STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, October 17, 2000

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[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order and welcome everyone here this afternoon. As you all know, we're dealing with Bill C-38.

We have the pleasure to have with us, from the Insurance Brokers Association of Canada, Kevin Umlah, president, and Francesca Iacurto, director of public affairs; from the Investment Funds Institute of Canada, John Mountain, vice-president, regulation; and from the Public Interest Advocacy Centre, Angie Barrados, policy analyst, and Camille Ainslie, researcher. Welcome.

Many of you have appeared before us, so you know you have approximately five to seven minutes to make your presentation. Thereafter we'll engage in a question and answer session.

We'll begin with Kevin.

Ms. Francesca Iacurto (Director, Public Affairs, Insurance Brokers Association of Canada): Good afternoon, Mr. Chair and committee members. On behalf of the Insurance Brokers Association of Canada, we would like to thank you for the opportunity to present our views on the federal government's new financial services legislation, Bill C-38.

[Translation]

I'm Francesca Iacurto and I'm the Director of Public Affairs for the Insurance Brokers Association of Canada. Our president, Kevin Umlah, who's also an insurance broker in the Halifax area is with me.

The IBAC is the national professional organization representing the 11 provincial and regional associations of property and casualty insurance brokers in Canada. These associations represent some 28,400 independent insurance brokers all across the country. Most of them work in small and medium-sized businesses.

Insurance brokers are the main distribution network for property and casualty insurance companies. Property and casualty insurance mainly includes movables, automobiles and risks other than life insurance.

Insurance brokers offer impartial advice to their clients concerning their insurance needs, interpret for them the complex legal documents that insurance policies are and represent them before the insurance companies when emergencies occur.

[English]

I will now turn to Mr. Umlah, who will continue our presentation.

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Mr. Kevin Umlah (President, Insurance Brokers Association of Canada): Thank you, Francesca, and Mr. Chairman.

As this committee is no doubt aware, independent insurance brokers, although provincially regulated, have a large stake in federal reforms to the financial services sector. Not only do they work with and provide the services of federally chartered insurance companies to consumers, but they also compete directly with other federally regulated insurers and financial institutions that provide insurance. In view of this, IBAC has actively participated in the lengthy review process leading up to this bill and has made representations at every available opportunity.

The perspective of independent insurance brokers on the reforms to the financial services sector is unique and threefold. As members of the SME community and taxpayers, we are concerned about Canada's financial services sector and its contribution to our country's economic growth and productivity. As consumers of many products and services offered by financial institutions, we are concerned about price, accessibility, and consumer protection rights, particularly as they relate to tied selling. As members of the SME community and the principal distribution channel for property and casualty companies, we seek competition on a level playing field with other players in the financial services industry.

Our summary position on Bill C-38 is that it is a very balanced piece of legislation, which we fully support. We believe it achieves the difficult task of effectively addressing the many different and sometimes competing stakeholder interests in the financial services sector. We also believe this bill will provide the necessary measures to increase the viability and competitiveness of the insurance industry and Canada's financial services sector as a whole.

Our key recommendation with respect to this bill is therefore that it be passed as quickly as possible so that its considerable consumer and industry benefits can begin to take effect.

Before I go on to offer IBAC's views on key areas of interest, I will take this opportunity to express our deep gratitude for this government's resolve to proceed with the reforms contained in this legislation. We also sincerely thank the many members of Parliament across all parties who listened to the concerns of independent insurance brokers and carried them forward during the lengthy review process that culminated in this bill. Thank you to all.

In terms of specifics, we are most pleased that this bill effectively addresses and brings closure to the longstanding concerns of independent insurance brokers in two important areas, namely bank sales of insurance and tied selling. I will briefly discuss each of these in turn.

First, we believe Bill C-38 should be most praised for what it does not do, which is to change the rules governing bank sales of insurance at the retail level. Our summary review is that the existing restrictions in this area benefit consumers by providing them with greater choice, and the property and casualty sector as a whole by maximizing competition. There is therefore no doubt that, primarily for what it does not contain, Bill C-38 is instrumental to the continued strength of our sector and is wholeheartedly supported.

