Finance Committee on Feb. 15th, 2007

[The Vice-Chair, Liberal, Massimo Pacetti]

Good morning.

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.

Mr. Flaherty, the committee met last week, and we decided to ask you to please try to keep your opening comments to between 10 and 15 minutes, so that the members can engage in questions. If need be, we'll try to provide you a bit of time at the end.

The only problem is that we have to be done by 11 o'clock, because we have to go to another room then.

If you're ready to start, thank you.

[Jim Flaherty, Conservative, Minister of Finance]

Thank you, Mr. Chair.

I apologize to you, Chair, and to the committee members for being late. I was in a cabinet committee meeting that ran a little late.

I thank you for the opportunity to be here today.

I appreciate this opportunity to appear before your Committee today to discuss Bill C-37, An Act to amend the law governing financial institutions and provide for related and consequential matters.

As you know, in November we introduced Advantage Canada, which is the long-term economic plan for our country. We introduced this along with the economic and fiscal update. Advantage Canada is a long-term economic plan designed to make Canada a world leader, both today and for future generations. It will help make the Canadian economy even stronger and improve our quality of life through competitive economic advantages. A strong economy must be supported by a financial system founded on competition, which instills confidence and efficiently provides the financial services that families, individuals, and businesses need in Canada.

Canada does have a strong and sound financial system that has served Canadians well. It provides about 700,000 highly skilled, knowledge-based, well-paying jobs.

In the coming years, however, Canada's financial system will have to adapt to the evolving needs of households and businesses.

It will also need to embrace the increasing use of technology in the delivery of financial services.

That would be achieved through a flexible regulatory framework founded on sound principles. That is where Bill C-37 comes in. The bill does not seek to overhaul the financial institution statutes that by and large work well. Rather, the bill introduces adjustments to the framework, fine-tuning to further promote competition disclosure, regulatory efficiency, and innovation. The results will benefit families, individuals, small businesses, and the economy overall.

Before I outline the measures in the bill, I want to underline the fact that the proposed changes I'm referring to today are based on extensive consultations. These changes were then outlined in a white paper, which was issued last June, entitled “2006 Financial Institutions Legislation Review: Proposals for an Effective and Efficient Financial Services Framework”.

Catchy title, isn't it?

[Some hon. members]

Oh, oh!

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Bill C-37 is consistent with the policy commitment of Canada's new government to ensure that our country's regulatory framework remains responsive to domestic and global developments. It also maintains the regular practice of five-year reviews of the financial institution statutes.

This bill has three basic objectives.

First, to promote the interests of consumers. These proposals will do that in a number of ways. One way this bill will benefit consumers is by improving the disclosure regime so that consumers have the information they need to make the best decisions in light of the choices made available to the them.

For example, with the increasing popularity of online banking, Bill C-37 proposes to harmonize online and in-branch disclosure requirements. This will allow consumers to compare products more easily and ensure that adequate disclosure is provided to customers conducting transactions online.

Another way the bill will benefit consumers and small businesses is by helping reduce hold times imposed on cheques. Instead of using this regulatory power, the government has finalized an agreement with the banking industry to voluntarily reduce the maximum hold period for cheques from ten days to seven days. Once electronic cheque imaging is fully implemented, that hold period will be reduced even further to four days.

The second objective of the bill is to increase legislative and regulatory efficiency in our banking system. One such example is to simplify the foreign bank entry framework. This will be especially helpful to the so-called “near banks”. These are foreign entities that are not regulated as banks in their home jurisdictions but that provide banking-type services. A car manufacturer, for example, currently has to obtain ministerial approval before being able to provide loans or make leasing arrangements, and this will no longer be required.

The measures in the bill will simplify the entry framework, reduce the regulatory burden, and provide for an environment that is conducive to increased competition.

Another way in which this bill will increase efficiency in our banking system is to improve the regulatory approval regime. This will ensure that transactions are dealt with faster and more efficiently.

