yvon Charest: No. The question is, what is the choice the customer will get a couple of years from now once you agree that a small number of large banks could sell and in fact control everything in this country?

The Chairman: So you're concerned about concentration.

Mr. Yvon Charest: Yes. You have two objectives here: increased competition and increased power of the the consumer. As such, I have certainly no problem with all the recommendations concerning la protection des renseignements personnels. I have absolutely no problem with this. That would be good for the consumer.

The Chairman: So your argument about their having information and accessing that is a secondary argument.

Mr. Yvon Charest: Yes, that's a side issue—competition now, and if you give them those additional powers, then what will be the level of concentration in 10 years?

The Chairman: Thank you. Mr. Garcia.

Mr. Claude Garcia: My view is maybe a bit different. As I said in my introductory remarks, let's put those rules in place and let's wait a few years to see how they work, because we don't trust our competitors too much. They have been behaving in such a way that we think we need to make sure the rules work and then we can revisit that issue.

[Translation]

Mr. Odina Desrochers (Lotbinière, BQ): Fortunately, sirs, the McKay Report has brought the debate down to earth. At the outset, the talk was about bank mergers. Now, we are discussing the administrative restructuring of financial services.

My party, the Bloc Québécois, is wondering if perhaps the federal government would be better off amending the legal framework before approving the mergers in order to give insurance companies and other financial institutions which are not interested in merging an opportunity to remain competitive. Do you think that's the way to go, or would you prefer to see the government take the first steps toward approving bank mergers?

Mr. Claude Garcia: When you talk about amending the legal framework, what exactly do you mean?

• 1640

Mr. Odina Desrochers: If bank mergers were approved under the current legal framework, all players not directly involved would come out on the losing end. I'm thinking, for instance, about the Desjardins group and about those insurance companies and banks that are not interested in merging.

Mr. Claude Garcia: On the subject of bank mergers, I'm happy with the McKay Report findings, because I was very worried the banks' agenda would take centre stage once again. For years now, each time the Financial Institutions Act has come up for review, the banks' agenda has always come first. This time, it is important for us to consider the interests of consumers. We have no problem with that, provided both sides are given an equal opportunity and a chance to compete on a level playing field with banks.

With respect to the merger proposals, I feel that Mr. McKay and his task force have provided a useful framework for action. Requiring banks to prove that merging is in the public interest is an interesting suggestion. Another aspect of the problem is respecting the rules of competition.

At Standard Life, we have no problem with the rule stating that the first player must not dominate more than 35% of the market and the first four players, no more than 65% of the market. The figures I've seen indicate that the banks will end up with a much bigger share than that. The first four financial institutions would have a much bigger share in many Canadian markets.

Therefore, it must be proven that the rules of competition will continue to apply. It's not clear to me that the merger of four banks into two is possible if we wish to continue abiding by the rules of competition. This problem won't be resolved simply by forcing banks to sell off a few of their branches.

Therefore, the whole issue must be examined while bearing in mind the public interest. Banks must make the purpose of this exercise clear. They maintain that their objective is to compete on foreign markets, but it isn't apparent that banks have a tendency to move in this direction. Rather the opposite has been true. Therefore, I think that the banks should be made to prove that mergers are in the national interest and that they are necessary. Will bank mergers help Bombardier sell aircraft in China? Will mergers help Quebecor or other Quebec and Canadian companies do business abroad?

The answers to these questions aren't obvious. When Quebecor wanted to buy QUNO several years ago, it allied itself with the Chemical Bank of New York. How is it that no Canadian bank stepped forward and agreed to finance this transaction? I can't answer that, but that's what happened.

Mr. Odina Desrochers: Mr. Charest.

Mr. Yvon Charest: We believe that priority consideration must be given to enhancing the powers and competitiveness of institutions other than the major banks. That's our position.

Obviously, I agree with you that bank mergers should not be our top priority. I noted that the McKay Report focused on the many reports prepared on SMEs and on the lack of competition in this particular sector. McKay said that unfortunately, he was unable to identify the source of the problem and that he was going to do another study. However, if bank mergers proceed in the meantime, if the number of banks declines and we observe increasing concentration, the people seated around this table can surely surmise what the contents of the next report will be. SMEs will be dissatisfied with the level of competition they face on the Canadian market. Therefore, as far as we're concerned, bank mergers should not be the top item on the agenda. We can't go along with that.

Mr. Odina Desrochers: You've expressed some concerns and you're right in saying that it would be easy to take the information gathered when a person opens a bank account and use it to sell insurance, if in fact the banks which sold insurance were... Couldn't legislation similar to Quebec's Bill 108 be brought in at the federal level? Perhaps even more could be done to protect personal information.

Mr. Yvon Charest: You are talking on a theoretical, rather than practical level. Theoretically, Quebec controls data banks and theoretically, Quebec maintains that the insurance industry should operate within a separate "pillar". However, from an information standpoint, that's not what happens.

Surprisingly, McKay took it one step further and added an important element, recommending that banking institutions be allowed to use personal information. In my view, that is going too far.

• 1645

[English]

Would the insurance companies change their business plans if the Canadian compensation fund was open to them?

To the extent that the law allows the banks to use all the information they already have on their customer base, including information on my 400,000 customers who are paying me cheques on a monthly basis, certainly I would change my business plan to make sure there was no way the banks would be aware of my customers. So I think that on this one the MacKay task force went too far.

This is the theory. Now, in practice there will remain an additional problem even if you control the electronic files. You may say that an employee will have to work in a separate office. There then will be 10 or 12 people in a branch working and lunching together on a daily basis. One worker might know that a customer is sick, and another might be at the point of giving him additional credit. What would the body language indicate? Would it be that you should wait a bit? I don't know. So in practice that will remain a huge problem.

[Translation]

Mr. Odina Desrochers: I have one last question. You say that you are very concerned about the survival of insurance companies and that's to be expected. If ever banks were allowed to proceed with their merger plans and were authorized to sell insurance, rural communities could lose their small independent brokers and financial services could be concentrated in the large urban centres. Do you think rural communities are in danger of losing the valuable services they now enjoy?

Mr. Yvon Charest: Your point is somewhat similar to the one we made several months ago when we testified before a Quebec parliamentary committee. The issue under discussion was this: should the Desjardins group of financial institutions be allowed to sell insurance, yes or no? As you know, Industrielle Alliance is the second largest insurance company in Quebec. It holds a 10 per cent market share. Outside the large urban centres, quite often, we are the only financial services centre, aside from the Desjardins group of institutions. I can't understand why the government would allow an institution which already controls 40% of the financial market to sell insurance in rural areas where only two financial institutions are present. I see why you're concerned and that's why I don't understand the government allowing deposit-taking institutions to sell insurance in the first place.

Mr. Odina Desrochers: Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Desrochers.

[English]

Mrs. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairman.

I'd like to ask both of the witnesses a question. Assuming all of the recommendations of the MacKay task force are adopted and put in place, would your industry be better or worse off?

Mr. Claude Garcia: It's difficult for me to speak for the industry, but I can speak for Standard Life. I think that in our case we would be better off overall. We compete already with banks for savings products, which is the greater part of our business, so I think we would be better off.

But we're still concerned that we haven't had a fair deal in the past. I think it's the duty of legislators to change the deal so that we have a fair one, and then let us catch up a bit with the banks before you put us on a level playing field. I think that's the issue.

We believe the banks have had an unfair advantage over us, and they have taken a bigger market share. We have to level the battlefield before you can give the banks more power. So that's our concern.

Mr. Yvon Charest: My answer to that is that the insurance industry was given two additional powers. The first one with CDIC and CompCorp was that they would level the playing field. As such, it won't change our business plan. It will just change the consumer's perception about the financial institution's safety. In some years it does not matter. In other years when there is a recession and economic times are tough, it would be a real advantage. But it would not change the business stance as such.

The opening of the Canadian Payment System may help insurance companies, including ours. But I'm afraid that right now we are just talking about access. We are not talking about who will control it, and we're not talking about cost.

• 1650

So before having seen the three pieces of it, I would say that I don't think by accepting all the recommendations my company would be better off.

Mrs. Karen Redman: If I could ask one more question, sort of on the same theme, the MacKay task force is very clear that mergers may be something that can be considered if it's in the best interest of businesses. It doesn't say they should go ahead, and you've answered very appropriately within the confines of the actual recommendations.

What if the bank mergers did go ahead? How would you respond to the MacKay task force regarding bank mergers? How would that impact on your industry? Would your answer be different? That's what I'm asking.

Mr. Claude Garcia: If it goes ahead, I think one would have to be satisfied that there would still be competition in the products that the banks are offering.

I personally am not convinced that there will be adequate competition. I'm not convinced at the moment that there will be enough competition. In some markets, the four top banks will control 85% of the market. So how can you have adequate competition when the four major players have 85% of the market?

Some professor has suggested that the bank could sell some branches. Well, when they sell the branch, they will make sure they keep the customers. If they're bright enough, they will keep a list of customers and contact them and keep them. So I don't see what that would do.

To me, there is a big issue in competition policy, and if we don't have adequate competition, then either we will be strangled or we'll have to go into fields where we don't have head-on competition with the banks in order to survive.

Mr. Yvon Charest: I have about the same answer. You have to look at basically the market share of those large institutions and at what time you consider that to be too much. You have to take into account all the powers you are prepared to give to each type of institution. Clearly, if you were to allow both bank mergers and banks retailing insurance, then I would say the consumer will lack choice in a couple of years, obviously.

Mrs. Karen Redman: Thank you.

The Chairman: I'd like to ask a follow-up question on Ms. Redman's question, which I thought was excellent. In reference to whether you would be better off or not, Mr. Garcia, if I remember correctly, you said you would be better off if all the recommendations were acted upon, and Mr. Charest, you said no. Is this division between you two reflective of what the industry is going through in this debate?

