The Vice-Chair (Mr. Massimo Pacetti (Saint-Léonard—Saint-Michel, Lib.)):
Order. I'd like to start with a little bit of housekeeping.
A notice of motion was presented by Mr. McCallum. The clerk tells me that we are going to address the report on income trusts on Thursday, so I don't want to get into a debate. If we decide to get into debate, we'll call a special hearing, but I don't want to interrupt the witnesses.
We're here pursuant to the order of reference of Thursday, December 7, 2006, Bill C-37, an act to amend the law governing financial institutions and to provide for related and consequential matters.
I would like to thank the witnesses for coming.
We will give you up to five minutes for your presentation. If possible, try to stay within that time so that members can ask you questions.
We will begin with Mr. Zinatelli from the Canadian Life and Health Insurance Association Inc.
Mr. Frank Zinatelli (Vice-President and Associate General Counsel, Canadian Life and Health Insurance Association Inc.):
Thank you, Mr. Chairman.
As you indicated, my name is Frank Zinatelli. I'm vice-president and associate general counsel of the Canadian Life and Health Insurance Association. I would like to thank the committee very much for this opportunity to contribute to your review of Bill C-37, an act to amend the law governing financial institutions and to provide for related and consequential matters.
We welcome this opportunity to appear before the committee as you seek to develop your report to Parliament on this important bill. The industry is extremely supportive of this bill and urges that it be passed in a timely manner.
With your permission, Chairman, I would like to make some very short introductory comments.
By way of background, the Canadian Life and Health Insurance Association represents life and health insurance companies accounting for 99% of the life and health insurance in force across Canada. The Canadian life and health insurance industry provides products that include life insurance, disability insurance, supplementary health insurance, annuities, RRSPs, and pensions. The industry protects about 24 million Canadians and some 20 million people internationally. It makes benefit payments to Canadians of $51 billion a year, has almost $371 billion invested in Canada's economy, and provides employment to over 119,000 Canadians.
Among the various statutes amended by Bill C-37 is the Insurance Companies Act, which is the governing statute for the regulation of life and health insurers at the federal level. Of course, life and health insurers are also subject to the rules and regulations that are set out in provincial insurance acts.
Following up on the June 2006 government white paper on the 2006 financial institutions legislation review, Bill C-37 represents a welcome fine-tuning of the financial institutions legislation and makes changes in three important areas.
With respect to enhancing the interests of consumers, for example, the bill would amend the Insurance Companies Act to require that complaint handling procedures be made publicly available, for mailing and online, for all consumers to access at any time.
With respect to increasing legislative and regulatory efficiency and to streamline the approval regime, for example, the bill would amend the Insurance Companies Act to shift the approval for some transactions from the minister to the superintendent. As another example, it would allow for the granting of more than one approval in a single instrument.
The bill would also reset the sunset date for financial institutions, which is now April 24, 2007, to five years after the coming into force of the Bill C-37 amendments. In this regard, prompt passage of the bill will ensure the legislative stability and continuity that are so important in the financial services sector.
In conclusion, Mr. Chairman, the industry strongly supports the provisions of Bill C-37 that are relevant to the life and health insurance industry and is willing to assist in whatever way it can in ensuring the bill's timely passage.
The industry greatly appreciates this opportunity to participate in the committee's review of Bill C-37. I would be pleased to answer any questions you may have.
Mr. John Lawford (Counsel, Public Interest Advocacy Centre):
The Canadian Consumer Initiative is a coalition of six major consumer organizations, including the Alberta Council on Aging, Automobile Protection Association, Consumers Council of Canada, Option consommateurs, Public Interest Advocacy Centre, which I represent, and the Union des consommateurs. CCI provides advice and assistance to the federal government to help safeguard consumer interests.
CCI has come before you today to ask this committee to consider embedding a framework for electronic payments into the Bank Act. Although this suggestion is not presently in the form of an amendment, we hope the committee will consider amendments at this late stage in order to benefit banking customers, which includes most Canadians.
Electronic payments include such systems as debit cards, both at ATMs and at point of sale; pre-authorized withdrawals and deposits into consumer bank or credit card accounts; credit card purchases, both at point of sale and without presenting the actual card, such as on the Internet; and new payment mechanisms through the Internet, in particular PayPal, electronic transfers of money through Interac or other online services such as online investing, e-mail money transfers, and soon mobile commerce through cellphones.
The Canadian banking system relies to a remarkable extent upon self-regulatory mechanisms for electronic payments. For example, the CPA has rules regarding pre-authorized debits. However, the code's provisions are not well known. For example, a financial institute can cancel a false debit pre-authorization through CPA regulation H-1. But because consumers are often unaware of the provision, they may believe they are responsible for the transaction and pay for the mistake.
In addition, consumers are only responsible for $50 maximum liability in unauthorized credit card transactions. But this rule is usually a provincial requirement. It is supplemented by no liability policies of major credit card companies. This policy is not contractual, and it could be changed at any time.
Regarding debit cards, Canadians made nearly three-quarters of a billion ATM transactions last year, but all of them were under the CPA's Canadian code of practice for consumer debit card services, a voluntary code. Although consumers are theoretically exempt from liabilities associated with unauthorized debit transactions, they may become liable for debit fraud through an innocuous admission to their bank that their spouse at one time knew their PIN number.
The CCI studied electronic payments in early 2006. We produced a report, which has been provided to the committee. That report concluded that the present hodgepodge of regulation and voluntary codes is inadequate and that Parliament should instead consider legislating in a holistic manner. That is what we are urging the committee to try as it considers Bill C-37.
The Canadian Consumer Initiative believes the following principles would provide a more predictable and effective electronic payment system in Canada, one that's consumer friendly and economically efficient.
The first is universality; it should cover the broadest range of payment technologies. Second, neutrality: all technologies should be regulated by similar rules, if possible. Third, security: payment technologies should be secure. Fourth, accountability: the risk should be supported by the party who creates it. Fifth, transparency: rules, roles, and prices should be transparent to all parties. Sixth, liberty: payers should be allowed to choose the payment technology they prefer. And finally, enforceability: parties should be able to ensure that the framework is effectively enforced.
