STANDING COMMITTEE ON FINANCE AND ECONOMIC AFFAIRS
Consideration of Bill 134, An Act to revise the Credit Unions and Caisses Populaires Act and to amend certain other Acts relating to financial services / Projet de loi 134, Loi révisant la Loi sur les caisses populaires et les credit unions et modifiant d'autres lois relatives aux services financiers.
The Chair (Mr Paul R. Johnson): The standing committee on finance and economic affairs will come to order. I'd like to apologize to the witnesses who are present today for the delay. I am going to let you know that I'm going to share our delay by every witness group, so you'll only have 28 minutes now instead of 30. I apologize for the members of the committee who are not here. We're going to start.
First, we have some committee business I'd like to share with the committee members who are here, that is, that the Minister of Finance is going to be here on Thursday, May 19. He will be here immediately following routine proceedings but can only stay till 5. He's indicated that ministry staff will be able to remain for the rest of that committee day.
Also, next Thursday at 10 am we have coming before us the Caisse populaire Ste-Anne-Laurier d'Ottawa Inc, and it has indicated it does not need French translation, so we will be meeting in committee room 1.
Mr Stephen Owens (Scarborough Centre): I just wanted to make a quick request of my colleagues on committee and of the deputants. I have a hearing problem that's developed over the last few days and I'm having difficulty, so if people speak clearly and if the background noise could stay to a dull roar, I would really appreciate being able to hear the witnesses.
The Chair: Without further ado, the group before us is the Ontario Share and Deposit Insurance Corp. If the representatives would please identify themselves for the purposes of the committee members and Hansard, then you may proceed.
Ms Lili-Ann Renaud-Foster: I'm Lili-Ann Renaud-Foster, chair of the board for the Ontario Share and Deposit Insurance Corp. With me are Andrew Poprawa, president and CEO, Ontario Share Deposit Insurance Corp; and Rudee Baksh, vice-president, Ontario Share and Deposit Insurance Corp. Permettez-moi de m'introduire. Lili-Ann Renaud-Foster, présidente du conseil d'administration de la Société ontarienne d'assurance des actions et dépôts.
The Ontario Share and Deposit Insurance Corp, or OSDIC, incorporated under the Credit Unions and Caisses Populaires Act, has a strong interest in ensuring that its governing legislation will enable it to provide effective protection to depositors and members of the credit union and caisse populaire movement in Ontario. We also believe that a sound statutory framework will assist our corporation in managing the deposit insurance risks which may be created by our member institutions.
We would like to discuss with you several key issues related to Bill 134 and provide you with some recommendations for your consideration. Before doing so, however, we felt it might be useful to provide you with some background information on OSDIC and its operations, as well as a brief overview of the current state of the industry. At the conclusion of our presentation, we will be pleased to answer any questions the committee may have regarding our comments.
OSDIC was incorporated in 1977 to provide deposit insurance for members of credit unions and caisses populaires, as prior to that there was no deposit insurance scheme in Ontario. As you are aware, today OSDIC covers member deposits and shares to a maximum of $60,000, similar coverage to that provided by CDIC, the Canada Deposit Insurance Corp, for banks and trusts.
In 1987, in response to a non-legislated provincial program entitled Program for Change, OSDIC was given the mandate to resolve accumulated system losses of about $100 million in some 125 units. This deficit resolution program was financed by a guarantee from the province to the extent of $95 million. Concurrently, the corporation's board composition was changed by appointing the majority of directors from outside the system.
Taking into account the current government-approved deposit insurance premium of $2.10 per $1,000 of deposits and assuming no further significant claims upon the deposit insurance reserve fund, the earliest OSDIC is expected to recover from its deficit is 1998, about one year after the current guarantee period is due to expire.
The corporation has a further exposure of some $26 million as a result of successful litigation by a group of unaffiliated credit unions over the return of funds used by the corporation in the early 1980s to resolve financially distressed member institutions. This litigation, currently under appeal, is not expected to be resolved until late 1994.
To discuss with you briefly a little more about OSDIC's operations and the current state of the system, I would now like to call on Andy Poprawa, our president and CEO, who will also discuss with you the key issues we would like to raise with the committee this morning. Thank you.
Mr Andrew Poprawa: Good morning, ladies and gentlemen. As the chair has indicated, I'd like to provide you with a brief update on OSDIC's operations and the system's performance, and then I'd like to talk about some of the key issues regarding Bill 134 that we'd like to raise with you this morning.
To assist in minimizing current and future losses, OSDIC has developed and issued comprehensive guidelines on sound business practices for use by member institutions. In preparing these guidelines, OSDIC was assisted by an industry advisory committee and the Ministry of Finance. These guidelines are presently used by the ministry as the basis for its inspections of credit unions and caisses populaires.
In addition to those sound business practices, we have developed a computerized system for monitoring and analysing the risk of loss in member institutions. Those units which pose a greater risk to the system because they aren't fully capitalized are supervised through a capital rehabilitation program administered jointly by OSDIC and the ministry, with the assistance of an industry advisory committee.
This program stresses the building of surplus by member institutions as the single most important priority. Since the inception of this program in 1987, 85 units with assets of $1.7 billion have graduated and are now in compliance with the interim capital requirements.
All nine units which are currently in a deficit position are under the administration or supervision of the corporation. By doing so, OSDIC can ensure that these units are not posing further risk to the system or to depositors. Units found to be viable are rehabilitated and returned to the community they serve.
Since the commencement of the Program for Change, OSDIC has assisted in the rehabilitation of 45 credit unions and caisses populaires with deficits of over $23 million. Those units which are not viable are wound up in an orderly fashion and the business is transferred to a neighbouring unit.
At the end of December 1993, there were 529 active credit unions and caisses populaires in the province, holding member deposits of $11.7 billion. This compares to about 925 a decade ago, with assets of about $5.6 billion. They serve 1.8 million Ontarians in 930 locations. They range in size from $50,000 to over $800 million in assets, and a significant number of these units are small. In fact, 326 have less than $10 million in assets. Fifty-seven of our member institutions with deposits of $1.7 billion are caisses populaires. They serve about 240,000 Franco-Ontarians.
Most of our members are also members of a league. There are three such leagues in Ontario, one for credit unions and two for caisses populaires. About 32 credit unions, with deposits of $2.1 billion, are not members of any league.
Currently there are about 110, with assets of $4.5 billion, which are not in full compliance with the interim capital requirements as established by the ministry. After-tax return on assets for the system in 1993 compares favourably with banks, at 35 basis points. It's 45 for banks.
The corporation fully supports the policy objectives of Bill 134. Through the legislative review committee consultation process established by the ministry, we have participated in the development of industry recommendations for legislative changes. In addition, the ministry has provided us the opportunity to discuss the specific provisions of Bill 134 and has sought our input on policy and technical issues. As a result, we have already provided the ministry our comments and recommendations with respect to issues dealing with the clarity and workability of the bill. From our discussions, we were satisfied that these issues can be resolved either through amendments to Bill 134 or through administrative practice.
Today, we'd like to raise with the committee a number of issues which will impact our ability to protect the interests of depositors and thus merit further thought and consideration. In particular, I'd like to discuss the administration of the capital adequacy rules, OSDIC's deposit insurance reserve fund, director training, and the proposed stabilization regime.
We fully support the introduction of the risk-based capital system to the credit union and caisse populaire system in Ontario. By allowing our member institutions access to risk capital, the levels of capital over the long term should be increased, thus reducing the exposure to loss to both the corporation and the system.
We also fully support the requirements for full, plain and true disclosure for potential shareholders of these types of capital instruments. We believe that full disclosure will allow potential investors to understand the risks associated with these instruments and prevent the public from confusing risk capital with insured deposits.