Mr. Claude Garcia: No, in our case it's because 90% of our business is on the savings side. So if you equalize the CDIC and the payment system issue, you give us an issue where we are already in direct competition with the banks.

We sell very little insurance. Industrielle Alliance sells a lot more insurance. Obviously our answer is going to be different. That's why, when I answered, I answered on behalf of Standard Life. We are the number one player in the pension business at the moment in Canada, so our pension business is going to be affected positively by this rather than negatively. So I think it depends. Each company has different circumstances.

Mr. Yvon Charest: Our company's main line of business is not the savings product; it's individual insurance. Even if we rank seventh in Canada in terms of the total in force, if you were to take only the new sales, we rank fourth.

We are pretty much involved in individual insurance. That accounts for perhaps 40% of our profits, and that line of business absorbs perhaps 60% of our direct expenses. That is why I'm saying that the popular measures, including banks retailing insurance as MacKay is proposing, would have a direct impact on insurance companies that are particularly active in that line of business.

The Chairman: They are very important observations, particularly for the public who may be watching these hearings, and in fact the insurance business is more diversified than we think.

Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you, Mr. Chairman.

I recently received a press release, I guess, from the Insurance Bureau of Canada, who admittedly are in auto, property and casualty insurance. But they baldly came out and said they were opposed to the bank mergers. One line here, which I think encapsulates their thinking, says:

The issue is not whether banks will be allowed to sell insurance. They already have the power to sell insurance. The issue is whether they will be allowed to use their enormous market power to compete unfairly against all other insurers.

• 1655

I suspect the existing infrastructure and organization the banks have provides them with a facility to market almost any product competitively with any other industry, even groceries, I suspect. It's a matter of degree.

I wanted to follow up on the point the chairman just made. We were talking about the financial services sector, not the bank mergers. The bank mergers tend to get more play in this. I think it's important for us to hear whether in your perspective, and given the focus the MacKay task force report has given to the subject matter, you feel this is the time to make some important modifications to the sector or to the rules by which the sector has to play, so it is visionary or anticipates the kinds of services that consumers and the public interest would appreciate.

What's your view on the need for restructuring the financial services sector?

Mr. Yvon Charest: Do you mean from a regulatory point of view? The fact is in the last decades all the modifications have had the consequence of increasing the power of a limited number of financial institutions. I know people would say that the essence is change. I would argue that your committee objective could be that the essence is balance. Everyone is talking about the number of changes and the speed of change. My message to you is that the objective should be less change and more balance. If you are asking me if there are any measures that should be taken at this stage in our country, I would say create more of a balance between the power of a limited number of banks and the other financial institutions.

Remember what was done in the eighties with the trusts and the brokerage houses. I'm sure at the time the objective was to increase competition, to allow everyone to compete in many different fields, and to put products together so the customer would have a cheaper price or a better service. Does the customer have a better service because of those diversifications and acquisitions?

My point is if you are asking me whether we should have drastic measures, I would say yes—to have more of a balance of power between a limited number of banks and other institutions.

Mr. Paul Szabo: Okay. I accept that. I think it's a point well taken.

Are you also saying that in your view, and I think this might be contrary to Mr. Garcia's view, since banks are under a certain set of laws and a jurisdictional regime, the insurance industry is under a slightly different mix of laws or regulations? Or that as the Standard Lifes get more and more into banking things, and the banks get more and more into your things, and then the banks might even get into the automobile leasing thing, before you know it, there is this haze and we're not sure whether an industry within the sector has a regulatory regime that makes sure the protection of all interested parties is in place?

Are you saying that maybe we should not be so hasty to allow this commingling of financial services products among all the various industries because it might lead to say cherry-picking or undermining certain aspects of a business of another sector to the detriment of that one business or sector, and that you'll have no way to defend yourself? Is it really an issue of survival?

• 1700

Mr. Yvon Charest: Personally, I have absolutely no problem with you deciding that the consumer should be given more protection with some institutions than with others. On that one the customer is king, so I have no problem with that aspect. My problem has more to do with the power you give to the institutions rather than all the measures you are taking for consumers.

Now if you asked me if it was a question of life or death, I'd say that I would prefer we put the debate at the consumer level and ask what choice the consumer will have a decade from now. That would be my answer to it. To the extent that you are giving additional power to other institutions, yes, we will have to work harder and perhaps the profitability will be less and all that, but what will be the choice for the customer? That's my point. As to predicting the way my competitor will use the additional power, how quickly they will use it, how high it will be on the agenda, etc., it's very difficult for me to say. What I'm sure of, though, is that the consumer will lack choice.

The Chairman: Mr. Garcia.

Mr. Claude Garcia: One issue, which is often raised and which Yvon mentioned in his statement, is the fact that restructuring will be helped by a foreign institution coming into Canada. I think if we look at what has been happening in the last 10 years, overall there has been a decline in the presence of foreign financial institutions in Canada. When the Bank Act came into force, the number of foreign banks that opened in Canada was very high. Since that time, many of them have pulled out of Canada.

In the insurance business, Standard Life is now the only major life insurance company that is not Canadian. Another one is Aetna, but in terms of assets it's much smaller than we are. All the big ones, such as Prudential of England, Prudential of America, and Metropolitan Life, have pulled out of Canada. As to the ones that have come into Canada, there is Fidelity, which is in the mutual fund business, and MBNA as well as Wells Fargo are trying to crack open the Canadian market. There have been more withdrawals from Canada than foreign entrants. The ING Bank has started up, but what ING is doing is due to the initiative of the Canadian management. ING is a bank, but they're not active in this kind of banking in Europe. It's just an idea the Canadian people brought to the bank, and it's to the credit of head office that they allowed the Canadians to experiment with this.

It's not that easy to crack open the Canadian market, which is very competitive. Certainly the insurance business is extremely competitive, and there aren't that many people out there waiting to enter the market. I think that restructuring or allowing the banks to do more things will continue what Yvon has described—that is, the takeover of all the sectors by the banks. Is this in the interest of Canadians?

That's why I ask that you give the insurance companies a chance to compete on a level playing field, and then we can talk about this a few years from now. The banks won't suffer. They may not make too many gains in this review, but they've made gains in every review before.

Mr. Paul Szabo: I want to raise another issue that just came to mind. Prior to being a member of Parliament I was with TransCanada PipeLines, a regulated utility, which had to go before the National Energy Board for rate-of-return determinations, etc. TransCanada received a guaranteed rate of return based on hearings that went on, but when their ownership changed—I think Dome Petroleum took over the CP interest—they started to get into oil and gas properties, non-regulated activities, all of which were rolled together and taken into account when evaluating the business.

One of the most critical issues that arose with regard to NEB hearings on rate-of-return determinations was whether or not there was any cross-subsidization of a non-regulated activity with regulated revenues or profits. I am wondering if you can see that from a jurisdictional standpoint there is the possibility that there could be the same or similar problems where one sector or one segment of a business could be used as a lever or a cross-subsidizer of another one to the extent it might be a loss leader or something like that, simply to enhance some other aspect of your business so that it would not be maybe as dedicated an effort in terms of some aspects of the business.

Is there a cross-subsidization possibility?

• 1705

Mr. Claude Garcia: I think if you have the financial might there are possibilities, but at the moment, if there is a cross-subsidization you'll suffer if you do that, because you'll build a business that may not be sustainable.

I hope you're not proposing that we'll have to ask permission to change our prices, because I don't think we want that.

The Chairman: Mr. Gallaway.

Mr. Roger Gallaway (Sarnia—Lambton, Lib.): In recent years, and I'm thinking in particular of last year, we've heard a great deal about consolidation of interests within the insurance business. Yet I don't recall seeing or hearing anything from other insurers or insurance companies about concentration of power or concentration of marketplace. Why is that? Why is it bad when the banks propose it, but insurance companies in fact do it?

Mr. Yvon Charest: In Canada there are more than 140 insurance companies. If you take the market share of the top companies, altogether in the last couple of years within the thirty largest insurance companies there have been mergers or acquisitions for ten of them, one-third. But it remains that the market share of the top five insurance companies, for whatever line of business, is still rather small as compared to banks.

For the individual insurance line of business, the top five market share is 57%. For group insurance it's 60%. For the savings market it's 65%. Then you have to remember that in the savings market we compare with all financial institutions, so that 65% does not matter as such. So the figures remain 57% and 60% for the top five, after all the consolidation process you have seen lately, including the acquisition of London by Great-West. So if you were to look at the market share of the top five banks in Canada, it would be more than 90%.

Mr. Roger Gallaway: Thank you.

Secondly, I think it was last spring that this committee did a review of the tied selling provisions. In fact I believe there was only one clear example of tied selling that was submitted to the committee. I found it interesting that there was only I think one insurance interest that appeared before the committee on the topic, yet we're hearing today a lot of talk about tied selling from the business. Where were you the last time? Why is it of apparent greater concern now than it was six months ago?

Mr. Claude Garcia: Why? I must admit that I missed your hearings. That's all. The example I gave you today I did give to the MacKay task force in November last year.

Mr. Roger Gallaway: One final question. I am told that in your business the cost of doing business, the overhead, because of the system of delivery that is in place involving a number of agents, is extremely high. In fact 20% is directly attributable to the overhead of the delivery system.

What do you say to the person then who comes to someone like you and says “I want to buy term insurance. I know what I want, and I would prefer the option or the opportunity of going to a bank and just buying something over the counter, because it's going to be lower overhead, as one would assume they're not amassing a lot of information and they're not sending someone out to someone's home.” I call it the generic product of life insurance, just term insurance.

What I'm suggesting is that in terms of consumer choice, what's wrong with giving insurance products to the banks?

Mr. Claude Garcia: The banks want to sell insurance with other products. They don't want to sell insurance per se. They're not interested in selling insurance per se. They're interested in selling insurance provided they can tie or package insurance with another product.

