Mr. Speaker, it is a pleasure to enter the debate on Bill C-100. This bill is designed to bring about certain changes and make some amendments to the Trust Companies Act, the Interest Act and so on. I want to address this in the context of what is happening in the financial world in Canada today.
About 10 years ago legislation was passed in the House which actually eliminated the four pillars of Canada's financial institutions. I will review briefly what that was all about. We know that the four pillars which existed were the banks, the trust companies, the insurance companies and the investment companies, or investment dealers as they are more commonly known today.
The provisions in the past were that the banks took deposits, made loans and had financial interaction with their customers. The ownership of the banks was restricted to 10 per cent. No one person or group could own more than 10 per cent of a bank.
The trust companies were another pillar. They were allowed to hold property in trust for others. They could hold shares, bonds and real estate. Often they exercised the prerogative and in fact did take the fiduciary responsibility to manage the portfolios of individuals, particularly widows, children, orphans, and other people who did not want to look after their own portfolios. It restricted very much the kinds of things the trust companies could do. For example, the trust companies could not lend out more money than they actually had on deposit. They also were limited in the kinds of loans they could give. For instance, they were excluded for many years from lending out under the Small Business Loans Act.
The insurance companies, the third pillar, were divided into two sections: the life insurance section, and the property and casualty section. The life insurance companies were there to provide life insurance policies and annuities for people who wanted payment in perpetuity. The property and casualty insurance companies dealt with the liabilities that might be incurred toward individuals. They also insured the physical properties, buildings in most cases and vehicles and other equipment.
The fourth pillar was the investment companies. The investment companies were the underwriters of equity shares. They also helped to distribute those particular shares once they were issued. They also underwrote debentures and limited partnerships and made a market for these particular securities. They acted nationally and internationally so that individuals who wanted to sell shares internationally could do that.
In 1987 these pillars came apart. They were changed. The legislation allowed the banks to own trust companies, the banks to own insurance companies and the banks to own investment dealers. The independence which was guaranteed before was now amalgamated under one piece of legislation. The insurance companies also took advantage of those changes. They bought trust companies and in some cases the established banks. They also got into the mutual fund distribution business.
Why did it happen? It happened because the insurance companies and banks are the two big giants in the financial institutions. They command the largest proportion of the money that is managed in our financial world. The banks wanted access to the huge funds of money the insurance companies had and of course the insurance companies wanted to keep them out.
There was a real conflict going on at that time. The insurance companies finally agreed to let the banks buy insurance companies. That made it possible for the banks to actually own an insurance company, but they could not distribute the insurance through their branches.
Actually, the very thing the insurance companies wanted to prevent they ended up not preventing. Now the only difference is the bank cannot really distribute it through their branch network. I will talk about that in more detail later.
I will briefly focus on the concentration of the financial interests that has come into an increasingly small group. Fewer and fewer companies actually manage more and more of the financial assets in Canada. That is really what has happened here. I want to bring this into a more detailed focus as I get toward the end of my speech.
The policy paper was presented by the Secretary of State for Financial Institutions when he appeared before the Senate committee in August. He said he intended to release a policy paper sometime early in 1996 which would deal with these four financial institutions under the Trust Companies Act, the Loans Act, the Investment Companies Act and the Bank Act.
The secretary of state wants to release that in the early part of 1996. That policy paper would then be followed by further consultation before we table legislation for passage early in 1997 which has to do with a total review of the Financial Institutions Act. He said: "I want to act now on the issues included in Bill C-100 because the legislation enhances the safety and soundness of the system. When steps can be taken to improve on it to diminish risk, I believe it is important to get on with those changes right away".
It is pretty hard to argue against that, except that we are now at the end of November. This statement was made in August. The bill is before the House. In the early part of 1996 there is to be this
policy paper, yet we have something that is supposed to be acted on right now.
I warn the secretary of state and the government that to make the kinds of changes that are being proposed in this legislation will affect other legislation. I am convinced it will affect the overall review that will take place in 1997.
What is the big hurry now? We are not even seven weeks away from 1996 and we are faced with supposedly some kind of an emergency. I submit there is no emergency. There is no urgency to get this done right now.