Changes to the Bank Act to embed this electronic payments framework could be considered at this time. CCI's analysis reveals that this might be achieved by regulation made pursuant to section 410--specifically paragraph 410(1)(c)--of the Bank Act, which gives banks, with ministerial approval, the power of collecting, manipulating, and transmitting information that is primarily financial or economic in nature, as well as designing and implementing information systems to do so.
Subsection 410(3) gives the Governor in Council the power to make regulations about financial information. Therefore, the Governor in Council may have power to regulate the mechanics of electronic payments under this section.
Any information disclosure or other necessary requirements of the framework could be authorized pursuant to either sections 459.4, which is consumer information regulation authority, or section 978, which is general regulation power under the Bank Act.
Although we have not had time to draft possible regulation wording for the committee, we highly recommend the U.S. Electronic Fund Transfer Act. It has since 1980 been in place in the United States, and with appropriate modifications could serve as a basis for drafting a coherent Canadian electronic payments regime inside the Bank Act.
Thank you. I'd be happy to take questions at the end.
Mr. David Phillips (President and Chief Executive Officer, Credit Union Central of Canada):
Good morning, Mr. Chair and committee members. I want to thank you for this opportunity to come before the committee today to provide some comments on Bill C-37. My name is David Phillips and I'm president and the CEO of Credit Union Central of Canada.
Canadian Central is a federally regulated financial institution that operates as a national trade association for the provincial credit union centrals in Canada, and through them, for 500 affiliated credit unions across this country. Our credit unions employ more than 24,000 Canadians, serving our members who number over 4.9 million Canadians. At the end of the third quarter of 2006, our credit unions held more than $92 billion in assets.
Credit unions are independent, community-based financial institutions that operate on cooperative and democratic principles. As such, the credit union system is decentralized and diverse in terms of the size and communities they serve. The credit union system does not operate like a bank, and credit unions are not branches subject to centralized direction. Rather, they are locally autonomous institutions that are accountable to their members.
This local focus enables credit unions to respond quickly and effectively to community needs. Credit unions are provincially regulated and from a constitutional standpoint fall under provincial jurisdiction. The federal government regulates two entities in the credit union system under the Cooperative Credit Associations Act, and amendments to that act are part of Bill C-37. The two federally regulated credit union entities are my organization, Canadian Central, as well as Concentra Financial Services Association, which was formerly Co-op Trust based in Saskatoon.
In addition, the federal government regulates several provincial credit union centrals that have chosen to be governed under part 16 of the Cooperative Credit Associations Act.
With this in mind, Canadian Central would like to clearly state its general support for Bill C-37, in particular the proposed amendments to the Cooperative Credit Associations Act contained in the bill. These amendments will make the corporation, under the act, more of an option for credit union organizations interested in pursuing the possibility of a federal corporate charter. There are nevertheless some elements of the act that could be improved and that are not addressed in the bill.
On these points, we look forward to working with the government on a going-forward basis.
I will offer some examples of positive changes to the Cooperative Credit Associations Act that we support in the bill.
The bill proposes to amend the act and make it easier to incorporate a retail association under the act by reducing the number of required incorporators from the current number of ten credit unions to two credit unions, from more than one provincial jurisdiction. The number of ten in the existing act was a nearly impossible threshold for credit unions to meet, as evidenced by the fact that credit unions have not sought to establish organizations under the Cooperative Credit Associations Act.
Secondly, the bill contains provisions that make it possible for corporate entities to convert to a retail association under the act. For example, the bill contains an amendment to the Canada Business Corporations Act that permits a CBCA company to convert to a company under the Cooperative Credit Associations Act and to continue under that act.
Thirdly, the bill will permit a retail association to operate on a level playing field with wholesale banks, where the association limits its deposits to deposits in excess of $150,000. In these circumstances the wholesale financial institutions need not be a member of CDIC. This option may be of interest to second-tier organizations in the credit union system, such as provincial centrals that might be considering a move to a federal corporate charter.
Mr. Chairman, I will confine my remarks at this time to these few points.
In closing, I would like to thank the committee for this opportunity to present our views on Bill C-37. I would be happy to answer any questions the committee may have.
Mr. Winsor Macdonell (Senior Vice-President and General Counsel, Genworth Financial Canada):
Good afternoon. My name is Winsor Macdonell. I am the Senior Vice-President and General Counsel for Genworth Financial Canada.
Our president, Peter Vukanovich, could not be here today and sends his regrets.
I would like to thank the committee for allowing me to participate in the hearings on Bill C-37. I apologize for my late arrival.
Genworth is Canada's home ownership company. We are the largest private sector provider of mortgage default insurance in Canada. Since 1995 we have helped over 700,000 middle-income Canadians achieve the dream of home ownership.
As you are probably aware, mortgage default insurance protects lenders against losses caused by a homebuyer's default on a mortgage, particularly low down-payment mortgages. It should not be confused with creditor life insurance, which has been the topic of discussion recently.
The benefits of mortgage default insurance are clear. It is the fastest and least expensive way for Canadians to get a home and build wealth sooner. Broadly, mortgage insurance increases the efficiency of the entire mortgage industry and contributes to the safety and soundness of the financial sector. Because of these benefits, mortgages with low down payments account for about half of all mortgages originated in Canada, and are a major reason Canada has one of the highest home ownership rates in the world.
Genworth supports the proposal in Bill C-37 to raise from 75% to 80% the loan-to-value threshold above which mortgage insurance is required by law. The 80% threshold is consistent with the threshold used in other major lending countries, such as the United States and Australia.
I would like to take this opportunity to thank the government, and particularly the Department of Finance, for being responsive to the issues raised during the consultation exercise leading up to the legislation. For us, while raising the minimum to 80% is an important change, even more importantly, the review that was conducted highlighted the value our mandatory system brings to Canadian consumers and lenders.
