Special Committee on Cooperatives Committee on July 10th, 2012

[The Chair, Conservative, Blake Richards]

Ms. Guy, your time has expired. I will give you about 15 or 20 seconds just to wrap up, very briefly.

[Denyse Guy]

I have six main, key areas: secure a partnership with the cooperatives sector and Industry Canada; transfer data and statistics on cooperatives that have been collected by the rural and cooperatives secretariat; re-establish a permanent federal government interdepartmental cooperatives committee; the fourth is that government programs be accessible and support the development of co-ops; the fifth, to revamp the Canadian corporate act to support the principles and values of co-ops; and the sixth is that the sector is moving towards a $40 million national cooperative development fund and we would like you to be a partner in that fund.

Thank you.

[The Chair, Conservative, Blake Richards]

Thank you very much.

We will move now to the Canadian Bankers Association.

Mr. Wrobel.

[Marion Wrobel, Vice-President, Policy and Operations, Canadian Bankers Association]

Thank you very much.

Good morning. I would like to thank the committee for this opportunity to provide the banking industry's perspective on the status of cooperatives in Canada.

For the purposes of my appearance today, I'm going to focus my remarks on financial cooperatives.

The Canadian Bankers Association represents 54 banks operating in Canada, banks that are well managed and well capitalized and that operate in a competitive market with strong, prudential oversight. A strong and healthy financial system is the cornerstone of a strong economy, and the CBA believes that credit unions are an integral part of a strong and competitive financial system.

Just to be clear, when I speak of credit unions, I'm also referring to caisses populaires, whether in Quebec or outside of Quebec.

A strong and healthy financial sector helps businesses grow and thrive and helps Canadians buy homes and save for education and retirement. Canadian consumers and businesses enjoy a wide range of affordable and accessible financial products and services, such as chequing and savings accounts, insurance, investments, commercial financing, and mortgages. Competition to provide these financial services is fierce. Not only do banks compete aggressively against each other to provide these financial products and services; they compete against a wide range of providers, including credit unions. These institutions offer products and services similar to those of banks.

For instance, when it comes to chequing and savings accounts, Canada has one of the most accessible financial systems in the world, with 99% of Canadians having an account with a financial institution. Banks alone offer more than 100 accounts packages in the marketplace. Youth, students, and seniors, as well as not-for-profit organizations can access discounted or free accounts. Indeed, 30% of Canadians pay no service fees at all for their banking, and credit unions also offer their own accounts packages to Canadians.

Canadians are well aware of the role of credit unions and of the level of competition and choice in financial services in Canada, and 92% of Canadians agree that there is good choice in financial services for consumers. In fact, credit unions account for 15% of deposits, 12% of residential mortgage originations, and 19% of lending to small and medium-sized enterprises across the country.

I would like to comment on the substantial evolution that we are observing among Canada's credit unions. In order to continue to provide a high level of competition and choice for Canadian consumers and businesses, there has been significant restructuring in the credit union movement. Credit unions, and correspondingly the credit union centrals that serve them, are amalgamating to support expansion in the marketplace and to take advantage of economies of scale.

Credit unions are increasingly moving away from the traditional one-branch or two-branch model. Across the credit union system, while the actual number of credit unions has declined, the size of the branch networks has increased. In Canada, there is one credit union that has nearly 100 branches, three that have between 50 and 75 branches, 12 with between 20 and 50 branches, and 28 that have between 10 and 20 branches. The size of some of these branch networks is comparable to that of small and medium-sized banks.

Consistent with this growth in branch networks is the growth of balance sheets. Over the past decade, the size of the average credit union's balance sheet has tripled. Not only is the average credit union growing, but the largest credit unions make up a significant share of the credit union system in some provinces. In Alberta, the two largest credit unions make up 73% of the credit union assets in the province, and the largest institution accounts for 58% of assets. In British Columbia, Saskatchewan, and Ontario, the figures are 51%, 40%, and 37% respectively for the two largest institutions.

