Finance Committee on March 31st, 2009

[The Chair, Conservative, James Rajotte]

I call to order the 18th meeting of the Standing Committee on Finance. We're continuing our study, pursuant to Standing Order 108(2), on the measures to enhance credit availability and the stability of the Canadian financial system.

We have four organizations with us here today. They are the Small Investor Protection Association, the Canadian Finance and Leasing Association, Financial Executives International Canada, and the Investment Counsel Association of Canada.

Could each of you make an opening presentation of five minutes? We'll proceed in that order.

We'll start with Mr. Buell. I believe we'll start with your presentation and work our way down the table.

[Stan Buell, Founder and President, Small Investor Protection Association]

Mr. Chairman, I'm from the Small Investor Protection Association. I'll keep my comments short because I have made a submission to your committee.

In August 2008 the Small Investor Protection Association made a submission entitled “Investor Protection Illusion” to this committee. The asset-backed commercial paper fiasco and the subsequent financial market meltdown are revealing financial fraud and wrongdoing at a scale that is hard to believe. The industry created structured investment vehicles to enhance the industry's take, and executive compensations spiralled ever higher while regulators failed to react.

The regulators claimed to provide preventative investor protection, but failed to prevent financial fiascos or systemic fraud and wrongdoing, the direct cause of small investors losing their savings. The Canadian public is being misled by the financial services industry and the regulators, who would have us believe that the investment industry is well regulated and that investors can place their trust in the industry. Reliance upon the industry to self-regulate and protect investors is an inherent conflict of interest and does not protect investors.

The industry creates innovative structured products to circumvent regulations, which cannot keep up with the fertile minds developing new products. Regulators allow these practices and at times provide exemptive relief from regulations supposedly meant to protect investors.

The Canadian Securities Administrators' 2008 enforcement report states that In 2008 about $200,000 was ordered in Saskatchewan and Manitoba in restitution, about $570,000 was paid out in Quebec and Manitoba in compensation, and about $15,800,000 was ordered in B.C. and Ontario in disgorgement against respondents.

In plain terms, the regulators ordered or paid out a total of about $770,000 to aggrieved investors in 2008, which is slightly more than David Wilson, chair of the OSC, receives in annual salary, but about $15,800,000 was paid to the regulators.

Canadians who lose their savings to investment fraud and wrongdoing need time to realize they have been victimized and then to find their way through the maze of regulators, who do not help. Victims will be condemned to finish their declining years without the fruits of their life's labour. Their lifestyle will be compromised, and in many cases so will their health. Still worse, many lose faith and hope, and contemplate suicide.

We recently received an e-mail, and I'll read the contents. It's quite short: “My parents, ages 81 and 76.... All of the money invested is lost. This was most of my parents' life savings.... My father became depressed from losing all of his money. Coupled with the cancer that he had, this caused him to take his own life.”

Widespread practice of fraud and wrongdoing costs Canadians $20 billion per year. Forged signatures and false documents are not unusual. Selling unsuitable products and use of inappropriate leverage are accepted practices. Creation of structured products to circumvent regulations, lack of disclosure, and use of creative accounting to mislead investors are rampant.

Industry tries to create an illusion that the industry is well regulated. The illusion is supported by regulators levying headline-grabbing fines, but the fines may never be collected. Our submission quotes extensively from the Markarian decision, because it illustrates reality. Judge Jean-Pierre Senecal wrote, “In this case, the defendant's conduct was highly reprehensible”. We've included longer quotes in our submission.

Registered representatives are given titles such as investment adviser, financial consultant, or vice-president. This conveys a message to investors that suggests these salespeople are qualified to act as advisers. However, they may simply be salespeople of mutual or segregated funds who are seeking to generate commissions.

Also, industry creates innovative products with names that tend to deceive investors. A prime example is the principal-protected note, or PPN, for which guarantees apply only at maturity and returns may be cut or suspended.

The Ontario Bar Association says that the justice system is not designed to provide justice, but to resolve disputes. The Laflamme decision shows victims take 10 years to obtain justice, but most seniors cannot survive the ordeal. Laflamme died a few years after gaining a Supreme Court decision.

The recent Longstaff case in British Columbia was dismissed because the judge found that an uneducated labourer who lost his savings did so because his adviser followed an accepted practice of a “leverage plan”.