Mandatory mortgage insurance works in Canada because it allows mortgage insurance companies to spread the risk of homebuyer default across a large pool of loans, including varying borrower profiles, different geographic regions, and various lenders. This pooling effect results in fairness and choice for consumers, who pay the same premium regardless of where they live. It is clear that a weakening of the mandatory requirement would result in consumers having to pay considerably more by way of higher interest rates for low down-payment loans.
Our system is working for Canadians. For the average family, real estate assets currently account for about 35% of their overall wealth, up from 29% just four years ago. At the same time, Canada's mortgage insurers collectively reduced premiums twice since 2003, effectively keeping $700 million in the hands of homebuyers.
Mortgage insurance also helps Canadian homebuyers in another way. Genworth is particularly proud when it can help homebuyers stay in their homes when they experience periods of economic distress and default on their mortgages due to temporary job loss or illness.
Beyond individual consumers, mandatory mortgage insurance also benefits the entire mortgage industry. The current system enables vigorous competition between national and regional lenders, like credit unions, and encourages product innovation to help growing segments of the population—such as new Canadians, self-employed people, and renters—to purchase homes. It also helps maintain the availability of mortgage credit at affordable interest rates during good and bad economic cycles, because lenders transfer the risk to well-capitalized, specialized insurance companies.
In closing, we support the change in Bill C-37 to raise from 75% to 80% the loan-to-value threshold above which mortgage insurance is required.
Thank you for your time.
I will be pleased to answer your questions.
Thank you very much.
Mr. Duff Conacher (Chairperson, Canadian Community Reinvestment Coalition):
Thank you very much to the committee for this opportunity to present on Bill C-37.
The Canadian Community Reinvestment Coalition, which I chair, is a coalition of a hundred anti-poverty, community economic development, consumer, labour, and citizen groups that represent, in total membership, more than 3 million Canadians. As a coalition, it has been advocating increased bank accountability and consumer protection for ten years now.
The coalition is concerned about key gaps in Bill C-37 that have been continued in federal financial institution laws for many years. Citizen groups and consumer groups have been pointing to these gaps for more than a decade, but the gaps have still not been closed. It's a serious situation, because according to 90% of Canadians, access to basic banking service is an essential service—as essential as heat, hydro, or other home services that essentially allow people to live in society.
At the same time, the market share controlled by the big banks in Canada in most main service categories in most parts of the country is higher than in most industrialized countries. As one former head of the Federal Trade Commission in the U.S. believes, the record profits of the banks are proof enough of excess market share controlled by too few players in the market.
At the same time, the watchdog agencies watching financial institutions in terms of accountability and consumer protection lack either independence, resources, or a strong enforcement attitude and record. As a result, financial consumers are essentially on their own and up against very powerful, well-resourced financial institutions when shopping for, dealing with, or complaining about financial institution services.
While the past twenty years of response from the federal government have largely seen inaction, there was somewhat of a breakthrough with Bill C-8 in 2001. However, the measures in Bill C-8 all contain key loopholes that undermine the effectiveness of the measures. As a result, in 2007, the 20 million Canadian financial consumers, especially of banking services, lack key protections. Equally, Canadian banks lack key accountability requirements that have been in place in the U.S. and other countries for ten to twenty years.
The first area--of ten--about which the Canadian Community Reinvestment Coalition is concerned is that of the public accountability statements that now have to be produced by federally regulated financial institutions annually. These public accountability statements pale in comparison to the accountability statements that are required—now for over twenty years—to be produced by banks and other institutions in the U.S.
The big problem is that, unlike in the U.S., the statements do not require the banks to disclose detailed data on their service, lending, and investment records--in particular, demand for lending and investment and the response by each bank, broken down on a neighbourhood basis and by characteristics of borrowers. As a result, it's impossible to tell what the lending, service, and investment record is of any bank in Canada.
At the same time, we are allowing the banks to grow, take over lots of institutions, and possibly merge in the future. With each takeover, as the banks get larger, we're not able to measure whether their service gets better or worse as they get bigger.
In the U.S., the essential rule is that if you're a bank with a bad record, you're not allowed to get bigger. It's just common sense. Why would you want a bank that has a bad service, lending, or investment record to get bigger? Then they're just going to serve more people poorly or continue to increase the discrimination in lending or other unfair lending practices.
As part of the accountability statements being strengthened so that they become more detailed, we also propose that the government would regularly review these statements and grade them, as is done in the U.S., and that growing as a financial institution would be conditional on having a good service, lending, and investment record. This is what has been done in the U.S. for more than twenty years.
A second accountability measure that we propose to be put in place is that government should not contract to financial institutions that have poor service, lending, or investment records. A mandatory condition for bidding on all federal government contracts should be that the institution can show it has had a good record every year for the previous ten years.
Right now the federal government hands out tens of millions of dollars of business to federal financial institutions and requests nothing in return. This is a leverage point, an incentive that can be used very effectively, as it has been used in other areas, to ensure that the banks have a good record and serve every Canadian fairly and well.
I'll turn now to a specific provision in Bill C-37, which is a loophole that was left by Bill C-8, and that is the policies that were required by the banks in terms of holds on cheques. Bill C-8 required only that the banks have a policy. The policy that they've put in place is that you get access to the money you deposit by cheque ten days after you deposit it.
For people with low incomes, that means they'll never open a bank account because they can't wait for their money for ten days. Bill C-37 reduces this cheque-hold period to only four to seven days, but 98% of cheques clear overnight. Our proposal is that this measure be amended so that depositors will have a right to access funds from a deposited cheque the day after the cheque is deposited.
To go through some of the other measures quickly, the Financial Consumer Agency of Canada is not allowed to name an institution that violates the law unless the institution is prosecuted by the agency. The agency has prosecuted only two institutions in the past five years. All of the rest that have violated the law remain unnamed, and as a result, Canadians have no idea which institutions have a good record or not. The agency needs to be required to penalize and name violators in every case that they find a violation.
As well, the Financial Services Ombudsman needs to be made much more independent and have binding powers. The federal government should not have let the industry set up its own ombudsman, but should have, as Bill C-8 set out, set up the ombudsman itself as a government-run body that would ensure independence and fairness in the operations, and given the body the power to order financial institutions to remedy unfair treatment.
