Finance Committee on Feb. 19th, 2007

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you.

Next, à titre personnel, Monsieur Bouchard.

[Richard Bouchard, As an Individual]

Good afternoon, Mr. Chairman, ladies and gentlemen of the committee. Thank you for giving me this opportunity as a citizen to share my fears with you, my fears about Bill C-37 and its repercussions on consumer protection.

First of all, I would like to explain how I myself went through the existing complaints processing system. To make a long story short, after an issue with the CIBC, I filed a complaint on October 4, 2005, in accordance with the steps described on the CIBC website. Their internal process took me as far as the CIBC ombudsman's office, who told me that he could do nothing for me.

In the meantime, I had notified both the President and Vice-President of the CIBC that I had identified failures to comply with the code of conduct and compliance, under the Sarbanes-Oxley Act. The initial idea was to notify the persons in question so that they could intervene. There was failure to comply with the code of conduct, but obviously that is my opinion.

Since nothing was happening, on December 2, I finally demanded that my file be transferred to the OBSI, the Ombudsman for Banking Services and Investments. The OBSI did not acknowledge receiving my file until December 21. On January 24, the OBSI notified me that he would investigate. Between December 21 and January 24, I was given no information at all. The OBSI conducted his investigation. On receiving the OBSI's draft recommendation, which included an investigation report, I contacted Mr. McCaughey, the President of the CIBC, once again to tell him that there was now evidence that my allegations were well-founded. I asked him what he planned to do. Mr. McCaughey answered, and I quote: "I regret to tell you that you have used all the available complaints management resources. This is the last answer you will receive on the issue."

At that point, I had no choice: either I had to accept the OBSI's recommendation, or declare personal bankruptcy and start again from scratch. The company was already bankrupt. At present, no regulations have come into play with the CIBC. During the entire affair, which has been going on since October 4, 2005, I have been keenly interested in the concept of self-regulation. Basically, voluntary codes are codes of self-regulation.

Allow me to summarize what I have discovered. In the McGill Law Journal, Marc Lacoursière, an attorney and professor at the Université Laval Faculty of Law, said, and I quote:

Financial institutions, which have become involved in the formulation of these principles...

These principles are the code of conduct.

...seem to shirk off their responsibilities rather easily. In view of the banking transactions that occur overseas, the theory of self-regulation is difficult to impose. Any foreign bank that provides banking services over the Internet, with no physical link to Canada can easily circumvent the Banking Act and its numerous limitations [...] since there is no way to enforce the legislation, foreign banks may well not be interested in complying with the organization's guidelines.

Mr. Lacoursière also refers to another European study carried out with a view to implementing ombudsman systems in the EU. The study was conducted by Lex Fori, an international law firm. It concludes:

Among instruments of "soft law..."

Since self-regulation is considered a form of soft law...

...some give better results than others. One of those is co-regulation, in the broader sense, which implies the involvement of public authorities in addition to the involvement of professionals and consumers. By contrast, self-regulation has shown itself, with a few notable exceptions, to be the most frequently disappointing instrument insofar as it is frequently no more than a list of good intentions.

That is the conclusion. Those studies are not new. And as a consumer, I can conclude that the conduct of banks has been reported to authorities for a long time now, but that the banks do not seem very interested in protecting consumers.

The Minister of Finance, during the second debate—

[The Vice-Chair, Liberal, Massimo Pacetti]

Mr. Bouchard, could you please conclude your presentation? Your time is up.

[Richard Bouchard]

I'm sorry.

The FCAC pointed out that 28% of Canadians, that is 3 million people, have reported serious problems with their banks. The CFIB reported that 26% of businesses, that is 385,000, have suffered from a breach of the code of conduct. Option consommateurs reports that 1,000 pre-authorized payments a day cause problems for their clients.

Does the government feel that Canada is still well protected? Before allowing any more wolves into the sheepfold, would it not be wise to make sure that the sheep are well-protected?

I thank you and I'm very sorry for having gone over my allotted time.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Bouchard.