Second, as this committee is no doubt aware, we have longstanding concerns with the ability of banks to tie the provision of certain services, insurance in particular, to extensions of credit or other products and services. Tied selling is a practice that adversely affects competition, as consumers no longer base their purchasing decisions on factors of price or product attributes. It can result from coercion by a seller or from a customer's perception that they might have received preferred consideration by volunteering to accept another product or service from the same seller. Either situation should not be tolerated.

While the 1998 amendment to Bank Act prohibiting coercive tied selling in relation to loans was a good first step, the extension of this prohibition to all other bank products and services will ensure that competition between banks, providers of insurance, and other financial institutions is on a level playing field. Consumers will also greatly benefit from the requirement that the prohibition on coercive tied selling be disclosed to them.

All in all, we are very pleased with the tied selling provisions proposed in Bill C-38 and would recommend that this committee not consider any changes to the wording.

Before concluding, I will also mention that we fully support the five-year sunset provision for this legislation, largely because it will provide a welcome moratorium on the debate over the issues to which this legislation is attempting to bring closure. At the risk of putting the cart before the horse, once the bill becomes law we would strongly urge that the federal government not formally reopen or reconsider any parts of the legislation unless absolutely necessary.

With respect to the eventual review of the prohibition on bank sales of insurance, we fully support the committee's recommendation, which was stated in the 1998 report entitled The Future Starts Now. You will recall that this matter was only to be reconsidered once the results of the future evaluation of the consumer protection regime proposed in this bill were known.

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Keeping the debate on bank sales of insurance closed for several years will provide investors with market certainty and a stable policy framework within which sound business decisions can be made. It will also enable our industry to continue to serve as a model for greater competition in the financial services sector. Indeed, the property and casualty insurance industry, with its multitude of players, is an excellent example of how well abundant and fair competition, more choice, innovation, and excellent service can benefit Canadian consumers and the economy at large.

To conclude, I will reiterate that we fully support Bill C-38 and recommend that priority be assigned to passing it quickly and with as few amendments as possible. While we realize that technical amendments to the legislation will be necessary, we strongly urge this committee not to consider any amendments that would be contrary to or inconsistent with the June 1999 white paper, particularly in relation to the areas of bank sales of insurance and tied selling.

Once again, IBAC commends the federal government and this committee for its receptiveness to our concerns over the years and for introducing this quality piece of legislation.

We thank you for the opportunity to appear before you today, and we would be pleased to answer any questions you may have. Thank you.

The Chair: Thank you, Mr. Iacurto.

We'll now hear from the Investment Funds Institute of Canada, Mr. John Mountain.

Mr. John Mountain (Vice-President, Regulation, Investment Funds Institute of Canada): Thank you very much.

The Investment Funds Institute of Canada wishes to thank the committee for the opportunity to comment on Bill C-38.

We appreciate that with all the talk of the upcoming election, you may have more interesting things to do than to spend time thinking about a technical bill. But we do appreciate your attention.

This bill represents an important stage in the review process that has been ongoing steadily since the last major changes to the Bank Act in 1992, and our industry welcomes it.

Let me introduce IFIC. We are the national association of the Canadian mutual funds industry. As of the end of August of this year, IFIC's membership included 83 mutual fund managers who manage 1,468 publicly offered mutual funds holding in the aggregate $438 billion in assets. These assets represent nearly 100% of all investments in Canadian mutual funds. IFIC also represents 144 firms that distribute mutual funds to retail investors and 76 affiliate members representing law, accounting, and other professional firms providing service to the industry.

On behalf of our membership we would like to emphasize our strong support for this legislative package. Our members believe it is an important step forward in improving the financial institutional framework for all Canadians. We think it is extremely important that this legislation move forward as quickly as possible. If an election occurs prior to the passage of this bill, we strongly urge the new government to pass it as soon as possible.