Mr. Winsor Macdonell:
In terms of our submission, we actually engaged two academics to research this issue for papers. One was a known Canadian real estate economist by the name of Frank Clayton, and the other, Dr. Susan Wachter, was a specialist on real estate finance out of the Wharton School of Business.
Their research concluded that the mandatory mortgage insurance requirement itself benefited Canadians by creating a large pool of insured risk that lowered the premium for all Canadians, and thereby allowed Canadians, notwithstanding their credit history or geographical location, to enjoy the same access to credit across the country. That was a very strong point, and that was where we saw the mandatory mortgage insurance requirement playing an important role in the Canadian economy.
When it comes to the threshold, obviously when you reduce the size of the pool, you take away from that. You end up with more people on the outside--who may be in a geographic area that's not an urban centre, or have worse credit--finding higher costs as a result of being pulled out of the pool due to the mandatory mortgage requirement.
Mr. David Phillips:
I'd be happy to.
The Cooperative Credit Associations Act is in many ways a work-in-progress. This act was enacted 55 years ago by the federal Parliament. For the first 52 or 53 years there were no institutions actually incorporated under that act. My organization was continued under it, and the other organization that exists under it right now, Concentra Financial, was also continued under the act. This act has been around for a long time, but really, only two organizations are regulated by it.
As we look at changes in the credit union system, we see that the federal charter, as an organizational option, is probably something the system will increasingly look upon with interest as a certain degree of consolidation takes place within the system. We're interested in creating that association under the act as an option that credit unions can look at in terms of their own strategic development. That doesn't mean they will go there, but it's an option for them to consider.
The difficulty we faced with the ten was that it was inconceivable that ten credit unions would ever get together and agree that they should go in this direction. Two credit unions, however, brings it within the realm of feasibility. Five years from now, I can't tell you if anyone will have taken advantage of that opportunity. I already mentioned the restrictions on commercial lending that may be a disincentive.
But I think what that change does is bring this within the realm of feasibility from something that was really quite impossible...the way it's drafted right now.
Ms. Judy Wasylycia-Leis (Winnipeg North, NDP):
Thank you, Mr. Chairperson, and thanks to all of you for your presentations.
It seems to me that one of the most overriding concerns we're hearing from witnesses on this bill is what's not in the bill. It seems to me that we may have missed an opportunity to actually do some fundamental changes and improvements on the Bank Act.
First, given the fact that this only happens every five years, what happened in between the review process and this legislation? Was everyone consulted? Was it a wide-open consultation process? How does it work? How did we end up with such a narrow piece of legislation?
I know, Duff, that you said it's pretty hard now at the committee stage to amend it, but it was almost all we were left with once they brought in the limited legislation. I think we need to learn for the next time, five years from now, how we can really go at the Bank Act, without giving up on amending where we can over the next couple of days.
Maybe I can just hear some comments on what went wrong. How did we end up with such a narrow scope in the whole thing?
Duff, do you want to start?
Mr. Duff Conacher:
It's really an imbalance of resources and, as a result, power. I mean, there are 100 full-time bank lobbyists. I spend a quarter of my time on banking issues, and I'm sure John doesn't spend much more, and there are a couple of others. So it adds up to one person. When you're outmatched 100 to one, the government hears 100 times from the one side and one time from the other side.
Again, the way to balance that is to form a financial consumer organization through the pamphlet method, at no cost to government and at no cost to the institutions. Then there would be many more lobbyists on the citizens' side. It's a very simple method to put in place.
Yes, it was an open consultation. We had a chance to put in our two cents to the Department of Finance at meetings, going back to June 2005, actually, because of the election. But overall, it's just an imbalance of resources.
Where does the money for the financial institutions to do their lobbying come from? From consumers. Consumers pay for the financial institutions' lobby. We're saying, use this pamphlet method to give consumers a chance to put their dollars toward a citizen group that would lobby for their interests.
Mr. Dean Del Mastro:
Mr. Lawford, you made a couple of specific recommendations. You talked about a U.S.-style electronic transfer act and the need for a better framework for electronic payment.
I come from small business, and this is a big area of concern for small businesses. Money seems to disappear in cyberspace, sometimes for days, on the wiring of money, and then it reappears in bank accounts.
At a panel here last week I asked the Canadian Bankers Association whether they felt they were in a position where they could self-regulate this, because they're actually benefiting on both ends of this by dragging their feet. They're both charging interest on lines of credit and collecting interest--in many cases it may be a loan that they're forwarding the proceeds for.
In your opinion, do they have any interest in self-regulating this area?
Mr. Duff Conacher:
This is really putting me on the spot.
There is no argument: 98% of things clear overnight. It was left in Bill C-8 as the one barrier the banks could still have in place that would mean that nobody with a low income, no one on social assistance, would open a bank account. It was a loophole left, on purpose, to give the banks an excuse to say that doing so was legal. All the other means that the banks were using for turning people with low incomes away--you have to be employed, you have to have a minimum balance in your account at all times, you have to produce five, six, seven pieces of ID--were made illegal under Bill C-8.
This one was left so the banks could continue to facilitate, as the federal government has, the growth of a two-tier banking system, in which the banks don't want to deal with people unless they have money, something to invest. Everybody else can go to the cheque-cashing outlet and get gouged even worse than they would at the bank. This loophole was left open so the banks could still turn people away.
Mr. Normand Lafrenière (President, Canadian Association of Mutual Insurance Companies):
Thank you, Mr. Chairman.
CAMIC commends the government for tabling a review of the financial services legislation that maintains unchanged subsection 416(2) of the Bank Act that prohibits the retailing of insurance in the branches of a bank. In our view, this will maintain the level playing field in which the insurance industry currently operates.
With respect to the amendments brought to the Insurance Companies Act, CAMIC concurs with all the amendments that specifically target mutual insurance companies, i.e., the amendment to paragraph 449(2)(c), which clarifies the exemption from the Property and Casualty Insurance Compensation Corporation afforded to mutual insurance companies' members of the fire mutuals guarantee fund.