In order to provide liquidity management, payments processing, and other support services to these growing credit unions, credit union centrals in various provinces are amalgamating as well. The credit union centrals of British Columbia and Ontario merged into Central One Credit Union in 2008, while credit union centrals in P.E.I., New Brunswick, and Nova Scotia joined together to form Atlantic Central in 2011. Discussions have taken place for additional consolidation at the central level. I would like to note that these centrals are federally regulated, even as the credit unions themselves are provincially regulated.

I would now like to turn to the federal government's initiative to permit the creation of federal credit unions.

As credit unions continue to evolve in order to provide further competition and choice in the financial marketplace across provincial boundaries, it is important that there be an appropriate supervisory and regulatory framework that supports growth while ensuring safety and soundness for individual credit unions and for the national financial system as a whole.

It is for this reason that the CBA strongly supports the federal government's efforts to establish a legal framework for credit unions to be incorporated and regulated at the federal level if they so choose.

The draft regulatory framework, which is currently the subject of ongoing consultations, subjects federal credit unions to the same prudential capital and liquidity standards and business and investment powers that banks are subject to. At the same time, it provides an opportunity for credit unions to broaden choices for consumers by improving services to existing members and by attracting new members across provincial borders.

While provincial credit unions can incorporate a banking subsidiary or establish a retail association, these options are cumbersome and do not effectively take advantage of economies of scale. The federal credit union legislation provides a more straightforward, simple, and seamless vehicle to operate across provincial borders. It is the view of the CBA that the addition of a federal option provides a tremendous amount of flexibility to the way in which credit unions operate and are supervised and regulated in Canada.

Credit unions can continue to operate under a provincial regulatory regime, but doing so means they will continue to be limited to the province of incorporation. For those credit unions that wish to grow larger by serving members in more than one province, the federal framework offers a good option.

It is important that there be no overlaps or gaps in the regulatory framework for credit unions. For instance, provincial regulators have raised some concerns about some credit unions taking advantage of gaps in provincial legislation and regulation to solicit cross-border deposits. This can ultimately lead to confusion about the nature of and responsibility over these institutions as well as about the nature of deposit guarantee. The federal framework, on the hand, provides a simple, clear, unambiguous means to reach out to members across the country.

Federal credit union legislation is an appropriate model to address the statutory and regulatory gaps. Credit unions incorporated under the federal model will benefit from oversight by the Office of the Superintendent of Financial Institutions and the Canada Deposit Insurance Corporation deposit insurance, while Canadian consumers and businesses will benefit from greater financial choice and competition.

In short, the federal credit union regime goes a long way to creating an appropriate, efficient, and effective regulatory regime for a modern credit union movement in Canada.

Thank you very much. I look forward to your questions.

[The Chair, Conservative, Blake Richards]

Thank you, Mr. Wrobel.

We move now to Credit Union Central of Canada.

Mr. Fitzpatrick will be making the presentation.

[Stephen Fitzpatrick, Vice-President, Corporate Services and Chief Financial Officer, Credit Union Central of Canada]

Thank you, Mr. Chair and committee members, for inviting us to be part of this very important study into the current opportunities and challenges facing the cooperative sector in Canada.

My name is Stephen Fitzpatrick. I'm the vice-president of corporate services and chief financial officer at Credit Union Central of Canada. As such, I'll be speaking from the perspective of credit unions, full-service financial institutions that are cooperatively owned by their individual and commercial members.

I will touch on a couple of the topics my colleague discussed, but as you may expect, we may have a slightly different perspective on some of those matters.

I was to have been accompanied by Monsieur Denis Laframboise, who's the president and CEO of Ottawa-based Your Credit Union. However, he had to deal with a personal matter this morning. He may be here a little later, but we will carry on.

I'd like to start by just providing you some contextual information about credit unions. The Canadian credit union system is a vital competitor in the financial services industry. Credit Union Central of Canada, known as Canadian Central, is the national trade association for its member organizations, which are the centrals, and through them 363 Canadian credit unions.

Canada's credit unions operate a branch network with more than 1,700 locations. These branches serve more than five million members and employ almost 26,000 people across Canada. Almost one-quarter of credit union locations serve small communities where the credit union is the only financial services provider.

