Finance Committee on May 17th, 2006

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

I understand, Mr. Le Pan. Maybe I should just rephrase it. In your opinion, what would be the impact of such a measure on those plans?

[Nicholas Le Pan]

Well, as I said, I think if you would like to hear from the Chief Actuary about the impact and what his estimate is, he's in the process of doing that. Others have been asking. The impact is going to depend on the amount and it's going to depend on the frequency with which it happens, because it takes a lot of money to move the contribution rate. That, again, is going to get into the issue of assumptions he will need to make to provide that kind of evaluation to federal and provincial stakeholders.

I'm really reluctant to express an opinion on that, but I would be happy to have him come here as soon as the committee would like, Mr. Chair.

I'm saying this in part because I and my office have been criticized in the past that we ought to make sure--and I think we do make sure--that we do not in any way get into the actuarial evaluation issues that are dealt with independently by the Chief Actuary and are then subject to peer review and so forth. So I'm really reluctant, unfortunately, Ms. Ablonczy, to get into that.

My office does not have a policy view on this. I want to emphasize that.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

I appreciate that. I, of all people, should appreciate your caution in that.

Let me ask you, then, about the regulatory burden on financial institutions. I hear a lot of that. I think we all do as we meet with financial institutions. I'm sure you hear even more about it. What are you doing? What efforts are being made to reduce this?

[Nicholas Le Pan]

I look at regulatory burden from two perspectives: what are our direct costs, and what are the compliance costs we impose on institutions? Broadly speaking, I think we continue to look for and take action on both sides.

Our direct costs, which we charge back to institutions, are $4 million or $5 million per large institution, which is not a large amount, quite frankly, but we continue to look for ways to keep those under control. It's one of the reasons they rose only 1% from 2005-06 to 2006-07 in the main estimates, because we cut out a bunch of heads, re-engineered some processes, and kept the costs down.

Going forward this coming year, we will not impose any additional costs on the property and casualty industry--and we've told them that--because we've again cut back on our efforts there because the situation has dramatically improved.

With respect to compliance costs, we maintain a very open dialogue with the regulated institutions, and we're looking for initiatives on a regular basis to try to keep compliance costs under control. Over the past couple of years, the biggest initiative has been rationalizing our data requests. As far as data is concerned, I like to say it's like a bush in the garden: if you never prune it, it just does this, because the natural inclination of a regulator is to ask for more.

Starting three years ago, we progressively went through our data requests as we were arranging our processes, and we cut the data requests to the insurance industry by roughly 30%. We are in the process of doing that now for the banking industry. They asked that we defer it by about 18 months because they had other IT initiatives going on. We'll come back to it in about another six or eight months, and I anticipate we'll have a similar kind of cutback. We'll also look at rationalizing how we get data in a more efficient kind of way. So that cuts down compliance costs. There are a range of those kinds of things we can keep doing.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Just quickly along the same line, what's your view of the progress of Basel II on this whole issue of regulatory costs and burden?

[Nicholas Le Pan]

Basel II is a big initiative, and it has a major impact on the biggest financial institutions. Its impact on the small and medium-sized financial institutions is pretty tiny, because Basel II deliberately allows simpler versions for smaller and mid-size institutions, which are essentially very similar to what they're doing today. In our discussion with smaller and mid-size institutions, there has really been no compliance issue in moving from Basel I to Basel II.

For major institutions, there are big investments being made--and appropriately for complex institutions, because they are complex. In many cases, those investments are enhancing their risk measurement and risk management capabilities a lot, and I think that's a good thing for financial stability.

[The Chair, Conservative, Brian Pallister]

Thank you, Madam Ablonczy.

Over to you, Madam Wasylycia-Leis.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Thank you, Mr. Chairperson.

Thank you, Mr. Le Pan, for being here. I think we need to get you back. I don't think we should have you once a year for estimates.

[Nicholas Le Pan]

I told the chair that I'm willing to come on whatever basis the committee would like.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

There are lots of questions. I'm going to start with a couple of specific ones.

I noticed in the news recently a lot of focus on payday lenders. I'm wondering whether, in your role as Canada's chief financial institutions regulator, you would have a view on the need to regulate or have regulations in this area, and whether you have any comments on some of the developments around this--for example, the desire on the part of the Manitoba government to open up the Criminal Code in order to be able to have rates set through the Public Utilities Board.

[Nicholas Le Pan]

There's certainly, as you said, a lot of interest in this territory. It's something that has interested a wide range of people.

OSFI, for better or worse, has no mandate in this area. We have no competence and no mandate because we're a prudential regulator and not a market conduct regulator. So we have had really no involvement in looking at the desirability of particular solutions or anything like that.

I'm well aware that there are ongoing discussions between the federal government and provinces about issues such as the ones you mentioned: opening up the Criminal Code, and are there other things that could be done? Are there more adequate forms of self-regulation with oversight by a consumer-type regulator, such as the FCAC has done federally or other groups do provincially, to look at voluntary codes and see how they're being adhered to? There is a range of issues out there. My office has no involvement in that. If we were asked to, obviously we would, but I'm not really competent to....

I'm well aware that those discussions are ongoing.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Fair enough.

There's another area that has been in the news a lot in the last year, and that is income trusts.

I'm wondering if in fact you have any concerns about damage to banks' reputations and the possibility of civil liability coming out of what many would consider to be unsuitable marketing of income trusts to pensioners.