• 1710

The best example is credit insurance. Credit insurance is extremely profitable for the banks. The lower distribution costs associated with credit insurance—because you're right, there are very low distribution costs because it's offered to the consumer at the same time that he takes a mortgage, a car loan, or whatever—have not been passed on to the consumer.

Mr. Roger Gallaway: I think we have to make a distinction between what is in a sense convergence in the marketplace.... I mean, you can go to Loblaws now and do banking, buy groceries, and buy gasoline and it's called product. The banks are saying this is not tied selling; we're bundling products. In other words, you go into the bank and buy a range of financial services. Offering a range is not, in and of itself, tied selling.

Mr. Claude Garcia: No, it's packaging.

Mr. Roger Gallaway: What prevents you from packaging?

Mr. Claude Garcia: We do some packaging. When we sell life insurance we sell a savings product with an insurance product. If you're going to say we're not allowed to package, we're in trouble.

But that's not the issue. The issue of tied selling is when you force people to buy another product. As I said before, when you buy a mortgage from a bank, they never package the insurance with it. It's always sold separately. So if the consumer is forced to buy the insurance from the bank, that's tied selling.

I don't know of any bank that offers a package of mortgage with insurance, because they can't afford it. Everybody competes on the rate of interest posted on the mortgage. So because you compete on that, you eliminate all the costs from that to offer as low a cost as possible to get the consumer in the door. Once the consumer is in the door, then you sell him other products. So that's not packaging. Tied selling and packaging are different. Packaging is when we have one price for a package of products. If you forbid packaging, all the credit cards issued in Canada would be illegal, because it's all packaged, the credit card with something, some insurance and so on. But there's only one price for the whole package; that's the difference.

Mr. Roger Gallaway: Thank you.

Mr. Ken Epp: It seems to me that your concerns about access to the payment system have two parts. One is the cost involved, where you're actually arranging for a bunch of profits to go to the banks, your competitors. The second one is the transfer of information.

Am I correct in hearing from you that you would like to have access to the payment system? That's correct, isn't it?

Mr. Yvon Charest: Yes.

Mr. Ken Epp: That means that as insurance companies you would begin having your own issued cheques that your clients would be able to use, and you would be able to issue cheques directly through the payment system.

Mr. Yvon Charest: The obvious benefit for us for having access to the payment system would be the speed to transfer some money to our customers without necessarily using a bank. I have two examples for it. The first one is the monthly pension cheque that we are giving to all our customers: instead of sending it to a bank account, we could send money to him in an account from which he would draw money at his own speed using Interac, for example. We will put the money in an account that will belong to us, not to a bank.

Mr. Ken Epp: Okay.

Mr. Yvon Charest: The second aspect is that we have many products with flexible premiums, so with having access to the payment system the customer will be able—without calling an agent, who will call the head office and all that—at anytime to transfer money in and out of particular products. So you will give flexibility to your customer, you will give him speed, and more importantly, access to his own money.

When we have to give money back to a customer, right now we have to prepare a cheque, send the cheque to a bank account, and then the customer has to take the money in the bank account. Obviously we will be using the payment system to accelerate the speed of transfer of money between the customer and the insurance company, without having a deposit-taking institution in the middle.

Mr. Claude Garcia: I quite agree with what Yvon has said, but I would also like to add that we would like to have access to the governance of the payment system. The governance will have to be changed so that we have a say in what they're going to do.

• 1715

In Canada the banks have just begun this. It's taken them a long time. For example, my telephone bill is now automatic; it's charged to my bank account every month. This is just recent. Although this has been a practice in Europe for a long time, it's only come about recently in Canada. There are many things like that.

So we would like to have access to the governance, because we will obviously think of additional products ourselves, additional ways of using the payment system to our advantage or to the advantage of our consumer and offer better products to our consumer. So we need to have access to the governance—not only access to the system, but access to the governance.

And of course, as Yvon has pointed out, we need to get the right price, although on this I'm not as worried as he is, because I think the competition tribunal judgment recently was quite clear. I think that issue, in my mind anyway, appears to be settled.

Mr. Yvon Charest: Just so you understand, access is a regulation that is telling you that from now on your friends from the Liberals will have no choice but to allow you to go in your house. This is access. Corporate governance is how long you will stay outside during the winter, and cost is how much you will have to pay to enter that house. So access is the very first part.

Mr. Ken Epp: I would like to know, because you haven't mentioned this at all, how important it is to you to have your own little bank for your transfer of payments. I use the word “bank” inadvisedly there probably, but you want to have the ability to issue cheques to your clients so that they can then draw on them at will. The thing you haven't mentioned is that this means that there is going to be a large amount of dormant capital lying there until the customers actually write the cheques. Right now what's happening is the money is transferred from you to the banks and the banks sit on the dormant money until the customer draws it. Is that important?

Mr. Claude Garcia: Of course. Why should it sit in the bank account? Why should it sleep in the bank account rather than in our account?

Mr. Ken Epp: Okay, so that's....

Mr. Claude Garcia: And we would offer our clients debit cards, because access to the payment system means having access to Interac. It means having access.

The banks were clever: they set up Interac outside the payment system. Why do you think they did that? Mr. Protti is coming afterwards, and you could ask him, but our suspicion is that they didn't want the federal government to be involved in this. They wanted that kept as a separate club outside, because they saw the benefits to them.

What we're saying to you is that we want access to this. We could give our annuitants a debit card. They could draw the money when they need it, just as they do from their bank account today.

Mr. Ken Epp: At a much less expensive rate of transaction.

Mr. Claude Garcia: Hopefully yes, or we could have a no-fee bank account with our customer.

Mr. Yvon Charest: Personally, I think the driver here is speed. If you have an RSP with a bank and you want to withdraw some money on December 31, you know you could sit down and they will say “done”, because they control all the processes. We don't control all the processes. If the same customer is going to visit us on December 31, we won't be in a position to say “done”; we will say “This is a cheque”. So in all the various laws and regulations you are looking at, I'm sure that word “speed” comes very often. Personally, I would say that the driver for that change is more speed than anything else.

Mr. Claude Garcia: Another issue we have to think about is to look at the future. It won't be long before we don't have any more money in our pockets.

Mr. Ken Epp: We almost don't now; we're taxed to death.

Mr. Claude Garcia: Being taxed, I agree.

What's left is going to be replaced with an electronic wallet. These electronic wallets will be issued by banks if the system does not change. What we'll be doing in fact is rewriting history. Before 1935 in Canada the banks were issuing the currency. In 1935 the government decided that this was something the state should do; hence, the Bank of Canada became the issuer of the currency. If we go to electronic money, at the moment, the way this is structured—and I know my friend Gordon Thiessen is watching this, because we've had discussions about this—the banks will be doing again what they were doing before 1935, because they will be issuing the money.

• 1720

That's why when we see all that happening we say this can't happen; we have to be involved. We have to be involved in some way, because we'll be eaten alive. We'll be eaten alive because they will have access to all the convenience. The convenience will always be the banks. That's not certainly in the interests of the consumer, but it will be a convenience issue simply because the legislators decide that this club belongs only to the banks.

The Chairman: I have one final question before I go to Ms. Bennett.

Going back to an earlier question I asked in reference to basic minimum privacy standards—that's what Mr. MacKay refers to in his report—I think it was established that this is a positive thing for consumers. But then, Mr. Charest, you went on—and I think, Mr. Garcia, you agree with this—that you're really concerned about the concentration of power. That's really the issue.

If we could come up and legislate those basic minimum privacy standards, that would take care of your concerns about banks having information and not using it the right way—although, Mr. Charest, you have your doubts, apparently, because you say in real life that doesn't happen. So should we go ahead with that anyway?

Also, you're saying that the concentration of power would in fact cause you not to be able to compete with the banks, thereby reducing the choice for consumers. Is that your line of thinking, basically?

Mr. Yvon Charest: Yes. If we start with the second question, obviously the first day the consumer will have more choice. Another financial institution will be selling insurance. My point is not that they won't; it is that over the medium term the consumer will have less choice, not more choice.

On the very first point, I mentioned to you that I have absolutely no problem personally with the recommendation concerning a better protection of privacy. Don't think, though, that this measure will ensure that if you were to give more power to the banks in retailing insurance.... Don't take for granted that those measures will help to decrease any concern the consumer may have there. But on the single matter of adding protection to the consumer, I have absolutely no problem with the recommendations as they are.

The Chairman: One of the key features of MacKay is the setting up of an entrepreneurial spirit within the financial services sector. Is that part of your world at all? Do you see that happening?

There were questions about foreign entry, because you said the system is too competitive to allow foreigners in—I think I'm quoting you correctly—which tells me something about our system: that it is competitive. How do you address the issue of entrepreneurship in the MacKay model?

Mr. Yvon Charest: Personally, I see a couple of recommendations to ease access to new institutions. I see a recommendation to have a more flexible regime based on the assets of the organization.

In theory, I see good moves on the part of MacKay to help to have more entrepreneurship, but in practice I'm afraid few people would try to enter this market if three players have a combined market share of 65%. The measures are good, but if you allow mergers, they would be applied in an industry where you have humongous institutions, and few potential institutions would be prepared to enter into that market, even if the rules are more flexible.

Mr. Claude Garcia: I think there are entrepreneurs today in the financial service sectors. There are entrepreneurs in the institutions, a lot of entrepreneurs in the field. I think a lot of insurance brokers are very good entrepreneurs. Small-businessmen or women do a very good job.

So there are lots of people who are entrepreneurs there. I'm not worried about the lack of entrepreneurship. But I think the main way to encourage entrepreneurship is by making sure there is a level playing field out there and that we can compete equally with the big banks. That's our concern, that we're not equal at the moment. They have more powers and more advantages than we do, and we have to change that. Then entrepreneurship will spring up and make it easier for foreign entrants.

