Finance Committee on March 31st, 2009

[Thomas Johnston]

Because of the time, we didn't highlight this in our fifth recommendation, but it ties to pension plans as well. The issue is that you have $1 trillion worth of pension plans; you have the top eight or ten who invest themselves, like Teachers, OMERS, and CPP. The vast majority of the remaining pension plans—there are about 6,000 defined benefit plans in Canada and about 46,000 capital accumulation plans, which are group RRSPs and DC pension plans—invest through members like us. We use our pooled funds to manage, where there are synergies.

There is a key issue, in that the tax act creates an arbitrary distinction between a fund that has 150 or more investors and a fund that has 150 or fewer. It really is just arbitrary. The anecdotal evidence we've heard is that Stanley Hartt, when he was in Finance, came up with this 150 threshold on the back of an envelope in an Ottawa restaurant.

The real issue of how this affects Canadians is that you could have your pensions in a fund that might have ten pension plans, which might have one million underlying investors in them, and one large group RRSP that has 200 members, so that you're over the 150. If the group RRSP comes out, you still have one million members, but from the tax act standpoint, the trust comes to be seen as non-commercial. And you have all sorts of tax implications that hit the pension plans: part of it minimum tax; part of it Part XII.2 tax; you can't do non-taxable mergers; it's no longer a registered investment for an RRSP.

What we're recommending is very clear. We believe there is no detrimental tax loss to the capital base for government. You can keep the 150; it's been there since the 1970s. But allow for a look-through for defined benefit and defined contribution plans, just as you do for group RRSPs. Also, consider changing the 150 down to 10 unrelated investors. This one effect would really demonstrate to the markets a recognition of the realities of how money is invested and show some sympathy to the pension industry.

[Katie Walmsley]

Let me interject one comment on that. You're seeing in the newspapers all these funds consolidating. This is one of the reasons they're doing it: they're getting too small; they're dropping below it, and investors are paying tax. On their statements, that tax is not transparent. In the spirit of transparency, investors need to realize that they're paying tax on RRSPs just because the fund has dropped below that limit. So it needs to be lowered; it's just too arbitrary.

[Ted Menzies, Conservative, Macleod, AB]

Good, thank you.

Let me go back to access to credit. Mr. Buell, you made some comments in your opening remarks and publicly about a common securities regulator. We had people here last Parliament reminding us, concerning this asset-backed commercial paper, that they didn't know what they owned, and others appeared before us who said that they didn't know they owned it, which we found very troubling.

Your group has been very good at highlighting those concerns, and I think all of us around the table share the concern that there are no repercussions for that type of adviser or broker, or whatever term you want to use. We'll all admit that a common securities regulator might not have stopped this, but if we can prevent a similar situation by bringing this together....

One of my favourite radio commentators, Anna Maria Tremonti, when you were speaking to her the other day.... I was speaking to her just the other morning, John, if you didn't hear me. I will quote: “One of the things that we're concerned about is that we don't have a national system of protecting investors, and that's to my point. People from different provinces will be treated a little bit differently, and we think it's important that all Canadians should have the same amount of protection, and that can only be done if there's a national organization.”

Do you have any advice for us, when putting this panel together, this group that will be recommending to the minister on how we set it up on a voluntary basis—just some quick advice, if you have some?

[Stan Buell]

My opinion is that the main fault with the regulatory system is that it's set up based on prescriptive rules, and this can be quite onerous but still ineffective in protecting investors. To me, there's a fundamental lack of the sense of right and wrong. In our court system, the judges follow the law, and you see some decisions that seem wrong—morally wrong at least, but maybe correct in accordance with the law. The Ontario Bar Association admits that the justice system doesn't mete out justice.

What we feel is needed is a change in the fundamental way we approach regulation. We should be talking about right and wrong. To me, it's fundamentally wrong to destroy a senior's savings, to put them into unsuitable products, when in many cases under the mattress would be all they need. They have enough money, but they end up losing the majority of it because they've been put into principal-protected notes or business income trusts or even some mutual funds that are quite toxic, which seniors should not be invested in.

Somehow I think we have to get the idea across that the financial services industry has a fiduciary responsibility, and if there is a court case...and court cases are not very suitable, because they take too long. We need something that gives a timely resolution, in two to three years. You can't have an 80-year-old spend ten years going through court. Somebody has to step up and say that we need a way to resolve these disputes quickly.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Menzies.

Monsieur Mulcair, please.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you, Mr. Chair.

Firstly, I wish to thank Mr. Buell most sincerely for his statement. His testimony was very moving.

