Finance Committee on Feb. 19th, 2007

[The Vice-Chair, Liberal, Massimo Pacetti]

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.

[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.

Thank you.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Zinatelli.

From the Public Interest Advocacy Centre, Mr. Lawford.

[John Lawford, Counsel, Public Interest Advocacy Centre]

Thank you.

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.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Lawford.

I would like to ask a quick question. Does your organization, the Public Interest Advocacy Centre, represent individuals or the consumer?

[John Lawford]

The actual Public Interest Advocacy Centre acts as a law firm for often other consumer groups, such as the Consumers' Association of Canada and the National Anti-Poverty Organization. The other members of the coalition are member-supported. So the other five members are member-supported.

[The Vice-Chair, Liberal, Massimo Pacetti]

Okay. And that's what you were referring to in your presentation when you said the Canadian Consumer Initiative represents six major consumer organizations, is that it?

[John Lawford]

It's a coalition of all of these other groups, which we've joined together in the last three years, yes.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you.

We're missing the people from Genworth, so we'll go to Mr. Phillips from the Credit Union Central of Canada.

[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.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Phillips. Very good, that was under five minutes.

From Genworth Financial Canada, Mr. Macdonell, you have five minutes. Go ahead, please.

[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.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Macdonell.

From the Canadian Community Reinvestment Coalition, we have Mr. Conacher.

[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.

[The Vice-Chair, Liberal, Massimo Pacetti]

Mr. Conacher, I have to cut you off there. You're way over time.

[Duff Conacher]

If I could, I'll just make one more point.

[The Vice-Chair, Liberal, Massimo Pacetti]

Quickly.

[Duff Conacher]

Overall, in the long term, we have a completely unbalanced marketplace. The way to balance it, at no cost, is for the federal government to simply require institutions to enclose a one-page envelope--like this--when they mail out their bank statements or credit card bills or insurance policy statements.

This one-page envelope, with postage paid, would invite financial consumers across the country to join a watchdog agency that would watch over the banks. This could be created at no cost to the banks, insurance companies, or the government, and would give the 20 million consumers across the country a chance to band together very easily into a nationwide lobby that would counter the power of the financial institutions.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you.

You'll have an opportunity to answer questions. I just want to allow all the members to be able to ask questions.

We're going to start with the first round of seven minutes, and then we should have time for five-minute rounds.

We will begin with Mr. McKay.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Merci, monsieur le président.

Mr. Phillips, do credit unions sell insurance in their branches?

[David Phillips]

It really depends on the place that credit union is situated. In some provinces, and I'm thinking particularly of B.C., there are powers conferred by the provincial government under legislation to sell insurance.

[John McKay, Liberal, Scarborough—Guildwood, ON]

So it just depends on the legislative framework.

[David Phillips]

It does. Again, we find considerable variation in the regulation of credit unions across the country because of provincial regulation, so that each province tends to regulate a little bit differently. Of course, in Quebec--

[John McKay, Liberal, Scarborough—Guildwood, ON]

In British Columbia they sell insurance, and in Quebec they sell insurance. Are there other provinces where they sell insurance?

[David Phillips]

Those are the two that come to mind at this point.