• 1725

There are lots of restrictions on foreign entry. For example, although this act has been recommended—the government has not yet proclaimed the new act—it's allowing the foreign banks to do business here as a branch only if they don't do any retail business. So if you want to do retail business, you have to incorporate a separate bank. Why?

The Chairman: You're both experts in your field. I'm just wondering what timelines you look at for change to occur. Are you talking about the next five years, the next ten, the next twenty, the next thirty? What timelines are you looking at?

Mr. Claude Garcia: What change are you talking about, the change in technology or legislative change or...?

The Chairman: I'm talking about MacKay and its implementation. What timelines are you looking at?

Mr. Claude Garcia: Regarding the recommendation I made, I would see that being implemented in the next couple of years, then having another review after that to see how the banks are implementing the recommendation. At the moment, they're not even respecting the legislation as it is, so why would you have a guarantee that they would do that eventually?

Mr. Yvon Charest: I'm more an expert in my field than in the field of seeing how long it would take to put recommendations in place. I think you are more of an expert in that. Altogether there are many recommendations, and I think it would be tough to have most of it in place in the next two or three years. There are a lot of recommendations.

The Chairman: MacKay is pretty specific about insurance when he says it should start in 2002.

I'm going to give Ms. Bennett the last question.

Ms. Carolyn Bennett (St. Paul's, Lib.): Thank you.

I understand you would prefer the banks weren't allowed to sell insurance. You've circulated the November 1977 brief to the task force, and I don't see that well articulated in your brief. I was just wondering, if you were to convince us it would be a bad thing, do you have any international examples, in the U.S. or Europe, where it was bad for consumers to do this? Are the consumers organizations in the U.S. upset about this, or is it something they're used to? If we were not to allow this, how would we explain it as bad for consumers?

Mr. Claude Garcia: This is an executive summary of the brief. Our brief focuses on the issue that I raised initially because I think this is where we have a problem right now. There are other countries where banks are allowed to sell insurance, but on the other hand, the deposit insurance systems that exist there are not unequal. There are many other things that don't exist there that exist in Canada.

As I say, we compete with banks today. RRSPs and RRIFs, for example, are available from banks, insurance companies, mutual fund dealers, credit unions, caisse populaires, and investment dealers. Everybody can sell an RRSP; everybody can sell a RRIF.

So there is very intense competition. The issue is that the banks have one big advantage in all these products because of deposit insurance. That's why we focus in our brief on these issues, because 90% of our business is this. I learned when I was at school that if you want to do something, you don't mess it up with ten things, you try to focus on three or four. That's why the brief was on that.

I think the issue of selling insurance in the branch is a different issue. It should be settled. Let's level the playing field and then we can discuss that. That's why we didn't talk about it. We feel the playing field is not equal right now and it has to be equalized.

Mr. Yvon Charest: What you should tell your customers is the only reason for not allowing that is the concentration of power. That's the reason. There was an article saying only insurance companies are against the MacKay report. My goodness, they own everything else. The only competition to banks right now is insurance companies. So clearly, that's the only reason we are saying only insurance companies are against banks.

Ms. Carolyn Bennett: Okay. Starting with levelling the playing field, one of the recommendations of MacKay is the community accountability statement. How far along do you feel you are in being able to do that? Is that something you would agree with?

• 1730

Mr. Claude Garcia: It is in principle. We'll have to see what it means.

Mr. Yvon Charest: That is accountability—which section exactly, please?

Ms. Carolyn Bennett: It's recommendation 99.

Mr. Yvon Charest: I'm not sure I understand the driving force in an industry where you have quite a lot of competition. To the extent that you don't, I understand the recommendation. If I were to put a priority listing on it, I would obviously not put it as top priority.

As I mentioned, when I read the recommendation I tried to understand the driving force for it—why there would be requests for one industry and not the others. Is that because some institutions are so large in origin that the community would like to know to what extent that huge organization is giving back to their own town or region?

To the extent you are in an industry such as the life insurance industry, where you have so many insurance companies, I'm not sure the community is asking for that. If they are, my goodness, we'll do our best to follow such a recommendation. I have my doubts that the collectivity and the community are asking that for our own industry.

I am prepared to listen to what extent the community is asking for that for our industry on top of asking it for the banks. I think that's another recommendation where MacKay's driving force was to start with the principle that everything should be applied to all institutions.

The Chairman: Are there any further questions?

On behalf of the committee, I'd like to thank you very much. I think you were quite eloquent in making your presentation and you raised some very interesting points, particularly the one about concentration of corporate power in the hands of a few. But I think we've also established the fact that all players in the sector really care about consumer protection, as does of course Mr. MacKay, who I think through his basic minimum privacy standards will make great headway in ensuring that everyone abides by the rules. So on behalf of the committee, thank you very much.

We're going to break for approximately five minutes and we'll be back with the Canadian Bankers Association.

• 1733

• 1741

The Chairman: I'd like to call the meeting back to order.

I'd like to welcome Mr. Raymond Protti and Mr. Alan Young, from the Canadian Bankers Association.

Mr. Protti, I'm sure you know how this committee operates. You'll have approximately ten to fifteen minutes for your presentation, and then we'll enter the question-and-answer session, which is usually a very interesting part of our committee hearings. Mr. Protti, welcome.

Mr. Raymond Protti (President and Chief Executive Officer, Canadian Bankers Association): Thank you very much for your welcoming remarks. On behalf of Alan Young and myself, I can say we're delighted to be back to see you just about a week after we were last here.

[Translation]

Mr. Chairman, we'd like to thank you for your invitation. We were here on September 14 last at which time we presented information on the banking sector, the industry players, their operations and some of the major changes taking place within the Canadian banking industry. Today, we wish to present to you our preliminary response to the McKay task force report. We will also be submitting more detailed observations on specific aspects of the report.

[English]

Mr. Chairman, we have provided you and your colleagues with a brief that outlines some of our preliminary views on the MacKay task force report. Before I turn to some specific issues, though, I'd like to note that the comments in this presentation are limited by two factors. First, the task force report, which is voluminous, comprehensive, and chock full of some very thoughtful information and ideas, was released only days ago. So, like you, in the weeks ahead we're going to be thoroughly analysing and thinking through the implications of this important body of work.

Second, as you are completely aware, two pairs of our member banks have proposed to merge, and this is presently under consideration by the government. These decisions were made by individual institutions, and as such, there's really no role for an industry association to play. Furthermore, our members are divided on this issue and what it means for the future of the financial services sector. So this presentation does not address issues in the report related to deliberations on bank mergers on the part of the government or your committee and other public policy issues that will flow from that debate. There are differing views, for example, among our members on the appropriateness of some of the more activist regulatory approaches proposed by the task force.

So while we will comment today in a preliminary way on a number of issues in the task force report, we simply haven't had time to consider all of the 124 recommendations contained in the report. Our absence of comment on these matters doesn't mean that we are necessarily in agreement with all of these recommendations.

Furthermore, Mr. Chairman, I note that your committee has invited each of our larger member institutions to appear before you, and you're certainly going to be hearing them speak from their perspectives in the weeks to come.

As an industry we have awaited the task force report with great anticipation. The report is the product of over 20 months of independent research and exhaustive analysis. Through the public consultations that will be held this fall before this committee and the Senate banking committee, we'll have the benefit of several more months of thoughtful review. All of these steps are necessary, and all of them are important.

Let me now turn to the report itself and our comment on some of its proposals and recommendations.

• 1745

In our view, the report is a most impressive document. It is very well researched, it's well thought out, and it is very comprehensive in scope. It sets out a clear vision of the future of the Canadian financial services sector, a vision that has at its core the empowered sovereign consumer. Indeed, a key question the task force poses as the basis for its vision of the future is “What should consumers expect from their financial system?”

Everything else in the report, including the institutional structures and the regulatory framework that's recommended, is driven by the task force's focus on the empowered sovereign consumer. We think this focus on the sovereign consumer is appropriate.

In our submission in October of last year to the task force, we described in some detail an ideal regulatory system centred on the interests and needs of the Canadian consumers and the benefits that would flow to individual consumers and to the economy as a whole from a financial sector that had the remaining barriers removed.

This afternoon I would like to set out two things: first, some preliminary views and some of the specific recommendations that we think are appropriate for furthering the interests of consumers; and then I'll set out some proposals for achieving the results the task force sets out as being desirable, which may modify the mechanisms discussed in the task force report.

Let me turn to some preliminary views on a few of the specific recommendations in the report. My opening comment does not deal with all of the issues that are in the submission before you.

The task force recommends expanding the number of participants competing for customers in Canada and suggests ways to break down existing barriers and encourage new entrants. While we believe that the current domestic marketplace is competitive, we welcome the prospect of even more competitors offering even more choices to consumers.

In our submission last year to the task force, we affirmed our support for policies that promote competition in financial services, including foreign bank wholesale branching that does not create an uneven playing field between foreign and domestic banks. This support was articulated just about two years ago to the day at an appearance we had here before the House finance committee in the fall of 1997, and again in our written submission to this committee in January 1997. We agree with the task force that the Canadian consumer is the beneficiary of more competitors offering more products and services, and we therefore look forward to the introduction of foreign bank wholesale branching legislation at the government's earliest opportunity.

In the areas of privacy protection, tied selling, reporting on the financing for small and medium-sized business, and consumer redress systems, the task force has recommended that whatever measures are put in place to protect consumers should apply to the sector as a whole. We are pleased to see that the task force clearly understands that these consumer protection measures should not apply solely to banks but should cover the broader spectrum of the financial sector. To do otherwise would be to work against the interests of the consumer.

Similarly, it's clearly in the interests of the consumer to level the playing field in the area of who can provide what services to consumers and on what terms. Using consumer preferences and needs as its guide, and bolstered by substantial and impartial research, the task force has recommended the removal of current restrictions preventing federal deposit-taking institutions from retailing a full range of insurance products through their networks and offering lease financing services for light vehicles. The task force not only concluded that consumers will benefit from more choice and lower cost in insurance and automobile leasing, but has also cautioned that to deny choice in these areas would be “contrary to the public interest”.