From the Office of the Superintendent of Financial Institutions, Ms. Dickson.

You have five minutes, please.

[Julie Dickson, Acting Superintendent, Financial Institutions, Office of the Superintendent of Financial Institutions Canada]

Good afternoon, Mr. Chairman and members of the committee.

Thank you for inviting the Office of the Superintendent of Financial Institutions (OSFI) to appear before you today to discuss Bill C-37.

The Office of the Superintendent of Financial Institutions is the prudential regulator of federal financial institutions. Prudential means we are concerned with the safety and soundness of financial institutions, which contributes to the overall stability of the financial system. Our mandate does not extend to market conduct or consumer-related issues, which are the responsibility of other organizations both at the federal and provincial levels.

In short, OSFI supervises federal financial institutions to determine whether they are in sound financial condition and complying with legislation. We are required to advise promptly in situations where there are material deficiencies affecting safety and soundness, and to take, or require management and boards of directors to take, necessary corrective measures in an expeditious fashion.

We also promote the adoption of policies and procedures to control and manage risk with financial institutions, and monitor and evaluate systemwide or sectoral issues that may impact institutions negatively.

Regular legislative reviews provide an opportunity to ensure that Canadian legislation promotes an efficient, competitive, and safe financial services sector. In any legislative review, OSFI is interested in the following: first, whether proposed legislative changes increase risk to financial institutions, thus creating major prudential concerns; second, whether the legislation is clear, because we administer compliance with most provisions of the act; third, whether OSFI has the authority it needs to act when necessary, so whether the prudential tool kit needs to be enhanced; and lastly, whether the regulatory burden can be eliminated in cases where it is clear that legislative requirements, which may have been necessary at one point in time, are no longer necessary from a prudential perspective.

In our judgment, Bill C-37 does not increase risk to the financial institutions we regulate. Further, Canada already has a framework with prudential tools that are consistent with international norms for strong regulatory regimes, thanks to changes introduced in previous legislative reviews.

As a result, OSFI did not seek significant new prudential measures as part of this review. However, there are several elements in Bill C-37 that would help us to be more effective, because they would bring clarity to certain areas of the act that we administer, and would eliminate some legislative requirements that are no longer considered useful, thus cutting red tape and regulatory burden.

A strong and efficient regulatory framework, one in which Canadians and those outside Canada can have a high degree of confidence, is critical to Canada's economic performance. In the opinion of OSFI, passage of Bill C-37 would help contribute to that confidence.

I would be pleased to answer any questions that the committee members may have.

Thank you.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Ms. Dickson.

From the Canadian Payments Association, we have Monsieur Legault, for five minutes, please.

[Guy Legault, President and Chief Executive Officer, Canadian Payments Association]

Mr. Chairman, I would like to thank you as well as the other members of the committee for giving me the opportunity to meet with you today.

Before I start, I would like on behalf of the Canadian Payments Association to commend the Department of Finance for all its work done in respect of this bill, notably the draft amendments to the Bills of Exchange Act and the Canadian Payments Act.

The CPA is a member-based organization created by an act of Parliament in 1980. Today we have 120 members, including the Bank of Canada, chartered banks, trust and loan companies, credit union and caisses populaires central offices, and other deposit-taking institutions.

The CPA's mandate is to establish and operate Canada's national clearing and settlement system, a system vital to the Canadian economy. However, the CPA does not see or physically touch any individual payment in the clearing system; rather, it establishes the common framework of rules and procedures that govern the daily exchange of payments between financial institutions. At the end of each day, CPA systems determine the net positions between financial institutions, so that they are able to settle across their accounts at the Bank of Canada.

The Canadian Payments Act also establishes public policy objectives for the association, namely the promotion of a safe, sound, and efficient clearing and settlement system that takes into account the interests of its users. Indeed, the CPA has a stakeholder advisory council composed of 20 payment-system users and service providers, including consumer groups, industry associations, and government, to name a few.

