Public Accounts Committee on Feb. 17th, 2011

[Michael Horgan]

When it comes to tax collection, they're the agency responsible for tax collection.

[Jean-Claude D'Amours, Liberal, Madawaska—Restigouche, NB]

I am not talking about tax collection. I am talking about what goes on right inside financial institutions so as to prevent financial advisors and bankers from helping their clients evade taxes, knowingly or not. I am not talking about the subsequent process of proving guilt. I want to know if, from the outset, there is a mechanism that can reassure the public that Canadian financial institutions are doing what is necessary to prevent tax evasion.

[Michael Horgan]

Yes, and that's a responsibility for the Canada Revenue Agency.

[The Chair, Liberal, Joe Volpe]

That's surprising.

Mr. Shipley.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

Thank you, Mr. Chair.

And thank you to the witnesses.

We're Canadians, all of us, and I think looking at reports that are positive is always good, because we're Canadians, because we learn from reports; we learn from positive things that have happened. I'm always looking at what we can learn from a report like this that can be transferred to other departments, other agencies, that will work, that are maybe not quite so positive as this one.

Madam Lafleur, on the regulatory framework in Canada, sure, we'd like to take credit, but we understand Canadian bank systems for many years have been strong. And that is very positive. To Canadians it seems this is the way it's always been. This is good. And it is.

You talked earlier a little bit about other countries. You said actually that they were interested in the regulatory framework we have. Does it go beyond that, where they're actually interested in the application of it, from some of the discussions you've had?

[Diane Lafleur]

By “application”, I assume you mean how they could take those practices and apply them domestically.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

That's right. It's easy to say that this is good, they wish they had it, and all of that, but then there has to be the application of it.

[Diane Lafleur]

Yes, and the challenge oftentimes is that different countries have different starting points. You can't just wipe the slate clean and start over. You have to deal with the circumstances you're facing at the time.

But I think it's fair to say that there has been a fair amount of interest. I look at Michèle, because I know, for example, on the deposit insurance side, there have been a number of countries that have approached CDIC with a view to asking about its experience of how it manages the deposit insurance system here in Canada, why it didn't have to react to the crisis and provide unlimited deposit insurance, etc. So yes, there has been quite a bit of that kind of request for information.

[Bev Shipley, Conservative, Lambton—Kent—Middlesex, ON]

We know that around the world—everybody knows—there's still a lot of uncertainty. We want to be able to help as much as we can to bring certainty back in, because Canada is not an island. Strong as we are, we get affected by the global....

I'd like to go to the conclusion part of the report, paragraph 5.71. I'd just like to read it: “According to some international organizations, Canadian banks suffered less”—we just talked a little about that—“than most countries during the recent period of financial turmoil, in part, because its regulatory framework and supervisory approach, including communication among federal organizations, are effective.” I think all of those are so important. It says,“A recent, international peer review and the financial crisis have shown that the Canadian regulatory framework is robust.”

We also understand, I think, that the challenge for us in Canada is that things become more complex, just about like every other instance. With innovation, things are more complex where financial markets are rapidly evolving and changing, and there's uncertainty in the markets.

I'm wondering what we should be doing to ensure that the supervisors and the regulators from markets have the tools they need to do their jobs. With the national securities regulator, do we have the framework to actually put that in place?

I'll just leave that. I have others too, but I think I'm going to run out of time.

[Michael Horgan]

I might make several comments. First, on some of your initial remarks, I think one of the strengths of the Canadian system is not only that we have regulations, but we have supervision, so we enforce the regulations, and I think we have a robust--if I can put it this way--Superintendent of Financial Institutions and an organization that is not just.... The regulations aren't just there; we actually have people who are implementing them and following those regulations and following the financial system on a day in and day out basis. So I think that's probably a strength of the Canadian system.

I think we've done well, but we always have to learn. Financial markets change all the time. We constantly have to keep up on developments, and we are doing that domestically, and of course we're following developments internationally very closely. It's very important for us to keep up with the latest developments and the latest techniques and tools to have an effective financial regulatory system.

On your comment on the Canadian securities regulator, as you know, it's the Government of Canada's view that we should put in place a Canadian securities regulator. If and when that is put in place, subject of course to the decisions by the Supreme Court of Canada, that securities regulator would be very much part of the regulatory system we would have. That would have to be integrated into the system we've got now in a robust way.

