Finance Committee on June 16th, 2008

[Tiff Macklem]

The set-up is different in every country. In the U.S....

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

But other countries are having the same kind of problem, in spite of having a national securities commission.

[Tiff Macklem]

There are examples of financial upheaval everywhere. Canada is affected, but the situation here is quite good if we compare it to that of other countries. Our banks are well-capitalized and the gaps in the money market are not that big.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

It's because of the Montreal Accord.

[The Chair, Conservative, Rob Merrifield]

The time has gone.

We'll move on to Mr. Wallace.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chairman.

And thank you for coming today.

I'll start from the back of your presentation, and this follows up on Monsieur Crête's question. You've mentioned a couple of times now the need for a common securities regulator, which a panel is currently reviewing. Will this issue of asset-backed paper be a case study for them? Is this the type of issue or problem they will be addressing in their recommendations, or how are they dealing with this? Do you have any concept of that?

[Tiff Macklem]

Well, I have spoken to the panel, but I haven't asked them about that. I have given them some of my views, but I haven't received back their views. They're working on that; they're in the process of consultation. I expect this is something they're hearing about as they go across the country.

I think, more generally, this broader situation really illustrates just how global the financial markets are. The events were triggered by increased defaults in subprime mortgages in the United States, and that's affecting global markets around the world. So I expect this broader issue is something they will be hearing about and it will be something they will be responding to.

[Mike Wallace, Conservative, Burlington, ON]

As for your choice of words here, maybe I'm picking a little bit, but I'm very interested in them, and I highlighted them a bit: “the priority is a common securities regulator with a more principles-based regulatory framework”. Are you telling me they're not principles-based, or what are you saying there? And what are you hoping to accomplish if they come back with a recommendation for a single regulator?

[Tiff Macklem]

There's a fairly active debate around the world about whether regulation should be more rules-based, as it is, for example, in the United States, or whether it should be more principles-based as, for example, the FSA, the Financial Services Authority in the United Kingdom, has pushed for. Now even under a principles-based system, you still need some rules. So I wouldn't want to make an overly stark comparison.

But I think the idea of a more principles-based system is that in a world where markets are evolving rapidly and the situation can change over time, it may be difficult to keep detailed rules up-to-date, whereas a more principles-based system—for example, with general principles around disclosure, as opposed to having detailed line-by-line rules—puts some responsibility on the industry players that they have certain principles they should have to live up to.

[Mike Wallace, Conservative, Burlington, ON]

Another thing you talked about here is, and part of your recommendations deals with, the need for improved transparency. What do you mean by that? Is that more information to the actual investor, whether they're a sophisticated investor or even Ma and Pa? We've had a few of those folks here who put their life savings into these things, based on advice they had received and their triple-A rating, relying heavily on this for their decision.

What do you mean by transparency? What can investors expect from that change?

[Tiff Macklem]

I think it has a number of dimensions. With respect to the products themselves, it means having more transparency as to what is in them; who is senior to whom, if something goes wrong; and more information about the structure itself.

With respect to credit-rating agencies, for example, I think we need more transparency about the rating methodologies. I think issuers themselves need to be putting out more information to the public so that credit-rating agencies aren't relying only on the information they have, but that everybody has the same information. I think rating agencies need to take more responsibility for the information they're getting and to do appropriate due diligence.

The basic underlying premise here is that if everything is laid out, people can make fully informed decisions, and it also creates appropriate incentives to design things in ways that should be better.

[Mike Wallace, Conservative, Burlington, ON]

When you talk about people making better decisions, are we hoping to have this in a structure that the average investor can understand, or are we still gearing this toward the sophisticated larger firms--pension funds--or whoever is buying the product that happens to be available at the time? Are we looking at growing it down so that my parents could buy it and understand what they are getting into? I have no money, so it would have to be my parents.

[Tiff Macklem]

We've talked about credit agencies and their responsibilities. I think an important lesson from this is that investors need to exercise appropriate due diligence as well. Ratings are a very useful tool, but they should be used as a tool. You probably shouldn't be buying things if your only metric is ratings.

[Mike Wallace, Conservative, Burlington, ON]

I understand.

Thank you.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We have two more. We'll move now to Mr. Pacetti, and then to Mr. Laforest.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chairman.

In most cases I've been hearing that we have to look to see what went wrong; we can't necessarily look to the past; and we have to look to the future to see how we can correct this. But in order to find a solution, we have to blame somebody--I don't know if I necessarily want to use the word “blame”.

I understand the complexity. I don't want to make it too simplistic, but we're going around in circles, in a sense. We have OSFI coming forward and saying they're here to protect depositors. You just said that investors should be more sophisticated and understand. But investors have advisers, and advisers didn't advise properly. The advisers rely on the credit agencies, and the credit agencies didn't do their job.

Then all of a sudden investors wanted a higher return. So the banks, or whoever bundled up these products, made it so the returns would be higher. There was a market that was fulfilled and there were people willing to buy. Those were the forces. I don't think we can ever change that.

It's not a securities regulator issue, because they'll look at what happened prior to this. There is no mechanism to prevent this from happening in the future, because this has to be prevented prior to it ever happening.

In the end, I don't even know if anybody is going to report or say they're going to fix it, because it's not anybody's job. The securities regulators will look at their end. OSFI will look at its end. You'll look at your end. Mr. Purdy Crawford is only making sure the investors get their money--and that's a separate arrangement for what happened in the past. I feel like we're going around in circles.

The answer always seems to be that it's very complex. But people were involved who put these products together and invested. We see now that the little investors are probably being protected, whereas some of the investors who are more sophisticated, like TransAd, that have the proper individuals to analyze these products, didn't do it. Jean Coutu and numerous other corporations in Canada invested in these products. I'm not sure if they're going to be protected. They had the ability to look at this. They relied on somebody, and somebody relied on somebody else.

Is there an answer? Is there something we could do? Is there something that somebody could do?

[Tiff Macklem]

Hearings such as this are helpful, and I welcome the opportunity.

On the broader issue, there are a few more pieces that need to be completed. As the superintendent mentioned, IIROC is reviewing the behaviour of the firms that sold the products. The securities commissions are reviewing the scope of the exempt market. From our perspective, we've been very active. I mentioned the FSF report. We have also taken a number of other measures. For example, in the budget bill--

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Sorry to interrupt, but will they be pieced together, or will they still be working in silos? Is there something that should be pieced together, or should more authoritative responsibilities or regulations be given to somebody?

I hate to compare ourselves on a global level. I'm not worried about what happened elsewhere in the world. It's great to blame everybody else, but Canada has its own house to deal with.

[Tiff Macklem]

We need to reflect on what went wrong and how to prevent this from happening again, and I think that is being done.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Is the Department of Finance going to piece any of it together?

[Tiff Macklem]

We have a broader stewardship role. We're dealing with OSFI and the Bank of Canada, and we interact with the securities commissions.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Is somebody afraid to put everything together because they're going to be ultimately responsible in the future?

[Tiff Macklem]

I think we are moving forward.

[The Chair, Conservative, Rob Merrifield]

I guess we'll have to find that out.

We're going to move to Monsieur Laforest.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

Mr. Chairman, the colleague who spoke before me said that we should worry less about what happens in other countries and more about what we have to do here. I don't entirely share his opinion.