The CPA is governed by a 16-person board of directors, including three directors appointed by the Minister of Finance; the chair; an appointee of the Bank of Canada; and the remainder appointed by members. The CPA is under the oversight of the Minister of Finance, who has disapproval powers over all of our rules. In addition, the Bank of Canada has oversight over our large-value transfer system, which has been designated as systemically important by the governor.

Despite the availability of new payment services and technologies, paper cheques remain a very convenient means of payment for Canadians and businesses, resulting in approximately five million cheques being physically transported and exchanged between financial institutions each business day.

The modernization of the current cheque-clearing process through the use of cheque-imaging technology will continue to support this vital payment instrument for Canadians.

Image-based clearing will allow for electronic cheque clearing, which will enhance the speed and efficiency of the cheque clearing system. It will also make the clearing system more robust by reducing its dependence on transportation networks and its vulnerability to related delays. Moreover, this modernization of Canada's cheque clearing system will allow it to keep pace with an international shift towards electronic clearing processes for cheques, particularly those in the United States and in France.

Imaging and electronic clearing of cheques will also help in the fight against fraud. Image-based clearing will shorten the clearing cycle, reducing the window of time that cheque fraudsters generally exploit. It will help financial institutions and their customers detect fraud attempts faster and improve their chances of preventing loss. It will also enable enhancements to the automated systems and tools that already account for the majority of fraud detection today. Further, to ensure integrity and privacy of images throughout their life cycle, a framework for security and a sound audit trail has been developed.

To facilitate a smooth transition to the cheque-imaging environment, the CPA and its members have been consulting broadly with a wide range of stakeholders, including consumer groups, large and small business organizations, law enforcement agencies, auditing bodies, the legal community, and service providers.

Further, the response from credit union consumers and businesses that have been receiving image-based services for some time has been very positive. Among the benefits most frequently cited by customers are more convenient and efficient record-keeping, easier account reconciliation, and more timely access to information about cheques.

In conclusion, we are very pleased overall with the proposals put forward by the government in setting out the legislative framework to support the cheque imaging initiative and to improve the association's governance and operations through amendments to the Bills of Exchange Act and the Canadian Payments Act.

I understand there's been some discussion regarding electronic payments and bill payments at this committee recently. I recognize that these matters fall outside of the scope of Bill C-37's review. My colleagues and I, however, would be happy to come back at a future date to address any issues you many have.

I thank you and I am now ready to answer your questions.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. Legault.

Thank you for clarifying that last point.

We're going to try a first round of seven minutes. Let's start with Mr. McKay and then Monsieur Paquette; then we're going to go to Mr. Norlock.

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

Thank you, Chair, and thank you, witnesses.

Mr. Legault, you're very popular, so I thought I'd start with you.

Mr. Conacher and others argue that you don't need ten days, you don't need four days, and in fact maybe you only need 24 hours; that 98% of cheques clear; that really this is a discriminatory system against poor people, etc.

I don't know whether you heard Mr. Conacher's or Mr. Lawford's testimony, but I'd be interested in your comments on whether this is, (a), possible, or (b), practical.

[Guy Legault]

If you don't mind, I will clarify the current system and then the system under cheque imaging.

Under the current system, a cheque may have to go through ten transportation legs, one way, to the branch where it was drawn upon. You can imagine if it goes from Whitehorse to St. John's, it has to go by truck to the airport, it has to be flown to their processing centre in Vancouver, and so on. Then if there are no funds to pay the cheque, the pay/no pay decision is made at the branch, and it has to go the reverse way. So it's a great way to accumulate air miles, but it takes some time. It can take anywhere between seven and ten days in the current environment.

That's why with cheque imaging we're going to drastically reduce that time. We think that time is going to be reduced up to roughly four days. We still have to transport the cheque for the first leg by truck and by plane to the processing centre, but then after that it will be truncated and imaged, and everything else after that will happen electronically. However, it still then has to reach a branch, it still needs 24 hours to make the pay/no pay decision, and then potentially return as well. The return will also be done electronically; however, you need all the linkages between the various systems of the various financial institutions. As you may know, we also have a three-tier system, where we have direct clearers and indirect clearers.