In our presentation today, Mr. Chairman, we would like to focus our comments on the issue of the Canadian Payments Association. We believe that expanding membership in the association is a wise step. It reflects the rapidly evolving nature of the financial services sector and should serve to strengthen the basic component of our economy's infrastructure.

The first issue I would like to discuss is the membership requirements. IFIC is pleased to see that money market mutual funds appear on the list of potential Canadian Payments Association members found in proposed paragraph 4(2)(h) of the bill. We are also pleased that our members constitute a class, class (d), in proposed paragraph 9(3)(d), for the purpose of electing directors to the board from representatives named by the members of our class.

IFIC's only concern with the membership provisions at this point is with the requirements for membership that will be set out in regulation. We trust that these requirements will be such that they will yield a class of members and representatives truly able to speak for the interests of money market mutual funds.

Our second point, Mr. Chairman, is governance of the association. It is a more general concern and involves what we would call the “tenor” of the Canadian Payments Association. It will be important for this new expanded association of financial service providers and its various committees to work collaboratively. A spirit of trust and cooperation will have to reign among all those contributing to the goals of the association. For that to occur it will be important that the association as a whole be guaranteed a certain independence in its deliberations. It would be unfortunate if such a key component of our economy became needlessly politicized.

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In this regard, we would like to draw the committee's attention to three features of the new association that do have the potential for frustrating the emergence of a collaborative culture: first, the appointment directly by the minister of three non-member representatives to the 16-person board; second, the appointment “in consultation with the Minister” of 18 of the 20 members of the stakeholder advisory council; third, the right of the minister not only to delay or disallow any bylaw, rule, or standard of the CPA for the sake of the public interest, which is reasonable, but also to issue positive directives to the association obliging it to make certain bylaws, rules, or standards.

Given the new dynamics of an expanded membership, IFIC believes these three provisions are excessive. Each could be curtailed while at the same time preserving the minister's ultimate and heavy responsibility for the safety and soundness of the payment systems. Combined, we are afraid that these provisions constitute a vote of non-confidence in the ability of financial service providers, under the chairmanship of the Bank of Canada, to regulate the payment systems on their own.

One of the association's explicit duties is to take into account the interests of users, a goal likely to be achieved as a result of the competitive mix around the new board table. At the same time, nothing should be done to dampen the full and committed participation of all members. An arm's-length degree of independence would foster collaboration as well as generating the necessary leadership to tackle changing conditions.

IFIC does not recall that so much discretionary power in the hands of the minister was ever contemplated by the Bank of Canada and the Department of Finance in their discussion paper on governance of the association published in December 1997.

We would encourage members of the committee to canvass other financial service providers for their views on the governance of the association before making the report to the House. If at that point the committee still believes amendments are not necessary, we would hope that the committee would indicate in its report the nature of our concerns and that they would be taken into consideration by the government when it drafts its regulations.

Our third point is status of designated payment systems. While the minister is given considerable discretionary power to direct the affairs of any payment system he or she so designates, it is not clear from the text of the bill when a payment system will be designated and how such a designated system will interact with the members of the Canadian Payments Association. For the moment, the status of designated payment systems appears to be in limbo.

Finally, regarding the upcoming regulations, in addition to the requirements that money market mutual funds must satisfy to become members of the CPA, there are other key elements of the governance structure that remain to be determined by regulation: the size and composition of the board, the number of directors to be elected from each class of members, the number of votes a member is entitled to cast for the election of directors, and the dues to be paid by each member.

Passage of Bill C-38 is only the penultimate step in what has been a long process. For us and for all involved, as either providers or users of payment systems, those upcoming regulations will be critical. Any direction the committee can give to the government in the spirit of our comments today would be greatly appreciated.

Thank you for your attention. We look forward to answering any questions you may have.

The Chair: Thank you very much, Mr. Mountain.