Other issues impacting Canadians' retirement security include excessive executive compensation, and Nortel illustrates this issue by the current Nortel executives' grab for bonuses while the employees have concerns about their pensions; exemption from regulations and the law, whereby many faulty products had exemptive relief and the ABCP solution exempted perpetrators from the law; lack of whistle-blower legislation to protect all Canadians; lack of special courts and judiciary to deal with white collar crime; underfunded workplace pension plans and the possibility of taxpayers without pension plans paying for a bailout.

I believe the majority of Canadians are just and upright, with a sound sense of morality and ethics. However, regulatory failure has allowed fraud and wrongdoing to become rampant. The investment industry has exploited this situation by providing incentives to create fundamentally flawed products and strategies that are sold to unsuspecting investors.

The investment industry is guilty of fostering an ideology that they are capable of self-regulation. Events have proven they are not. There were alerts raised that the investment system was faulty, yet regulators failed to react. There is lack of oversight, and there is no authority with a sole mandate to protect investors. Investors are left in the hands of the perpetrators of the various schemes developed to devour the savings of Canadians. We can only hope that the financial meltdown has sufficiently raised awareness to create public outrage that will precipitate government action to rein in an investment industry by revising legislation and regulation. It is time for government to act.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll go secondly to Mr. Powell, please.

[David Powell, President and Chief Executive Officer, Canadian Finance and Leasing Association]

Thank you, Mr. Chairman, and thank you for this opportunity to meet with the committee.

We've titled our submission to the committee “Getting Credit to Main Street Canada for SMEs and Consumers”.

The Canadian Finance and Leasing Association strongly supports the government's goal to restore liquidity and stability to the financial system while minimizing any potential long-term negative impact on taxpayers.

We are here today to strongly endorse the creation of the Canadian secured credit facility with an allocation of up to $12 billion to purchase term asset-backed securities, backed by loans and leases on vehicles and equipment.

For us, the Canadian Secured Credit Facility represents very positive commitments being made by the federal government, a significant and innovative step towards kick-starting funding for loans and long-term leasing of vehicles and equipment.

This initiative is a win-win situation for both small and medium businesses and the consumer, as well as a short-term, low risk and profitable investment for the government. The spinoff will be significant. We should expect consumers and SMEs to receive credit which will contribute to restoring the confidence of private investors in the commercial sector.

The members of the Canadian Finance and Leasing Association are the largest providers of debt financing in Canada after the traditional lenders, the banks and credit unions. As of December 31, 2007, the industry's portfolio of assets financed was estimated to be worth $112 billion.

Most of the financing industry's clients who rely on assets and long-term leasing are small and medium-sized businesses and consumers.

In the five minutes allotted to my opening remarks I want to offer a few key points.

First, all this industry does is finance the acquisition of equipment, machinery, and vehicles by business and consumer customers. All the capital obtained by the industry is deployed to carry out that single mandate. Any liquidity injected into this sector will directly, quickly, efficiently, and effectively reach the general marketplace.

The industry does not borrow excessively, and does not accumulate capital. Capital must be used. As such, each dollar of liquidity injected into this sector shall be used in the economy directly, rapidly, efficiently, and effectively.

Second, the assets financed by this industry are straightforward: equipment and vehicle loans and leases. Customer credit generally has not experienced problems associated with poor underwriting standards. Industry receivables continue to perform within the normal levels that can be expected in an economic downturn and well within anticipated tolerances.

Assets financed by this industry are straightforward: they are loans and long-term leasing of equipment and vehicles. These assets are generally necessary to meet the basic needs of our clients: essential equipment for business operations or a car needed to travel.

Third, this industry supports a broad network of dealers, manufacturers, distributors, vendors and brokers and their customers in hundreds of communities across Canada. Equipment financing companies have relationships with manufacturers, vendors, and distributors of all sizes to provide financing to their customers to acquire machinery and equipment.

The automobile manufacturing sector's financial affiliates finance dealerships, and the clients of dealerships who are seeking to acquire a vehicle. For those clients, longer-term lessors of commercial fleets use the automobile dealership network to acquire, maintain and dispose of vehicles in all the provinces.

Fourth, funding, which is fundamental to the credit cycle provided by our members, has just stopped. Despite having been prudent in credit extension, this industry is suffering from the effects of the freeze in credit and liquidity. Very few private funders remain active in this marketplace.

Fifth, the Canadian Secured Credit Facility is an investment being made by government. The taxpayer will draw the same benefits, and receive the same protection that any private investor would have received.

Sixth, we do not expect the government to have any long-term role in funding the industry.