It is unclear, however, why the task force does not feel the same degree of urgency in providing consumers with the benefits of greater competition in the insurance retailing and lease financing areas as it does in urging broader access to the payments system. Further, if appropriate consumer safeguards are in place, why should consumer access to these products be delayed?

• 1750

Before moving on, let me note that you will hear from those who claim that bank involvement in insurance retailing or auto leasing will cause economic disruption and massive job loss. The task force has conducted extensive research, and without emotion or rhetoric has examined this issue for close to two years. Their assessment of jurisdictions—and by that I mean provinces in Canada and other countries—where deposit-taking institutions are allowed to sell insurance and offer lease financing shows that traditional insurers, lease financing companies, and auto dealers can and indeed do co-exist, compete, and thrive in the marketplace alongside deposit-taking institutions. The task force's research is compelling and its conclusions are clear.

Let me turn to the important issue of taxation. When I was before this committee last week I addressed the question of taxes, you will remember, from a purely informational point of view. I noted at that time that I was not there seeking tax relief, because that was not the right forum. You may recall that I did advise you, however, that I would be back to you on this issue, and true to my word, Mr. Chairman, here I am.

The MacKay task force hired tax experts to examine very closely how financial institutions are taxed in Canada. What was the task force's conclusion at the end of the day? Their report says that capital taxes are “perverse”. Accordingly, the task force recommends eliminating the imposition of capital taxes on financial institutions. Simply put, we think the task force got it right.

Moving now to the critically important issue of access to the payments system, Canada's banks agree with the task force recommendation that there should be broader access. At the same time, however, we also very firmly believe that any steps to broaden access to that system must be done in such a way that the safety, soundness, and efficiency of the system and the interests of Canadian consumers are maintained. The task force acknowledges this itself, but let me elaborate for a couple more minutes.

The Department of Finance issued a discussion paper in July 1998 that proposes criteria for new entrants into the system. If new entrants were not required to meet appropriate regulatory, solvency, and liquidity standards as set out in the finance department's paper, the mutual confidence and expectation of credit-worthiness among members would be eroded. If these issues are not addressed appropriately, this could result in a two-tier system where customers may find that cheques drawn against riskier institutions would take longer to be cashed and that debit cards issued by such institutions may face lower limits for acceptable payments. Such a result would reduce efficiency and undermine customer confidence in the reliability of the payments system.

Access to the payments system is a most important issue, with significant implications for service to individual consumers and indeed for the economy as a whole. It will merit your committee's very close attention and careful thought on the part of all interested parties in the weeks ahead.

Although the task force report forcefully, and in our view correctly, speaks of the need for a flexible regulatory system to enable it to adapt to the changing marketplace, it has at the same time recommended a number of measures that may have the effect of increasing the regulatory burden and lessening flexibility in the system. Clearly, we are still thinking through the report and all its implications, but there is some concern that the suggested implementation mechanisms will not further the task force's goals of empowering consumers, strengthening competition, and supporting innovation and entrepreneurship in the sector. We believe there are alternative approaches to achieving the task force's goals.

The task force recommends, for example, that a legislative approach is needed to combat coercive tied selling, to protect privacy, and to offer consumer-effective means of redress, and so on. It may be difficult to reconcile some of these initiatives with the task force's clearly stated objective that “there should be no more regulation than necessary to achieve public policy objectives of safety and soundness, competition, and the protection of consumer interests”.

• 1755

The task force has put forward one option for addressing consumer empowerment. I'd like to put another approach on the table for consideration. It is possible that a more effective, more flexible, and considerably less costly way to achieve these worthy goals is through a self-regulatory system, albeit under the watchful eyes of government. For instance, the task force comments favourably about the bank's ombudsman system, including the office of the Canadian Banking Ombudsman, or CBO. The task force found two things it would improve regarding the CBO: one, broader coverage of financial institutions, and two, the perception of a lack of independence from the banks. We believe these two matters can be accommodated through a private sector solution.

We would reiterate the recommendation we made to the task force last fall that the mandate of the current Canadian bank ombudsman, which by the way operates at no cost to consumers, could be broadened to encompass a full range of financial institutions dealing with consumers and small businesses. In effect, the CBO could become the Canadian financial services ombudsman, thereby achieving broader coverage and removing the perception of a lack of independence from the banks.

Regarding coercive tied selling, members of this committee are aware that the banking sector was the only group to follow the guidance of the then chair of the House finance committee and develop a self-regulatory regime to deal with this important issue. Despite the fact that real documented cases of tied selling are very rare, the task force nevertheless recommends amending section 459.1 of the Bank Act to extend its application to all credit products, not just loans, and to insurance products.

From our perspective, the task force's recommendation as it relates to credit products is already covered by the banking industry. The CBA's statement on tied selling covers all credit products offered by banks, including mortgages, credit cards, and lines of credit. A specific enumeration of credit products in our industry statement is definitely worth exploring, and we will do this with our members. We will also support the inclusion of insurance products.

While we welcome the task force's recommendation that measures to deal with coercive tied selling should be applied across the entire sector, we continue to believe that a self-regulatory approach is a viable way to proceed.

Mr. Chairman, I'd like to conclude my remarks with two observations about the regulatory system in Canada.

The task force has recognized the negative impacts of the overlap and duplication in Canada's regulatory structure. In our view, the task force's recommendations, such as provincial delegation to OSFI and harmonization of rules, constitute useful first steps but do not go far enough in streamlining the system. In our view, the key to addressing the issue of overlap and duplication in the Canadian regulatory system is to achieve what we call national regulation of all financial services for those provinces that choose to participate.

It's interesting to note that internationally, through our trade obligations and NAFTA, WTO, and the free trade area of the Americas, Canada is moving toward a common market in financial services with our trading partners. Internally, however, we still face a welter of overlapping and conflicting provincial rules.

My second observation relates to the level of risk in the regulatory system and the financial system as a whole. We agree with the task force's emphasis on more competitors in the marketplace, but we also caution policy-makers that they must take care as they pursue this goal. Fostering the creation of more deposit-taking institutions can result in additional risk in the system, since there is greater potential for institutional failure. Indeed, the task force, and they're very blunt on this, fully expects and accepts that there would be more failures. But failure does have its costs, particularly when institutions are deposit-insured.

• 1800

Although the new risk-related premiums being introduced by CDIC may help to better allocate risk among CDIC members, there remains a concern that sounder institutions will bear a significant part of the cost of any failures in the future.

Since the creation of CDIC in 1967, there have been more than 30 failures of deposit-taking institutions. The cumulative cost of these failures to the remaining CDIC members was about $5 billion. The vast bulk of that $5 billion was borne by Canada's banks, not by taxpayers, and ultimately those costs are borne by our customers and our shareholders, the one in two working Canadians who own shares in Canada's banks, who we spoke about when we were with you last week. This, I want to emphasize, is not an argument against the vision of the empowered consumer set out in the task force report. It is an argument for policy-makers to ensure that proper prudential safeguards are in place and that undue levels of risk are not introduced into the financial system.

Let me conclude by saying that when we appeared before the committee last week, you asked that we provide you with a vision of how the Canadian financial services sector would look 10 or 15 years from now. As I noted at the outset, there is a divergence of views within our membership on how the financial services sector should evolve, and we know and trust that the committee will hear from our members individually on this matter. Our member banks have been made aware of this request so that they can present their vision of the future of the Canadian financial services sector when they appear before the committee.

It is clear that the sector is at a critical turning point in terms of the changes taking place in the marketplace and the range of public policy issues currently under discussion, including the proposed mergers. It's also clear that, in the words of the task force report, “for financial institutions, their customers and public policy, reliance on the status quo is no option”.

I hope, Mr. Chairman, that our comments on the public policy issues will assist you and your members in your deliberations on the future of the policy and regulatory framework for Canada's financial services sector. Yours is not a simple task, but it is a fundamentally important one, not just to the financial institutions we represent, but more importantly to Canadian consumers. The task force has provided you with a substantial and impressive body of work from which to seek the advice of Canadians and to draw recommendations.

We wish you well in your deliberations, and we stand prepared to provide whatever assistance we can in the preparation of your report.

Mr. Chairman, Mr. Young and I would be pleased to try to respond to any questions you and your colleagues might have. Thank you.

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

We will now move to the question-and-answer session. Mr. Harris.

Mr. Dick Harris: Thank you, Mr. Chairman.

Mr. Young and Mr. Protti, welcome. I'm sure we're going to be seeing a lot of each other in the next several weeks.

I want to ask a couple of questions. The first one has to do with the role of the ombudsman and the structure of the ombudsman's office. While the banking community is pleased with the role of the ombudsman, I don't find that much confidence in the general public at both the consumer and small business levels. I think there's a general feeling that under the present system the ombudsman's office is no more than an extension of the people in the banking business.

Now, the MacKay task force report has recommended a more independent ombudsman's office with a few extended powers, but Mr. MacKay did specifically say that as far as redress to the banking industry, the greatest power would be the power of influence. I think that was his term.

• 1805

In some other countries, more particularly the U.K., they have a very independent ombudsman's office, which not only has the power to investigate, but also to assess penalties and call for compensation in the event there has been a violation proven.

Again, Mr. MacKay specifically said the reason they could not recommend such an office for Canada was because of the possible litigation that could follow. However, this system has been in effect in the U.K. for a number of years, and they appear to have gotten most of the bugs worked out of the concerns that Mr. MacKay expressed.

So the question is how the banking industry would feel about having an ombudsman's office such as in the U.K., with extended powers.

Mr. Raymond Protti: Thank you for that question. You made quite a variety of different points. Let me see if I can reply to all of them.