We also support the amendment brought to subsection 346(3) of the Insurance Companies Act to recognize the audit work done by an actuary who is not the actuary of the company. While this amendment is brought to reflect the new audit guidelines set by the Institute of Chartered Accountants, it also serves provincially licensed mutual insurance companies that often do not have an appointed actuary and will simply depend on the actuary of the audit team to ascertain a company's liabilities.
Our only disagreement is on not seeing any measure requiring property and casualty insurers to set up catastrophe reserves. Because of our lack of action on this front, many foreign companies are better prepared than Canadian companies to face major natural or man-made catastrophes.
Foreign-owned property and casualty insurance companies doing business in Canada often benefit from taxation provisions in other countries that allow them to set aside reserves, free from income tax, to meet their obligations in cases of labour catastrophes. For its part, the Canadian system considers as profit in any given year sums of money received but not reserved for the payment of a specific claim.
To establish a level playing field with their foreign competitors, many Canadian-based companies have resorted to establishing what are called offshore companies. Through these offshore companies, they can obtain tax advantages equivalent to those enjoyed by many foreign companies doing business in Canada. For their part, mutual insurers do not resort to the offshore companies' concept and find themselves at a tax disadvantage with many of their foreign-owned and Canadian-owned competitors.
The solution lies in allowing the establishment of a man-made and natural catastrophe reserve in Canada that is free from income tax, similar to the catastrophe reserve concept implemented in many European countries and in Japan and in tune with the commitment of the U.S. federal government to help should a major terrorist or man-made catastrophe occur in the U.S. Our catastrophe reserve proposal is self-financing, as the investment income generated by these reserves would be taxable.
We also regret the fact that nothing is being done to help create mutual insurance companies in Canada. Fifty years have gone by since the last mutual insurance company was created. We should reassess the minimum amount of capital needed for setting up a mutual insurance company, if we want to help the future growth of this kind of investment.
Moreover, the mutual insurance companies will be holding a conference on the modern state of the mutual principle all day tomorrow. There will be a reception at the end of the day, and we would appreciate it very much if you, honourable members, could come to join us tomorrow at 4:00 p.m., at the Château Laurier.
This concludes my presentation. Thank you very much.
Mr. Jim Callon (Acting Commissioner, Financial Consumer Agency of Canada):
Good afternoon, Mr. Chairman. I thank you and the Finance Committee for inviting the Financial Consumer Agency of Canada, the FCAC. As we are short of time, and as the chairman requested, I will make my opening statement as brief as I can.
This afternoon, I will discuss the mandate and the role of the agency, in the context of Bill C-37. Afterward, I will be pleased to answer all of your questions.
FCAC's mandate is set out in the FCAC Act and can be summed up succinctly by saying that we protect and inform Canadians with respect to the financial sector. Parliament, in establishing the financial consumer protection framework, clearly separated the concept of individual consumer redress from the enforcement of the law. The ombud services were in part a response to Parliament's desire that all financial institutions belong to an independent third-party dispute resolution body that would provide redress for individual consumers, based on fairness.
Rather, FCAC focuses on law enforcement, addressing issues and making improvements in the public interest. As a market-conduct regulator, our ultimate objective is to encourage a fair and competitive marketplace. We make sure that financial institutions meet their obligations to consumers, as outlined in the federal statutes. In some cases, a compliance decision can affect hundreds of thousands of consumers. When we deal with individual consumers seeking redress, we provide them with the tools and information they need and we'll refer them to the complaint-handling processes provided by their financial institution.
Where regulatory action is required, the agency undertakes investigations and examinations. When addressing problems with compliance with the law, the legislation provides the commissioner with options in terms of how best to address the matter. The commissioner may enter into a binding compliance agreement that requires financial institutions to take actions to improve their level of compliance with the law. The commissioner may initiate a legal process for determining if an institution has committed a violation, and, where appropriate, impose an administrative penalty up to $100,000. That decision is subject to court appeal. And if you note, Bill C-37 proposes to increase this to $200,000. After finding a violation, the commissioner has the discretion to publicize the nature of the violation, the name of the person who committed it, and the amount of the penalty imposed.
With respect to our consumer education mandate, FCAC informs consumers about their rights and responsibilities when dealing with financial institutions. We provide objective and timely information to help Canadians understand and shop around for day-to-day financial services and products. Our publications and online interactive tools provide information on financial products and services such as credit cards, mortgages, and bank accounts. By addressing the information gaps that exist in the marketplace, FCAC provides Canadians with the tools they need to help them navigate the financial marketplace.
Demand for our services is growing. Every year, thousands of Canadians come to us to obtain information or to register a complaint about a financial institution. Since 2001 FCAC has received more than 123,000 phone calls, e-mails, and letters from Canadians. Last year, in 2005-06, we distributed more than 450,000 publications across the country. Our website has become one of Canada's best sources of objective, up-to-date information on financial products and services. Since 2002 the number of visits to our website has increased by 69% each year. This year our website has already reached 1.1 million visits for the first nine months of the year. Through our outreach program, FCAC is working closely with a growing number of partners to increase our reach and awareness of the agency among consumers. For example, this past year our partnership with Canada Revenue Agency helped us reach over six million consumers directly through inserts with Government of Canada cheques.
Finally, with respect to Bill C-37, FCAC will be responsible for enforcing all the key consumer-related changes that are being proposed to the current legislative framework. And in keeping with the agency's broad consumer-education mandate, the FCAC will continue to be proactive in informing consumers of the changes being made by this broader legislative review.
In closing, I would like to thank you for the opportunity to appear before the committee. I look forward to answering any of your questions.
Mr. Richard Bouchard (As an Individual):
Good afternoon, Mr. Chairman, ladies and gentlemen of the committee. Thank you for giving me this opportunity as a citizen to share my fears with you, my fears about Bill C-37 and its repercussions on consumer protection.
First of all, I would like to explain how I myself went through the existing complaints processing system. To make a long story short, after an issue with the CIBC, I filed a complaint on October 4, 2005, in accordance with the steps described on the CIBC website. Their internal process took me as far as the CIBC ombudsman's office, who told me that he could do nothing for me.