Some people will say that this is actually to come to grips with a big problem we had last year when Confederation Life went down. What is really involved here is that this is a very subtle way to get us ready for that continued erosion of the distinction between the financial pillars. It will have the effect of drawing more and more power into the hands of fewer and fewer financial institutions, namely the banks.
I will get into the Confederation Life matter in greater detail because it is this concentration of power that creates some difficulties. For example, the Confederation Life people bought trust companies and through that trust company they developed what would easily be characterized as an imprudent portfolio. It was imprudent from the point of view that it was overextended in a particular sector.
My understanding is that the former Superintendent of Financial Institutions did tell the Standing Committee on Industry that he had warned that particular institution that it was over extended in the real estate market. But what did he do? Nothing. What did the company do? Nothing.
Some people would argue it is more poor management than an imprudent portfolio. Imprudent portfolio, poor management, whatever the case, the issue is there was legislative provision that allowed a concentration and overextension that was never the intention of the original legislation but nevertheless was the effect of it. That is precisely the danger we are running into here.
Suppose one of our chartered banks today were to go down. Imagine the implications that would have across the country. Within that context let us now look at the provisions in Bill C-100. In particular, I want to look at the Office of the Superintendent of Financial Institutions.
In this context I would refer to exactly what the purpose of the bill is. It is to amend the Bank Act, the Co-operative Credit Associations Act, the Insurance Act, and the Trust and Loan Companies Act, dealing with the disclosure of information, the elimination of appeals in relation to certain matters, the disqualification of persons from becoming office holders of an institution, the taking of control of an institution by the Superintendent of Financial Institutions, and changes to the duties of the superintendent.
Then there are amendments to the Winding-up Act respecting the circumstances and procedures for winding up an institution and the revised part III dealing with the restructuring of insurance companies and amendments to the Canada Deposit Insurance Corporations Act concerning the business affairs of the corporation, the restructuring of the institutions by means of divesting of shares and the corporation becoming a receiver, the assessment and collection of deposit insurance premiums, and the enforcement of the act.
What are some of these details? I refer to clause 81:
(2) The Governor in Council may make regulations and the Superintendent may make guidelines respecting the maintenance by life companies and societies of adequate capital-
Okay, let us keep that in mind.
(3) Notwithstanding that a life company or society is complying with regulations or guidelines made under subsection (2), the Superintendent may, by order, direct the company or society
(a) to increase its capital; or
(b) to provide additional liquidity in such forms and amounts as the Superintendent may require.
Does anybody need any more authority than that to run a company? The whole company could be run with those two phrases.
Then the bill goes on to state:
The Governor in Council may make regulations and the Superintendent may make guidelines respecting the maintenance by property and casualty companies of assets of a particular value.
This is again a direct imposition. In fact the Superintendent of Financial Institutions can get into the exact management now of the company itself:
Notwithstanding that a property and casualty company is complying with regulations or guidelines made under subsection (2), the Superintendent may, by order, direct the company to increase its assets.
A company may then enter into a transaction with a related party of a company if the Superintendent, by order, has exempted the transaction from the provisions of section 521.
We want to put this into the context of clause 93, because we recognize how significant the powers of the superintendent are in determining the assets of a company, to increase its financial situation, to look at the ownership of property of the company. Now let us get a good view of what else happens here:
The Superintendent shall disclose, at such times and in such manner as the Minister may determine, such information obtained by the Superintendent under this Act as the
Minister considers ought to be disclosed for the purposes of the analysis of the financial condition of a company, society, foreign company or provincial company-
Good, we will say, that is fine; there is nothing wrong with that. I agree. It goes on:
(a) is contained in returns filed pursuant to the Superintendent's financial regulatory reporting requirements in respect of companies, societies, foreign companies or provincial companies; or
(b) has been obtained as a result of an industry-wide or sectoral survey conducted by the Superintendent in relation to an issue or circumstances that could have an impact on the financial condition of companies, societies, foreign companies or provincial companies.
Now comes the key part. We notice that the superintendent can do these things but subject to the minister's approval. The second clause states:
The Minister shall consult with the Superintendent before making any determination under subsection (1).
What has happened here? We have the minister deciding in the first instance what the superintendent should do and what kinds of information can be collected, and then before he can have any discussions or make any public pronouncements he has to go back and consult with the superintendent before he can do that. Who is in charge here?