As member-owned financial cooperatives, service continues to be our number one motivation. That commitment to service is gaining recognition. For the seventh consecutive year, Canadians ranked credit unions first in overall customer service excellence among all financial institutions, surpassing all the Canadian banks in Synovate Canada's 2011 best banking awards. Credit unions also took sole honours in the categories of “values my business” and “branch service excellence”. In addition, credit unions tied for first place among Canadian FIs in the categories of “financial planning and advice” and “telephone banking excellence”.

I'd now like to highlight for you some of the current trends in the Canadian credit union system. First of all, credit unions continue to be strong performers. Even through the economic crisis, Canada's credit union system has performed extremely well. Canadian credit unions ended 2011 with assets that were 10.1% higher than in 2010, reaching $140.2 billion, while generating record profitability. For comparison, this asset size, $140 billion, is roughly comparable to that of the National Bank of Canada.

Our cooperative model is a key reason for our solid financial performance. Direct accountability to our members, each of whom has an equal say in our operations, means that credit unions are prudent lenders and naturally inclined towards productive investment in our local communities. This strong financial performance has resulted in continued growth in membership. Today more than 5.2 million Canadians belong to a credit union. Our membership growth has slightly outpaced population growth. Despite competition from the large banks and other financial services providers, credit union membership has grown at an average annual rate of 1.2% over the last 10 years. During that same period, Canada's population grew at an annual rate of 1%.

Consolidation in the credit union system is a continuing trend. For decades, some credit unions have responded to increased complexity, to compliance costs, and to changing demographics through consolidation. Mergers between neighbouring like-minded credit unions offer effective solutions to meet the competitive challenges of our rapidly changing financial services industry, while at the same time permitting growth and diversification opportunities in a larger market.

Many small and medium-sized credit unions, and lately larger credit unions, continue to join forces to reduce overhead costs, afford new technology, and offer a broader range of better products. As a result, between 1992 and 2011 the number of credit unions has decreased by 726, declining at an average rate of about 36 credit unions per year.

While mergers have reduced the total number of credit unions, the network of branches, combined with the range of electronic banking services available to members, remains strong. As an example, over the last 20 years the number of ATMs in the system has increased by approximately 50%.

Overall, credit union mergers have contributed to our vibrancy, and they've strengthened our commitment to local and community banking. The result is a combination of locally owned small, medium, and large credit unions that reflect the individuality and character of the communities they serve.

I'd like to talk about the federal credit union option just briefly. The consolidation and growth of the system has implications for the traditional geographical scope of credit unions. For instance, in British Columbia, the three largest credit unions hold 61.5% of the assets in that province. Similarly, in Alberta, the largest credit union holds 59.6%, and in Newfoundland and Labrador, the largest holds 52%. For these credit unions the greatest potential for growth and expansion is beyond the borders of their province of incorporation. For this reason, among others, Canadian Central welcomed the federal credit union legislation that was adopted as part of Budget 2010. We were pleased to hear last week that draft regulations have been released for comment, and we look forward to the coming into force of this legislation that will enable credit unions to choose a new option to address growth opportunities and enhance service to their members.

As we manage growth and the growing expectations of our members in the communities we serve, credit unions do face marketplace and regulatory challenges where the federal government has a role. There are two in particular I would like to draw to the committee's attention today.

First is in relation to small business. Credit unions appreciate the role we play within a strong regulatory framework to protect the savings and security of Canadians. However, we share the concerns of many members of Parliament that regulations are being applied in the same manner for financial institutions with 2,000 employees as they are for those with a dozen or fewer, the result being relatively high compliance costs for credit unions. In their recent final report, the government's red tape reduction commission emphasized that a “one size fits all” approach to regulation tends to disproportionately burden smaller businesses like credit unions.

We urge the federal government to follow through on its commitment in Budget 2011 to require regulators to examine current and future regulation through a small business lens to ensure that new and existing rules do not adversely affect credit unions while creating unintended advantages for larger financial institutions.

