Mr. Speaker, it gives me great pleasure to enter the debate on Bill C-5, an amendment to the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act.
Let me begin by saying that changing both these acts is an ongoing process. The minister, along with his officials, consulted very extensively on the insolvency business in Canada over a long period of time. All those consultations with stakeholders have come together and basically formulated this act. I believe it was an amendment by the member for Prince George-Bulkley Valley which was accepted by the committee.
I sit on that committee and there were almost 100 amendments made to this piece of legislation. It is something that the government initiated, industry has been involved in and something that all parties have participated in.
I would like to discuss some specific aspects of the bill but also a general concept of bankruptcies. The previous speaker mentioned rising consumer bankruptcies and he could not be more correct. I have a statement here showing that in January total business and personal bankruptcies were 7,320 compared to only 5,000 for the previous year. In February the total bankruptcies were 7,947 compared to only 5,900 for the previous year. In March the total was 7,775 compared to 7,100. We can see that there is no question that there is a trend line and it is upwards. A huge portion of this is consumer bankruptcies.
I also listen to the Reform Party from time to time talking about tax cuts and how it would stimulate demand. I would like to point out why I do not believe tax cuts would do that. The bottom line is that consumers are living in a sea of debt. As governments back in the 1980s and earlier did not match their spending with their income, neither have individuals.
It causes me great pain when I talk to some of the people in my riding who have mortgages on their houses and consumer debts well in excess of their ability to pay for them. Often those mortgages are well in excess of the value of the properties. There are many people who are caught up in a debt spiral. They are two income families and hardly ever see their kids. Some people work shifts and hardly ever see each other. They are caught in that debt spiral and are not breaking out of it.
As a government we should be concerned about how that happened and what it means to the future. It will have a big impact on our policy directions here in Ottawa.
Another indication of this problem is the rise in the percentage of disposable income which is allocated to fixed debt payments. By disposable income I mean the amount of the take home cheque after taxes have been deducted. The percentage of that income which is now allocated to fixed debts in Canada has risen dramatically.
In 1980 the figure was 71 per cent, in 1981, 65 per cent. By 1989 it was up to 74 per cent; in 1990, 80 per cent; in 1992, 85 per cent; 1993, 88 per cent; 1995, 93 per cent; and in the second quarter of 1996, 94.3 per cent. This is a clear indication that there is a problem. There is rising personal debt and people are caught on a treadmill trying to get out of this.
It shows up in many other areas of our economy. I saw an article in the newspaper today about consumer retail sales for this Christmas. A survey done by Arthur Andersen basically shows a lack of optimism. Retailers do not believe they are going to have a very good Christmas this year. That is part and parcel of the same problem.
For registered retirement savings plans, while last year was a good one in quantum, in fact the percentage of people who had available funds relative to their income to contribute to RRSPs went down. In other words people are saying that they do not have any money.
Bad debt losses in Canada relative to consumer debt are rising. Some people do not think that is alarming, but in Canada that represents 1 per cent. In other words 1 per cent of total consumer credit card debts outstanding every year are delinquent.
Some people like to look at the United States to see certain future trends. In the United States consumer debt delinquencies are now up to 5.7 per cent. It has become a whole business on how to deal with debt in that country. It should also be noted that the banks are getting out of the debt business directly. They have actually been able to factor out their consumer card business. In other words, they create the debt and then they factor it out to other companies to collect it.
Industries are popping up in the United States finding different and intrinsic ways of getting people into debt. There are credit card companies that deal almost exclusively with the poor, people who are high credit risks. Do we do that in Canada?
I am amazed when our young people show up at university or community colleges and one of the first things put into their hands is a consumer kit. This so-called consumer kit is a composite of 5 or 10 credit cards, one from a bank and others usually from a number of retail stores and gasoline companies. These people have very low earning power.