The goal is to restore the confidence of private investors so that they restore financing for these transactions.

I would be very pleased to answer your questions.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll now go to Mr. Conway.

[Michael Conway, Chief Executive and National President, Financial Executives International Canada]

Good morning, Mr. Chairman and committee members. Thank you for the opportunity to present, on behalf of Financial Executives International Canada, our recommendations for your study.

FEI Canada is a voluntary membership association of more than 2,000 of Canada's most senior financial executives from coast to coast. Our recommendations are the result of consultations with our membership through a task force and a survey conducted to respond to your study, the summary of which is included in pages 6 to 8 of the materials we've left with the committee.

Michael Boychuk, who's with me today, serves as a volunteer director of the Quebec chapter of FEI Canada, and in his day job Mike is treasurer of Bell Canada.

Our recommendations are framed around three goals: increasing the availability of credit to business, the efficiency of capital markets, and rebuilding confidence in the economy. Achieving these goals will foster strong Canadian global competitiveness, support expansion projects, and help companies develop markets--

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

On a point of order, Mr. Chairman, the witness has referred to a document, to certain pages, and we don't seem to have it.

[The Chair, Conservative, James Rajotte]

I just checked with the clerk. Apparently we did not receive anything from the organization.

[Michael Conway]

Excuse me, it was provided this morning. I'm sorry if it wasn't distributed in advance, but it's--

[The Chair, Conservative, James Rajotte]

Is it in French and English?

[Michael Conway]

Absolutely.

[The Chair, Conservative, James Rajotte]

Okay, we'll distribute that. I'm sorry for the interruption.

[Michael Conway]

I'm sorry it wasn't distributed in advance, but there's a copy in each official language for your reading pleasure.

[The Chair, Conservative, James Rajotte]

Thank you very much. It's appreciated.

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

It's a lot more helpful when we have the information.

[The Chair, Conservative, James Rajotte]

Order.

Mr. Conway, please continue.

[Michael Conway]

Thank you.

Achieving our goals will foster strong Canadian global competitiveness, support expansion projects and help companies develop markets, enhance profits, boost capital productivity, and most importantly, create jobs.

I'd like to begin by addressing the availability of reasonably priced credit to business. Our survey results confirm that businesses are finding that access to credit has significantly tightened, its cost has risen, and the process of securing credit has become much more difficult. Our survey revealed that the situation is particularly difficult for small enterprises, businesses seeking longer-term credit facilities, and companies whose loans need to be syndicated because of their size.

Increased credit availability can be accomplished in four ways.

One is to encourage funding of small and medium-sized businesses, which could be done by adjusting the Canada Small Business Financing Act to allow for larger loans, and by supporting an emerging new economy by both making funds available to early-stage enterprises that focus on innovative new processes and technologies as well as green investments and funding more innovation centres to serve as incubators that nurture the development and sustainability of start-ups in a knowledge economy.

Second is to help increase the availability of long-term credit facilities by providing incentives to financial institutions that grant loans for the longer term, and by enhancing existing government guarantee programs for qualifying business loans, particularly in the most impacted area of equipment lending and leasing.

Third is to help improve working capital credit availability by increasing the rates for and the refundable portion of investment tax credits and scientific research and experimental development tax credits, since banks lend against this collateral.

Fourth is to provide relief to defined benefit pension plans by allowing plan sponsors to fund solvency deficits over the actual liability timeframe. Not only would this be more equitable, it would free up capital to reinvest in the economy.

Finally, we call upon the government to encourage EDC, BDC, and similar lending agencies to increase loan volumes and venture capital availability to companies requiring capital.

Our second set of recommendations deals with improving the efficiency of capital markets.

FEI Canada encourages the government to reduce interprovincial trade barriers. This would include moving to a single national securities regulator and achieving the free flow of capital, goods, services, and labour among Canadian provinces.

There must be a review of the tax system with an eye to easing the burden of economic restructuring on Canadians. How might this be accomplished? First, expand tax credits for flow-through shares to ease the raising of equity for small and medium-sized businesses, particularly early-stage companies not yet in a taxpaying position; provide relief to displaced workers and troubled companies by extending to three years the period over which severance payments and capital gains on debt forgiveness are reported for tax purposes; and provide a three-year tax holiday for start-ups launched by entrepreneurs coming out of employment displacement.

Finally, we call upon the government to help in the restructuring of the securitization market through better transparency, accountability, and reporting practices, as this will instill greater confidence and will improve liquidity and availability of short- and long-term funding.