The bill gives the director of credit unions and caisses populaires, the chief regulator in the province, wide latitude to allow member institutions to operate without the required level of capital. Past experience has shown that the level of forbearance in allowing member institutions to operate without the required capital has significantly and adversely impacted the corporation's deposit insurance reserve fund. No other financial institution operating in this province or elsewhere in Canada has been allowed such latitude unless it was first placed under severe restrictions or under the control of a regulatory agency. This approach is not consistent with the government's objective of a level playing field in terms of regulation.
We recommend that section 86 of Bill 134 be revised to ensure that credit unions and caisses populaires not be allowed to operate if they do not meet capital rules unless they have been either granted a variation by the director under stringent conditions or are under the supervision of a stabilization authority or are under administration.
As we have indicated, OSDIC's deposit insurance reserve fund is currently in a deficit position of some $70 million, assuming we are successful in our appeal of the lawsuit brought by the unaffiliated credit unions. The government's loan guarantee of $95 million which supports our borrowings expires in June 1997.
Bill 134 is silent on the key issue of government support for the deposit insurance function. While the bill makes it mandatory for the corporation to establish an insurance reserve fund, there is no requirement to bring it up to a certain level within a specified time frame, nor is there a provision for government to support the program through a guarantee or authorized line of credit. Other deposit insurers, such as CDIC, QDIB in Quebec and FDIC in the United States, have some arrangement of support from their respective governments.
Given the state of OSDIC's insurance reserve fund, explicit support either in legislation, regulation or through an administrative agreement is vital to public confidence in the system. To date, the level of support provided by the government has been an essential element in maintaining the security and stability of the system.
We have explored a number of options in this area. While there are many alternatives, the model which in our view has the most merit includes the requirement to build a reserve fund within a specified time frame in order to maintain confidence in the system and to reduce the government's exposure to draw on its guarantee.
We believe that the deposit insurance process should continue to be self-supporting. To date, the system itself has paid, through its deposit insurance premiums, the cost of resolving all deficits without any loss to any legitimate depositor in the province. We want to ensure that this record is continued.
We therefore recommend that the bill be revised to provide for a requirement that the corporation's deposit insurance reserve fund attain a level of not less than 1% of system assets within a 15-year period from the time the bill is proclaimed, and to provide the corporation a limited authority to borrow from the government's consolidated revenue fund to support its deposit insurance program.
Credit union and caisse populaire boards of directors are comprised of individuals not normally employed or knowledgeable about the financial services sector. As such, these directors are typically at a disadvantage in assuming their statutory responsibilities. We strongly believe that this has been a major contributing factor to the significant losses suffered in the industry over the past years.
In provinces where credit unions and caisses populaires have become industry leaders, director training and orientation has played a major role in the risk management system. While the bill provides for the government to pass regulations prescribing minimum training requirements, ministry officials have indicated that the government will not pass any regulations unless the industry does not fulfil its commitment to voluntarily train directors.
We recommend that the ministry move quickly to establish regulations requiring credit union directors to take training programs or, at a minimum, set out the criteria on the basis of which it will be satisfied that directors possess the necessary skill and knowledge to competently fulfil their duties.
For many years, the staff of the corporation have been frustrated in their work by the lack of powers to enforce required remedial and corrective action to be taken by member institutions to avoid costly losses. We are very pleased to see that Bill 134 will address this inadequacy in the present regime. Virtually every other province in Canada has a stabilization function that has the power now contemplated for the corporation in the new act. With these new powers, we will be able to assist in preserving the capital base of member institutions by requiring early action to correct identified problems. This will in turn reduce the risk exposure to the corporation and result in minimizing losses and deposit insurance costs.
We are also particularly pleased to see in Bill 134 the ability of the corporation to delegate to the industry the powers required for delivering stabilization programs. This first important step towards self-regulation is most welcome.
While Bill 134 provides the required powers to implement an effective stabilization program, it is unclear regarding the funding mechanisms to be used. We understand it is intended that the voluntary stabilization funds be used as a first line of defence in assisting member institutions to resolve financial difficulties, rather than using the deposit insurance reserve fund. The bill, however, is unclear in this area. It is also unclear about why the government would want to involve itself in regulating voluntary funds.
We recommend that the concepts of stabilization funding be clarified to ensure it's clear that: first, all stabilization funds established are voluntary and the government will not be prescribing the ways funds are assessed and maintained; second, the corporation will not be required to establish a stabilization fund; and third, the funding of the administrative costs of delegated stabilization authorities will be at the discretion of the corporation.
We recognize that the government, after reflecting upon the submissions made before this committee, may in fact make changes to the bill now before us. In considering these proposed changes, we believe the committee and the government should recognize that any significant modifications to the powers and resources of the regulator or the corporation may impact the delicate balance between the business powers of our member institutions and our collective ability to manage them. We would therefore urge the committee to consider the impact of any motions for amendment on this balancing of powers.
In our written submission, we've also raised a number of other issues for your consideration, but time does not permit discussion of all our points today. This brings us to the conclusion of our remarks, and now we'll be most pleased to answer any questions the committee may have.
In terms of the issue of the deposit insurance reserve fund, the 1% solution, as it were, I'm wondering if you could tell the committee what your understanding of the view of the credit union/caisse populaire movement is with respect to this 1%.
Mr Poprawa: Certainly. The 1% solution is something that's been looked at by other provinces and other jurisdictions around the world, and the rationale for it is that it provides a balancing between who pays for the protection of the depositor over the long term. There's a general view, no doubt, both in the industry and in government, I think, that the industry itself should always be there to protect the depositor and fund that protection through some kind of mechanism.
Of course, in our business, access to support is extremely important in the case of a problem of confidence in the system. Should a credit union or caisse populaire have difficulties with respect to a run on deposits, we would have to make arrangements to fund that run, to the extent of making sure that all depositors are paid out immediately.
Deposit insurance basically works on an element of trust and confidence. We believe very strongly that at all times the industry should be there to support it. The industry today, however, through the corporation, does not have the ability to build a reserve fund. We have a $70-million deficit we have to pay off first and we have to work towards building a fund of some sort.
The object of the game here is to put some rules in place for the next 10 or 15 years so we can have a clear path at the end of the day to, as I said earlier, have a reserve fund in place and, second, to reduce the exposure of the government to having to draw on its guarantee. Does that answer the question?
Mr Owens: I appreciate your answer. I'm not quite sure it responded directly to my question, but in the interest of time I do want to say that the government, like OSDIC, is ultimately concerned about depositor security. The way we approach it may be from different ways. The commitment I make to you, the credit union movement and the depositors, is that we'll continue to work with OSDIC and the credit union movement to ensure that we have a high level of depositor security.
Mr Harvey Glower: The approach that OSDIC is suggesting with respect to whether a credit union should or should not be allowed to continue to operate if it doesn't meet the rules may, in certain circumstances, be viewed as somewhat rigid. In a particular situation, if a well-capitalized credit union decides to assist an undercapitalized credit union through a merger or an asset transfer, this well-capitalized credit union may, as a result of the assistance, find itself under supervision. The approach may be somewhat rigid, and you may wish to address that.
The regulatory forbearance the ministry has taken in the past and would like to continue to take obviously doesn't mean a credit union can continue to not comply. In other words, the statute is very clear that they must still comply with capital adequacy rules, and a variation -- or this forbearance, if you will -- has been granted with certain strict measures. That isn't to say that if OSDIC or the ministry found there was a particular problem, either one of those two organizations couldn't put a credit union under supervision, or in fact OSDIC on its own would have the power to place the credit union directly under administration.
Mr Murray J. Elston (Bruce): There are several areas we'd like to get into, but as there isn't a lot of time, how important are your recommendations, in your view, to making your role function properly in the public interest?
Mr Poprawa: Thank you for the question. We believe very strongly that the issues of regulatory forbearance and capital and in particular the issue of the funding or some kind of mechanism for funding of the deposit insurance regime are the two critical issues we would like to leave with you for your consideration. Without those, we are placed at a disadvantage in being able to manage the risk that's created for us by our institutions.
Mr Elston: It's been some time since I've enjoyed discussions with the organization, but at some point or other we could get a point where there are so many security funds or stabilization funds, so much money taken from the system to act as security, that you start jeopardizing the actual carrying on of operations.