All of that being said, we think it could easily take up to four days. If I can then link it back to the discussion on holds on cheques, you have to realize that the clearing is only one aspect of the financial institution's decision regarding holds, because it's also very much a credit decision.

Regarding the percentage that has been quoted, of 98% of cheques being cleared overnight, I don't know where that statistic comes from. This is really just my own take on it, but there may be a confusion with a study we did many years ago where we detected that only 2% of accounts had a hold on them on a daily basis. That's basically because financial institutions give provisional credit to their customers. Therefore I'm afraid that maybe some confusion has been occurring regarding the data, because we don't have anything to confirm that percentage.

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

Thank you, that is helpful. Unfortunately we have a ridiculously small bit of time to talk about what is probably the central issue that has come up over the last number of days.

The other issue, as you know, has to do with electronic clearances. There is an issue that frankly the banks are taking the money out of people's accounts and then only posting them later, particularly with even large accounts like credit card accounts or utility accounts or taxes or things of that nature. So the consumer has the worst of both worlds, and yet the consumer is behaving in a responsible fashion, trying to pay their bills on time.

I'd be interested in your thoughts on that.

[Guy Legault]

Do you want a 30-second answer or a two-and-a-half-minute answer?

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

Thirty seconds.

[Guy Legault]

That's what I figured.

In that instance, I would just mention that for bill payments, it's easily a process that has to go through four systems for financial institutions. The first one is where consumers interact with their financial institution to give the instructions. Then you have the financial institutions that do the clearing, that's part of our mandate. After that, the financial institution of the biller has to then again take the information and credit the account of that biller on an aggregate basis. Then the fourth system is really with the biller itself, who then has to take that information to do the reconciliation. Unfortunately it's not always done electronically. It still relies heavily either on paper or even on e-mail, and therefore it introduces transition into the whole process.

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

But if it was done electronically, there's no reason it couldn't be instantaneous between a bank and one of your large companies. I mean, even bank-to-bank, is there any reason why that can't be electronic?

[Guy Legault]

Even today when it's done through EDI, the electronic data interchange, you still have to basically go through those four steps and systems. You still have to do the reconciliation, to take those aggregate amounts and make sure that you reconcile them and that you credit every individual's account. And all of that takes time.

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

I'm sorry I can't follow up on that, because I think all of us would be enlightened by just following it step by step to see how practical these things are.

Mr. Lafrenière, on your argument about catastrophic reserves and that you're disadvantaged vis-à-vis your insurance competitors, essentially what you're proposing here is that effectively you've set up a catastrophic reserve fund as a tax-free entity inside Canada, as opposed to your competitors, who set up a tax-free entity for catastrophic reserves outside Canada. Is that the nub of it?

[Normand Lafrenière]

Exactly.

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

Currently, do mutual fund companies do an end run on the system and set up outside?

[Normand Lafrenière]

No. None of the mutuals have any outside companies, offshore companies. Basically what we're saying is that in order right now to build a strong reserve to face catastrophes, we have to do it on a tax-paid basis. So on a tax-paid basis, you have to charge more in order to build a reserve big enough in order to face catastrophes.

If it were to be on a tax-free basis, as it is in other countries, you would build a much stronger reserve, if you will, or in this case a reserve as opposed to a surplus, and be in a better situation to face catastrophes.

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

Presumably then there would be no need to have offshore companies for anybody.

[Normand Lafrenière]

There would be no need, exactly--but we don't resort to offshore companies.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. McKay.

Mr. Paquette, you have seven minutes.

[Pierre Paquette, Bloc, Joliette, QC]

I'm going to follow the same tack as Mr. McKay. You say that even with imaging, it would take four days because of certain constraints. How was the Canadian Bankers Association able to sign a private contract aimed at reducing the wait time from 10 to 7 days? What allowed for this reduction?

If I understand correctly, even if Bill C-37 is not passed, the banks are still committed to reducing the cheque-holding period from 10 to 7 days. And yet, you have stated that given the size of the country, there are limitations as far as the transportation of bank instruments is concerned.