We'll now hear from the Public Interest Advocacy Centre, Ms. Angie Barrados, policy analyst.

Ms. Angie Barrados (Policy Analyst, Public Interest Advocacy Centre): Thank you very much for inviting us to present our views on Bill C-38 before the committee.

First I'll just say a few words about the Public Interest Advocacy Centre, or PIAC. PIAC is a non-profit organization that provides legal services and research to Canadian consumers and the organizations that represent them. Our work primarily concerns important public services, including telecommunications, broadcasting, energy, and of course financial services. PIAC has a national board of directors and members that include individuals, groups, and organizations representing 2.5 million Canadians.

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Like several other consumer organizations, we have been following the financial sector reform process closely and have advocated strongly for greater consumer protection in the sector. We are generally very pleased with the results of the reform process and support the consumer-oriented provisions of Bill C-38. As good as the bill is for consumers, though, there are several important gaps in its provisions. The committee actually has the chance to rectify these gaps, so I would urge you to seize this opportunity.

Today I'll draw your attention to three main points, the first of which is rural bank branch closures.

PIAC recently published a study on rural bank branch closures. In the study we determined that in the 10-year period between 1989 and 1998, about 45% of rural bank branches had closed. Since 1998, many more branch closures have been announced. The situation therefore is considerably worse now than when the task force on the future of the Canadian financial services sector published its recommendations, and this is why we feel that additional measures to address the problem should be considered for the bill.

When a bank branch closes in a small town, it causes difficulties for consumers and businesses in the entire area, who are then faced with having to travel long distances to do their banking. I'm sure some of you are aware of this problem. Small towns tend to revolve around the gas station, the local shop, the post office, and the bank. Once the bank closes, the shop and the gas station may be next, and then who will want to stay in the town? Obviously, it's a very hard situation on these communities, and recently it has been happening more and more often.

When we published our report, one comment I heard many times was that it's nice to know at least someone in Ottawa cares about what's happening out here. So I'd like to urge the members of this committee also to become people in Ottawa who care about the fate of the small communities all across Canada. To that end, we have several practical recommendations that are not overly interventionist that would address the problem.

First of all, keep a close eye on the problem, which isn't really being done right now. Something that's really important for rural communities is to have access to a bank machine, even if they don't have access to a bank branch, and this isn't being tracked currently.

Track the issues, and then, more than that, make sure in some ways banks are accountable to consumers. Get the information out there, and get the banks to report on what they're doing to solve the problem. If they're not doing enough, then at least consumers will know about it and will be able to make their voices heard.

Provide the know-how to communities that need to organize alternatives to a branch that's closed. Community leaders need to know what might be involved in establishing, say, a credit union branch, or options for post office banking, or other agency arrangements, and what other towns have done in similar situations. Don't leave every town to figure out the whole thing themselves from scratch.

Also, make sure Canada Post's activities in retail banking are actually beneficial to consumers. Post office banking clearly has the potential to enhance rural consumers' access to financial services, but there are important concerns. There's clearly no public interest to be served by Canada Post promoting services that could compete with credit union branches or offering low-quality services such as white-label ATMs.

The second main topic to which I want to draw your attention this afternoon is accountability of the proposed Financial Consumer Agency of Canada that's established by the bill, or the FCAC. We feel that the establishment of the FCAC is a very positive step and definitely key to the overall consumer protection framework. We're quite concerned, however, about some of the details in its enabling provisions. In particular, we would urge the committee to ensure that there's full public reporting of FCAC activities. It's going to be very disappointing for everybody who has been involved in this reform process if the FCAC reports don't really tell us what monitoring has been undertaken and what the results of the monitoring have been.

Secondly, make sure the FCAC has an adequate mandate. The general expectation is that the FCAC will generally oversee consumer matters in the financial services sector, and it should have the mandate to match this expectation. At the very least, clause 3 of the bill should be brought into line with the mandate outlined in the government's white paper.

