Finance Committee on May 29th, 2014

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Just to clarify, you are telling me that the proposed amendment to the legislation does not apply to the products traded on the Montreal Exchange, but rather to any negotiated over-the-counter derivatives, which don't currently come under the jurisdiction of the Autorité des marchés financiers.

[Wayne Foster]

Yes. It wouldn't include exchange-traded derivatives that are traded on the Montreal Exchange that are regulated by the AMF.

[The Chair, Conservative, James Rajotte]

We'll vote on clause 210.

(Clause 210 agreed to)

(On clause 211)

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Foster. I appreciate your time here this evening.

We will move to division 14, Insurance Companies Act.

We'll ask Mr. Wu to come forward. We have one clause and three amendments.

Our first amendment is LIB-15 with Mr. McKay.

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

Thank you.

This involves the demutualization, as you know. Mutual insurance companies play a pretty important role in rural communities. When the government held consultations on the demutualization framework, they heard from Finance Canada and their own summary of the consultation said:

Concerns were expressed that demutualization could lead to consolidation, reduce competition, access to services, and weaken ties to the rural communities in which most mutual companies are based.

The committee also heard concerns that votes in demutualization proposals could be decided by just mutual policyholders and not all policyholders. Amendment Liberal-15 helps respond to these concerns by requiring that all policyholders be entitled to vote on the demutualization proposal. It also requires that any such vote take place at a meeting with a quorum of a majority of all policyholders in person or represented by proxy holders.

This amendment was requested by the Canadian association of mutual policy companies.

So there are my instructions from my colleague but it's fairly simple. If in fact demutualization is going to be taking place then it has to be all policyholders rather than just simply a restricted pool of policyholders and the fear is that mutual companies will simply disappear, particularly in rural Canada but in other places as well.

[The Chair, Conservative, James Rajotte]

Mr. Caron, please.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much, Mr. Chair.

In our opinion, the content of clause 14 is not in line with the government's commitment to establish an effective and fair regulatory framework for the demutualization process.

I think the provisions that enable the government to bring certain matters before the courts illustrate a lack of seriousness. They also illustrate a lack of political will to establish a real framework and to protect the industry against private interests.

Once again, clause 14 of Bill C-31 does not take into account the need to modernize laws and procedures relative to subscription notes and, consequently, to subscribers' right to vote in the context of a demutualization process. This bill contains no information on the nature of mutual companies' assets and the way they should be used and allocated following a demutualization.

In addition, a witness representing the Canadian Association of Mutual Insurance Companies said that mutual companies' assets should be considered as the mutual insurance industry's collective assets. That's especially the case when a mutual insurance company goes bankrupt, as other mutual companies should handle any outstanding contracts.

We heard a number of witnesses discuss this. Several of my colleagues from this committee were there when we studied the issue of demutualization during a meeting entirely dedicated to that topic. The discussion was interesting because this is a very complex sector. During that study, some fairly informative facts were brought forward, especially when a typical case was discussed involving the Economical Mutual Insurance Company, which talked about some issues with demutualization.

The company currently has over one million insurance policies. However, only 943 individuals are mutual insurance policyholders. The company has a capitalization of about $1.3 billion. An attempt at demutualization had begun that would have enabled each of the mutual policyholders—so each of the 943 individuals—to obtain personal assets in the amount exceeding $1 million. What would have happened to regular policyholders? They would have been left high and dry.

In short, it is really important to think about the interest of all those mutual insurance companies' users. It is also important to ensure that those policyholders—not only mutual policyholders, but all policyholders—can have a say in the case of demutualization proposals.

Currently, the bill delegates far too much authority to the courts. It relieves the government of its responsibility to make a decision, despite the commitment the government has made. Finally, the legislation allows the courts and tribunals to determine what happens in the case of a demutualization, and that could put all the power in the hands of mutual policyholders.

So if mutual insurance companies or shareholders are driven by short-term profits, the mutual company itself is at risk. The company is also potentially at risk. In fact, the president of the Economical Mutual Insurance Company did not even conceal the fact that the company, or the mutual, planned to be absorbed by or to merge with another company and eventually disappear altogether.

Once again, individual policyholders ultimately suffer in a situation where mutual policyholders are interested in short-term profits.

I know that our amendments are somewhat similar to those moved by the Liberal Party. However, ours aim to integrate policy holders, either by ensuring that they are invited to general meetings where demutualization would be discussed, or by giving them a say should they participate in that general meeting.

I invite my colleagues to seriously consider the decision they will make during this vote because some fairly significant consequences will arise for thousands, if not millions, of individuals. I know that Mr. Van Kesteren, among others, has done business with a mutual insurance company in his riding.

Give this some serious thought because your vote will have a fairly considerable impact.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you Mr. Caron.

I'll go to Mr. Van Kesteren now, please.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Chair.

