moved that Bill C-100, an act to amend, enact and repeal certain laws relating to financial institutions, be read the second time and referred to a committee.
Mr. Speaker, it is a pleasure to launch second reading debate on Bill C-100. The legislation offers concrete, well considered measures to further enhance the safety and soundness of Canada's financial system.
These measures are the culmination of an extensive consultation process. I take this opportunity to extend the government's thanks to the many industry participants and other stakeholders who provided constructive insightful advice and to the Senate committee for its extensive hearings and report. As well I express appreciation to the Standing Committee on Finance for its decision to hold advance hearings on Bill C-100 during the summer parliamentary recess.
The presentations received by the committee were invaluable groundwork for effective clause by clause review of this wide ranging package. It will ensure that the legislation we approve will fulfil the best interests of consumers, financial institutions and their stakeholders, as well as the Canadian economy.
There is no question that sound, secure financial institutions are a fundamental requirement for national economic well-being.
Canada is blessed with a world class system. The financial sector is very much a part of a world of dramatic, accelerating change driven by new technology, by surging globalization, by new consumer demands and by heightened competition. That is why we are introducing the legislation now rather than waiting for the mandate in the 1997 review of financial regulations.
As I said in many forums, we are acting now not because the system is broken, and it surely is not, but to maintain a dynamic, competitive system. We must do our part to help it evolve with market trends and respond to recent experiences. That is why Bill C-100, dedicated to safety and soundness, responds to our experiences with financial institutions that have recently failed.
The changes in Bill C-100 are not patchwork nor band-aid measures. They flow from a series of basic principles outlined in the white paper we issued last February. They include that the ownership of a financial institution is a privilege and not a right, that it is preferable to have early intervention and resolution of institutions experiencing difficulty, that financial institutions must operate with sufficient incentives to solve their problems in a timely manner, and that there must be appropriate accountability and transparency in the system.
The first principle, that ownership of a financial institution is a privilege and not a right, is virtually a given, but good principles are worth reiterating from time to time. More important, we believe the principle leads to an important corollary. In certain circumstances it may mean that the interests of depositors, policyholders and creditors will take priority over the interest of shareholders.
This is why we believe it is necessary to provide the Office of the Superintendent of Financial Institutions, OSFI, with the new powers needed to resolve a troubled firm's problems early on. Financial institutions need incentives to manage their risks adequately. When an institution fails to manage its risks and experiences financial difficulty, it is then to the advantage of depositors, policyholders and creditors of the company to have the situation resolved promptly.
This would not necessarily mean that the institution would be closed. For example, the institution could develop a plan to implement changes that would solve its problems. The simple fact is that early resolution is likely the best way to prevent substantial losses to depositors, policyholders, creditors and potentially shareholders.
The legislation stakes out the clear position that if an institution is facing difficulty owners do not have the right to continue in business until they hit the brick wall and cannot pay liabilities as they come due. This leads to another closely related point. Our regulatory approach must recognize that the failure of a financial institution does not in and of itself represent a failure of the supervisory system.
In a vibrant, competitive marketplace firms can and do fail. No system can forestall every institutional failure unless it is given the authority and the resources to oversee all management decisions and unless institutions are severely restricted in the loans and investments they can make. Canada could not afford the price of such a failure safe system, even if it did work. My experience of almost 40 years in financial institutions clearly indicates to me that it would not. However, even if it did work, the result would be to strip the industry from contributing to the dynamism, growth and evolution of the economy.
One final principle is the need for transparency of the supervisory system. It is important that financial institutions understand the steps authorities could be expected to take if the financial condition of an institution deteriorates. Furthermore the supervisor must have a clearly defined role.
A new legislative mandate for OSFI notes the importance of OSFI taking prompt action to deal with institutions in trouble. The guide to intervention we have also set out clarifies the actions that could be expected and the role of OSFI and CDIC.
I have highlighted the key principles underlying our proposed legislation. Let me now turn to some of the specifics of Bill C-100. The legislation includes amendments to what are collectively referred to as the financial institution statutes including the Bank Act, the Trust and Loan Companies Act, the Insurance Companies Act and the Co-Operative Credit Associations Act.
A key thrust of the new regime as highlighted is to allow the superintendent, where circumstances warrant, to take control of a troubled institution earlier than at present including the authority to close an institution before its capital is depleted.
The function of the Minister of Finance will also be affected. He or she will no longer have to come to an independent view of the solvency of an institution. The legislation places this responsibility more appropriately in the hands of the regulator involved with the day to day activities of the instutition.
Other changes are being made to move responsibility for approving matters of a more technical, supervisory nature from the minister to the superintendent. The minister, however, will continue to play a key controlling part in the process with final responsibility to determine whether or not it is in the public interest to close an institution.
Increasing OSFI's scope for early intervention provides an incentive for problem prevention, not just a means of resolution. Under the proposed legislation troubled financial institutions will understand that OSFI will take action if its concerns are not dealt with promptly.