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Thirdly, make sure a consumer advisory committee is established, and put this in the legislation. The implementation of this legislation depends heavily on regulations, like so many other pieces of legislation. Establishing a consumer advisory committee would put consumers on an equal footing with the industry in the process to develop these regulations by making sure there's a fair, effective way for consumer interests to be heard. Obviously the banking industry has a lot of resources behind it. Consumers don't always have the same resources, so put us on an equal footing with the industry.

The third overall point I'd like to draw to your attention is the issue of holds on cheques. This is one area in which we feel the bill's access provisions could be improved. More and more consumers are going to cheque-cashing outlets to cash their cheques, where they are charged very high fees and don't get the benefits of having a bank account. Why? The main reason is the holds of up to ten days that banks place on many cheques. Most people need their cash right away. Unfortunately, all the other provisions in the bill that promote access to bank services for vulnerable consumers are undermined by these hold policies.

Rather than merely requiring banks to state what their hold policy is, we feel that the bill should actually limit the hold periods. In particular, cheques cashed within a province should be held no longer than two days, and all government cheques, both federal and provincial, should not be held at all.

More detail on our recommendations can be found in the submission we made to this committee this summer.

Thank you very much for the opportunity to address you. I'd be happy to answer any questions.

The Chair: Thank you very much, Ms. Barrados.

You may not see it, but there's a light flashing that means a vote is going to take place in 15 minutes—or 13 minutes now. So we'll probably have a five-minute round of questions, beginning with Mr. Epp.

Mr. Ken Epp (Elk Island, Canadian Alliance): I have a few really quick questions here.

First, to Mr. Mountain, I'm curious about your concerns on the powers of the minister in appointing the representatives to the boards. Why is that? Don't you trust the minister?

Mr. John Mountain: I trust the minister. My concern is if the minister is the ultimate authority in all decisions, the board will not assert its own sense of obligation. I'm not sure I'm describing that accurately, but my concern is that it won't take its role as seriously as I think it should.

Mr. Ken Epp: Okay. Do you think the board, because they're appointed by the minister and therefore, I guess, can be dis-appointed by him, would feel inhibited? Is that what you're suggesting?

Mr. John Mountain: I'm sorry, do you mean the stakeholder advisory committee, or...?

Mr. Ken Epp: Well, both of them. You mentioned this on the stakeholder advisory committee as well as the governing board.

Mr. John Mountain: No, it's more a sense that if the minister has such total authority over every aspect of the board's processes, the board will be essentially rendered nugatory.

Mr. Ken Epp: Okay, but the reason the minister is there is because that is the feed of the people via their government to hold these financial institutions accountable. If you're going to take that away, then all you're going to have is the financial institutions running their own show and they don't have to give a rip about the consumer.

Mr. John Mountain: To be clear, I was not suggesting that the power of the minister be taken away completely. What I was suggesting was that the power to appoint a certain number of the members of the stakeholder advisory committee should be taken away, that the power to appoint anybody to the board itself should not be there, and that the power to tell the board explicitly to create a rule or a standard of a certain type should not be there.

I did say that the minister should have, under the legislation, the power to disallow or disapprove proposed rules, which I would have thought would give him the authority to do what you just said.

Mr. Ken Epp: I'm a little confused there. Maybe I didn't hear you right, but I wrote down in my notes that you don't like the minister's ability to delay or disallow bylaws. I may have misheard that.

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Mr. John Mountain: No, I was telling you what his power was when I came back to what I don't like. I thought I said that I didn't like his ability to force them to make certain bylaws.

Mr. Ken Epp: Okay.

I want to ask the first group, why are you supportive of the five-year sunset provision? You're talking about this bill bringing closure, and it seems to me the five-year sunset provision forces us to open it again at five years. Is there not an inconsistency there?

Mr. Kevin Umlah: I'd suggest that we've been debating most of these issues now for the last 10 or 12 years. Passage of the bill would give us certainly at least a five-year window before these issues are revisited, and we'd certainly appreciate that bit of a breather.

