Mr. Speaker, Bill C-15, an act to amend, enact and repeal certain laws relating to financial institutions, is a continuation of the old Bill C-100 before Parliament prorogued. The government is bringing it back substantially in the same form as Bill C-100. That is why we are at third reading now.
The purpose of the bill is to make many amendments and changes to financial institutions and to do a lot of fine tuning. This act is a result of a review of the safety of financial institutions.
It comes about as a response to the failures of a number of financial institutions and is essentially the government's response to concerns regarding these same institutions. The bill is also a prelude to the Bank Act review due in 1997. That review promises to be much wider in scope.
I will go through some highlights, some objections and some deeper facts on some of the aspects of the bill. It is very complicated and complex. It covers a lot of areas. I will not touch on all of them, but I will try to hit on some of the points I feel the Canadian public should be aware of. I will also try to enlighten people interested in this debate.
The bill rejects deposit co-insurance, and we do not know why. Since the introduction in 1967 of 100 per cent deposit insurance up to a maximum dollar value which is currently $60,000, 30 financial institutions have failed, with 20 failures in the last 10 years. This has cost the CDIC, the Canadian Deposit Insurance Corporation, about $5 billion as of March 1994.
Interestingly, in the period proceeding 1967 there were no bank failures. Governments over the years have exhibited reluctance to institute market based measures of reform such as co-insurance, instead opting for more regulation and oversight. The use of the market through the implementation of co-insurance and market based criteria as early warning signals would alleviate the problems in the financial system in a less costly yet more effective manner than proposing further regulatory change.
Regulatory attempts to mimic the efficient results achievable only by the free market will always be more costly for all parties involved and will rarely if ever achieve the same quality of results.
Under the proposed system depositors are only encouraged to seek out the best rates regardless of the risk profile of the institution in question since they know they will be fully compensated by the CDIC in the event of a failure. This facilitates the entrance, growth and eventual failure of risky and recklessly managed institutions. It also discriminates against healthy, strong
financial sector players who minimize risk by conservative lending and borrowing policies.
I sure have a tough time making a loan. They are always tough on me.
The act does set the stage for risk based CDIC premiums. However, premium levels for different institutions will not be made public. Again this gives the appearance designed to protect weak institutions. As mentioned earlier, it also keeps the regulation of financial institutions under too large a veil of secrecy. A willingness to provide more information to the public would be a positive move.
The Reform Party does not support the bill because the government could have done much more in conjunction with financial institutions to make it an open system, an accountable system, a system that would work. Then Canadians would know what is happening and would have some faith in it.
The bill proposes rated premiums for the CDIC and the premiums will be according to the risk. As I mentioned, the bad thing is that the CDIC intends not to make the Canadian public aware of the particular potential risk involved in any particular financial institution. This is a veil of secrecy and the taxpayers will be left with the bill when large institutions collapse, as we have seen in Barings' $1 billion loss and in Alberta's Principal Savings and Trust Company.
That is why it is important for the government to consider what it has unfortunately rejected, co-insurance as a partial solution. By perhaps insuring up to only 90 per cent rather than 100 per cent of deposits, investors having a 10 per cent stake in what they are investing in, a 10 per cent stake in what is going on, would know they have a potential exposure.
The advantages of this exposure would make the public more interested in its money and it would do a little more research on the financial institution. The competition and knowledge that this would bring out would bring out the best in business among those institutions. Just to have a monopoly, big is not necessarily better.
Also recent claims, as I have pointed out, have cost. When they go into receivership these losses cost the taxpayers money, which gives this guarantee by the government and CDIC which is really backed by the taxpayers, and the big banks love it.
I will continue in this vein and discuss some facts on co-insurance basically for future consideration, to lay it on the record. There are some strong advantages in considering co-insurance.
One hundred per cent coverage creates an incentive to place funds with high risk institutions. With 100 per cent insurance risky institutions can attract deposits by offering slightly higher rates.
Depositors are willing to use these institutions because they know the CDIC safety net up of to $60,000 will be there if anything goes wrong. This has enabled risky and uncompetitive institutions to enter the marketplace, grow and ultimately fail and distort the marketplace.
The consumers who bear the cost of deposit insurance. Depositors of stable institutions suffer the most. They do not get the higher interest rates and yet they still have to pay for the damage caused by risky institution failures.