I am not saying that university students are incompetent or unable to deal with their debt and deficit problems. However, it is clear when we talk to credit counsellors that it is a rising problem in this town. They tell us that the percentage of university students coming through their doors for their counselling services is rising.
What are our institutions doing to be responsible for creating this problem? General Motors is a big feature in my riding. I am hoping very much that they will get back to work pretty soon. It has a tremendous impact on business in Durham.
Be that as it may, another interesting observation from General Motors in its marketing procedures is that its market in Canada is shrinking, as car markets generally in Canada are shrinking. Not only are they shrinking but the type of cars Canadian consumers are buying is significantly different from what they were buying even 10 years ago. They are smaller dollar purchase items, even compared to their American cousins to the south.
We are seeing a tendency where people have less liquidity, less ability to consume. I suspect if there are tax cuts, and the province of Ontario has already done that, I do not see any change in consumer demand. The bottom line is those people will take the money, and justifiably so, and pay it against the debts they already have.
I should bring to the fore the recent report of the Office of the Superintendent of Financial Institutions. This gentleman's job is to supervise financial institutions. His report is very interesting. In it he states that levels of household debt reached an all time high in 1995-96 but they have not appeared to have plateaued. Both consumer and business bankruptcies increased in 1995. Mortgage and credit cards at real levels, though low in his estimation, began to climb. Despite improving profitability and capital levels, and he is talking about financial institutions, the risk profiles of some financial institutions increased as they expanded beyond their core activities into new lines of business.
I suggest that those new lines of business are consumer credit and also paper currency transactions, derivative markets and so forth. I will get to that later in my dissertation.
Some of the macroeconomics belie the real problem that lies beneath these statistics. We have an intergenerational problem. Almost 33 per cent of our population is now considered to be baby boomers. I suggest that the baby boomers in some small way are consumed out. They may well have had their two cars in their driveway. They already have a television, a VCR and all the good stuff that goes with the good life. The bottom line is they do not really need a lot more. They may even have their houses paid off.
There is another group whom I would consider above middle income, maybe around 35 years old who are basically on the debt treadmill. Also the younger generation coming behind that group seems to be copying the same basic tendency.
This bill talks about Canada student loans. The Government of Canada has over $1 billion in defaulted student loans. Undoubtedly some abuse is taking place where people declare bankruptcy so they can wipe off their loans before they start to work. This bill deals with that problem. It requires a two year stay prior to those people declaring bankruptcy. If within that two year period they have a job and so forth, they are able to pay off the debt and well they should.
The issue is somewhat larger than the bill actually deals with. That is, why is it that these young people are being persuaded into debt which they basically cannot sustain? It is not just student loans. It is also the consumer credit card. What is wrong with consumer credit cards? Absolutely nothing. If you want to give your daughter a credit card so she can come home on the weekends from university and she just uses it for that, you pay it off, fine, it is a convenience.
Most people see us moving toward a cashless society with more convenience in business transactions. I applaud that. I do not think I have actually stood in front of a teller in about a year and a half. Some people still like standing in line and talking to people in their communities and I understand that issue as well. For a lot of people it is a convenience and financial institutions are addressing some of that demand, but along with that, we are developing a second scenario.
People are being constantly pushed more and more into living beyond their means, quite frankly. They are told that they can do this, that all they have to do is have a credit card. The question is, do lending institutions check for total credit exposure? What do I mean by that?
That credit card chit I talked about probably gave the individual up to $800 worth of credit. It does not take a lot of intuitiveness to see that if you pay your $20 a month, you can probably jump that up and keep on jumping it up. Worse than that, within the credit industry there does not seem to be a system of cross-checks in this country. In other words, it is possible for that student to get $10,000, $15,000 or $20,000, way beyond their ability to pay without a lot of checks going on within the financial institution structure itself.
What do the banks do in a situation like that? They say: "Well that is too bad. I guess that is one we lost on. We will just charge that to the good customers". It is incredible to watch the deviation in interest rates between the prime bank lending rate and credit cards.