In the meantime, I had notified both the President and Vice-President of the CIBC that I had identified failures to comply with the code of conduct and compliance, under the Sarbanes-Oxley Act. The initial idea was to notify the persons in question so that they could intervene. There was failure to comply with the code of conduct, but obviously that is my opinion.
Since nothing was happening, on December 2, I finally demanded that my file be transferred to the OBSI, the Ombudsman for Banking Services and Investments. The OBSI did not acknowledge receiving my file until December 21. On January 24, the OBSI notified me that he would investigate. Between December 21 and January 24, I was given no information at all. The OBSI conducted his investigation. On receiving the OBSI's draft recommendation, which included an investigation report, I contacted Mr. McCaughey, the President of the CIBC, once again to tell him that there was now evidence that my allegations were well-founded. I asked him what he planned to do. Mr. McCaughey answered, and I quote: "I regret to tell you that you have used all the available complaints management resources. This is the last answer you will receive on the issue."
At that point, I had no choice: either I had to accept the OBSI's recommendation, or declare personal bankruptcy and start again from scratch. The company was already bankrupt. At present, no regulations have come into play with the CIBC. During the entire affair, which has been going on since October 4, 2005, I have been keenly interested in the concept of self-regulation. Basically, voluntary codes are codes of self-regulation.
Allow me to summarize what I have discovered. In the McGill Law Journal, Marc Lacoursière, an attorney and professor at the Université Laval Faculty of Law, said, and I quote:
||Financial institutions, which have become involved in the formulation of these principles...
These principles are the code of conduct.
||...seem to shirk off their responsibilities rather easily. In view of the banking transactions that occur overseas, the theory of self-regulation is difficult to impose. Any foreign bank that provides banking services over the Internet, with no physical link to Canada can easily circumvent the Banking Act and its numerous limitations [...] since there is no way to enforce the legislation, foreign banks may well not be interested in complying with the organization's guidelines.
Mr. Lacoursière also refers to another European study carried out with a view to implementing ombudsman systems in the EU. The study was conducted by Lex Fori, an international law firm. It concludes:
||Among instruments of "soft law..."
Since self-regulation is considered a form of soft law...
||...some give better results than others. One of those is co-regulation, in the broader sense, which implies the involvement of public authorities in addition to the involvement of professionals and consumers. By contrast, self-regulation has shown itself, with a few notable exceptions, to be the most frequently disappointing instrument insofar as it is frequently no more than a list of good intentions.
That is the conclusion. Those studies are not new. And as a consumer, I can conclude that the conduct of banks has been reported to authorities for a long time now, but that the banks do not seem very interested in protecting consumers.
The Minister of Finance, during the second debate—
Mrs. Julie Dickson (Acting Superintendent, Financial Institutions, Office of the Superintendent of Financial Institutions Canada):
Good afternoon, Mr. Chairman and members of the committee.
Thank you for inviting the Office of the Superintendent of Financial Institutions (OSFI) to appear before you today to discuss Bill C-37.
The Office of the Superintendent of Financial Institutions is the prudential regulator of federal financial institutions. Prudential means we are concerned with the safety and soundness of financial institutions, which contributes to the overall stability of the financial system. Our mandate does not extend to market conduct or consumer-related issues, which are the responsibility of other organizations both at the federal and provincial levels.
In short, OSFI supervises federal financial institutions to determine whether they are in sound financial condition and complying with legislation. We are required to advise promptly in situations where there are material deficiencies affecting safety and soundness, and to take, or require management and boards of directors to take, necessary corrective measures in an expeditious fashion.
We also promote the adoption of policies and procedures to control and manage risk with financial institutions, and monitor and evaluate systemwide or sectoral issues that may impact institutions negatively.
Regular legislative reviews provide an opportunity to ensure that Canadian legislation promotes an efficient, competitive, and safe financial services sector. In any legislative review, OSFI is interested in the following: first, whether proposed legislative changes increase risk to financial institutions, thus creating major prudential concerns; second, whether the legislation is clear, because we administer compliance with most provisions of the act; third, whether OSFI has the authority it needs to act when necessary, so whether the prudential tool kit needs to be enhanced; and lastly, whether the regulatory burden can be eliminated in cases where it is clear that legislative requirements, which may have been necessary at one point in time, are no longer necessary from a prudential perspective.
In our judgment, Bill C-37 does not increase risk to the financial institutions we regulate. Further, Canada already has a framework with prudential tools that are consistent with international norms for strong regulatory regimes, thanks to changes introduced in previous legislative reviews.
As a result, OSFI did not seek significant new prudential measures as part of this review. However, there are several elements in Bill C-37 that would help us to be more effective, because they would bring clarity to certain areas of the act that we administer, and would eliminate some legislative requirements that are no longer considered useful, thus cutting red tape and regulatory burden.
A strong and efficient regulatory framework, one in which Canadians and those outside Canada can have a high degree of confidence, is critical to Canada's economic performance. In the opinion of OSFI, passage of Bill C-37 would help contribute to that confidence.
I would be pleased to answer any questions that the committee members may have.
Mr. Guy Legault (President and Chief Executive Officer, Canadian Payments Association):
Mr. Chairman, I would like to thank you as well as the other members of the committee for giving me the opportunity to meet with you today.
Before I start, I would like on behalf of the Canadian Payments Association to commend the Department of Finance for all its work done in respect of this bill, notably the draft amendments to the Bills of Exchange Act and the Canadian Payments Act.
The CPA is a member-based organization created by an act of Parliament in 1980. Today we have 120 members, including the Bank of Canada, chartered banks, trust and loan companies, credit union and caisses populaires central offices, and other deposit-taking institutions.
The CPA's mandate is to establish and operate Canada's national clearing and settlement system, a system vital to the Canadian economy. However, the CPA does not see or physically touch any individual payment in the clearing system; rather, it establishes the common framework of rules and procedures that govern the daily exchange of payments between financial institutions. At the end of each day, CPA systems determine the net positions between financial institutions, so that they are able to settle across their accounts at the Bank of Canada.