Bill C-37 also responds to changes in the marketplace. Mandatory insurance for high-loan-to-value or high-ratio mortgages was introduced over 30 years ago, and that was as a safety measure to ensure that lenders are protected against fluctuations in property values and associated defaults by borrowers. The marketplace has of course changed over time and the mortgage insurance restriction is no longer required to the same extent. So this bill proposes to raise the loan-to-value ratio requiring mortgage insurance from 75% to 80%.

This will lower the mortgage down payment consumers are required to make before the law requires the purchase of mortgage insurance and will create an opportunity for mortgage cost savings.

So a family purchasing a $200,000 home with a down payment of 20% could save approximately $1,600. This is a significant amount, of course, especially for first-time home buyers.

The third objective of Bill C-37 is to provide the financial institutions framework with the ability to adapt to new developments in the industry. Amendments in Bill C-37 reflect the fact that banking services must remain up to date with new technology. The proposal to implement electronic cheque imaging is one such example.

Given the development of new technology, the old paper-based process of clearing cheques is too labour-intensive, time-consuming, and costly. So electronic cheque imaging will result in significant efficiency gains, saving time and resources currently dedicated to the movement of cheques. This amendment is complementary to the proposal to reduce cheque hold times that I mentioned earlier.

Another important change is the proposal to allow financial institutions to add more foreign directors to their boards. This amendment will enhance the ability of our financial institutions to pursue global business opportunities, allow for even greater benefits from the expertise and experience of foreign talent while maintaining a majority of Canadian directors on their boards.

As I've said before this committee on other occasions, I'm very proud of the performance of our financial institutions internationally, including in China, where four of our chartered banks are active and two of our largest insurers, Manulife and Sun Life, are active as well. This is something to be encouraged and applauded in terms of our financial institutions taking leadership roles outside of Canada, helping to promote trade for Canadian businesses, which can follow in the path, as they often do, of the large Canadian financial institutions.

In summing up, the amendments proposed in Bill C-37 will enhance the framework governing Canada's financial institutions.

Thank you, Chair.

I invite questions that committee members may have. And officials are here, of course, with me from the Department of Finance.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Minister.

I would like members to remember that, when a minister appears, the New Democrats speak third. We'll begin with a first round of six minutes, and we'll try to have a second round. I want you to remember as well that the senior officials from the Department of Finance will be appearing at 11 o'clock.

Mr. McCallum, you have six minutes.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you, Mr. Chair.

Mr. Minister, I thank you for your presentation.

I think it's unlikely that the Liberal Party would object to this, because most of it occurred when we were the government, in the form of a white paper, and I think the bill does make some useful changes, but I think it's mainly of a technical nature. So I would think that this would not be terribly controversial, nor that there would be major bones of contention.

Would you agree with that assessment, from your standpoint?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Yes. We often agree, Mr. McCallum. It's not unusual.

[Some hon. members]

Oh, oh.

[John McCallum, Liberal, Markham—Unionville, ON]

Given that we're in full agreement on this subject--

[A voice]

We should order drinks more often.

[Some hon. members]

Oh, oh.

[John McCallum, Liberal, Markham—Unionville, ON]

It appears that we're in full agreement on this subject, although we may change our minds after we hear witnesses, and I wouldn't want to prejudge that. Since that is the case and there's not too much point in going further when we're in agreement, I'll change the subject to income trusts.

As you may know, we recently came up with a proposal to have essentially a much more moderate rate of taxation on income trusts. We believe that, as four expert witnesses who came before us established, a much more moderate tax would in fact be sufficient to ensure tax fairness and to ensure that the personal sector was not disadvantaged in any way by lower taxation paid by corporations in income trusts. We dealt with the tax fairness issue according to these four experts, and we didn't really have opposition from the government side, because on that all we got was a blacked-out paper. We didn't get the numbers.

The great virtue of our plan is that experts have also shown that by virtue of a much lower tax rate, we do much less damage to the sector, and that approximately two-thirds or so of the wealth that was destroyed--the $25 billion of wealth that was destroyed by your plan--would come back under our much more moderate plan. So in that sense, our plan is fairer: it is fair not only to households, but also in that those who've lost so much money would stand the chance of regaining the majority of their losses.