Industry Canada put out a statement for the month of September. The spread between the Bank of Canada credit card rate, currently 4.25 per cent, and the sample VISA card tracked by Industry Canada has continued to increase on average since 1994. We all know that interest rates have been declining. It is currently 13.25 percentage points compared to its average of 8.9 per cent, the difference between the prime bank lending rate and what people are being charged on their credit cards. The spreads between the bank rate and standard rates presently range between 11.65 and 14.65
points while the spread between the bank rate and the retail card rate is 24.55 per cent.
What am I saying? Basically, interest rates are going down and the actual credit card costs are going up. How do banks explain that to the public? They explain it by saying they have rising consumer bankruptcies. It is a self-fulfilling prophesy. They advanced more money. They did not really spend a lot of time on how they advanced it because they wanted to get that interest rate up there to pump the bottom line showing an increased profitability. At the same time, when they take a hit on it, they apply it to everybody and charge them more interest.
It is a great system, but it is not in the best interests of the consuming public. I do not think it is in the best interests of public policy.
Some of the European countries deal with this. In some of the European countries, if there is a credit card default and it can be proved that they did not check with other institutions to see the total quantum of debt, they cannot collect it. In other words, we should be taking those debts off the bottom line of those banks, not allowing them to charge them within the interest rate structure where everybody pays for them. That would do a lot to reduce the number of bankruptcies in Canada.
We want financial institutions to take responsibility for the lending that they make. It is not good enough just to take a shotgun approach to the industry and say: "Who cares about any of those who fall by the wayside? We are going to get the other guys to pay for them and we will still make lots of money". This is what is wrong with the banking industry in Canada.
One of my major interests here is small and medium size businesses. We all know that small and medium size businesses have complained constantly about their ability to access credit. Someone who has a good idea goes to the bank. The bank says it is not interested because that person is a small business operator. This has improved marginally but not very significantly.
I note that the banks are coming before us again with their quarterly statistical report. There has not been in quantum much change in the total amounts of money advanced to small and medium size business.
More remarkable, a study which the banks themselves had done trying to show how effectively they were dealing with small and medium size businesses identified that 44 per cent of all small business operators look on consumer credit card debt as a source of financing for their businesses. That is profound. In other words, people who cannot get normal bank loans to run their business are having to run it up on consumer card debt.
This happened in my office recently. A gentleman came in with a good idea for fixing computers. He had no debts, his house was paid for and he had assets. He had gone to the bank to borrow $20,000 and the bank manager told him he was not interested. I told him to go back to that bank and tell the manager he wanted $20,000 on his credit card. He got the $20,000.
The banks are changing their whole attitude toward small business lending. They are going to make them all on credit cards. They are saying that anybody with $50,000 or under will have a credit card system. The bank will not check the financial statements every year because they really cannot be bothered. What the banks are not telling the borrower is he or she will pay a minimum of prime plus 3 per cent on loans.
The point I am trying to make is that banks are a major part of the bankruptcy problem and they are a major part of the problem of creating jobs. The banks, banking institutions and other financial institutions have gone into the business of paper transactions. The major growth in the financial sector is in derivatives. These are all paper transactions that occur on Bay Street or somewhere in Paris or New York. This does not mean much to the average person who has a good idea, who wants to develop a product that consumers can use and will employ more people.
We need a different attitude toward how we lend. We have to lend responsibly but also have to lend on the brainpower of Canadians.
A number of major changes have been made to the bankruptcy act which are important. We have underpinned the concept of remediation rather than forcing people into bankruptcy. I am apologetic to some of my colleagues in the bankruptcy industry that promotes bankruptcy. It is a big business now. You can hear the jingles on the radio: "Come down here, we will solve all your credit problems". We have to stop that. We have to move toward greater accountability, financial responsibility by our financial institutions toward small and medium sized businesses and the young people who are in debt way beyond their means.