Does your 1% solution, as it's described, cause any impairment to the system in putting aside so many funds? There's required capital adequacy, at one level, and later on we talk in here a little about what the leagues are supposed to have, a voluntary stabilization fund -- a whole series of other items. I'm wondering how many of these funds we can afford to have in the system before we start looking at having a large deposit of money sitting around waiting for bad things to happen, and whether that impairs people's opportunities to actually conduct business in a real way.
You're right. The 1% solution may be a solution that other jurisdictions have used, but it does not take into account the stabilization funds that might be held by leagues and other organizations. From that point of view, there's some obvious flexibility in looking at that number and saying, is that the right number?
For example, in British Columbia, for purposes of establishing the required level, the regulator and the system have gotten together and combined the stabilization fund and the deposit insurance fund, and indicate that to depositors as the level of security they have for the funds in the system. That's one model we can certainly look at jointly with the ministry and the industry.
Our objective here is to provide as much strength and stability in this area as possible. We believe that depositors are now, particularly in the province, looking more and more at the stability and safety and soundness of the financial institutions they're dealing with, particularly in community economic situations. As I said earlier, there's never enough capital.
Mr David Johnson: I'm going to ask you about your first recommendation in terms of ensuring that credit unions do not operate "if they do not meet the capital adequacy rules." You've indicated in your brief that about 110 do not meet those rules at the present time.
Mr David Johnson: But there's a suggestion in section 86 that they can apply for variation. Has there been any suggesting of grandfathering? I don't know what this recommendation would mean. Would it mean that all 110 would be essentially out of business?
Mr Poprawa: No. The recommendation basically means that it would be a lot tougher to get a variation from the ministry to continue operating if you did not meet capital requirements. For example, today, units which do not meet capital requirements are allowed to take deposits unfettered, are allowed to grow unfettered, are allowed to take on new risks unfettered, without any regulatory control over them.
What we're suggesting is that the whole area of regulatory tightening of the rules around those particular units, to reduce the risk both to our corporation and the system, be looked at very carefully.
Mr David Johnson: I don't know what the level of lack of compliance would be, whether they would fail to meet the capital adequacy rules by a narrow margin or by quite a variation. Is this going to be an onerous consideration for many of these 110 credit unions?
The recommendation is not draconian, given that right now we do have some rules operating, but they are not as stringent as they should be. That's what we're saying, not that they should be placed out of business, but that if they are granted forbearance, the rules under which they operate should be very stringent to ensure that the level of risk they pose to OSDIC and the system is well controlled.
I'd just like to remind the committee members that when we divide the time up, we have control over absolute time but we don't have control over how long the witnesses take to answer, and sometimes that eats into the next caucus's time. However, you get that back when you have the opportunity to put the first question.
Mr John Evans: I am very pleased to be here this morning to assist you in your deliberations regarding Bill 134. As you know, I represent the Trust Companies Association of Canada and its 37 member trust and loan companies. Most of these companies are licensed to do business in the province of Ontario.
My comments on Bill 134 will be brief and to the point. First, let me assure you that the association supports the informed modernization of financial services legislation, including that applicable to the credit union movement wherever that occurs. We realize that the credit unions have waited a long time for their turn for legislative reform to arrive.
At the same time, we feel that modernization should proceed equally for all participants. It is not, in our view, appropriate for new powers to be given to one group and not to others competing in the same field. In other words, legislative leapfrog is both unfair and out of keeping with the spirit of a level playing field.
Furthermore, such legislation invariably sets up pressures on governments to introduce measures which correct these newly created imbalances. The association believes that a more appropriate approach would be to introduce reforms to all competing sector legislation and regulation at the same time and provide for a common coming-into-force date. This was the approach taken in recent federal reforms, and we feel it has worked both equitably and well.
Thus, while we fully support the aspects of Bill 134 which restore the credit unions to an equal footing with other deposit-taking institutions, we tend to object to those aspects which advance credit union powers beyond those available to their competitors.
More specifically, we note the proposal to grant credit unions the powers to network insurance products. No other deposit taker in Ontario has these explicit powers. At the very least, insurance networking by credit unions should not be allowed to come into force until comparable amendments are made to the legislation or regulations governing competing institutions.
The other area where we take objection to Bill 134 relates to the proposal to grant direct fiduciary powers to the credit unions. The association does not object to credit unions networking fiduciary services through their branches, but we do feel that the creation of these services should be undertaken by a separate trust company subsidiary. This is the approach that has been taken elsewhere, and it seems to provide a workable balance between the need for expanded consumer service and the control of conflicts of interest.
We understand that the intent of the fiduciary provision in Bill 134 is to facilitate trusteed RRSPs, but the regulation-making power found in this provision is not restricted to this area alone. Thus, today's intent could easily be altered by tomorrow's reality.
In closing, I would like to note the appreciation of the trust industry for the series of much-needed and welcome changes to the trust company business powers that were announced in the recent budget. We have long asked for the power to expand our business activities into the commercial realm. The minister has, to his credit, responded favourably to our request, and we thank him for this.
At the same time, we would like to point out that other necessary changes to the Ontario loan and trust act await to be made, specifically, elimination of the equals approach, and a modification of provisions relating to legitimate and non-threatening business dealings between related parties.
The equals approach has been a continuing source of difficulty and frustration for the industry from the day the Loan and Trust Corporations Act was proclaimed. We had hoped that by now this feature of the legislation would have been eliminated for a more reasonable and workable alternative such as the designated jurisdiction concept. While this has not happened, we continue to hope that the government will soon realize the merit in our request.
Apart from the equals, it is unfortunate that many provisions such as the related-party prohibitions were hard-coded into the loan and trust companies act instead of being left to the regulations. We note with approval that such inflexibility is avoided to a large measure in Bill 134 as a result of much greater use of regulation-making powers. We urge the government to consider, where appropriate, following this practice more extensively in the future.
Mr Elston: Seven? Twice the time. John, thanks for coming to see us today. Maybe I should start by asking, not you so much but the parliamentary assistant, when it is contemplated the other promised reforms that John has talked about are to be brought in. If you are actually contemplating bringing them in in some timely fashion, the discussion around those things should probably be left to a later date. We should know what you're planning on doing.
Mr Owens: I was going to have Terry Campbell respond to some of the detailed issues contained within the brief, but with respect to the policy and the legislative process, the government and the ministry are continuing to work with the trust companies through the association, as well as individual trust companies, to resolve outstanding issues. There is a process ongoing. We would like to get it in as soon as possible, but in terms of resolution of problems and some of the realities around this place, it's not possible to peg a definitive date. We did say we are working in good faith with the trust companies -- I think we've demonstrated that good faith through the budget process -- and we're going to continue to do that.
Mr Elston: What is that line of securities about "clear, plain and truthful disclosure"? What is happening here is that everybody now is coming to grips with the destruction of the four pillars. It's an even playing field, John. I guess that's clear. I was one of those people you used to talk to about equals and other things. Not to go any further on when these reforms are coming, let me ask a question about equals. How is it hampering trust business in Ontario now, or are you speaking more particularly for other-located trust companies, as opposed to Ontario-located?
Mr Evans: In respect to the Ontario companies that are also federal companies, for example, they are having to comply with two, in some cases conflicting, sets of legislation and regulation. The business powers issues that the minister responded to in the budget help. They certainly help a great deal. We were most pleased to see those measures brought forward.
Other aspects in terms of the administration, in terms of related-party rules, do continue to cause us problems. A designated jurisdiction approach would certainly go a long way to eliminate the problems from the point of view of federal companies. It would still leave Ontario companies at a disadvantage vis-à-vis their federal counterparts in the marketplace.
Mr Evans: But that does cause difficulty. Some of the large federal companies -- I note Canada Trust being one -- requested that at least a designated jurisdiction approach be applied to them, and in fact I think they went even further than that, primarily so they could comply with one set of legislation where they do business across the country.