The person in charge here is the Superintendent of Financial Institutions. The Minister of Finance, who is to be looking after the financial affairs of this country on behalf of the people and who the Prime Minister has entrusted with this particular portfolio, is now having his hands virtually tied by the Superintendent of Financial Institutions, a bureaucrat who has been appointed by the minister.
These kinds of provisions are not for the health of this country.
I draw the attention of the House to the exact powers and objects of the Office of the Superintendent of Financial Institutions. The objects are to supervise financial institutions in order to determine whether they are in a sound financial condition and are complying with their governing statute law and supervisory requirements under that law; to promptly advise the management and board of directors of a financial institution in the event that the institution is not in sound financial condition or is not complying with its governing statute law or supervisory requirements under that law and in such a case to take or require the management or board to take the necessary corrective measures or series of measures to deal with the situation in an expeditious manner; and to promote the adoption of management and boards of directors of financial institutions of policies and procedures designed to control and manage risk.
That is good. A further object is to monitor and evaluate system-wide or electoral events and issues that may have a negative impact on the financial condition of financial institutions. That is good. Further, in pursuing its objectives the office shall strive to protect the rights and interests of depositors, policy holders, and creditors of financial institutions, having due regard to the need to allow financial institutions to compete effectively and take reasonable risks. We would say that is just great, and I agree.
Notwithstanding that the regulations and supervision of financial institutions by the Office of the Superintendent of Financial Institutions can reduce the risk that financial institutions will fail, regulation and supervision must be carried out having regard for the fact that boards of directors are responsible for the management of financial institutions. Financial institutions carry on business in a competitive environment that necessitates the management of risk, and financial institutions can experience financial difficulties that can lead to their failure.
He is supposed to do all these wonderful things and then in the final analysis he is given the power to intervene, to get involved in the actual management of a company. Then in the final section it says that if things go wrong it is not his fault. I think the bureaucrat wrote this, because he is totally absolved on these things.
We are dealing with the trust and the faith that individuals have in financial institutions. I have no difficulty in recognizing that the Office of the Superintendent of Financial Institutions is a very important office. It has been given extensive powers. But in the final analysis, who is accountable?
We have to come to grips with this. We need to know all the secrets. In all the texts I read there is no obligation to make those kinds of things public. I want to get into the Canada Deposit Insurance Corporation, because it is here that it becomes even more significant.
The Canada Deposit Insurance Corporation guarantees the first $60,000 deposited in a financial institution that is covered under that particular act. This is a great provision, but I want to take a look at some of the experiences.
This particular corporation was set up in 1967. There were no bank failures prior to 1967. Since 1967 there have been 30 failures of financial institutions, 20 of them in the last 10 years. The CDIC has now paid out a total of about $5 billion and owes the federal treasury $1.7 billion as of March 1994. It may be a little more than that, about $1.745 billion if my memory serves me correctly.
The provisions of this act are very noble. People want to know that their deposits are insured. However, it has had some very interesting effects. Financial institutions did not fail before but have failed since. Why? There are pretty obvious things, but
nobody can prove them. It reduces the incentive of a financial institution to look after the deposits up to $60,000. They can be reckless or risky because that money is not going to come out of their pockets. The first $60,000 will be paid by the Canada Deposit Insurance Corporation.
There is also no incentive on the part of the depositor to look around to find which of the financial institutions is the soundest. They look to see which institution is to pay the best return on their money after it is deposited. That becomes the issue, and not the soundness of the financial institution.
There are some interesting things that can be looked at here. The insurance premium the institution pays to the Canada Deposit Insurance Company should be commensurate with the risk incurred by placing these deposits in certain kinds of ways. The act does go that way up to a point. It states, for instance, that financial institutions will pay $5,000 as a base and after that I believe it is a fraction of a percentage, based on the total of the money that is on deposit. That is great, except that the minister, without telling anyone, has the right to reduce that rate.
The other part of this is that the rate the institution has to pay for its premium to be insured by this company is secret. This means that on the one hand we have the financial institution paying a premium that is somewhat commensurate with the risk involved, but the person who deposits does not know what it is. So he has no way of telling whether this financial institution is a sounder one than the other one.