Another issue of concern to credit unions is the legislative mandate of Farm Credit Canada. Credit unions value the role of Farm Credit Canada, the role it plays as a committed partner that supports Canadian agriculture in good times and bad. However, the FCC is in an anomalous position relative to other crown financial institutions. It does not face a requirement to lend in the manner that complements the activities of private sector FIs, but instead it can aggressively compete head to head with credit unions while enjoying marked advantages that are related to its status as a crown corporation.

It is also unique in that unlike Export Development Canada and the Business Development Bank of Canada, FCC is not subject to a regular parliamentary mandate review. Canadian Central recommends that the government undertake a public review of the Farm Credit Canada Act to ensure that FCC continues to play a relevant role in a competitive marketplace. We also recommend that the government consider amending FCCs legislation and operating principles to bring them into closer alignment with those of the Business Development Bank and Export Development Canada. Specifically, this would mean that the legislation governing FCC would be subject to a regular parliamentary review, and second, that this legislation would be amended to require FCC to operate in a manner that complements rather than competes with the activities of private sector lenders.

Mr. Chair, Canadian Central wishes to thank this committee and your colleagues for undertaking this important and timely study. Across Canada this year, credit unions are taking part in celebrations to mark the 2012 International Year of Cooperatives. This is an ideal time to reflect upon the vital role that cooperatives have played in building our country and upon how together we can continue to promote and grow cooperatives and credit unions as democratic, responsive, and successful businesses.

I thank you very much for the opportunity to provide some thoughts to you today. We're here to take any questions.

Thank you.

[The Chair, Conservative, Blake Richards]

Thank you very much to all three of you for your opening remarks.

We will move to our first round of questioning now, beginning with Madame LeBlanc.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

Thank you.

I want to thank all the witnesses.

Ms. Guy, I hope that the documents you sent to the chair will be provided to all committee members.

I was especially interested in your presentation. You had some very intriguing suggestions for the federal government. You said that the programs for small and medium-sized businesses, which previous witnesses had praised, did not meet the needs of cooperatives. Could you elaborate on that?

[Denyse Guy]

Thank you very much for the question. I will make sure that you all get the briefs.

One of the challenges in the application forms for various programs that are government sponsored is that they're more easily accessible for business corporations or sole proprietorships or partnerships. Often there isn’t a little box for a cooperative. It's as simple as that. Then they ask, who are the key investors? It's often very difficult to list perhaps 250 members, if it's that size of a cooperative. So that's an issue.

One area we've been focusing on is the services available through the Community Futures Development Corporations, as an example. You should be able to walk into a CFDC across the country and be able to get information on cooperatives. There are initiatives across this country concerning partnerships with local CFDCs, but there should be a Canadian initiative for a level playing field for accessing information about how to incorporate a cooperative and what the steps are in cooperative development. Those are just two examples.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

I was fortunate enough to attend the credit union conference in Montreal at the end of June. I see credit unions as a vital part of our economy, promoting a very specific set of values and principles.

You said you would like to see Industry Canada provide services to credit unions. How do you think we can recognize cooperatives as entities that are distinct from corporations while continuing to promote cooperative principles?

[Denyse Guy]

I think the first place is education and creating more awareness about the cooperative model because there are differences in how we're regulated at a provincial or national level. There's a lack of awareness in and around that. There's also a lack of awareness in the governance structure and in our principles and values, as you've mentioned, which are international principles from the International Co-operative Alliance. Those are key principles. No matter what type of cooperative and where you are in the world, you support these principles.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

Let's turn to the 2012 budget. Would you say that, when it comes to credit unions, the current government is willing to invest money, promote cooperative principles, provide services to this sector and view it as an important part of the economy?

[Denyse Guy]

I would hope so. We're certainly going to be giving a submission on the 2013 budget. We did a budget submission for 2012. We had our three legacy wishes. Obviously, we did not get support for those, but we're hoping to strengthen our partnership with the government. We are hoping....

