Mr. Chair, ladies and gentlemen of the committee, 20 years ago, this Parliament opened up the banking industry by letting banks become involved in the securities market: the greatest financial reform in the country's history.
The goal was to increase competition in the capital market by completely overturning the rules of the game of finance. Up to that point, Canadians were used to dealing with two very different kinds of institutions. The first was the credit industry, made up of commercial banks, finance companies and credit cards. The reciprocity rules were clear. Both clients and institutions were subject to an obligation of result: repay loans or deposits or go bankrupt.
There were various safety nets, such as deposit insurance, and there was only one regulator making sure that the market operated in a disciplined way: the Office of the Superintendent of Financial Institutions and the Bank of Canada.
The second industry, the trust industry, made up of the whole other world of securities, brokers, portfolio managers, mutual funds, retirement funds and stock traders. The reciprocity rules were confusing as there was no obligation of result, just an obligation of diligence. Consumers were in no doubt that risks were higher and more complex, but they had no way of recognizing if the diligence—that famous due diligence—that is, the resources and the practices, reflected situations that were generally recognized and accepted. There was not one regulator, there were thirteen. There was no indemnity insurance against fraud and abuse, no super-cops to make sure that the market operated in a disciplined way. Literally, it was another world.
Ladies and gentlemen, the opening of the market blurred the distinction between credit risk and trust risk that investors, both small and large, both with experience and without it, are still struggling to navigate through 20 years later. This is what the ABCP crisis shows us. Many investors did not distinguish between a certificate of deposit and commercial paper, given the promises they received that their deposits were secure and liquid. Even worse, some people believed that these products, rated triple A by DBRS and often sold at bank branches and cooperatives, were protected by deposit insurance. Was this an obligation of result or of diligence?
Eighteen hundred investors holding 1% of non-bank ABCP are now threatening the Montreal accord and seven months of difficult work intended to safeguard some $32 billion in assets issued by specialized funds set up by non-bank institutions. For the first time in a long while, small investors seem to be in a position of strength in the capital market. It seems that there is no other choice but to buy back their participation if a major catastrophe is to be averted. The question is, by whom?
Those who sold the paper should assume their share of the responsibility because the evidence shows that the notes were sold with the promise of a degree of security even greater than for deposit certificates. Canaccord, with equity of $390 million and assets of $422 million at the end of 2007 and Credential, with eight institutional shareholders, all cooperatives, should be able to absorb this transaction. In fact, it is what Canaccord proposed yesterday. Financière Banque Nationale could do the same, as could Scotia Capital, which ended up with $220 million in ABCP. But, look, nothing requires them to do so. Even more ironically, those brokers should go into bankruptcy so that their investors can be compensated by the Canadian Investor Protection Fund, as its rules stipulate.
It seems that the weight of the decision will have to be borne by the signatories to last August's Montreal Accord which was designed to ensure that 100% of the proposed ruling passes. As if by chance, eyes are turning to the Caisse de dépôt et de placement du Québec and its $150 billion.
Public opinion, for the most part, sees the Caisse de dépôt as Quebeckers' nest egg, even though the public controls less than 30% of it through its contributions to the Régime des rentes du Québec or its premiums to the Société d’assurance automobile du Québec. The Caisse's 20 other depositors are private pension funds or dedicated insurance funds.
But the Caisse is not a crown corporation like Hydro-Québec. It makes no profit for itself, it has no funds of its own like an independent manager and only serves its depositors. Unless the public servants, the construction workers, the emergency medical technicians and the farmers were to agree, and unless it could be shown that it is their interests to agree, the Caisse could not come to the aid of the other holders of ABCP. The Caisse is not a regulator, nor an indemnity fund, any more than Ontario funds like Teachers or Omers.
Ladies and gentlemen, what Canada most needs is just that, an indemnity fund for investors in cases of fraud or breach of trust. We cannot keep asking ourselves, every time there is a scandal or every time major market errors come to light, who should compensate the investors. Nor can we depend on discretionary or arbitrary decisions of one institution or another. It makes no difference if it is the Mouvement Desjardins, the two other savings cooperatives in Ontario and the West that are offering compensation, the Financière Banque Nationale, which is offering partial compensation, or Canaccord and Credential Securities, which did not offer compensation until very recently.
The responsibility lies in the financial sector and it can be assumed only by some institutions, or a segment of the market, as was the case in Quebec with the savings advisors, the only group to fund the Fonds d'indemnisation des services financiers du Québec, which does nothing.
Such a fund would increase competition in the marketplace by allowing a greater number of management companies to offer equivalent protection to investors. According to Jean-Luc Landry, the outgoing president of the Association des conseillers financiers du Québec, there is an urgent need to treat mutual funds in the same way as any other common consumer product or other savings products.