I believe there are some very serious shortcomings in this act. If we really wanted to get serious about this act we should think about such a thing as a co-insurance plan of some kind. An individual who is depositing his money into a particular institution knows it is insured up to $60,000 but with a deductible. The individual will have the responsibility to put it with an institution that will insure his or her deposit for the full $60,000. If the Canada Deposit Insurance Corporation insures it for up to $58,000, the financial institution will give the other $2,000 with no penalty.
An institution could also state it is going to be paying 12 per cent on your deposit, CDIC covers a major part of it and it will cover part of it, but because this is going to be a high return you are eligible for $1,000 or $2,000 deduction. So there is a co-insurance plan here, which will provide the incentive to the financial institution to manage the money well or to at least let the individual know where the risk is in that particular deposit.
Second, that individual will say: "If I am to get a higher rate of return from this institution, I also need to carry some of the risk". There has to be responsibility in those particular areas. There are major concerns about the proposed amendments to this legislation.
I want to move now to another part of the review of financial institutions which has to do with the concentration of power to which I alluded before. The four pillars have, to a large degree, been eroded. It is my suspicion that the review in 1997 will erode them even more.
I draw attention in particular to the big fight now being displayed in the newspapers, financial papers and other media between the insurance companies and the banks. The insurance companies are saying: "You are not going to sell our product through your network". The banks are saying: "If we can own the insurance company, we want the authority and the power to do that". The fight is on.
A lot of problems are associated with the concentration of power, one of which I want to detail. That has to do with conflict of interest. I am going to take my example not from the insurance area but from the investment business. The investment companies have the opportunity to underwrite shares for an issue. I will use as an example the privatization of CN Rail. This share issue is underwritten by a number of investment dealers. Who owns the investment dealers? The banks, with a few exceptions. They underwrite the issue. However, some people are going to borrow money to buy those shares. Who will lend them the money to buy those shares? The banks.
There is a projection that the investment dealers of Canada are going to have an extraordinary year. They will have great profits this year. Guess what the main contributing factor was on "Canada AM" report this morning. The privatization of CN Rail.
This is very interesting. It is a very cosy arrangement. A crown corporation is in the process of privatizing. The underwriters are investment dealers who are, to a large degree, owned by the banking community. The banking community will, through its subsidiaries, show a tremendous profit. The banks will earn approximately $5 billion this year and, as well, the investment dealers will realize a terrific return.
The banks are also saying they want to sell the insurance product because it will give them more money. Associated with that money comes a far more significant issue, of which I am most fearful, which is the concentration of power. When a few people can decide where the money is going to be applied and how it is going to be invested, that is too much power in the hands of too few people. That is my big concern.
Every effort should be made to balance this situation very carefully. We must not run into this situation without being very clear about the implications.
Comparisons will inevitably be made by the banking community. The banks will argue that they should have the service because to be competitive globally they have to be able to sell insurance. Let us look at this situation.
Approximately 2,000 banks operate in France, while in Germany there are 4,600 licensed banks. With such intense competition it is difficult for a European bank to cross-subsidize its entry into the insurance business. That situation cannot be compared to the one that exists in Canada. To use that argument is not only specious but misleading. We have to be very very careful not to get sucked into that kind of situation.
To suggest the banks are going to take control is rather easy to understand. In 1992 reforms gave the chartered banks unrestricted powers to own trust companies. A few years later, what portion of the trust business is now in the banks? Almost all of it. Less than three years after the 1992 financial institution reforms came into effect only two independent trust companies of any size remained in the business. The danger of banks cross-subsidizing their entry into other financial services is that it is provoking a reduction in competition for consumers.
Probably the most vicious argument is that all this entry into the marketing of insurance through the branch network is in the consumers' interests because they will have one stop shopping. That may be convenient, but will the consumer get the best advice? Will the consumer get the best price? Will the best interests of the consumer be served? That ought to be the consideration, not whether the consumer can do it all in one place. If the customer gets a bum deal in one place, it is a bum deal regardless of the fact that it was very convenient to do it in that place. That becomes our concern.
We need to make sure the power is balanced, that we have a separation so the people's best interests not only now, but in the long term, are looked after as well.