This is a very special year for the cooperatives sector. We're looking at a stronger relationship with Industry Canada. We're repositioning ourselves within the government.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

Have you had any meetings with Industry Canada officials that indicate the current government is willing to work with credit unions?

[Denyse Guy]

We had initial meetings early in June, which were very positive, so yes.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

A major international gathering is set to take place in Quebec City this fall. Do you think it would be useful for the committee members to attend, in order to meet with people and learn more about the international credit union movement, before preparing their report?

[The Chair, Conservative, Blake Richards]

Your time has expired. I will allow a very brief response.

[Denyse Guy]

Yes, I think it would be a wonderful opportunity for committee members to attend the summit. Also, there's a pre-summit to which leading economists from around the world are coming. I think it would be a wonderful opportunity.

[The Chair, Conservative, Blake Richards]

Thank you very much.

We move now to Mr. Lemieux.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Thank you, Mr. Chair.

Thank you for your testimony. I thought it was excellent. There was a lot to learn there. There were a lot of positive comments from each of you about cooperatives—that they're resilient, that they're strong, adaptable. Madam Guy mentioned that their assets earn about $330 billion, and talked about their survival rates. Mr. Wrobel talked about the substantial evolution that we're experiencing amongst co-ops. The size of the average credit union's balance sheet has tripled over the last decade. Mr. Fitzpatrick talked about the increase of assets, 10% in 2011, generating record profitability. These are all strong indicators that the co-op presence in Canada is not only solid but it's improving.

The first question I'd like to ask is about the survival rate. The study done in Quebec showed that after about ten years, the survival rate of a co-op is about twice that of a business. Madam Guy mentioned that there were similar-type studies done in other provinces as well.

I mean, that's quite a remarkable statistic, a survival rate twice that of business, so I wanted to ask what you think would contribute to that. I'll ask Mr. Fitzpatrick, just because credit unions I'm sure, as we heard from the department, are in the business of lending money, probably to some other co-ops.

I'm wondering if you, from your experience, might be able to comment on what it is that gives co-ops this inherent strength and survivability, particularly in difficult economic times.

[Stephen Fitzpatrick]

From a lender's perspective as opposed to a co-op perspective, I think a lot of it relates to the same factors that make credit unions successful. They are locally owned. They are responsive to the members of their communities. They reflect the character of those communities. There is a willingness within the community to keep those businesses going because they reflect so much of what the community is. They are important to the fabric. If it's a fisheries cooperative in a fishing village in Nova Scotia or Prince Edward Island, it's a vital component of the local economy.

From a lender's point of view, we do a lot to support, let's say in the fishing context, both the individual fishers as well as the cooperatives that they may be a part of. We've worked with them through the low times to get them back to when the times were better.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

Just while I have you speaking about credit unions, perhaps you could elaborate, then, with regard to this initiative to put in place federal regulations for a credit union-type structure. Your notes would indicate that you support that. Do you feel that's a good initiative by the government? Do you feel the government has a good understanding, then, of the credit union presence on the ground right now provincially, but also where they would like to go nationally?

[Stephen Fitzpatrick]

First of all, we do think it's a positive initiative. There are credit unions that are bursting at the seams in their local market, so having the opportunity to move into markets where they aren't as well represented now is an opportunity.

As far as the level of understanding, I think elements in the legislation reflect the character of credit unions. We just received the draft regulations last week, as you know, and there is a 30-day comment period on that. We'll be reviewing those. We think it's a positive first step. There's one credit union that has indicated that it will at least actively look at it, at going federal. We know there are others who are looking at it.

There's a lot to take into account, because it is a different regulatory regime with different requirements and different business lines. There are a lot of factors to take into account. But yes, we do look at it as a positive step.

[Pierre Lemieux, Conservative, Glengarry—Prescott—Russell, ON]

For example, when I think of Desjardins, they are based in Quebec but they are also operating in Ontario. Are you able to elaborate on how perhaps they've structured themselves to allow them to do that, to operate in two different provinces?

[Stephen Fitzpatrick]

I think they've sold their Ontario branches now to Meridian Credit Union—