I'll move to our final category of recommendations: rebuilding confidence in the economy.

To keep our banking system strong we must continue to enforce capital regulations and lead the way in international oversight of financial products. While we support some economic interventions, such as infrastructure spending, it is key to ensure that these moneys are being spent responsibly and that Canada stay fiscally prudent by avoiding structural deficits.

Ladies and gentlemen, the objectives highlighted here not only contribute to the stability of our financial system; they also strengthen Canadian competitiveness and long-term prosperity.

FEI Canada thanks you for your time and the opportunity to present our ideas to you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Conway.

We'll now go to Ms. Walmsley, please, for your presentation.

[Katie Walmsley, President, Investment Counsel Association of Canada]

Thank you very much for the opportunity to present to the committee today and provide input on your deliberations on the Canadian financial sector, protection of investors, and the stability of the Canadian financial system.

I will endeavour to be brief in my comments, so as to leave sufficient time for questions. My colleague, Thomas Johnston, will also be making his own remarks. We will be very happy to answer your questions. To begin, allow me to tell you who we are.

The Investment Counsel Association of Canada represents investment management firms across Canada. We invest the assets of private individuals who are saving for retirement, and we invest the assets for pension plans across Canada.

We have 115 companies that are members of the association. They represent every province and every territory in Canada. Our members are managing total assets of $700 billion for their clients.

As you can imagine, the turmoil in the financial sector during recent months has been a grave concern for our members and their clients. The market collapse has been broader and deeper than many downturns in recent years. With millions of baby boomers within 10 to 20 years of retirement, the urgency of an economic recovery that will restore Canadians' capital and confidence as soon as possible is critical.

We want to interject to applaud the federal government for some of the measures you have taken recently in the federal budget, measures that we believe are important first steps toward strengthening the economy: the stimulus package announced in the budget, with $40 billion in stimulus over the next two years; support for the liquidity measures through various measures, which have been commented on in some of the presentations; and support for the OECD in terms of the GDP spending that has been recommended.

We believe government intervention is important, but we also believe it is critical that the federal government look at ways to restore confidence of Canadians in investing in the capital markets and to encourage saving to ensure that they can meet their retirement goals. Confidence in the markets is key, and confidence in the markets is necessary not only for short- and medium-term credit, but also for encouraging savings and investment in the country.

What can the government do? We are going to focus on about six specific initiatives that we believe could restore confidence in the financial system and help Canadians rebuild some of their lost capital. I want to highlight that we truly believe some of these measures would immediately increase the return that Canadians are seeing in their statements, in their investment portfolios, and in their retirement savings. We will end with a key point that our association has been on record for supporting for many years, which is to move forward as soon as possible with a single securities regulator.

The first recommendation we have is that GST be eliminated on investment management fees.

If there is any lesson Canadians have learned during recent months with the economic turmoil, it is the importance of having good investment advice and selecting advisers who clearly understand their retirement goals, understand and are comfortable with their investment philosophy, and communicate with them in a manner that allows them to understand their financial position. Presently, investment management fees are subject to GST. In provinces with harmonized tax, the amount paid by consumers for investment management services is even higher. If Ontario moves forward with the harmonized tax, investors will pay an additional 8% in investment management services. It is important to note that investment managers are able to reclaim the GST or the harmonized tax, but investors are not.

In this time when individual investors are in more need than ever of professional investment advice and pension plans are turning to investment managers to turn around their portfolios to meet their pension plan commitments, it is critical that the federal government consider this as one way to help Canadians rebuild their lost capital. For this reason, we urge the government to consider the elimination of GST on investment management fees. This would restore some capital to individual Canadians and their pension plans and would also encourage some Canadians to seek advice in pursuing their retirement goals.

The second recommendation we wanted to make is with regard to a former Bill C-10. I don't mean the recent budget bill, but Bill C-10 from the last government. It will be reintroduced in the House in the near future, and this committee will be reviewing it. Our association made a presentation to this committee in 2006 and subsequently, in part of our pre-budget submission, in 2007.

The heart of this bill looked at closing off some offshore tax havens through changes to rules on non-resident trusts and foreign investment entity rules. Had the bill passed without amendment, pension plans and retirement savings would have been subject to tax, so over a trillion dollars in pension money would have been subject to tax.

This bill is not before the House right now, but we wanted to comment on this matter because it will likely be introduced in this session of Parliament.