I think this is a balanced alternative. CIBC World Markets has come out with a report stating that the Liberal proposal does create a balance between the investing public's need for a strong and growing income trust sector and the public policy need to stem tax leakage and eliminate unrelenting conversions to income trust structure. In addition, the Canadian Retired & Income Investors' Association says, and I quote:

The Liberals' policy is a major improvement over the ill-conceived, highly damaging Conservative plan. We applaud them for caring about seniors and other ordinary Canadians.

Mr. Minister, you were aware of this option. Our proposal is the same as one of the proposals made by PricewaterhouseCoopers, and certainly finance department officials were aware this was an option. Clearly it did far less damage to people who had taken the Prime Minister at his word and invested in income trusts; and clearly as well, it would have restored tax fairness, and it would have been, indeed, fairer because it would have been so much less damaging to those individuals.

So my question to you, given these third-party endorsements, and given what I would regard as a compelling need to do minimum damage to those who had taken the government at its word and invested in income trusts, rather than maximum damage to the tune of $25 billion, is whether you would consider changing your plan to the plan that we have just proposed.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. McCallum.

Just before you answer, Mr. Flaherty, I think we're treading on thin ice here. The normal tradition of the committee is to allow members to utilize their time in whatever fashion they please. I think you're a big boy, so you can handle and answer that question any way you want. I don't think I have to rule it out of order, but if you wish to answer it, it's up to you. I'll let you handle it in the way you see fit.

Thank you.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Thank you, Chair.

The preponderance of the evidence before the committee was in favour of the plan I announced on October 31, which is about tax fairness. I think the Liberal Party, including Mr. McCallum, have forgotten that. You'll see the recurring theme of tax fairness reflected in the budget I do as well. That is, that individuals in Canada should not be asked to assume the corporate tax burden, and that among corporations, regardless of corporate structure, whether it's an income trust structure or a corporate structure, everybody should bear their fair share of the tax burden. That's tax fairness.

There is leakage on this, all right. There's leakage of credibility by the Liberal Party of Canada, and by you. You said on November 5, 2006, on national television, that the government did absolutely the right thing. Since then, I guess you've had some kind of conversion by lobbyists from various parts of the country, and you've changed your mind. So now we have three Liberal plans--just as we had three budgets from the Liberals in 2005. Three seems to be the lucky number--

[John McCallum, Liberal, Markham—Unionville, ON]

Mr. Chair, maybe I could clarify that statement.

You're taking my statement out of context. If you read the full transcript, you will see that the first part was right in terms of the government having to act. But I subsequently said that the government was totally wrong to drop a nuclear bomb on the industry when a surgical approach would have done the job.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. McCallum.

Monsieur Paquette, six minutes, s'il vous plaît.

[Pierre Paquette, Bloc, Joliette, QC]

Welcome, minister.

I'll stick to the Bank Act. I don't think the bill you've introduced contains any elements to which we object. These are very technical elements. Cheque imaging is an interesting thing for consumers and banking institutions.

However, I'm concerned by what isn't in the bill. The Bank Act is revised every five years. This was an opportunity to settle and decide a number of issues. Take insurance, for example. The banks want to sell insurance. They've proposed a compromise solution, as you know, but the insurance companies don't want that.

Why haven't you decided the matter? This issue will no doubt continue over the next five years.

There's also the issue of electronic payments, which are increasing in number. Debit cards are now more popular than cash. Here I have a document from the Canadian Consumer Initiative. That consists of six Canadian consumer associations. In Quebec, Option consommateurs, a consumer association, is requesting that a coherent, modern electronic payments structure be created, as the United States and the European Union have done. According to that association, the fact that the forms of protection are highly uneven and complex will ultimately cause problems for consumers. It's already causing some, but this might even put a brake on the development of electronic payments.

Why weren't these matters addressed in the context of the Bank Act review?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Thank you for your suggestions.