The Canadian Payments Act also establishes public policy objectives for the association, namely the promotion of a safe, sound, and efficient clearing and settlement system that takes into account the interests of its users. Indeed, the CPA has a stakeholder advisory council composed of 20 payment-system users and service providers, including consumer groups, industry associations, and government, to name a few.
The CPA is governed by a 16-person board of directors, including three directors appointed by the Minister of Finance; the chair; an appointee of the Bank of Canada; and the remainder appointed by members. The CPA is under the oversight of the Minister of Finance, who has disapproval powers over all of our rules. In addition, the Bank of Canada has oversight over our large-value transfer system, which has been designated as systemically important by the governor.
Despite the availability of new payment services and technologies, paper cheques remain a very convenient means of payment for Canadians and businesses, resulting in approximately five million cheques being physically transported and exchanged between financial institutions each business day.
The modernization of the current cheque-clearing process through the use of cheque-imaging technology will continue to support this vital payment instrument for Canadians.
Image-based clearing will allow for electronic cheque clearing, which will enhance the speed and efficiency of the cheque clearing system. It will also make the clearing system more robust by reducing its dependence on transportation networks and its vulnerability to related delays. Moreover, this modernization of Canada's cheque clearing system will allow it to keep pace with an international shift towards electronic clearing processes for cheques, particularly those in the United States and in France.
Imaging and electronic clearing of cheques will also help in the fight against fraud. Image-based clearing will shorten the clearing cycle, reducing the window of time that cheque fraudsters generally exploit. It will help financial institutions and their customers detect fraud attempts faster and improve their chances of preventing loss. It will also enable enhancements to the automated systems and tools that already account for the majority of fraud detection today. Further, to ensure integrity and privacy of images throughout their life cycle, a framework for security and a sound audit trail has been developed.
To facilitate a smooth transition to the cheque-imaging environment, the CPA and its members have been consulting broadly with a wide range of stakeholders, including consumer groups, large and small business organizations, law enforcement agencies, auditing bodies, the legal community, and service providers.
Further, the response from credit union consumers and businesses that have been receiving image-based services for some time has been very positive. Among the benefits most frequently cited by customers are more convenient and efficient record-keeping, easier account reconciliation, and more timely access to information about cheques.
In conclusion, we are very pleased overall with the proposals put forward by the government in setting out the legislative framework to support the cheque imaging initiative and to improve the association's governance and operations through amendments to the Bills of Exchange Act and the Canadian Payments Act.
I understand there's been some discussion regarding electronic payments and bill payments at this committee recently. I recognize that these matters fall outside of the scope of Bill C-37's review. My colleagues and I, however, would be happy to come back at a future date to address any issues you many have.
I thank you and I am now ready to answer your questions.
Mr. Guy Legault:
If you don't mind, I will clarify the current system and then the system under cheque imaging.
Under the current system, a cheque may have to go through ten transportation legs, one way, to the branch where it was drawn upon. You can imagine if it goes from Whitehorse to St. John's, it has to go by truck to the airport, it has to be flown to their processing centre in Vancouver, and so on. Then if there are no funds to pay the cheque, the pay/no pay decision is made at the branch, and it has to go the reverse way. So it's a great way to accumulate air miles, but it takes some time. It can take anywhere between seven and ten days in the current environment.
That's why with cheque imaging we're going to drastically reduce that time. We think that time is going to be reduced up to roughly four days. We still have to transport the cheque for the first leg by truck and by plane to the processing centre, but then after that it will be truncated and imaged, and everything else after that will happen electronically. However, it still then has to reach a branch, it still needs 24 hours to make the pay/no pay decision, and then potentially return as well. The return will also be done electronically; however, you need all the linkages between the various systems of the various financial institutions. As you may know, we also have a three-tier system, where we have direct clearers and indirect clearers.
All of that being said, we think it could easily take up to four days. If I can then link it back to the discussion on holds on cheques, you have to realize that the clearing is only one aspect of the financial institution's decision regarding holds, because it's also very much a credit decision.
Regarding the percentage that has been quoted, of 98% of cheques being cleared overnight, I don't know where that statistic comes from. This is really just my own take on it, but there may be a confusion with a study we did many years ago where we detected that only 2% of accounts had a hold on them on a daily basis. That's basically because financial institutions give provisional credit to their customers. Therefore I'm afraid that maybe some confusion has been occurring regarding the data, because we don't have anything to confirm that percentage.
Mr. Richard Bouchard:
Yes. When I called the FCAC, I was told to file a complaint, which I did. However, this has been extremely frustrating.
On the first page, the FCAC describes its mandate as follows, "was established to protect consumers...". The Grand dictionnaire terminologique de l'Office québécois de la langue française defines consumer protection as follows:
||Series of provisions intended to ensure and improve the respect of consumer rights. These provisions seek mainly to protect consumers in their contractual relationships with merchants, by offsetting inequality with respect to consumer rights and bargaining powers.
The FCAC is founded on that definition. After numerous appeals and arguments, I was told that I would need to file a request under the Access to Information Act in order to consult my file. So I did. Finally, the charming woman in charge of my file, Ms. Charette, told me that she was aware of my file and that the agency had not decided to investigate.
I then learned that the agency would only address this issue if it received so many thousands of complaints on that matter. However, I wanted the agency to confirm whether I was right or not. If I say that a company has violated its code of conduct, I want confirmation of the violation. I did not ask for any other information. Finally, I was told this was none of my business. It is extremely frustrating.
Earlier, Mr. Callon explained his mandate. He is convinced that if the agency was called the financial institution monitoring agency, I wouldn't have asked any questions. But, it is called the Financial Consumer Agency of Canada. There is something wrong here.
Mr. Normand Lafrenière:
It would be that everybody would be treated the same way. We're not asking to be more competitive, we're asking to play on a level playing field.
The way to do so is to allow everybody to set up a reserve to better face catastrophes. It would be an amount, maybe 5% or 10% of profits, that they could put aside. That money would be put aside and taken out only when major catastrophes occur. It would be up to the government to decide what a major catastrophe is. Basically, that money is set aside to avoid situations where we have three years backwards and seven years forward of taking money out of profits in order to pay for catastrophes.