For a national company trying to compete with the banks, any increase in administrative cost is a factor that is going to detract from their ability to compete on a level playing field. The banks are certainly massively powerful now, given that they've absorbed the majority share, virtually, of the trust industry into their own ranks through their acquisitions. That has to be a major consideration if we're going to continue to have large institutions within the trust industry competing directly and on a level playing field with the banks.
Mr Elston: Would the designated jurisdiction or designated area principle provide the trust companies with an uneven playing field with respect to credit unions and other institutions, bearing in mind that you might be carrying on business in, let's say, Durham, Ontario, but choosing to be under the rules and regulations of some other area?
Mr Evans: I don't believe it would. The modernizations you're bringing to the credit unions act here in Ontario in Bill 134, with the exception of the insurance networking powers, which bring the credit unions ahead of the other institutions, will as I understand it level the playing field between the banks and the credit unions in terms of their powers and their abilities to do business.
Indeed, the representatives from OSDIC previously indicated that there's a great deal more forbearance in respect to the credit unions than there is with respect to other deposit-taking institutions that might fall under the jurisdiction of the Canada Deposit Insurance Corp, for example. We have very little flexibility in terms of capital. My member companies have experienced a number of difficulties in the last few years as a result of that capital shortfall, and we have not been given the kind of forbearance that's available to the credit unions.
It's a matter of public policy, government policy, to do that, and we're not arguing on that basis. But a designated jurisdiction would simply say you have to comply with the rules in your home jurisdiction, which in this case would be the federal rules, and the federal rules are not going to be significantly different from the credit union rules once Bill 134 is through.
Mr Evans: All the failures in the last few years have been basically capital shortfall problems. When the institutions fell behind or below their legislatively required capital ratios, both the office of the superintendent of financial institutions and CDIC were less than magnanimous in their dealings with these institutions as far as their continued survival went.
It started with institutions in the mid-1980s, and rightfully so. The problems the United States faced with the savings and loan industry and the banks down there caused our regulators to take a very careful look at the problem and to deal with it much more severely and directly than had been the case in the United States. From what the representatives from OSDIC were mentioning this morning, there's a great deal more forbearance and leeway given to credit unions to try to get them back on side from a capital point of view than was ever the case with the trust and loan companies.
Mr David Johnson: In general, what are your observations with regard to the capital requirements for all sectors, the banks, trust companies and credit unions? Are they too stringent, given today's economy?
Mr Evans: I don't think they're too stringent. They're basically in line with international standards, although the international rules are interpreted quite differently in different countries. But as a general across-the-board standard, the BIS rules the banks are complying with and that hopefully the trust companies will come under at the federal level, if we can resolve some interpretation difficulties, are adequate and fair. That's a relatively high level of capitalization compared to what has been the case historically, but we don't see that as being out of line with prudence and what's in the public interest.
Mr David Johnson: Going back to your brief, with regard to networking of insurance products, your objection is that if the credit unions, for example, have this ability, other institutions should have the same ability. At present, I gather, the trust companies don't have this ability at all.
Mr Evans: We certainly don't have it at the federal level. It's a matter of interpretation whether Ontario trust companies have that power. It's not that they have been granted the power; it's that the power has not been denied them. I understand some trust companies have been examining this and indeed may be engaging in networking, but there's a controversy about whether they should be involved, because even though the legislation doesn't say they can't, it doesn't say they can either. This is an area of controversy.
But clearly at the federal level they cannot. For the federal companies, it's specifically in the legislation that they may not, and that was a result of the 1992 changes and the power of the insurance industry in Ottawa. Whether this is going to carry on beyond 1997, when the next revision has to take place, is open to question. I would seriously doubt it would remain in place. That's kind of the time frame we're looking at, I would expect.
Mr Evans: The level playing field is that you should use your financial services distribution system as efficiently as you possibly can. Given that the most efficient distribution system today is the branch network of the deposit-taking institutions, that should be used to the greatest possible advantage. That would imply that insurance networking is something that would be in the public interest, in my view. That's a personal view that I hold. Some of my member companies would object to that position. Others would strongly support it. I will give it to you from that perspective. Ten years down the road, I would expect that a totally different distribution system would be in place and you might be talking to Bell Canada about networking insurance products.
Mr David Johnson: On the second point you made, with regard to granting fiduciary powers to credit unions, if I'm interpreting what you say here, you don't object to it, but it should be undertaken through a separate trust company subsidiary. I'm not sure how that would work.
Mr Evans: I think Canada originally had a very sound basis for managing financial services: the four pillars. We kept things separate. That's not a realistic way of doing business these days. But we have maintained, at least at the federal level, some semblance of the four pillars. We've allowed common ownership, we're allowing common distribution, but we have required that a commonly owned entity maintain the trust power, the investment dealer power, the securities power, the insurance power and the banking power in separate legal entities. That, I think, makes it less likely -- it's not impossible, but it makes it less likely -- that you'll get conflicts arising in the administration of those powers by a single corporate entity.
Conflicts certainly can exist between the fiduciary power and the banking power and the insurance power and the securities power. There's no doubt about that. If you're administering a large volume of assets on behalf of others as a result of your fiduciary power and you are also underwriting securities and you are also making loans to a corporate entity, that volume of assets that could be invested in the securities of the corporation that you're underwriting or in the securities of the institution that is borrowing from your bank, there's an obvious possibility of using those funds that you're holding in trust to the advantage of other elements of your corporate entity. While it doesn't totally eliminate the possibility that someone may abuse those conflicts, I think it sets the conflicts out much more clearly and it makes it easier for the public and government to monitor how those conflicts are being managed.
Mr Owens: Just briefly before I go to Mr Campbell, Mr Evans, thank you for your presentation. It's the view of the minister and our government that the financial services review is a very important cornerstone in terms of modernizing and bringing what is a very good financial service sector into line with global realities. We're committed to doing that. With the assistance of people like yourself and other members of the financial community, I think we've done a good job to date and certainly look forward to addressing some of the issues contained within your brief.
Mr Terry Campbell: I just wanted to make a couple of points, Mr Evans, on two of the issues in your brief. One is on networking. I think from our point of view there's a broad networking issue -- that is, the ability of financial institutions to retail the products of other financial institutions -- and a specific subset of that relates to insurance retailing.
Our reading of the situation is that both federal trust companies and provincial trust companies do have the power to network in the sense that they have natural person-powers and their ability to undertake financial services generally is not constrained, except where constrained by the statute. So I think in a general sense, they can network.
On the specific issue that I think you were referring to about insurance retailing, the intention on the credit union side, Bill 134, is actually to achieve equivalency with the federal rules. What the federal trust companies can and cannot do now in respect of insurance retailing we have tried, and I hope successfully, to match in the credit union statute. So I think from our point of view there's actual parity there; there's equivalency. In fact, our legal drafters attempted to use the federal model as the guide. We went at it with a somewhat different approach, but the effect is the same.
On the second issue that you raise about trust powers, fiduciary powers, I think your point is well taken in the sense that if trust activities are going to be undertaken, they should be undertaken as subsidiary. The intent in the statute is not to make credit unions into trust companies or to allow them to undertake a full range of fiduciary activities. If that is to be done, that should be done in the subsidiary.
I think you're referring to one section which would allow credit unions to hold lawyers' trust accounts and to get themselves involved in some RRSP activities. That is the sum total of it, and in some way it's either reflecting current activities or just reducing a small anomaly. The statute is limited. They cannot engage in any trust activity in the absence of a reg, and there is no intention that regulations through the back door would change them into a trust company.
Mr Evans: Thank you, Mr Campbell. That gives us some comfort, but you opened up the Pandora's box with your last comment, that in both cases, the insurance networking and the fiduciary powers, it is by way of regulation. I think most people around this table, certainly myself included, understand that what is one minister's intent in respect of regulations may not be another minister's intent in respect of regulations, and the difference between the federal legislation and this legislation is that it's hard-coded in the federal legislation and that the federal government cannot expand by regulation the insurance networking powers of banks and trust companies, whereas that could be the case when Bill 134 is in place.