The office has just started up. It's been in place for a little over a year, and it's probably fair to say there are still an awful lot of consumers who, despite all the efforts that have been made in advertising the existence of the office, are not aware of it. I know the current ombudsman has an aggressive public relations campaign to make the office known to Canadians.

On the question of independence, I'd like to say a couple of things.

When the office was first set up, the board of directors had an equal number of bankers and independent directors. A point was made quite forcefully that there should be a majority of independent directors, and that's what happens now. So there is now a majority of independent directors on the board.

The ombudsman himself has a very extensive degree of insulation in terms of how he can be removed. For example, he can't be removed unless there is a unanimous vote in support of that removal by the independent members of the board. All of this is designed, of course, to create a structure in which the ombudsman can feel that he can objectively look at a particular complaint and suggest a remedy for it. And I understand that for every complaint that's come before the ombudsman, where the ombudsman has recommended a redress by the bank, the bank has followed that recommendation.

So I think we've created a structure that is independent. If the other players in the financial services sector would climb on board, and had been invited to do so, then you'd create a Canadian financial services ombudsman who would be even more removed.

Regarding the U.K. example—I haven't brought the numbers with me and I can't remember them off the top of my head, but we do have the numbers and I'll get them to you—we looked at the length of time it takes to handle a consumer's complaint under the U.K. system, and it is extensive. Now, why is that? It's because they have clearly created what amounts to a virtually quasi-judicial tribunal, and that's what worries me about a legislated approach in this area.

I know from my own personal background as a senior civil servant of more than 25 years that when you legislate a solution to a problem like that, you begin to build up regulation, and then you begin to turn your redress office into a quasi-judicial tribunal. You will find—and this is what really worries me, because it won't serve the consumer in the end—you're going to have a set of lawyers on this side representing the office, and you're going to have a set of lawyers on that side representing the financial institution, and the poor consumer will be sitting here trying to figure out what happened to his insurance claim. He's going to be caught between the battle of the titans, the lawyers on this side and the lawyers on the other side. I think that would be a regressive step if it were allowed to happen.

Mr. Dick Harris: Thank you. I appreciate that response.

The task force recommended the compensation arrangements for deposit-taking institutions and life insurance companies be rolled into one. It argues that there's a competitive imbalance in the present situation, with one group of companies being insured by a crown corporation and the others by a purely private arrangement. That was brought up in the earlier presentation by the insurance people.

• 1810

Do you support the MacKay recommendation on this circumstance? Which of the two models does your organization prefer, a CDIC-like model or a private sector model?

Mr. Raymond Protti: I'd like to make three preliminary comments on the issue.

We're still examining the two options, so we haven't definitively come down on one side or the other. I would say, however, that in our submission to the task force we addressed this issue of whether or not there was an unlevel playing field. We felt there was not. The task force has obviously concluded differently.

What we do say in our preliminary views is that if insurance companies are going to be brought into a joint system, it will be important to build separate silos, so that if an insurance company fails it's not the bank and its shareholders who are picking up the bill for a failed insurance institution. In the same way, if a bank were to fail, it would be unfair to ask insurance companies and their shareholders to pay for that failed institution. We should set up separate silos.

The third point I'd like to make just speaks to how much work has been done by this task force over the last 20 months. If you go into one of their interesting 18 research studies, you will find a study done by a Mr. Warren Moysey. You will find in his study a very convincing case that with respect to deposit insurance, we should move to a co-insurance scheme so that individual depositors would have some responsibility for the insurance of their deposits. There are a variety of ways in which this can be done.

We think that the task force, for whatever reasons, did not pick up that issue. We think it's one that is worth exploring and we'll have more to say about that in the near future.

Mr. Dick Harris: I'll come back to that. I think Mr. Epp has a question.

Mr. Ken Epp: I would like to know why you guys want to get into insurance. Banks do financial services: insurance is buying, it's protection against a risk. Why do you want to do that?

Mr. Raymond Protti: Well, we're finding that we have an increasingly knowledgeable consumer who really wants advice on the entire range of financial services, challenges, and issues that they face. We find there is a range of consumers who are increasingly looking and are attracted to the concept of being able to do one-stop shopping. They want to be able to go to the financial institution of their choice and be able to say “Here is the range of financial challenges I am facing. I need deposit taking, I may need some lending products, I need financial investment and advice on my RRSP, I may want to buy some mutual funds, and I have some insurance needs.” There is a range of consumers out there who want the capacity to have a financial institution that can cover the range of issues they're confronting.

Second, we think, and the task force analysis shows, that the life insurance market in this country is underserved and underrepresented. By that I mean there is an awful lot of time and attention spent on the insurance needs of high-net-worth individuals. There is a mid-market here of middle-income and lower-income Canadians who could benefit from life insurance products, for example, who are not being adequately served from our perspective in the marketplace.

I believe that the task force—I think I got this right—noted in the report that less than half of Canadian households, for example, get visited by a life insurance agent. We think there is a market there for low- and middle-income Canadians to meet their life insurance needs and that the banks, through their networks, are perfectly suited to providing a low-cost alternative.

Mr. Alan Young (Vice-President, Policy Division, Canadian Bankers Association): If I can just add this as well, it in effect reflects developments in the financial sector over the past decade. You may recall in 1987 the legislation was amended to permit banks to get into the securities business. In 1992 the Bank Act reform basically opened up, in many respects, and blended the four pillars that had previously existed in the financial sector. Since 1992 you've seen institutions that were in one pillar getting into the business of another. This is simply an ongoing process of the consumer being able to select what product they want from an institution of their choice. So it provides greater choice to consumers, and it's an ongoing process.

• 1815

Mr. Ken Epp: So how do you expect to deliver that insurance service? Insurance can be fairly complicated, whether it's life insurance or car insurance or house insurance or disability insurance. Are you planning on getting into all of those areas of insurance?

Secondly, are you planning on visiting the homes that the insurance companies haven't visited, or are you expecting only to serve those who come in, serve them at your counter, and say here you are, boom, boom, boom, and you are out, and you thereby really cut your costs and give them a non-personalized service?

Mr. Raymond Protti: Each institution would, of course, decide what was the appropriate operational response for itself. It's a good question to put to the individual members when they appear, because I think they would all have a somewhat different approach. It would be their strategic decision to make.

You did make a reference to the sorts of individuals, and so on. As an industry and as individual institutions, we would clearly want to ensure, though, that the people we had at the counter selling these products were meeting all of the certification standards that already exist in the industry. I'm sure the industry as a whole would certainly undertake to do that.

Mr. Ken Epp: Are you prepared to provide the facilities so that clients can, if necessary, spend half an hour or an hour with the agent or whatever you're going to call that person at your bank?

Mr. Raymond Protti: That's already happening with a whole range of other financial products that we currently do.

Some people have very extensive and complicated mortgage arrangements, for example, with banks, and some of them are very simple. But it's not unusual to have a client who might take an hour and a half to two hours to sort out their particular mortgage situation. Others are being done on the mortgage side over the Internet in thirty seconds.

Mr. Ken Epp: How are you going to assure that you are not going to put indirect pressure on this tied selling thing? How do we know for certain that a person who comes in for a loan isn't going to be almost forced to buy their insurance from you as well?

Mr. Raymond Protti: In my introductory remarks, I spoke about our view on coercive tied selling. We agree that it is illegal and ought not to take place.

Mr. Ken Epp: How are you going to ensure that it doesn't happen?

Mr. Raymond Protti: There are two options that are going to be on the table, and you as policy-makers and parliamentarians are going to have to decide which of those two approaches you adopt.

We believe in the self-regulatory approach that the banks have put in place. We're the only financial institutions that have done it. We have a code, and we're prepared to regulate ourselves. Plus, we're the only ones today that give the consumer an independent redress mechanism if they feel they have been subjected to coercive tied selling. So that's the approach we've taken. We believe it works.

The instances we have of tied selling are very rare. In those instances, there are independent appeal mechanisms. We're the only ones that have them.

Mr. Ken Epp: I haven't had an answer to the question of whether you are planning on getting into all the five different types of insurance that I'm aware of.

Mr. Raymond Protti: I tried to answer that by saying that I really couldn't speak because it would be a strategic decision on the part of each of my members. Some of them might choose to concentrate, if they're given the authority, in one particular line of insurance business. Some might decide that they're going to do all of them. Some might do a blend. Each one would have to decide on their own. They may be in a position, though, to answer somewhat more specifically, because it would be up to them to decide.

Mr. Ken Epp: I can see the banks getting quite a monopoly here. You come to lease your car, and then you have to get your mortgage for your house there and your car insurance. We'll give you a good package. But if I say I don't want to buy my insurance here, I'm going to have to go somewhere else, and then you're going to say that in that case your interest rates are higher. You're going to come up with these little packages, these incentives, which, even though they're not tied selling directly, sort of push the customer into that particular mould.

• 1820

Mr. Raymond Protti: May I make two comments, Mr. Chairman, in response to that?

First, the framework Mr. MacKay and his task force put on the table predicts the development of hundreds of financial institutions across this country. His proposals also imply obliterating the distinctions that exist among banks, insurance companies, trust companies, securities dealers, and mutual fund dealers. And access to the payment system is vital to that particular vision. So the future is not a question really of whether or not banks will be involved and can monopolize these particular lines of business. If Mr. MacKay's framework is implemented and if his predictions are correct, what we're looking at is a flowering of financial institutions in this country, where any consumer who felt at all subject to what they felt was coercive or tied selling would have a whole variety of institutions they could go to who would be offering the same business.

Mr. Ken Epp: Unless you're living in a little town in Alberta somewhere and there's only one outfit in town.

The Chairman: That's an interesting question, Mr. Epp. Do you think there are small towns in Canada that only have one life insurance salesman?

Mr. Ken Epp: In my riding there are some that don't have any.