Right now, this is the situation. If you don't have a catastrophe or a loss in a given year, your profits are considered as profits. We know that over a ten- to twenty-year period, we're bound to have a catastrophe. We don't have the money set aside to pay for that catastrophe.
I'm not saying that financial institutions are weak. OSFI and our provincial governments are doing a very good job of making sure we are solid. But we don't have the kind of solidity, if you will, that foreign companies do, and even Canadian companies with offshore companies do.
Ms. Judy Wasylycia-Leis:
Thank you very much.
I'm sorry I wasn't here for everyone's presentation before. I had to run off and deal with a panel on the next budget.
I did hear your presentation, Mr. Callon. I do want to focus a lot of my remarks around the Financial Consumer Agency of Canada, which, as you've mentioned, is a relatively new entity that came about as a result of the previous review of the Bank Act and that was put in place as a vehicle to deal with consumer issues and to uphold the act, in terms of clients of the banks and other financial institutions.
I think if there are any concerns today about this whole area, it's not so much with the work of the FCAC as with the legislation that guides you. I think that's why we're disappointed that the proposed legislation today doesn't have some more teeth in it. From my experience in dealing with bank closures, of which we've had many, there are really no teeth in the act to force banks to actually consult with the community, to hear the concerns of the community, to provide advanced information, to have a due process around this.
Mr. Norlock and I were talking about this earlier. I have the case of an inner city riding that lost, in the major part of that riding, all of its bank branches. The citizens fought back tooth and nail, but we couldn't stop a single bank closure. In the end, with the help of FCAC, we did force the last bank to leave, CIBC, to have a more meaningful meeting. That didn't stop the bank from closing, although they did, I must say, put some money in to study an alternative financial services centre, which is now a reality in Winnipeg.
That's the good news, that consumers and citizens out there are ready to stand up for some rights in this whole area, but this legislation isn't going to help them one bit.
Here is my question to you, Jim. We are going to try to move an amendment that would at least make the holding of public meetings around bank branch closures mandatory. Do you think that's possible within this bill? Secondly, will it help in terms of some of the issues you're dealing with on a day-to-day basis?
Ms. Judy Wasylycia-Leis:
Right, and the difficulty is that the banks are under no obligation to disclose any information about the profitability of that bank branch. So it really comes full circle, every time, on this issue--that is, legislative provisions that require transparency and accountability on the part of these financial institutions. That would make your agency a lot more effective, and it would give some assurances to consumers and to ordinary citizens that their interests are being protected. The right that Duff Conacher mentioned, which I totally support, the right to access financial services somewhere within one's community, must be upheld. This is not now the case.
So what we've got in Winnipeg North is that all the bank branches get closed, ATMs pop up, and then those ATMs of those banks are sold to private label companies. Then a person has to pay $6 to take out $20, or $30, or $40 of their own money. At private label, white label ATMs, it's as high as $6. And there are no regulations. At any rate, we're going to try to deal with that as well.
Let me ask a question about when it is possible for FCAC to actually prosecute. I understand there was a survey done in 2003, a mystery shopper survey of 1,600 bank branches, and you actually found that there were more than 800 bank branches in violation of the Bank Act. The reasons ranged from violating the legal requirement to post interest rate information, to violating the requirement to have a clear publicly available on holds on cheques, violating the requirement to have their public accountability statements publicly available, violating the requirement to make publicly available information on interest rates and loans, violating the prohibition on tied selling, and so on.
But as I understand it, no prosecutions ever happened. Then, I understand, in fact your agency then tried to reduce the areas for which you were surveying so that in fact you didn't get the same numbers again.
I think we need to have some clarification on that, to know what you're able to do when there are violations, in any one of these areas; whether or not you continue to survey on all those issues; and what we need to do, if you can't do it, to beef up the legislation to make it possible to go after banks that actually condone and allow these violations of very clear measures under the Bank Act.
Mr. Jim Callon:
I can assure you that simply using a hammer doesn't get you very far. We have uncovered some significant issues that we've been able to address with the institutions, through sitting down across the table and negotiating an agreement and improving the level of compliance. For example, we audited the penalty clauses.
We as an agency have a call centre. We monitor the trends that happen at the call centre on a weekly basis, and where we notice there's a problem, we start inquiring further. In this particular case, the example I used is the mortgages and penalty clauses. We noticed that consumers were complaining, not just about the amount, but they just didn't understand what was happening. On our own, we decided we would ask all the large banks to file all their mortgage documents--English and French--with us.
You can imagine there were hundreds of documents we ended up going through.
Then, in reviewing those documents, we found a significant number of errors in terms of how the disclosure was made. You can tie yourself up as a small agency in the courts for years or you can sit down with the industry, with a firm hand, and demand that changes get made to the documents and within a certain timeframe. The industry did that.
Almost every mortgage document that we found has been revised over the last two years. We've done that in terms of cost-of-borrowing issues. We also did a mystery shop dealing with access to banking, where, although it was an improved performance from previous measures, it still wasn't good enough in terms of what we consider is the level of compliance that we expect.
They have sat down and they have committed to action plans in terms of improving training at the branch, in terms of providing better tools that branch personnel can refer to with respect to, for example, demanding ID of consumers. We'll take that approach where we can see discernable progress in improving the marketplace.
The Vice-Chair (Mr. Massimo Pacetti):
Thank you, Ms. Wasylycia-Leis.
If I can end there, if we can get ratings on restaurants, wines, and all types of different consumer products, I'm sure we can do that with the banks. If you don't want to name them, at least rank them. We get it with the credit cards, so I think that would be something that should be considered.
If you are able to provide the information Ms. Wasylycia-Leis asked for, provide it through the clerk's office. I think all members would appreciate it.
Again, members, if we can get the amendments tomorrow, we'll see you tomorrow for clause-by-clause at 11 o'clock.
There will be food.
Witnesses, thank you very much for taking time out of your day. It was very interesting.
The meeting is adjourned.