We haven't seen the regulation. More comfort would have been available to those of us who are observing the legislation if the regulations had been on the table at the time we came before this committee, but that's not the case, and I can understand why. But that's the concern, that it's being done by regulation, and regulations can be changed at the will of the minister.
Mr Norm Jamison (Norfolk): I just wanted to ask one question. It really deals with the most recent budget. My question is, won't the recent changes announced in the budget help trust companies do more commercial lending and give them basically a broader ability to compete in that marketplace? What's your opinion on that?
The problem, as there is always a problem, is that the companies that probably could have made the greatest use of those powers in the interim between the introduction of Bill 86, the Ontario loan and trust companies act, and today have been absorbed by the banks. I'm not saying they wouldn't have been absorbed by the banks had this power been available to them, but certainly their options would have been broader had these provisions been available from 1986, when the original legislation was brought forward.
But given that, we thank the minister for taking these steps. We had hoped he would do that, and he met our expectations in regard to those provisions on commercial and consumer lending. Certainly my member companies and the other non-member trust companies are going to be looking very hard at how they can take advantage of those powers to compete with other lenders in the field, and specifically the banks.
Mr Elston: Mr Chair, while we're waiting for the presenters to come forward, I wonder if Mr Owens could give us an understanding of how many undertakings have been given with respect to changes or types of regulations to be brought forward as part of the companions to the credit unions act. Certainly, with respect to the way the drafting is done around insurance offerings and things, there are particular understandings of what regulations are to be passed.
There was a request from our first presenter that certain regulations be put into effect, and I wonder if we can have a working list of those regulations. I understand you may not have them finalized, but in order for us to contemplate what is being done by this bill in a more fulsome sense, I think those lists of regulations you're working on that are pertinent to policy issues, as opposed to just the regular housekeeping, would be helpful to us so we don't get taken off our lines of pertinent questioning.
Mr Owens: Thank you, Mr Elston. I can give you and the rest of the committee an undertaking that we'll provide that answer in writing. I don't have the other figures, the information, totally committed to memory, so I certainly wouldn't want to mislead yourself or any of the witnesses here today. The ministry has noted your question and will get back to you.
The Chair: The next presentation we have this morning is by the Independent Life Insurance Brokers of Canada, Martyn Rice, immediate past president, and James Bullock, president. Please come forward and make yourselves comfortable. Welcome to the committee. If you would please identify yourselves for the purposes of the committee members and Hansard, you may proceed.
Mr Martyn Rice: My name is Martyn Rice. I'm the past president of the Independent Life Insurance Brokers of Canada. Instead of saying that all the time, we call ourselves the brokers' association. We are conscious of the courtesy you do us in letting us speak to you and we hope we do it as succinctly as we can.
We are conscious of the fact too that most people are disturbed at having to face one insurance agent at a time; two must be a little daunting. We hope we'll overcome that. Anyway, we're not lawyers, so we hope that's on our side.
Mr Rice: As I said, I'm the past president and Jim Bullock, sitting next to me, is now the president. We changed horses last week, which is really why we're both here. James had a long history in the particular function of watching legislation as it affected us: for some 20 years, in fact. I think his first meeting was with Mr Thompson, a name some of you may recall. He has been following changes since then and consequently will be carrying the ball for most of this morning.
There are a couple of things about insurance agents that are worth mentioning, I think. One is that we are the people who actually face the public. That is to say, we carry the insurance company message and the legislative message to them and when we are asked to do things which are a bit peculiar, the public says to us, "What are you up to?" and we have to explain. Some of those peculiarities exist in the existing legislation, and we're happy to see that most of them are disappearing. James will mention them as we go along.
The other thing to mention which I suspect is not apparent to, if I might say this, relative newcomers to the whole system is that in the life insurance world, which includes all kinds of odds and ends like group insurance and segregated funds -- a type of mutual fund -- pension funds, disability insurance, a number of peripheral or considered peripheral notions, all are part of the package and consequently affect our opinions. But the two markets that exist are really having to do with a method of distribution: those companies that distribute through agents who represent them exclusively and those companies that are represented by agents who themselves represent a number of companies. That distinction really requires a different tone of voice in the legislation. We think there's a need for the legislation to at least realize those two systems exist.
Mr James Bullock: We've appreciated the liaison we've enjoyed over the years. I see some very familiar names here this morning: Mr Owens, Murray Elston. I remember meeting with Monte Kwinter many years ago.
If Bill 134 was passed tomorrow as is, we'd be comfortable. Obviously, there are a few things that we would prefer were done differently. The comments this morning are going to be strictly addressing the issues that we think relate to how Bill 134 impacts on the public. We have done our lobbying in the past.
I can recall about 10 years ago one of the bureaucrats in Financial Institutions whom I was talking to saying it was his hope that the Insurance Act would be brought into the 20th century before it was over. He wasn't kidding when he said that. What he was trying to tell me was that getting an Insurance Act changed is no mean feat and is not easily done.
With that in mind, we are asking you to bear in mind what you're putting in regulation and what you're putting in the act itself, because what you put in the act could very well be there for another 100 years.
Today we have insurance products marketed through television, through fax machines, through modems, and over the telephone. I'm sure that when that act was originally passed, none of those things were ever foreseen as marketing tools. Lord knows what the future's going to hold, so be careful what you enshrine in the act, because we're going to have to live with it.
The concept of banks being involved with marketing of insurance products we find scary. This isn't because of our perception; it's because of what we've seen in other jurisdictions. In Northern Ireland, for example, or Australia, the banks virtually dominate the insurance market now. Why is that? I know in my life, the insurance company that I choose to insure my house is entirely a discretionary thing. Whether or not I have a mortgage on the house is hardly discretionary. When I'm talking to the banker about the mortgage on the house, if he hands me a long, complicated form about the insurance on the house and says, "By the way, if it's with us, you can skip all that," I get the message real fast.
The power, the coercion, that any lender has when it comes to things like insurance is infinite. Frankly, I don't think the two can be mixed without the public getting hurt. I know some of you may regard insurance as being generic, and, "One is as good as the other." If I can put on my broker's hat for one quick moment, I can assure you there are differences in policies. In my own personal case, the policy that covers my house is with that company because it does not have a limit on sports equipment, whereas a lot of companies do have a limit on the sports equipment that's covered on a policy. I happen to know that is why my broker put me with that company. Your broker may have insured your house with a similar type of consideration, and you may not have picked up on the subtlety. If your banker indicates you'd better change policies, you do. The public is the loser.
In marketing, knowledge is power. If I can peruse a bank's files, I know what kind of discretionary income you have. I know what kind of investments you have. I know what kind of RRSP you have. I even know what insurance you have. I even know your insurance due dates. Knowledge is power. It doesn't matter if in getting that power I am wearing the hat of the bank's own insurance company or just some very, very remote affiliate. If I, as an insurance person, get my hands on that bank data, I have an incredible amount of power and leverage in the marketing of insurance. I think the sharing of that kind of information is wrong. It tends to get misused.
Moving on to the element of Bill 134 that relates directly to insurance, the education requirement right now to become a life agent is very low. In my opinion, it's ridiculously low. Not too long ago, I sent my secretary off to write the exam so she could get a licence so that she could sign in my place on documents. It was a very convenient thing in the office. Can you think of any other profession where you could send your secretary off to get a licence? In no profession worthy of the title would that be feasible.
In fact, there's a gentleman here in Toronto who offers a money-back guarantee on a training course. He trains somebody for one evening and all day Saturday, and he guarantees that you'll pass your insurance exam. It's a crash course. The information that's imparted is probably barely enough to get a licence, and probably the knowledge that went with it would last until about the day after the exam. But it does serve the purpose of getting a licence issued. That does not serve the public.