The Chairman: That's an interesting point.

Mr. Harris, do you have a question?

Mr. Dick Harris: Just a comment for the benefit of Mr. Protti. There is a perception out there that the banks getting into the insurance business was going to create some sort of a fast-food type of insurance sales. I know you've heard that phrase before. As Mr. Epp pointed out, the insurance business is for the most part a very personal business. They certainly have to be careful that they're providing the right insurance for the right circumstances.

I guess we need to be convinced that should the government follow the MacKay task force recommendations and allow the entry, the banks are going to have to present a good case to first of all specifically demonstrate that the industry is underserved at the present time, as you've stated—that I'm sure will be argued by the insurance people—but also that the banks are going to be able to provide very qualified professional service to the consumers of that business.

Mr. Raymond Protti: Could I just respond quickly with two comments? I appreciate those comments.

First, we'll dig this out, because it's buried. But one of the things the task force did was look around at other countries, and this is one of the few where deposit-taking institutions are not in a position to offer a competitive insurance product through their branch network. And I understand from the research the task force did that everywhere where there's competition in other countries, the consumer has benefited. So I think that's point one.

Secondly, the essence of the banking business, as you know, is building and developing and maintaining a trust relationship with your clients. We shepherd millions of Canadians cash in between semi-weekly deposits. It's the whole foundation for our business. They trust us and know that it's going to be there 48 or 72 hours later when they need it. If we can't maintain that trust relationship, for whatever reason—offering a shoddy insurance product, having ill-informed, untrained staff—then we will breach that trust relationship. If we ever breach that trust relationship, then the franchise is gone. Everything depends on maintaining that trust with the client.

The Chairman: Thank you.

Mr. Perron.

[Translation]

Mr. Gilles-A. Perron (Rivière-des-Mille-Îles, BQ): Thank you, Mr. Protti and Mr. Young, for coming here to enlighten us. I have two questions for you. First of all, the McKay Report refers to financial mega holdings. I believe that this is also the theory being advanced these days by one of your members, Mr. Rousseau from the Laurentian Bank.

• 1825

I would be interested in hearing your views on the subject.

Mr. Raymond Protti: I'd like to give you a specific answer, but this is one issue on which the industry as a whole has not taken a stand.

Mr. Gilles Perron: However, Mr. Protti, you must have your own opinion on this issue. Surely you can comment.

Mr. Raymond Protti: No, I have not taken a stand on this. I'd like to, but our members have vastly different views on a number of issues, including this one. You are right, as far as what Mr. Rousseau said yesterday. He has a very interesting perspective on this matter, and all I can say today is that it will be up to Mr. Rousseau and his colleagues from the other banks to respond to that question. I'm sorry, but I really cannot comment on this matter.

[English]

Mr. Alan Young: Is the question regarding financial holding companies rather than about creating mega financial institutions?

Mr. Gilles Perron: It's financial holding companies.

Mr. Alan Young: In that case, in our submission to the MacKay task force we set out a series of options that we think ought to be available, and not just to banks, but to financial institutions across the board, to structure themselves so as to enable them to provide service to the consumer in the most efficient way. The financial holding company was one of the options we put on the table. The two other options were to have a bank holding a bank option, which is currently unavailable, and also an extension of the universal bank model, which brings in all businesses within one institution.

So we did address the issue of financial holding companies. We didn't choose to say that one model was better than another, because what we really want to achieve is flexibility to allow financial institutions to have the choice of how to structure themselves to best meet their own strategic objectives.

The MacKay task force does speak favourably to two of the options we put on the table, one being the financial holding company option and the other being a bank holding a bank option. They don't specifically address the issue of universal banking, but because they do say in their recommendation that they think there should not be any restrictions on the way a financial institution structures itself, we think that at least the door is open to discussions with policy-makers on extending the universal bank model.

[Translation]

Mr. Gilles Perron: Mr. Protti, you are an expert when it comes to avoiding answering questions. Perhaps you should consider a career in politics.

My second question relates to something you said in your submission. As you know, I come from a part of the country called Quebec. You state the following on page 11: "Internally, however, we still face a welter of overlapping and conflicting provincial rules". I'd like to get your comments on that statement. Could you elaborate further?

Mr. Raymond Protti: If I may, I'd like to answer that question in English, because some of the French terminology escapes me.

[English]

I think one of our members looked at the number of federal laws, federal departments, provincial departments, provincial agencies, and the laws and regulations to which it was subjected in the course of its normal business operations. I think the count was in excess of 80 federal and provincial departments and agencies to which it was subjected, and that count may indeed be low. That meant in turn several thousands of pages of law and regulations.

What we are saying is that we would like, as a matter of some urgency...and by urgency I mean I do hope that federal and provincial ministers of finance, given that the MacKay report has come out, will now put this on their agenda for a substantive discussion. Is there a way in this country of finding an opportunity where we can develop what we call truly national regulation—not federal, not provincial? It may be an institution and a set of laws that are jointly owned and managed by federal and provincial governments but that are truly national. So if a province wants to participate—because this would all have to be compeletely voluntary—there would be a way of harmonizing what is going on in terms of the regulatory burden on financial services across the country as a whole. This would obviously have to be an enormous cooperative and voluntary effort. Some provinces may wish to play, some provinces may not. It is also not clear what perspective the federal government would have on this issue.

• 1830

If Mr. MacKay's vision is going to be adopted by policy-makers across this country, we think that it will require urgent action on the part of governments to find some way to do a more effective job in regulating all the financial service players across the country.

[Translation]

That is what we're saying.

Mr. Gilles Perron: Thank you, Mr. Chairman. Thank you, Mr. Protti.

The Chairman: Thank you, Mr. Perron.

[English]

Mr. Szabo.

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

Mr. Protti, one view that seems to be recurring is that these discussions are about bank mergers as opposed to the financial services sector. I think the most evident example of that is the continuing quoting of the phrase “the status quo is not an option”. When Harold MacKay and John Cleghorn were before us, they both made it clear that the phrase referred to the entire sector and that it was not a commentary on bank mergers. I think it's important to keep that in mind.

In your comments you did indicate that more competition and services were necessary. It appeared to me that your comments referred to banking only because your reference to the entry of more foreign banks was the context in which that statement was made, I believe. I'm wondering if you could comment on whether or not we need more competition and services in the financial services sector, in banking by non-banks or near banks, etc., and if you see that could cause some difficulty, particularly because of the emphasis you placed on the regulatory challenges that would be placed on us.

Mr. Raymond Protti: Thank you for that question.

Mr. Chairman, if I left you with that impression, I didn't mean to. What I meant to say and thought I'd said is what the industry said in its October 1997 submission; that is, if the view is that there ought to be more entrants and more competition across the financial services sector and within banking as a whole, we were not opposed to new competition in the marketplace. We believe that the ultimate beneficiary of more competition will be the consumer, whom we're all supposed to be serving. That was a kind of blanket statement I was making, and I didn't by any means want to restrict it just to banking.

Mr. Paul Szabo: I have one final question. I think you have raised an issue that I feel is very vital to the whole discussion of the future of the banking industry, specifically mergers, and it has to do with this regulatory question. The banking industry is subject to the Bank Act and jurisdictional regulations. The insurance industry has its own set of rules, and other players within the financial services sector have certain jurisdictional restrictions or facilities available to them.

To the extent that there would be this cross-pollination of financial services throughout the entire sector, it would appear to me that the first step in this entire process would have to be a restructuring and rethinking of the fundamental regulatory environment under which the financial services sector has to operate. You called it a national regulatory sector. In your opinion, would that have to take place and in fact be in place before any other major changes were contemplated, including bank mergers?

Mr. Raymond Protti: Thank you for the question. It would be absolutely wonderful if it were, but the practical reality of dealing with these sorts of jurisdictional issues is that it is going to take a concerted effort over quite a long period of time to in fact put that sort of system in place. I think in the end we'll get there.

• 1835

I may be hopelessly naive, but I think if federal and provincial governments jointly recognize that they're dealing here with a sector that is 17% of the GDP and is responsible, probably in total, for 1.2 million to 1.5 million jobs across the country, we'll eventually get there. But if you decided you wanted to do that first, then the constitutional jurisdictional wrangles that are going to have to be sorted out here before we create this new concept of national regulations are going to take us time.

To broaden this out, I have to say I'm personally disappointed about how in this country, for whatever reason, we have lacked the innovation and creativity to recognize there are some different models of cooperation between federal and provincial governments on a variety of things that would be efficient in the end.

I'm not talking just about regulation in the financial services industry. I would have thought, for example, that there were very significant efficiencies in the federal and provincial governments getting together in a true national tax collection agency. I think it's also true, for example, on a simpler issue like the collection of statistical data. Why haven't we been able to come together as a country and say listen, we'll create something truly national, not owned by the federal government, not owned by the provinces, but jointly owned and jointly managed? This area is absolutely crying out for it.

I haven't discussed this with my counterparts in the insurance or securities industry, but I intend to, because I think if we're all going to look alike, we should all work together to find a way of encouraging the federal and provincial governments to come up with a far more efficient and less duplicative regulatory system. The taxpayer will win big in the end.

Mr. Paul Szabo: Thank you.

The Chairman: Ms. Redman.

Mrs. Karen Redman: Thank you, Mr. Chairman.

Mr. Protti, can we touch on auto leasing for a minute? I would like to hear from you what benefit there is for the banking industry in getting into auto leasing, and how you would respond to the concern I've heard raised, which is that eventually you will drive out competition and reduce consumer choices.

Mr. Raymond Protti: Thank you for that question.

The benefit, in the end, from being able to compete against the other providers is really the consumer benefit. That's what you really want to focus on. If we can get involved in this line of business, the current players who monopolize this business—I'll come back to some numbers here in a second—are going to have to sharpen their pencils. When they sharpen their pencils, who benefits? It's going to be the person leasing their car.