Last night, at the NDP caucus, we met with Ms. Diane Urquhart who, like Mr. Buell, works extensively in this area, namely with the victims of non-bank commercial paper. She was accompanied by a retired police officer who had more than 30 years of service with the Toronto police in the area of economic crimes. They both made a very impassioned plea in favour of a more stringent enforcement of legislation, especially the Criminal Code.

I would like to know if Mr. Buell shares the same point of view as Ms. Urquhart.

[Stan Buell]

Yes, I would confess that she is a member of our association. We have a number of people who are members of our association, but we feel that my voice alone is not enough, so these people speak out on specific topics. Ken Kivenko is our expert on mutual funds. We have a professor from York University who looks after disputes or complaints handling, which is another problem.

But I think we need to look at the fundamental cause of all of these problems. That's why I say we need to look at right and wrong and develop a national securities regulator, not—

[Thomas Mulcair, NDP, Outremont, QC]

Allow me to ask another question. You are right. Your comments are similar to the ones made by Mark Carney, Governor of the Bank of Canada. He said that in all of these issues, we must return to the concept of value-based products, to use the term that he used. Thank you very much, Mr. Buell.

I would like to now turn to an old friend and colleague from the Quebec Bar, Mr. David Powell. I can assure you of one thing, Mr. Chair. The fact that he is sitting next to me does not necessarily mean that he has joined the international socialist movement, even though I still remain hopeful.

Now that the budget has been adopted, what is the most important thing that the government must accomplish? I greatly appreciated the nuances and subtlety in his answer to my colleague Mr. McCallum's question, and I understand the circumstances, but in concrete terms, what must the government do to achieve its objectives?

[David Powell]

Thank you, Mr. Mulcair.

Yes, indeed, you're right that it may be some time before I consider joining the international socialist movement. That aside, I will say, and it may sound contradictory to my earlier remarks, that I do agree that time is of the essence.

I didn't say that at the outset. Our concern is that there is still demand out there for credit, but with every day that passes and with what people read in the newspapers, there is concern that people are going to start making decisions about whether they want to take credit or not, and I think that moving this forward as quickly as possible has to be a primary objective.

The second is the KISS principle: keep it simple.

[Thomas Mulcair, NDP, Outremont, QC]

Isn't there a second S?

[David Powell]

No, it's “Keep it simple, customer”, or KISC.

We've seen programs that were put forward for the banks in the fall that were just not taken up by the banks because they didn't work. That was because either the pricing was too high or some other criterion just didn't work and didn't reflect the marketplace. So I think it's extremely important to keep it simple.

The last point is that we cannot wait for the government to create its own internal major infrastructure to deal with this issue, because if we wait for staffing rules and practices, procedures, and forms, it will be 18 months from now and we'll find that the marketplace has changed dramatically.

There are a lot of people out there. This is an industry that was well known, that has been around for 25 or 30 years, with a lot of expertise. Quite frankly, as I've told people at Finance, the people who have the expertise that the government can draw upon are underemployed right now, and my concern is that in a few months' time they may be unemployed and we'll lose a lot of expertise that we will need going forward.

[Thomas Mulcair, NDP, Outremont, QC]

Thank you very much, Mr. Powell.

I wish to congratulate Mr. Boychuk for his very refreshing and candid comments. He said in a very distinct and straightforward way: “It's not happening.” Such honesty is quite refreshing, and I thank him. That is exactly what we feel. This is part and parcel of the committee's analysis.

As I have only two minutes, I will now turn to Ms. Walmsley, with whom I would like to have a brief exchange. To her mind, the federal government could do a better job of regulating securities. She is certainly aware of the Vincent Lacroix case, in Quebec. Mr. Lacroix is serving a prison sentence of more than 10 years. His case is still before the courts, where it has yet to be determined whether his sentence will last 8, 10 or 12 years. It is the duration of the sentence that is being appealed, not the sentence itself. He was convicted on charges laid by the Autorité des marchés financiers du Québec. Vincent Lacroix is literally facing thousands of criminal charges. Yet, as regards the criminal charges that fall within federal jurisdiction, the first day of the first trial for the first charge has yet to occur.

I would like to know what makes Ms. Walmsley believe that the federal government could be doing a better job in this regard. In the sponsorship scandal, each one of the legal actions that led to a prison sentence and convictions was brought by the Province of Quebec. This was not the outcome in any of the proceedings instituted by the federal government in the sponsorship scandal.