The havoc that poorly conceived insurance can wreak on a family is into six digits. That's very heavy-duty chaos by not understanding the subtleties, and to have the kind of exam and educational requirement we have right now is a joke. It does not do the public any good.
It has a lot of other ramifications. Mr Savage here can probably tell you horror stories about disciplinary problems he has faced over the years. How many of those disciplinary problems relate to the fact that there are people in the business who shouldn't be in the business?
The brokers' association would like to see educational requirements something along the lines of the standards that the general insurance industry has or the real estate industry has. That's the type of program that is taught at the community college. We would all benefit.
I'm going to tell you something that I've told Mr Savage a hundred times. The one element that disturbs me about the act is that the word "broker" is not defined. As an insurance broker, I'd like to see something in writing that explains that there is such a thing as a broker in Ontario.
The reason for my sensitivity is that the existing act makes it clear that brokerage is not legal. It would be an offence to hold yourself out as representing more than one insurance company, the way the act is now written. As an association, we're doing pretty good when you consider that we're not supposed to exist in Ontario.
Your proposal will bring brokerage in front and centre. Our concern about the definition of "broker" is that the public has a perception of what a broker is. The public has an understanding that if they go to the Yellow Pages and they're looking to insure their car, agents represent companies, such as the agent for Allstate or the agent for State Farm, and there are also people called brokers who represent a number of companies. If that is the perception the public has, I think it would be appropriate and less confusing if a similar concept was carried over into life insurance so they know that some agents represent a single company and brokers represent a number of companies.
Quebec has a very short little phrase in its insurance act that says that a broker represents more than two companies and that none of those companies has an exclusive contract with them. That's a very simple definition. We'd be very comfortable with something like that.
Bill 134 envisions a council coming in to take over the day-to-day running of the insurance industry or the marketing of insurance. Our experience in watching other provinces with councils gives us cause for concern. The way it's proposed here appears to be much more realistic, and I am quite comfortable with the way it's proposed.
The problem in the other provinces has been that there is very strong competition within certain marketing elements in the marketplace. To name two, I'm a broker; I compete with people who are agents who represent a single company. We obviously both believe our marketing system is good and valid and makes sense. If you have a council that is dominated by one group or the other, the council becomes an extension of the marketing arm of that element of the industry, where it either promotes one side or tries to hold back the other, which of course is not what a council is intended for. Unfortunately, that is how they have been used in other provinces.
What you're looking at in Ontario is a proposal where there will be some type of proportionate representation of the various marketing elements on the council. That is very good, and please understand that 10 years from now, when we're all buying our life insurance through modems and computers, the people who specialize in that type of marketing will now have a seat on the council. If they don't, people like me will do our damnedest to stop that kind of marketing, which doesn't serve the public. The council has to remain responsive and proportionate to the way insurance is being sold.
When I say "proportionate," proportionate to my eye means proportionate to the way the insurance gets sold, not how many people it takes to do it. Three or four people in a head office in an insurance company with a big advertising campaign using fax machines and telephones might market as much insurance as 1,000 agents. It doesn't matter if it's three people versus 1,000 people; what matters is, from the public's point of view, how is insurance being sold?
There's a little plug in there, because although brokers numerically are not very strong on the ground, in terms of the amount of insurance actually changing hands we're very powerful. About half the insurance sold in this country is sold through brokers. Some companies you've probably never heard of sell more life insurance than companies such as Sun Life, which you have heard of. It's because the activity of the brokers and the advertising is not aimed at the public; it's aimed at the brokers themselves.
The final element I'd like to comment on is the issue of replacement. This is a very contentious issue in the insurance industry. It's contentious because it's a marketing fight. If I, as an agent or a broker, am replacing somebody else's policy they've sold, we're now in a marketing fight, and the regulations get dragged into it.
The way the replacement provisions work is that if I'm going to replace your policy, I have to give you a disclosure form that explains what I'm proposing and what you now have. That may not sound ridiculous, but suppose we were saying: "I'm a banker. I'm proposing to replace your mortgage, and I'm offering you a better deal on your mortgage." Could you imagine regulations that say that the first company that arranges a mortgage for you doesn't have to tell you what your interest rate is, doesn't have to tell you what the provisions are to get out, but if somebody else comes along and says, "We have a better deal," then they now have to for the first time tell you the facts about what you've got and what they're proposing?
What we would like to see is disclosure of details of insurance when it's sold, not when it's replaced. Frankly, in a lot of cases, by the time we're around to replacement, the damage is done. You needed to know what the policy had when you bought it, not when it's being replaced; that's too late. Insurance is about the only financial instrument I know of where the seller is under no obligation to disclose the relevant facts.
There's life insurance being sold today where there is no life insurance death benefit in the policy for the first two years. That's a very relevant detail. There's no obligation to disclose that. In a lot of the insurance sold today, the premium can change in the future, at the whim of the insurance company, perhaps inversely with interest rates, perhaps inversely with mutual funds. There are policies sold where the death benefit will fluctuate with other factors. This is pretty important stuff. There's no requirement to disclose it. Is it any wonder that a couple of years later, when the person discovers that his premium is going up or the face amount's going to go down for the first time, he's unhappy and wants to replace it? Then I, for example, as the broker who is stuck with this mess, am now under a legal obligation to disclose what the first policy said.
The one who in a replacement situation should be obliged to disclose what the old policy said is the original insurance company. As the broker, I should be obliged, I submit, to tell in writing the old insurance company, "Joe Blow is considering replacing your policy with a new one." They should disclose to him what's in the new one. They know how to put it in the best possible light and presumably tell the truth about the details of the policy. Why should I try that? Sometimes I have to look at policies that are obsolete, nobody's seen them for the last 20 years, and I'm stuck with the job of trying to figure out what it is and explain it to the client. The insurance company can do that. That would best protect the consumer. The best protection to the consumer is a law that requires the details to be disclosed at the time of sale, as it is with mutual funds, as it is with loans, as it is with any other financial instrument.
The Chair: We've used up almost all of our time. We have about a minute for question-and-answer per caucus. That's not a lot of time, I know, but Mr Johnson, if you want to quickly make a comment or ask a question.
On the original comment about banks being involved with insurance products, and you mentioned Ireland, where the banks tend to dominate: Other than I guess the conflict of interest that you mentioned, have there been catalogued problems or infractions or difficulties that have occurred in countries where the banks do sell insurance?
Mr Bullock: If the training of agents were high, presumably the difficulties wouldn't arise just because it would be a bank-oriented person doing it. However, I'm talking in the context of Ontario, where the skill level of an agent need not be very high at all. If you take an ill-informed or poorly trained individual who has the ability to coerce changes in insurance, I think the opportunity for catastrophe is very high.
Mr Owens: Just because of time, I'll very quickly thank Mr Rice and Mr Bullock for their presentations. It's been a long time since I stood at your annual meeting and talked about the reforms that we see in the bill, and it's a pleasure to hear you today.
Mr Lawrie Savage: I'll be very brief. First of all, with regard to education, we certainly agree that the standards need to be increased, and the proposals go some way in that direction. There will be two levels of examination, and level two will be quite a significantly more difficult test than currently exists. I might also just mention for the benefit of the committee members that although we agree the exam could be more challenging, at the present time only about 50% of the applicants pass the exam, so it's maybe not quite as easy as might have been suggested.
Also, very quickly on replacements, the proposals go quite a distance to require additional disclosure by agents when they're dealing with the public. There will be a code of ethics that would have a know-your-client rule and also a rule that the agent always has to act in the best interests of the client. Also, it would be contrary to engage in any misleading practice. We think those things would go some way towards dealing with the point that's being made.
The replacement form would also be in plain language and would have, boldly highlighted, a number of consumer tips that consumers should keep in mind when policies are being replaced. We think that's quite an improvement in the present system.