Another important element of Bill C-100 deals with information, which is a critical commodity for effective public and regulatory decision making. That is why we are amending the statutes to facilitate the release by federal financial institutions and by OSFI of more information on the financial condition of institutions. I do not, however, believe that financial institutions or OSFI should disclose information regarding regulatory actions. Doing so could create self-fulfilling prophecies with detrimental consequences for the institutions.
I emphasize that OSFI's role is not and cannot be to mirco manage financial institutions. Nor do we deploy an army of examiners to scrutinize federal financial institutions. That is why we must place constant emphasis on corporate governance. The boards of directors are on the frontlines ensuring problem prevention and good management. Bill C-100 takes important steps to strengthen the effective, independent corporate governance that is a vital part of strong, prudential framework.
First, the legislation proposes that the superintendent will have the power to designate certain directors as affiliated for purposes of the requirement that one-third of directors of an institution be unaffiliated.
Second, the legislation proposes changes that will prevent the board of a financial institution from being identical to an unregulated parent firm. This will help ensure there are directors of a regulated institution who will focus primarily on the institution's interests.
Third, the legislation will empower the superintendent to veto the appointment of directors and senior officers of troubled institutions.
Legislative amendments are being made for insurance companies so that the superintendent can employ the services of an external actuary at the company's expense in certain circumstances. There will also be a separation of the function of corporate chief actuary from certain other executive positions to avoid potential conflicts. OSFI will have the explicit authority to develop standards of sound business and financial practices for insurance companies.
Now let me turn to the amendments that Bill C-100 makes to the Winding-up Act. As part of the early intervention policy these amendments will provide additional grounds for obtaining a winding-up order for a financial institution.
The act is also being amended to provide more flexibility to restructure, under court supervision, the affairs of insurance companies in liquidation. As a result of these provisions a liquidator will have greater scope to enhance the value within the estate and improve recovery of assets disposed of by the liquidator, all of which will go to the benefit of policy holders.
The principal changes are designed to provide for earlier closure of problem federal financial institutions in cases where this would reduce the loss to consumer stakeholders.
I will touch on a third area of action under Bill C-100, the amendments to the Canada Deposit Insurance Corporation Act, or the CDIC act. This is another aspect of our emphasis on the principle of incentives for timely problem solving. The act is being amended to allow the CDIC to develop a system of varying premiums on member institutions based on the risk rating of specific firms, reflecting the risk they could bring to the deposit insurance fund.
The risk rating would provide a clear signal from the CDIC to the company's board of directors and management concerning the level of risk. More important, such an approach will recognize firms for good management.
As well, the government is making changes that will allow the CDIC to act as receiver of an unhealthy member institution's assets and to sell those assets along with a package of liabilities to a healthy institution. This should permit CDIC to obtain more value than it would if the institution was liquidated and its assets sold.
I want to turn to a final important area of change proposed by Bill C-100, which is one dealing with transactions between financial institutions here in Canada and with the rest of the world.
Through this legislation we are proposing a new act, the payment clearings and settlement act. It is designed to ensure that major clearing and settlement systems for financial transactions are designed and operated properly.
By the term "properly" we are addressing two clear concrete objectives. The first objective is to reduce or eliminate systemic risk to the Canadian financial system by ensuring that the failure of one participant in a clearing system will not lead to a domino effect by bringing down other members of a group. Second, it will enhance the international competitiveness of Canada's clearing and settlement systems.
The key components of the legislation are as follows. They will give the Bank of Canada explicit powers in the oversight of clearing and settlement systems that are potential sources of systemic risk. Again I emphasize systemic risk. Systems designated by the bank would be subject to bank oversight.
Second, they will provide the Bank of Canada with the capacity to participate in aspects of these clearing and settlements, such as the large value transfer system, or LVTS, as well as to serve special functions, such as guaranteeing settlement.
Third, they will give statutory recognition to netting arrangements in payments and other clearing and settlement systems in order to ensure that Canadian participants in derivative markets have greater certainty that their transactions will close. This will ultimately mitigate systemic risk.
I want to dispel concerns raised by the Quebec government last August. Systemic risk is an issue internationally and it is the central banks that have led in the development of measures to deal with systemic risk concerns in various fora, such as the Bank for International Settlements, the BIS.
Let me be very clear. The proposed federal legislation is not aimed at, nor will it result in, the regulation of securities markets. The focus of the Bank of Canada's oversight role is very different from that of the provinces. It does not in any way infringe on any province's jurisdiction.
I have talked at some length because this legislation covers much ground and deals with important issues. I believe Bill C-100 will help Canada's financial sector preserve and improve its world class stature to the benefit of all stakeholders and all Canadian citizens.
The measures we have proposed strike a critical balance between on the one hand, protecting the rights of depositors, policyholders and creditors and, on the other hand, facilitating innovation and growth in economic activity.
Canadians expect the government to ensure that their hard earned savings and investments will be well protected. The legislation will ensure we have the best and most efficient regulatory system, one that recognizes the interests of policyholders, depositors and creditors as well as one that promotes dynamic economic growth.