I could draw up a long list of many similar cases where the federal government shows total incompetence in enforcing existing laws, be they provisions of the Criminal Code or the Competition Act, which both fall within federal jurisdiction. At this committee, we have heard from representatives from the famous Office of the Superintendent of Financial Institutions, which does nothing.

I'd simply like to know what makes you believe that the federal government is doing a better job. What is the basis for this bias?

[Katie Walmsley]

I believe in my opening remarks I complimented the government on taking some first steps toward stimulus and helping to stabilize the economy, but our comments in our submissions on a single regulator acknowledge that right now there is a hodgepodge of regulations in Canada that needs to be reviewed and simplified. It's the KISS principle again.

We are by no means suggesting that we have utopia right now, but we need to move in a direction that is going to better protect investors and provide more stability.

[The Chair, Conservative, James Rajotte]

Thank you.

We will go to Mr. McKay.

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

Thank you, Mr. Chair.

With all this kissing in the room, I am just feeling the love as we speak.

Mr. Wallace and I, speaking of love, were chatting before the committee started--

[Thomas Mulcair, NDP, Outremont, QC]

That's more information than we need.

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

If that makes you uncomfortable, Mr. Mulcair....

We were chatting before the committee. Mr. Wallace had just gone out and bought a car. He had sufficient funds to pay for the car, yet it made absolutely no sense for him to actually pay money for the car. It made far more sense for him to just take the credit, because the credit was going to cost him nothing.

It seems to me to be a significant anomaly in the system. It compels the consumer to make a rational economic choice that to use somebody else's money for nothing is far more sensible than using his own money. It seems to me that if that decision is repeated over and over again throughout the system, you will create your own difficulties in the credit system.

Would you comment on that, Mr. Powell?

[David Powell]

In certain segments in the leasing industry, particularly the vehicle leasing industry, car manufacturers have chosen in effect to subsidize the rates. That was a business decision they made in order to attract market share. Canadian consumers benefited enormously from it, and continue to benefit enormously from it, because rates are still subsidized.

In most of the equipment area that is not the case, but it was just a business decision they made--

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

Hasn't this become a short-term gain for long-term pain?

[David Powell]

The way it was explained to me, in part, was that if you have an automobile that could retail for $23,000 and you choose to sell it for $25,000 and give away free financing, you're essentially taking your profit as the manufacturer as opposed to the credit company. The credit company for the automobile manufacturers is essentially part of the production and sales cycle of the manufacturers. The credit company is there to help move vehicles, so instead of taking a profit at the credit company level, you are taking a profit at the manufacturer level. It all comes out in the wash.

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

Effectively, it increases the prices of vehicles and postpones your profit for the course of the three-year term of the financing, ultimately creating a great difficulty for the manufacturer.

[David Powell]

Don't get me wrong. I'm not here to defend the marketing practices of our members. Those are their particular choices.

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

I appreciate that, but it is an anomaly. When you do financing for something other than financing, you create your own internal set of contradictions, and that is one of them.

Thank you.

My second question is directed to Mr. Conway. It has to do with the pension issue.

There is a lot of pressure on the government to change the ratios or to move them down and be a little more flexible, etc. With certain plans, possibly Air Canada and maybe others--I don't really know--you can move these ratios around until the deck chairs on the Titanic are nicely arranged, but the truth of the matter is that the pension plan is going to require government intervention.

Mr. Conway, should the government contemplate changing the date at which the pension is realized? In other words, should it go from age 65 to age 67 or something of that nature? Should that be on the table as a point of discussion for federally regulated pension plans?

[Michael Conway]

Our focus has dealt mainly with the period of the funding of the solvency deficits of the defined benefit pension plans. There is currently an anomaly in that the liabilities are a long-term obligation, yet the shortfall that's created by the drop in the asset values is being.... Under current regulations, they're a five-year term, and we presented to Mr. Menzies' group our recommendations in that regard.

Mr. Boychuk also has experience in that area.

[Michael Boychuk]

I would comment that our group, as well as many other groups who have been in front of Mr. Menzies in the last little while—and those likely to come—are of the firm belief that the best protection and safety for any pensioner or any member of a pension plan, particularly a defined benefit plan, is the financial viability of its sponsor.

When you look out a little bit further and consider the more common question you've posed about extending the age from 65 to 67, all it is going to do is to increase longevity, which has already been baked into a lot of the plans, because people are living longer today. So that is in fact a cost to the pension plans and a burden. When you look at the period of time that companies have to fund those deficits, it's a fairly short period under the current rules for liabilities that extend decades into the future.