Wouldn't it make good sense for a person who's trying to replace a policy to know what you're replacing so that somebody isn't disadvantaged when he or she chooses to take your policy over the other? How could you make that sale unless you had some understanding of not only what their circumstances called for, but what circumstances were met at the time with the policy, whatever it might be, that was in hand? I'm kind of confused that you wouldn't want to understand what the policy was that a person had when you were recommending perhaps that they replace it, particularly in the case where maybe there was some feature that made the policy cheaper that ultimately had passed and there was perhaps full coverage for life, let's say after the two years -- the problem with having been misled actually having been overcome by time, for instance.
Mr Bullock: Yes. When I'm in a situation where I'm telling you that what you have isn't very good and there's something else that's better, I obviously believe I have a good grasp of what you have. What I'm concerned about is who has the legal onus to give you the final opinion as to what your policy says. Right now it's me. I'm saying that you would be better served if I simply told your company, "We're looking at replacing your policy," and it prepared a simple disclosure form that told you what your premium was, what your future benefits were etc.
Obviously, in order for me to transact business, I'm going to have to make you a presentation. If I'm right, they will simply confirm what I told you. If I'm wrong, you have an opportunity to get it from the horse's mouth, so that when I said, "Your premium is going to go up," and the company sends you its copy of the form and says, "It's not going to go up," you realize I was all wet. Right now, the onus is all on me to talk about somebody else's policy. That isn't fair to me and it certainly isn't fair to you.
Mr Elston: But isn't it a material representation that you're making to me that you're replacing a product that is inferior to the one you're giving me? Shouldn't you be held responsible for making that as an allegation, with respect? I don't see how you can get away from having an obligation to go into the background policy, particularly in replacements.
I agree with you, in fact. When somebody says, "You need a policy," and in plain language, "This is what I'm giving you: I'm giving you $10,000 worth of whole life" or "I'm giving you this coverage for accident and health benefits," I agree fully with that. But on the replacement, it has got to be a material representation in terms of urging me to change my policies, it seems, which is a holding out that you know what I've already got. I don't see how you would want to or how you could allow somebody to escape the obligation.
Mr Bullock: I'm not proposing they should. I could not sell you a replacement situation without explaining what you have and what I'm proposing. What I'm talking about is the ability for you to be sure I've got it right. The way for you to be sure I've got it right is for your own company to provide you the other half of the apples-to-apples comparison.
The law, as I envision it, would require me to disclose in a simple, standard format the premium, the future benefits etc, and your own company to provide a similar document for your existing policy in addition to the one they gave you, ideally, when you bought it, which right now is not the case.
If, for example, Mr Savage discovers that I am routinely telling people it's A, and in fact when the insurance company comes through with its copy, it's B, either I'm incompetent or I'm misrepresenting. Right now, I have to fill in both sides. It's unfair to ask the Chevy salesman to try to explain how the Ford worked. Let Ford do it.
The Chair: The next presenter this morning is Mr Tom Gunn, representing Canada Trust, National Trust and Household Trust. Please come forward, make yourself comfortable, and whenever you're ready, you may proceed.
Mr Tom Gunn: I have a short presentation to make this morning on behalf of Canada Trust, Household Trust and National Trust, which are three companies which some time ago formed a private group to work with the ministry for changes in financial legislation.
To elaborate a little bit on the background, Canada Trust is the largest trust company in Canada, with over $150 billion in assets. It is not a member of the trust companies association. While Canada Trust shares some interest with the association, it does differ in some aspects. Household Trust and National Trust are members of the association.
Personally, I am the former chief financial officer of Canada Trust and am now a consultant in the industry. For over a year, Canada Trust, Household and National Trust have been working together on legislation.
Earlier this morning, Mr John Evans, the president of the Trust Companies Association of Canada, gave his remarks. Many of the remarks I will be making this morning are very similar, so I will keep my comments very brief.
Firstly, I would like to point out that both credit unions and trusts offer many of the same services to people in Ontario. Both credit unions and trust companies are deposit-taking institutions and have certain prescribed lending powers. While the structure of credit unions is very different, many of the rules governing the business conducted by credit unions could just as easily apply to trust companies.
Another reason why trust companies are interested in the regulatory regime for credit unions is competition. Since all deposit-taking institutions are regulated in some fashion, the type of regulations and power we have do in fact dictate how, when, and what advantage we have relative to each other and to the banks, as well as to other institutions operating in Canada from abroad.
Let me point out something which all the parties in Ontario have recognized. That is that the regulatory burden on the financial services industry, just as much as any other industry, can impose some very significant costs. We are always looking for ways these costs of regulations can be minimized without compromising consumer or depositor protection. Let me say that I really do believe the credit union act has the potential to achieve that balance.
Another reason why the group is here is the process that preceded the introduction of Bill 134. In December 1992, the government launched a major review of financial services legislation governing all aspects of trust, credit union and insurance companies, and that review really was badly needed. Discussion papers were published as part of the exercise and each sector of the financial services community was invited to participate and comment on all or any parts of financial services reform. We very much appreciated this opportunity, since what happens in one part of the industry does have a very major impact on the others.
Consultations were detailed and were carried out with due confidentiality where required. That did enable our three companies to provide technical expertise and comments on the draft legislation, and we hope this has made for stronger legislation. In short, the process was very thorough and inclusive, and we see this appearance as part of the continuing process of consultation.
Over the last few years the financial services sector has changed very dramatically. It's become much harder to distinguish between the four pillars, especially as some new pillars seem to have evolved. Both personal and commercial customers are looking for a much broader range of products and services regardless of where they deal. Financial institutions are now involved in multiple businesses, all of which need appropriate and modern powers described in legislation. In addition, the sector does require modern regulatory provisions. Again, it's a question of both law and regulation having to come together.
In the past few years, federal legislation did receive a comprehensive review, and the provinces are now catching up. Until the federal government updated its legislation, the provinces were significantly ahead, and Ontario was the leader in this move. But what is very clear now in the current economic and business environment is to have flexible legislation for all sectors of the industry. By "flexible" I would not mean loose; flexible to the extent that one can take advantage of a rapidly changing economic environment appropriately and not be constrained by rules which are designed to apply to an entirely different economic or business environment.
The staff and legislative counsel have done an excellent job in drafting this legislation. I think I made the point to a couple of the drafters personally, because I do like the language in this. It's very clear and it's very effective. I think it represents some good progress on the province's part. This is certainly very hard to do, and it's very important to those of us who have to live by the letter of legislation that it is clear. A great deal of credit is due to the staff efforts in this area. I personally appreciate their efforts and think they should be recognized.
Wise choices have been made between putting principles in legislation and rules in regulation. With a rapidly changing marketplace and economy and new products and services constantly being developed, the government is in a much better position to respond to changes quickly through regulation and to deal with actual problems as they occur.
Financial regulatory regimes are certainly not the first thing that comes to mind when we're trying to interest an electorate in a government's record of accomplishments. While this is perfectly understandable, it ultimately can mean that the industry rarely has an opportunity to update its legislation when that is required. Nor, just as importantly, does the government have an opportunity to develop new rules to handle new realities in the consumer and economic interest. The balance that has been struck in this legislation is just the sort of balance we'd like to see in trust company legislation.
One of the things we are most pleased to see in the credit union legislation is the change to a prudent portfolio approach with regard to investment powers. In principle, this means investing in a prudent way rather than a strictly prescribed way or an eligible list of investment methods that hitherto was on the books. It is very clear in the act that this doesn't mean people are free to do what they wish. There's a very clear set of sections in the act which does define liability if one does not act in a prudent manner. This change is good news for the economy because credit unions should theoretically be freer to invest in new projects.
We use the terms "principle" and "theoretically" quite deliberately to make another point that is very important both to the trust companies and to the credit unions, and that is the regulations which will accompany this. As is often said in our business, it's the details that make all the difference, and no one would like to see that the powers have been expanded in law and immediately taken away by regulation. That would not serve anyone.
To touch very briefly on the changes in the budget proposed to trust and loan legislation, it was always understood that as part of the process, the credit union and caisse populaire would be the first to see legislative changes. As many of you know, our three companies have been working hard to ensure that changes in our own legislation are next. We were extremely pleased to see that some of the proposals did appear in the recent budget as part of the government's strategy for helping the private sector consumers contribute to full economic recovery.