Therefore, as recognized in the just published study by the Public Interest Advocacy Centre, the irony is that it is the very group that co-insurance is intended to benefit, the average consumer, that subsidizes the risky activities of the more sophisticated who know how to take advantage of the inefficiencies embedded in the system as a result of 100 per cent deposit insurance.
There is almost universal consensus and support for co-insurance. Talk about having committee meetings, listening to witnesses and acting in conjunction with what you hear, despite diverse interests from the banks, the insurance industry, both present and past superintendents, the chairman of the CDIC, the Canadian Institute of Actuaries, academics including most recently PIAC which studied the issue from the consumers point of view, and the Senate banking committee, all supporting co-insurance, this bill and these changes do not include it.
Consumers can judge risk. Consumers do not use the vast amounts of disclosed information because without co-insurance there is no incentive to do so. Why worry? Why bother? Why read? Why care? Just put in your money, it is guaranteed anyway. Look for the best advertisement, the highest rate of return and away you go.
The extremely high percentage of insurance deposits in failed institutions illustrates that consumers are making accurate judgments. For example, a recent failed institution, Income Trust, had 99 per cent of deposits insured versus the 50 per cent industry average.
Countries such as the United Kingdom and Ireland have forms of co-insurance with no evidence of widespread demand for 100 per cent coverage.
The secretary of state argued on August 15, when this bill was still Bill C-100: "The measures included in Bill C-100 flow from a series of basic principles as outlined in the white paper issued last February. Our subsequent consultations have left me more convinced than ever that these principles and the fundamental shift in the philosophy that some of them represent make this legislation a vital and valid turning point in our approach to regulation".
The secretary of state went on to point out there are are four key principles underlined in this bill: ownership of financial institutions is a privilege, not a right; early intervention in and resolution
of institutions experiencing difficulty should occur; financial institutions must operate with sufficient incentives to solve their problems in a timely manner; there must be appropriate accountability and transparency in the system.
Those are tremendous underlying key principles. How could one in the financial sector argue with those principles? I support satisfying those principles, but this bill falls far short of the accountability and transparency in the system. It is still veiled in secrecy and by not considering co-insurance it denies the consumer the opportunity to make some rational judgments for himself.
There has to be a greater review. Financial institutions of all types, the four pillars, must come under a serious review, not separately but collectively. We must do a massive evaluation. It is time to stop and take a good look at the financial sector.
My colleague, the hon. member for Okanagan Centre, who is the Reform Party's industry critic, wrote this brief paper. I would like to read it into the record to give him credit for it because if we truly wish to satisfy the four principles which the secretary of state has stated in terms of evaluating financial institutions, then I feel that my colleague's recommendations are worthy of consideration.
The paper states:
Finance Minister Paul Martin surprised many in his 1996 budget speech by assuring Canadians that banks would not be allowed to sell insurance through their branch networks this year. This softball so deftly tossed our way neither eased our concerns nor addressed the issue.
The real issue is not whether the banks should be allowed to sell insurance or enter into the car leasing business, but whether true competition exists within the financial sector and, thus, whether the consumer and the economy will benefit if banks are allowed to enter other markets.
The banks assure us that their own industry is competitive and not the oligopoly that Canadians suspect. This is difficult to believe when the six largest banks in Canada move en masse to raise or lower interest rates every time the bank rate so much as twitches. The only competition in this case is who will move first.
Yet none of them have moved very quickly to change interest rates down on the personal credit cards that everybody has through Visa and MasterCard, et cetera. One would think someone would drop the rate to get more business.
The four pillars of the financial sector, banking, insurance, trust companies and security dealers, have crumbled as deregulation and technological progress has blurred the lines of distinction. The banks have been applying pressure ever since to sell insurance in their branch networks, enter into auto leasing and increase their interest in the securities market. Further deregulation and the subsequent increase in the size of banks, however, could reduce competition in the financial sector and hurt consumers. These are perennial issues in the Parliament of Canada, particularly when a review of the Bank Act is scheduled. Major reviews are conducted every ten years, interspersed with minor reviews every five years.