[Nicholas Le Pan]

Again, our focus is on safety and soundness. The issues around appropriate disclosure of products to customers are either matters for other market conduct regulators federally, like the FCAC, or the securities commissions. We have focused on income trusts, though, from a slightly different perspective, because one of the issues that's out there is whether it would be possible for a financial institution to turn part of their business into an income-trust type of structure. We have focused on thinking through--in concept, at least--in advance of receiving any specific application. We're not talking about a whole bank becoming an income trust, but there are smaller organizations or parts thereof. We've concluded that we would need to look at such an application for approval under the statute case by case. We would use the criteria that are already in the statute. We'd look at the ability of the organization to continue to raise capital if it was an income trust structure, and those types of things. There might be some cases where that would be appropriate, so we haven't ruled that out a priori.

That's really the role we need to play in the income trust area.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

On that, there has been a lot of speculation about major banks converting at least part of their operations into income trusts.

What I'd like you to address is the impact or ramifications in the context of some of the evidence being put forth, such as the Standard & Poor's study, showing that there are some really questionable practices happening, and whether you look at it from that point of view because it has an impact both on the health of a prudential institution and on pensioners income as well.

[Nicholas Le Pan]

We will focus as per our mandate on the financial institution from a prudential or safety and soundness point of view, because our mandate requires us to look at the possibility of institutions being able to compete. If an institution came to us and said, we can compete better from a cost and capital point of view because we're going to have to restructure as a holding company, for example, or restructure part of the operations and income trust structure, we'll look at that. We'll look at it from the perspective of what it would do to the risks in the institution and what it would do to their capability to raise capital to deal with those risks, because we're in the business of protecting the safety of moneys placed in these organizations.

The moment an institution puts part of its operations into an income trust structure or some other structure, just like if it sells other kinds of instruments, it's going to be subject to a variety of market conduct rules--disclosure rules, all those lawyer-customer kinds of rules, and so on. In our country most of those are administered by the securities commissions, not by an organization like mine.

That would be something those institutions would have to factor into account. We would broadly be interested in their compliance with those rules on an ongoing basis, no matter what those rules are, whether it's an income trust structure or something else.

But we're not in the business of enforcing compliance with specific market conduct rules. I don't have any rules to enforce; they're not set by me.

[The Chair, Conservative, Brian Pallister]

Ms. Wasylycia-Leis, quickly.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Okay, this is a really quick question on the defined benefit pension plan that you already discussed with John McKay.

This is becoming a serious issue--poorly financed pension plan benefit packages. I'm wondering if you have enough staffing and resources to monitor it, to make the recommendations to prevent this trend, and to do something in terms of whatever mechanisms you use to stop sponsors from taking contribution holidays and to encourage them to increase the funding.

[Nicholas Le Pan]

We have increased our staff in this area. One of the reasons we've set up OSFI the way we have is to ensure that we can take action when we need to, have the kinds of people we need, and pay them what we need to pay them in order to do our job. That's part of my job--to make sure that happens.

We've been pretty successful over the past couple of years. Very few plans have terminated with losses. In many cases, we have dealt with contribution holidays, gotten money put into plans. We've gotten sponsors, even when they were terminating plans, to fund the deficit in the plan to that point in time, even though the legislation does not now require that--or the regulations do not now require that. We're dealing very actively with this situation. It's not for nothing that we've been called in public places the most activist pension regulator around. That's what we want to be.

We're still balancing things, because the plans have to exist, right? If we set the system so tight that everybody just terminated the plans.... They're volunteer arrangements, as you and I both know, so they have to be voluntarily continued by all the parties. A lot of what we do here is force the parties to recognize the problem and deal with it themselves. We can't always impose our judgment on that.

I'm pretty comfy with what we have. We'll keep adjusting it. We've had some success. We're going to continue to have some success. But this is an ongoing issue, and the responsibility is also on management, boards of directors, boards of trustees, union members, and so on in trying to resolve these situations.

[The Chair, Conservative, Brian Pallister]

Thank you, sir.

Over to you, Mr. Savage, for five minutes.

[Michael Savage, Liberal, Dartmouth—Cole Harbour, NS]

Thank you, Mr. Chair.

Welcome, Mr. Le Pan.

On the issue of the pension plans, how many federally regulated pension plans do you have responsibility for?

[Nicholas Le Pan]

About 1,200, of which the vast majority are defined contribution plans. So we're dealing with 300 to 400 defined benefit plans.

[Michael Savage, Liberal, Dartmouth—Cole Harbour, NS]

Last May, about a year ago, there was a news release that said the Department of Finance launched its consultation on private defined benefit pension plans. Were you involved in that?

[Nicholas Le Pan]

We assisted the department in analyzing and working through those issues. Yes, we work with the department on legislative issues or proposals or areas such as that.

[Michael Savage, Liberal, Dartmouth—Cole Harbour, NS]

Can you give me a sense of what you discovered, what you learned, what helped, what didn't?

[Nicholas Le Pan]

For defined benefit plans I think there are two kinds of issues. There's a short-term funding issue, which we talked quite a lot about. One of the other issues out there is that many sponsors believe that the current system is stacked against defined benefit pension plans and in favour of defined contribution plans. A lot of people commented about the shift away from defined benefit plans, and that's partly funding rules, but it's also uncertainties about how to deal with a surplus in these plans--there are a variety of issues that are longer-term structural issues.

I'm not saying I support the position of one side in this. I don't carry a brief for one side or the other, because there are a lot of divergent views out there on the longer-term issues. I think it's really been commendable that the Department of Finance has started to put on the table some of the longer-term issues, which are in that paper. They're not easy issues to deal with. I think it's important to look at them.

I think it's really great that the short-term issues have been looked at in the budget, because I think that flexibility is going to be helpful. The longer-term issues matter for...and I've spoken about this, the Governor of the Bank of Canada has spoken about this, and so on. I think the minister has said he wants to come back.... It's a longer-term kind of issue; it's not immediate. I think it's beneficial that those things are out on the table.

At this point, there is not a lot of consensus out there among a variety of groups about what the right solutions are. I think that's going to be important too, and I've spoken on that.