It's good that the bill is at committee. If your party has constructive suggestions, Mr. Paquette, with respect to the bill, I'd welcome consideration. I'm sure the government members of the committee would welcome consideration of those. We have made clear, as a matter of government policy, that we're not about to take action with respect to the request by banks to sell insurance more than they do now.

I'm aware that in the credit union movement, including Groupe Desjardins, there's a different scope of business.

On the second item, about electronic payments, again, that's something we could consider. And I know that you have some comments on that, Mr. Dupont.

[Serge Dupont, Assistant Deputy Minister, Financial Sector Policy Branch, Department of Finance]

On that point, I'd simply like to point out that the government stated in the June White Paper that it would propose a voluntary approach to all stakeholders. The federal government does not regulate all stakeholders with regard to payment systems. It regulates the banks and other stakeholders. Consequently, we will initially favour a voluntary approach based on what was used for the debit card code, to see whether we can come up with a code that can govern all electronic payment systems as a whole.

[Pierre Paquette, Bloc, Joliette, QC]

Our system is based on self-regulation. The bank ombudsman is funded by the financial institutions. For some, that may seem to be a conflict of interest, since the banks fund the monitoring organization themselves. I'm not saying it's bad, but it seems to me that, on the consumer side, a number of things have been proposed, such as a coregulation system in which consumer organizations would play a bigger role. We should have been told why the self-regulated system is being maintained. I met with the people from the Canadian Bankers Association. They explained to me things that I thought were entirely reasonable. In that case, it's as though we were disregarding a significant problem and debate.

[Serge Dupont]

I don't think the problem is entirely disregarded. Moreover, the consumer associations will be invited to work on the development of this code. The Department of Finance will be acting somewhat as a leader in this field and will invite the representatives of the provinces, the consumer organizations, payment service providers — we regulate some of them and not others — so as to put all the issues on the table and develop a code that can satisfy all those parties. The problem isn't completely disregarded, on the contrary. We're trying to involve all stakeholders in order to come up with practical solutions.

[Pierre Paquette, Bloc, Joliette, QC]

If I have a little time left, I'd like to ask a final question on banking fees, particularly fees related to automatic teller transactions.

Have you thought of that? It seems that the practice in Canada is quite different from what it is elsewhere. In most countries, there aren't these kinds of fees. Perhaps there's some logic there. I repeat that we are at the start of a consultation process that we want to be quick — I want to reassure my friends and the parliamentary secretary — but we would like to know a little about where the government stands on this.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Mr. Paquette, since the issue was raised in the House about ATM fees, I did communicate with the banks about that. I have a response from the Canadian Bankers Association, and I've gone ahead and communicated directly with the banks again. I'm looking for a more direct response on that issue.

I did have occasion to meet with the credit unions. I mentioned this in the House of Commons when the issue was first raised because this is really a question of competition and choice. I'm not familiar with the practices of Groupe Desjardins in Quebec, and elsewhere where they have branches, but I am familiar with the other credit unions across Canada, who informed me that they have a network in one instance of I believe 1,600 machines, and another one of 2,600 machines, where, if you're a member of one of the credit unions involved in that network, you do not have to pay any fee if you use the machine either to withdraw money or to deposit money.

So for many Canadians there is choice with respect to the use of ATMs belonging to other financial institutions than the one they do business with directly.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Flaherty.

We will go to Mr. Marston, and then Ms. Ablonczy.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Minister, I want to begin by saying I'm pleased with the role you were able to play recently with regard to mortgage insurance for the widows of Canadian veterans. I'm not one to give Conservatives credit too often, but that one certainly is worthy of it.

Further on the ATMs, on December 11 and December 29, in response to NDP questions in the House, you indicated you'd be raising the issue of unnecessary ATM fees charged by the banks. As we've heard, there is a differential between when the fees apply and when they don't, and of course from our perspective with the banks, with their $19 billion in profits--Mr. Nixon receiving $5 million in a bonus--we think it's time for action on that. If you agree with our position that the bank ATM fees are inappropriate, as you indicated before, why haven't you done something more substantial on these fees?