I think the task force has done an important service to the public debate on this issue, because it's one that, quite frankly, I believe Canadians have been bamboozled about for the last half dozen years. The task force has now done a piece of work that shows unmistakably that this is not a car dealer issue.

They show that 80% of the car leases in this country are done by the foreign financing arms of the automobile manufacturers. Three of them—GM, Ford, and Chrysler—do 70% of that business. So 80% are done not by car dealers, but by huge foreign institutions with very deep pockets. Ten percent are done by auto leasing companies like GE Capital, arguably the most successful unregulated financial institution in the world, and the most profitable. The third and last 10% are done by dealers. Of that 10% that's done by dealers, 45 dealers in this country, or 1% of the total dealer community, have a lease portfolio of over 200 cars. On average, 99% of the dealers in this country have car leases of about 25.

When I arrived in the industry two years ago I found this issue staggering. When you look at the United States, Ford Credit, GM Credit, and Chrysler Credit have to compete in their own marketplace against banks and a whole range of other financial institutions. They've got 46% of the market in the United States. They have 70% of the market here. And what happens? You have sharper pencils in the United States.

• 1840

The analysis we did showed that if we could get competitive lease rates in this country, it would save consumers about $370 million. That was an independent piece of research we did.

Mrs. Karen Redman: You've answered well what's in it for the consumer. What's in it for banks? Why do banks want to get into leasing automobiles?

Mr. Raymond Protti: We think we can also benefit our shareholders.

We think we can offer very competitive rates. We can offer a competitive financial services product. We will only do so, of course, if we can make some money at it, and we think we can, but it's going to be a much tougher marketplace. If we can't offer a competitively priced product with a competitive level of service, then we're not going to make any money and we won't be in a line of business.

Mrs. Karen Redman: Thank you.

The Chairman: Ms. Bennett.

Ms. Carolyn Bennett: You were pretty clear that you preferred a self-regulatory system to any additional legislation. I understand about the bank ombudsman, but I also understand that MacKay says that only 20% of people even know that exists. I would suggest that probably in the insurance industry even fewer people know there's someplace to go. They sort of think they have to sue.

I want to know whether by blending banks and insurance agencies, the legislation is just a necessary by-product because there is this sort of confusion in terms of how consumers are protected.

Mr. Raymond Protti: Thank you for that question.

I think I said in an earlier response that we've been up and running with the Canadian bank ombudsman for about a year. We've made some pretty determined efforts, or at least the office has, in trying to alert Canadians to the fact that it exists. If I recall correctly, it took the U.K. ombudsman some time as well in their system to get up and be known so that there was a high recognition factor. So I know for certain that as time goes on more Canadians will know about its existence and may in fact turn more frequently to use it.

In terms of cooperation with the insurance industry, and so on, I'm told that the Canadian bank ombudsman has written this week and reaffirmed to all of the players in the financial services industry and reaffirmed CBO's wish to transform themselves into a Canadian financial services ombudsman.

Would that be an improvement over what we have now? Absolutely and definitely, because then it would be one-stop shopping for a consumer who had a complaint. Whether it was with a security dealer or whether it was a mutual fund dealer or an insurance company, and so on, there would be one number to call and one redress mechanism, and I think that would be a great benefit.

Do we need legislation to do that? Our view is that we don't. And my real concern, as I expressed it earlier, was that it would be enormously unfortunate if we ended up with a legislative mechanism that turned into a quasi-judicial tribunal that—I'm not a lawyer, so maybe I should be careful saying this—turned out to be a great gravy train for all the lawyers in the country as they lined up, and the poor individual consumer is sitting at this end and you have all the lawyers there and all the lawyers there, and then it becomes extremely costly and of course, what lawyers are good at, time-consuming. That's what I worry about, a legislative approach.

Ms. Carolyn Bennett: Is alternative dispute resolution something you see, that this is where the office of the ombudsman is going?

Mr. Raymond Protti: Absolutely. Whether it's a self-regulatory approach or whether it's a legislative approach, what I've seen personally where alternative dispute resolution techniques are used is that they're very beneficial for all concerned, because they are far faster and far cheaper than following a judicial route. So even if we ended up with a legislative model, it would be kind of nice, if that were going to be the case, if emphasis was put on using ADR techniques rather than legal ones.

The Chairman: Thank you, Ms. Bennett.

[Translation]

Mr. Charbonneau.

• 1845

Mr. Yvon Charbonneau (Anjou—Rivière-des-Prairies, Lib.): I have two questions. The first concerns the retail insurance market. Members of Parliament have been deluged with representations from industry players who feel that if banks were allowed to break into this industry en masse, many jobs would be threatened. They are very insistent about the fact that we should oppose this move.

I've gone over your notes and in my view, you do not really address the issue of job losses, the impending threat or the particular relationship between clients and their insurance broker or agent who acts as an adviser throughout their lifetime. Often, the relationship between a client and his family and his insurance agent lasts for decades.

Can we really expect this type of relationship to develop with persons who serve customers at the bank and who can be transferred any time from one branch to another? Can you explain to us again why you believe that from the consumer's standpoint, this would be a good thing, particularly given the threat of job losses?

Mr. Raymond Protti: Thank you for your question. I'd like to answer in English, if that's all right with you.

[English]

First, the task force in fact looked at this question of whether or not there was going to be massive job loss and dislocation, and in every country they looked at where the insurance community and insurance agents coexist with financial institutions, including deposit-taking institutions that can retail insurance through their branches, there's no indication of massive job loss. In fact they work together and the consumer has a variety of choices then of where he can go to get his insurance products.

Second, will there continue to be Canadians who face insurance situations that require in-depth counselling advice and monitoring on a regular and continuous basis by independent insurance agents who can provide high-quality products and high-quality advice? Absolutely. There's no doubt in my mind. So I don't see the wholesale disappearance of the insurance community in this respect.

The third comment I would make, which I made earlier in reply to another question, is that we do see segments of the insurance market that we feel are underserved. I think the task force acknowledged that. There are a great number of low-income and middle-income Canadians who do not have detailed sophisticated insurance needs but who could benefit from having some insurance products that they currently don't have. My guess is that my member institutions would very much target that audience.

Mr. Alan Young: If I can just add to that, in our submission to you we have added a series of quotations directly from the MacKay report dealing with the issues you're concerned with. I will just read out one brief quote from the report, at the very back of our submission:

The task force believes it likely that low- and middle-income Canadians will be the principal beneficiaries of having basic insurance products, such as individual term life insurance, available through the branch networks of deposit-taking institutions.

This was a finding they made after close to two years of examination and looking at experiences around the world.

[Translation]

Mr. Yvon Charbonneau: My second question is of a somewhat more general nature. In the your opening remarks, you state that you will be commenting on some issues, but that you will not be addressing the matter of bank mergers and other policy issues flowing from that debate. You say that your members have differing views on the appropriateness of some of the more activist regulatory approaches proposed by the task force.

I don't know whether the decision not to address this issue is a strategic one on your part, but we can nevertheless ask you questions, given that it is difficult for us to appreciate some of your comments or observations and given that we do not know where the merger proposals are headed. Bank mergers mean increased concentration. However, you maintain that you are not opposed to seeing new players or more players in this sector.

• 1850

If indeed we were to see more players in this sector and greater concentration, it would be as if you were to show us a $100 bill with $100 written on one side and $50 written on the other. It is impossible to know exactly what we're dealing with. You say that your members hold differing views on this issue and that you would like to see more players, but that you are perhaps prepared to see increased concentration. Could you at least tell us what aspects of this issue members disagree on? It is not necessary for you to name the members in question, since we're going to meet them and find out who they are eventually. However, could you at least tell us why some members hold one view, and others a different one?

Earlier on, we met with two insurance company representatives. The chairman asked a question and noted that the witnesses seem divided on a particular issue. One answered: I hold this opinion because my primary area of responsibility is retirement planning. The other responded: I work primarily in the insurance retailing area. It was immediately clear that it was possible to get two different viewpoints from two persons who work in different areas of the industry. Could you at least explain to us why your members do not present a united front?

Mr. Raymond Protti: As this is a very delicate matter, I'd like to answer the question in English.

[English]

First of all, it is not a question of strategy on our part; it's simply a reflection of a very fundamental reality. That is, I have member institutions in the banking community who have very substantially different views on how the sector should evolve and what sort of strategic approach they should follow.

I have four members in two pairs who believe that in the face of this evolving sector, the best strategic approach for them is to merge. I have other members who very strongly oppose that view, and they will be unequivocal when they appear in front of you in explaining in great detail why it is they have that perspective. As a consequence, I'm very much limited in what I can say.

On the issue of do we or do we not welcome competition in the sector, the industry's answer to that is a unanimous one: we are prepared to meet competition in whatever form head on.

[Translation]

Mr. Yvon Charbonneau: That's easy for you to say, because, if I may continue the discussion, you are bracing yourself for increasing concentration. You say that you want more players in this sector. You have not addressed this issue in your analysis and you cannot tell us what your position is based on because your members are divided. However, you say that we should be prepared for increased concentration in this market.

[English]

Mr. Raymond Protti: I don't know, Mr. Chairman, if there's much more I can add to my comment on that.

The Chairman: Given the circumstances you face, Mr. Protti, I understand what you're saying. There's obviously a division in the CBA at this point, so you're limited to the comments that you've made.

Going back to your comments, on behalf of the committee I would like to thank you first of all for the technical briefing you gave us a week or so ago and for your presentation today. The unfortunate part of your presentation, and something I was looking forward to, was the future design of the financial services sector. But I understand the circumstances.

I still think this committee will go on at great length to make sure we dedicate a lot of our energies towards understanding or at least helping to shape the future of the financial services sector. It's certainly not an issue we underestimate. It's our responsibility to address that particular issue head on.

On behalf of the committee, thank you very much.

The meeting is adjourned.