[The Chair, Liberal, Joe Volpe]

Thank you, Mr. Horgan and Mr. Shipley.

Mr. Horgan, just very quickly, I know that if anybody is listening to this...from your last two responses, I felt if I were in the audience someplace I would have to ask on their behalf. If the CRA is the one that's responsible for ensuring that the framework you've put in place is followed and that it translates into appropriate revenues for the Government of Canada, the people of Canada, who is responsible for people like Jones and what he perpetrated on the Canadian public, or indeed the other fellow, Madoff, and the banks? Who would take responsibility for that if you say the system is well regulated by you?

[Michael Horgan]

I think that's an issue of securities regulation, which at the moment is done at the provincial level. I think one of the things you're proposing to do as the Government of Canada is to put in place a Canadian securities regulator, and part of that would be an enhanced and robust enforcement of those securities regulations.

[The Chair, Liberal, Joe Volpe]

That's not good enough now?

[Michael Horgan]

We think it would be better if there were a Canadian securities regulator.

[The Chair, Liberal, Joe Volpe]

Monsieur Vincent.

[Robert Vincent, Bloc, Shefford, QC]

Thank you, Mr. Chair. I am going to share my time with Ms. Faille.

Mr. Horgan, you said the following in your opening remarks:

More recently, SAC invited the Canada Mortgage and Housing Corporation to help form advice on ensuring the long-term sustainability of Canada's housing market. With the benefit of this advice, the Government introduced adjustments to the rules for government-backed insured mortgages aimed at supporting the long-term stability of Canada's housing market.

In terms of access to housing, we know that bank rates have gone down because of the economic crisis. Yet we see that, in all the provinces, inflation has triggered a dramatic increase in the prices of houses, condos or whatever sells on the market. But if interest rates go up by 2%, many owners could lose their houses because of all the financial implications. It is not normal for house prices to go up this much during an economic crisis. You might not find the situation alarming at the moment, but have you started thinking seriously about it?

They showed on TV the financial ramifications for condos that were sold at $150,000 but were actually worth $120,000. And the Canada Mortgage and Housing Corporation is financing that. No one is losing money, but, sooner or later, someone will be. It will be the banks and CMHC. Have you been warned? Do you think we should avoid the day when interest rates go up, depression hits, and houses are repossessed?

[Diane Lafleur]

In short, I would say yes. Absolutely. We are keeping a close watch on that. Let me remind you that, in 2008, even before the crisis was at its peak, the government changed the criteria for insured mortgages. It has since taken action twice, including last January, tightening up the criteria again. The main goal is to maintain long-term stability of Canada's mortgage market.

We realized during the economic crisis that some practices were really reckless. That started in the United States and in other places, and it almost became the norm. In Canada, those practices were not very frequent, but there were some signs here and there. The government saw fit to do something before the 40-year mortgages with no down payment became too popular. The purpose of all that was to ensure that Canadians who buy houses can continue to pay their mortgages even if interest rates fluctuate.

[Robert Vincent, Bloc, Shefford, QC]

The minimum wage and people’s salaries do not go up, but house prices do. The financial backlash will affect banks and CMHC. Right now, we are managing to give people a chance to pay, but tomorrow, when interest rates will go up by 1 or 2%, what will happen with all those houses? Will you repossess the houses and then repay the banks?

[Diane Lafleur]

One thing we did—last April, I believe—was to make the criteria stricter for people who were applying for a mortgage. They must qualify for a five-year rate, even if they get a one-year mortgage. The five-year rate is normally higher than the one-year or two-year rate. Most people take out a short-term mortgage, but we want to make sure that, if interest rates increase, they will be able to handle a higher rate. So that leaves some leeway.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

Do we still have time?

[The Chair, Liberal, Joe Volpe]

You have one minute.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

My question follows from my colleague's.

The federal government absorbs mortgage penalty charges when its employees relocate. Could you tell us how much the government paid out in 2007, 2008, 2009 and 2010, throughout the crisis? If you don't have the figures handy, could you send them to us?

[Diane Lafleur]

I sure don't have that kind of information with me.

[Meili Faille, Bloc, Vaudreuil—Soulanges, QC]

Could you send us a written report about it? That would be useful to us.

[Diane Lafleur]

I'm not sure that falls under the Department of Finance, but we are going to look into it.