Working with the Senate banking committee, the Department of Finance did issue a comfort letter that provided some exemption for pension plans. It is our hope that when this bill is reintroduced and this committee is reviewing it, you will see those exemptions for pensions such that pension plans will not be subject to any tax, in the event that they invest in anything internationally deemed to be a trust. We are confident that the Department of Finance is working on this initiative but want you to be aware that this is something that will likely be coming in the next legislature. If the amendment is not introduced, Canadians who have already been hit with losses in their retirement savings are going to be subject to tax.

The third point is that our association has always been in support of reduced barriers to trade, both interprovincially and internationally. The former government removed the 30% foreign content limit on RSPs, which we saw as a very positive development. This helps Canadians investing and their investment managers to diversify their portfolios and look at things both within Canada and abroad.

However, there is still a significant barrier that exists for Canadians wanting to invest internationally. Investments on certain foreign stock exchanges are not qualified for investment within RSPs and other tax-deferred savings plans. Even though the government has removed the foreign content limit, there is still a very limited number—about 35 to 40—of foreign exchanges that are allowed for RSP purposes. There are a number of very well respected, established foreign stock exchanges that are not presently available for RSP investment. The list is simply out of date and requires updating to reflect the fact that we are part of a global economy and that a part of diversification of investments is looking internationally and locally. That list needs to be updated.

Our fourth recommendation is this. The federal government and the provincial governments have been looking at modernizing some of the pension rules, which we very much support. The federal government recently released a pension paper entitled “Strengthening the Legislative and Regulatory Framework For Private Pension Plans Subject to the PBSA”. One key recommendation we made as part of our submission is the loosening of the pension rules, again in keeping with encouraging international investment and removing international barriers to investment. Right now there are very restrictive rules limiting the investment pension plans can make in specific companies and portfolios. We are simply asking that these rules be less restrictive and rely on a prudent person to allow investment managers—

[The Chair, Conservative, James Rajotte]

Ms. Walmsley, I apologize for interceding, but I have given you more than your allotted time. We have a lot of questions from members, and so I ask that you conclude very briefly.

[Katie Walmsley]

Our association has been on record as supporting a single regulator. This committee has heard multiple presentations on this, but we want to reiterate that we think it's crucial to move forward on it to encourage investor confidence.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll start with Mr. McCallum, for seven minutes.

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

Thank you, Mr. Chair.

Starting with Ms. Walmsley, I agree with all the recommendations you've made, except one. Unless I'm missing something, I see no merit whatsoever in exempting investment management fees from GST, because every other group in the country would want to be exempted from GST. If investment management fees are exempt, why not dentists' fees? Why not this? Why not that? You're in favour of free trade and open markets and all these goods things, and so I don't know why you're indulging in this special pleading.

The question is, why are you making this special plea, when every other conceivable group in the country would want to ask for the same thing if you got it?

[Thomas Johnston, Treasurer, Board of Directors, Investment Counsel Association of Canada]

It's a good question, Mr. McCallum.

I think at the heart of the issue is that investment mutual funds are a financial service and that there are other financial services that are very similar, such as GICs and deposit instruments, which are exempt from the tax on the labour portion of the fee, which represents about 60% of the management expense ratio of the fund. If we assume that the average fund has a management expense ratio of about 200 basis points and there's $600 billion in the funds, there's $645 million of tax that right now is being attributed directly to the GST. The money is really Canadians' savings for retirement. It's a financial service, but it's categorized differently.

As my colleague has indicated, if we had harmonization with some of the provinces—Ontario, for example, where the provincial tax is currently 8%—that would take the $645 million in tax up to about $1.6 billion. Of that $1.6 billion, $1 billion would be taxable to the labour, if we assume that 60% rate on a financial service, whereas it wouldn't be if it were in a GIC.

At the heart of your question is that mutual funds are retirement savings. They are a financial service, but they are categorized differently. At the end of the day, if the government wants to encourage people to save and have money for retirement, then taking a potential extra $1 billion out, if there were harmonization in just one province alone, would have an adverse impact.

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

Well, I'm not convinced, but thank you.

Mr. Powell, I certainly agree with the $12 billion for auto leasing and with everything you said, except for one question: why is it taking so long? The Prime Minister talked about this around Christmastime. I definitely agree that money needs to flow. Now we hear it won't flow until May at the earliest. Months and months have gone by. I'm all in favour of it for reasons you described, but do you have any idea why it's taking forever to happen?