1997 brings a minor review, but it is a major review that is required. We need to know a good many things. How do our financial institutions interact? How do they operate in relation to other sectors of the economy? What are the strengths and weaknesses of the current regulatory structure? Not only will the answers reveal whether or not true competition exists within the banking sector and, thus, whether or not they should be allowed to expand into other financial services, the answers will determine the veritable strength of our financial sector as it heads into the 21st century. Until such a review is completed, a moratorium should be placed on making any further decisions about financial institutions.
Furthermore, Parliament must be the venue, perhaps in the form of a joint committee of the finance and industry committees. It is the only way we can assure that all interests will be recognized and the process will be both accessible and transparent. Canadians must be able to see the process in order to put their faith in it.
As lobbyists from all sides pressure members of Parliament to take sides and others try to frame the issue within the overtly political constraints of a war between big and small business, the challenge will be to keep our eye on the ball. That is, to ensure true competition exists and is free to function within the marketplace, that stability is maintained in the respective financial sectors and a prudent regulatory structure is in place to protect the consumer. If the bottom line is met, Canadians and the economy will indeed emerge as the winners.
Before I conclude, I have one thing to say about financial institutions and, more specifically, the banks.
There is concern among a lot of people, especially people who are left wing political animals, who feel that the banking institutions are taking advantage of them. I have some good things to say about big banks and some criticisms as well. Since we are dealing with financial institutions, I would like to take the opportunity to touch on two points.
A lot of people are criticizing the banks for not paying their fair share or they are saying they should be embarrassed by their huge profits. I know that the banks, although some may make a billion dollars in profits, also pay a billion dollars in taxes. Profit is not a dirty word. Profit means jobs. Losses mean lack of jobs. Losses means subsidies; grants from governments; subsidization by taxpayers; losses mean rewarding failure.
Let us reward and encourage profit and stop criticizing companies that make a profit. That is no business of the politicians. It is the business of businesses. Businesses should be encouraged to grow, prosper and expand the economy. They should be given compliments when they do so and government should stay off their backs and out of their pockets so that they can create jobs.
How many pages does this bill contain? All these regulations have to be read and interpreted by somebody. This is a cost. It is an expense to business. This is not an inducement to improve business or hire more people and increase employment. We need fewer regulations. Good regulations, yes, but fewer. We need to get the government out of the business of being in business.
There are many financial institutions. I am looking for a document that lists the number of institutions and their assets. I was shocked to see how much these institutions control. But it looks like I will not be able to find it at the moment so I will not be able to quote from it.
One criticism I have of the banks is that they are quick to fiddle with certain prime rates but have not looked at the rates of interest on consumer loans or credit cards. I feel that sometimes they encourage indebtedness by sending letters to university students giving instant credit of $1,000. I know that happened to my daughter when she graduated a couple of years ago. A bank sent her a credit card and guess what? Within 30 days she was in debt to the tune of $1,000. I do not feel that is a practice I would like to see. As a parent I know I did not like it but it is done. There is nothing illegal about it, but I feel that some people get themselves into financial difficulties when that happens.
The problem with government tinkering with regulations and trying to establish a level playing field among the four pillars of financial institutions is that it keeps attempting to amend the definition of a bank. In the Bank Act the definition of a bank is something like "a bank is what a bank does in Canada". Governments keep changing what a bank does. Therefore, other financial institutions have a hard time competing because they are at a disadvantage.
The thorough and proper review which is scheduled for 1997 should lead to some positive results. I sincerely believe that once again this is an example of a Liberal government which uses all the right words even when it describes the budget. It has the rhetoric down, but the reality and what it is doing does not match the words. The words are greater than the actions it takes.
As I have pointed out, the four key principles which the secretary of state believes he is accomplishing with these new regulations for financial institutions is honourable. But he is ignoring completely and avoiding the issue of co-insurance which would clean up a lot of the failures in these institutions and introduce responsibility to investors. It has so many advantages. With so much support from all the institutions and groups, at the very least this could have been done. I believe we introduced it either in the standing committee or in the House at an earlier stage as an amendment which was defeated. I know we talked about it as a party.
This measure would eliminate the burden on taxpayers. It would reduce the risk for high risk institutions. We must have high risk investments. We must have somebody to take them. We must encourage them. The best person to take that risk is a person who can afford to take the risk. We should not be putting all the taxpayers' money at risk.