Mr. Ken Epp: Okay.

My time is almost up and we have to run, but to Angie, what is your objection to the post office running basic financial services in rural areas where bank branches have been closed? It seems to me they could provide a valuable service to those communities and fill in exactly the vacuum that's left when the branches close. What is your objection to that?

Ms. Angie Barrados: Actually there is no objection at all. We think it's probably a good idea. It's just that we see there isn't any strategy right now about it, and the credit unions are somewhat concerned that the post office could become a deterrent to opening new credit union branches. A credit union branch is a better alternative than post office service.

The other thing is in Ontario right now the post office is placing the white-label ATMs, which are the non-bank ones that charge additional fees. We are very concerned about that, because they're completely unregulated and they don't offer very good service.

Generally, we would like to see more post office banking, but we'd like it to be done under a strategy that assures that it's in the public interest.

Mr. Ken Epp: In other words, what you would like to see—and just tell me if I'm right or wrong here—is if a branch is closing, they have to give notice. And by the way, some of the others indicated concern about that. This bill addresses closures. They have to give notice of up to six months before they do that.

Ms. Camille Ainslie (Researcher, Public Interest Advocacy Centre): We're concerned about the distribution of closures, and that we won't be made aware of where the closures are happening so that in a rural community it's flagged. This is a bank that's closing in a rural community. At the moment that's not tracked anywhere.

The Canadian Bankers Association says that overall the number of banks are increasing, but what they're failing to accept is that the distribution in rural areas is actually diminished. The banks in rural areas have actually diminished, from the reports we have.

Mr. Ken Epp: So would you be happy if during that time of notice everybody was apprised of this closure? It should be public knowledge, as opposed to being just a secret little notice to the town council or something, and then actual notices being sent out, maybe to adjacent credit unions and others: there's going to be a vacuum here; come and fill it. And if they don't—

Ms. Camille Ainslie: Exactly.

Mr. Ken Epp: —then the post office could do it. You'd like to have that in that sequence.

Ms. Camille Ainslie: Yes.

Ms. Angie Barrados: Basically, what we're saying is the notice provisions are great, but something has to happen. The notice provisions are there for a reason: for the community to be able to organize alternative services.

I've been told there is actually some cabinet directive to the post office, saying that they shouldn't compete with other better services, but we just haven't seen this in public. I think it's very important that we do see something like that.

Ms. Camille Ainslie: In addition, we did commission a survey, and there seems to be some consensus among rural inhabitants that they are concerned about post offices operating as banks. Now, we didn't have the funding to go into that in great detail, and we do feel this is an issue that needs to be addressed.

Mr. Ken Epp: Okay. We probably don't want to see the post office getting into the lending business and mortgage business and stuff like that, but basic cheque-cashing services and so on I think are totally reasonable.

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Ms. Camille Ainslie: That's absolutely it. That's exactly what we're saying. There are issues of confidentiality and training and so on, and unless there's some overall study done we can't pin down the exact issues people in rural areas have with the post office acting as a bank. It's a good idea in principle, but it does need some concerted planning.

Mr. Ken Epp: Thank you, Mr. Chair.

The Chair: Thank you.

On behalf of the committee, I'm sorry, we only have five minutes to get to the House of Commons. I know it's not very far, but we have to be there.

I want to raise an issue I think many people have been talking about. I think Mr. Mountain brought it up: the issue of a possible election call. As a committee, we operate business as usual. But I do want to put on the record that I think Bill C-38 is an extremely important bill for the financial services sector, which I think has been quite patient in waiting for this legislation to actually take hold. When you consider consultation and white papers and reports by a lot of committees, I just want to tell you—and I'm not supposed to talk about hypothetical situations, but I will today—that if an election call takes places, I'm one of those individuals who really thinks that this is an absolute priority bill to be reintroduced. I think it's of extreme importance to not only your sector but indeed the economy. I just want everyone to know that's where I stand on this particular issue.

The meeting is adjourned.