We're talking about the framework. The authority to create the framework should be set out in forthcoming regulations, as it was done in the life demutualization process. The property and casualty companies’ unique circumstances require a framework that is flexible enough to address the dual structure of some of the companies that they seek to demutualize.

The government has committed itself in economic action plan 2014 to consult on this framework. We must remember that this sets out the authority to set out that framework alone, and that consultations will take place when that process begins.

[The Chair, Conservative, James Rajotte]

Thank you.

Further discussion, Mr. McKay...?

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

For some reason or another that's not giving me great comfort. Let me just ask Mr. Wu a couple of questions here.

It seems to me that when there is a business opportunity for merger or demutualization, or possibly even in bankruptcy, that the mutual policyholders seem to be able to jump to the head of the line, make the decisions, and leave the others holding the bag. So I don't quite understand what the opposition is to this particular amendment if in fact you're trying to level the playing field among policyholders.

[James Wu, Chief, Financial Institutions Analysis, Department of Finance]

Thank you very much for the question. Let me try to elaborate a little bit on the process that is envisioned in respect to this framework. As was stated in the economic action plan 2014, the government committed to providing a demutualization framework for P and C companies. As occurred in the case of the mutual life insurance companies, the legislation just gives the broad regulations-making authority...and many of the details and issues I think that were raised earlier are set out in the regulations.

So for example with respect to who has the right to vote, which I think is one of the concerns raised, in the process those details and definitions are set out in the regulations. The view is that the regulations are in the appropriate place to develop and articulate the framework. There are many complicated pieces to how a demutualization framework could operate, and it's important to have a vision of all those pieces together to understand how the framework would operate. I think it is important to get the framework right the first time because these are major structural changes for the companies.

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

Why wouldn't you take this opportunity to secure the rights of the folks who are the policyholders?

[James Wu]

These issues, as well as many of the others that were identified to the government during the consultation process in June 2011 and in subsequent consequence processes, formed considerations that are assisting the department in formulating proposals on the framework. It's up to the government to decide what to do with those considerations in articulating the framework.

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

Here's the government and they're presenting this massive bill and they want to do this so the mover of the amendment is suggesting that this is time to protect some people by giving them votes at special meetings. If you're going to establish a framework surely you should have some guidance from Parliament as to what the framework should look like, and it's actually generated from your own consultations. I'm not saying you're being hoisted on your own petard here, but you're the ones that raised the issue. This is a response, and it is to a framework, and it is to a protective framework, so why not?

[James Wu]

Thank you for the question. I don't presume to comment on the prerogative of Parliament to decide what is legislation versus regulations. Let me just say that in respect of, again, the existing framework for mutual life insurance companies, the framework seemed to have operated well. Again very similar to this case, the framework under which regulations were made were set in legislation, and the details including who gets to vote and who gets the benefits were set out in regulations.

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

Well it seems to have worked very well for those who are the owners of the special policy, the mutual policyholders, but it hasn't worked quite so well for everybody else. I'm sure that Manulife shareholders converted their policies into shares and thank you very much we've done very well, but that sometimes leaves the others high and dry.

So why wouldn't the Government of Canada as an even-handed approach try to protect the rights of shareholders with this amendment?

[James Wu]

Again I don't presume to speak for the government, but on behalf of the department let me just say in using the similar approach in the framework that exists under the life demutualization framework we appreciate there are concerns and unique aspects of the mutual P and C industry, and hence that's why adjustments or expansions of the regulations-making framework were recommended and tabled in Bill C-31.

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

But why would people make representations to the minister or the department? The department takes note of their concerns, and in fact publishes their concerns, and when an opportunity comes up to level the playing field to protect, the department stands back and says, “Well, maybe we'll cover it off in the regulations, or maybe we won't.”

I don't understand your reasoning.

[James Wu]

Let me try to answer this way. The proposed framework that the department would have in mind would set out all the relevant factors in the regulations.

[The Chair, Conservative, James Rajotte]

Monsieur Caron.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Mr. Wu, thank your for joining us today. I have a few questions for you.

You said the following regarding the issues covered in this amendment.

You say they would be better addressed by the regulations. Why do you say that?

[James Wu]

If we use the mutual life insurance demutualization process as an example, a lot of the relevant details, and if you will, even the concerns that were raised by policyholders in the P and C process, were articulated in regulations. I think, as you said, sir, this process can be very complex, and the regulations try to factor in all the relevant and important issues together in one framework, in one proposal, and in fact, if you will, in one consultation process, because when the regulations move ahead through the regulatory process in part I of the Gazette, they will be published, and there will be a common period, and all the relevant factors will be seen together, and appropriate comments will be obtained from relevant stakeholders for further consideration.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

On the other side, you would agree with me that the process of regulation and publishing through the Gazette and so on is much less transparent and gives more possibilities of inconsistency in decision-making?

[James Wu]

I don't think I'm in a position to comment on that, sir.