While this legislation has yet to be introduced, some of the principles set out in budget paper A do look very similar to the changes that were proposed for the credit unions. For instance, trusts will soon be able to adopt a prudent portfolio approach to investments, to issue letters of credit, which has been a very serious point of contention, and have no restrictions on the denomination of subordinated debt. While it might seem to be a small point, it actually is a very important access-to-capital issue. These are all changes that both credit unions and trusts have been asking for for many years and we're all delighted to see that they are being made.
I do want to say, however, that trusts will not have the advantage the credit unions have had in terms of a comprehensive review of legislation. I think a couple of the other points that would have been in a comprehensive review were mentioned by Mr Evans.
Harmonizing rules for related party transactions to permit reasonable transactions that present no risk to depositors and fundamental disentanglement for companies that are subject to duplicate regulation at the federal and provincial levels must follow before trust legislation is truly and thoroughly updated. The industry and the individual companies will continue to press for changes in this in the weeks and months ahead.
If I may add just one other cautionary note at the end, the changes signalled for our industry in the budget have not yet appeared in legislation and in regulations. We would all want to watch very closely just to see how these principles are actually set out and enacted in regulation.
On page 3 of your presentation, part V, you say that financial regulatory regimes are not the first thing that comes to mind when one is talking about the government's record of accomplishments. I do have some sympathy with that statement. It's been my experience as an observer, watching when something does happen in the field of financial services with respect to a failure, that the first question asked by depositors is, "Okay, so where's the government, what kind of regulations does it have in place and what can we do to ensure our deposits are safe?"
I appreciate the kind of work your group and others within the trust community have done with the government with respect to this issue, representatives like Ann Creighton, who have made your point clearly and concisely in working with our ministry representatives.
Mr Gunn: Yes. The comments Mr Evans raised this morning about subsidiaries for trust powers I think is something that could be handled in regulation rather than legislation. Certainly as a matter of principle there are no changes which we would suggest would need to be made from the standpoint of the three companies I'm representing today.
Mr Elston: Since we don't have a lot of material to talk about in the text of the bill, can you give me a little bit of a view? You represent Canada Trust, National Trust and Household Trust here, I guess as their combined agent or maybe as a new CEO for the entire new amalgamation or something, for all we know. What are the future prospects for trust companies in the financial market, just from the standpoint of some vision? I think that's important for us with regard to what really the even playing fields are.
Mr Gunn: Certainly, Mr Elston. I must comment first on the remark you made as to my role here today. I may well appear back in this committee in some other role. You may well think so; I couldn't possibly comment at this time.
First, with regard to the role of trust companies, it's not so much the actual type of legislation or name of the company as much as the powers that are extended and the quality of service that is offered by institutions. There is nothing detrimental in the term "trust company" that caused the failures of the industry. In actual fact, it had more to do with legislation being obsolete at both the federal and provincial levels.
Just touching for a moment on the nature of the length of time it takes to make changes, when the federal act was updated, the core legislation dated back to the 1920s, and business problems which were current in the 1920s were definitely not present in the 1980s and 1990s.
A number of the problems in the trust industry came about by people trying to bend existing legislation, being very frustrated with the lack of progress. With updated legislation, I think you would actually see fewer problems. One of the things that certainly happens at all companies these days is that directors and officers are much more aware of issues of corporate governance and are less inclined to look to bend rules. If powers are clearer and the ability to expand into new areas is plainer, people will in fact engage in less risky transactions because there is more opportunity and clearer opportunity to engage in better-quality transactions.
I think the industry will survive. There is a role for smaller companies in Canada and elsewhere. Indeed, some of the smaller financial institutions around the world, not necessarily the largest, are the most prosperous.
Mr Elston: Perhaps we should bank on seeing you back here on some occasion in the future. With regard to the rules for affiliates and other things you see in your industry, would you have any problem if there was a different rule to be applied to affiliates of credit unions, for instance? There are some reservations about how the treatment of an affiliate to a credit union might make their world work. I'm just wondering if you had any observations on difficulties you might spot in that regard.
Mr Gunn: One of the underlying issues that still exists with all institutions, with credit unions as much as anyone else, is the issue of management quality. If an organization is not well run, it will not prosper. The act will neither prevent their failure nor ensure success. If companies are well managed and can adopt proper business standards, they will prosper.
I know there is some concern expressed that there seems to be an opening in Bill 134 to allow a tight set of rules for credit unions. While this may be thought to be appropriate, that may be letting them off one leash but back on another, and I think that should be looked at very carefully before it's done.
Imposing tight rules can rebound in ways that one would never expect. For instance, a rule in trust legislation, thought to be well founded at the time, with regard to the replacement of the so-called basket clause, requiring a company to pay dividends before a trust company could invest in it, by a standard that said all companies must be in business for five years was not intended to inhibit the growth of small firms, companies in the technology business in areas like Kitchener, where technology companies abound, yet it had that effect.
Mr Elston: Just one final comment: The real problem in looking at having legislation is that if you are an aggressive management -- and we have seen examples of that in the trust business. Some of those people, now not being in the trust business, see the act and have seen the act, even in its previous incarnations, as being far too difficult to deal with even though it had some flexibility built into it. It's almost impossible to make the legislation flexible enough for at least some management teams, and there's always going to be an internal debate, it seems to me, and some of the debate was led by representatives of at least one of the firms you are here today representing. And even on the other side of that might be one of the other firms you are also representing today.
To look to the legislation to be both flexible and stable enough to prevent risky investment becomes a very difficult job for the regulators; in fact, almost an impossible world for them to hold with any degree of certainty.
Mr Gunn: You're quite right, if one perceives flexibility as meaning risk, but it need not do so. Flexibility can actually mean ability to make use of current legal drafting language to adapt to new types of securities and new types of business that are available, rather than if you stick in the commercial mortgage field.
Mr David Johnson: I'd also like to thank you, and just ask you perhaps a very naïve question: Why does it take so long to update legislation? Is there a lack of consensus in the industry or is it other political priorities? Maybe it's a political question I'm asking you, I don't know, but you say the federal legislation hasn't been updated since 1920.
Mr Gunn: When the federal reform was passed, it had taken virtually 70 years to get done; you're quite correct. It is a political question, but it's one which all parties have shared. All governments face the issue of priorities and of allocating needs to meet economic development processes. Reform of financial legislation doesn't readily appear to be something that ties to economic development until you work through the consequences of restraining companies by old legislation, and slowly but surely recognizing that the restraints drive the companies to lend in fields which can be totally counterproductive to economic development.
For instance, at the federal government level there was a thrust, and for that matter in Ontario as well, to ensure that there was adequate money available for mortgage lending in Ontario and elsewhere across Canada, particularly after the Second World War. That is still the regime we're in 50 years later. I think we'd all agree that Canada is much better housed than it was, yet the trust industry at both federal and provincial levels was being encouraged and compelled, virtually, to stay in the housing finance business. We all look at what has happened when money is pushed out the door, so to speak, in commercial developments. It isn't prudent, yet it was one of few outlets for money those companies had.
There are other things that are of higher government priority, reform in other sectors, that have taken precedence, and it simply takes long effort to make it well known that reform is required. That applies to Ontario, to British Columbia, to Quebec and to the federal government as well.
Mr David Johnson: On page 1 of your brief, you talk about the regulatory burden on the financial services industry, and perhaps that's in the vein you've just been talking to us about at this point. Now my colleague Gary Carr has been on a task force attempting to address regulatory burden, not only on the financial industry but on our total industry and business across Ontario. Are there any other specifics you would like to note in terms of current regulatory burdens on the industry?
Mr Gunn: Yes, there are, and this gets back again to a point raised by Mr Evans this morning, and that is the issue of harmonization of designated jurisdiction and overlapping regulation. There is an opportunity now for most of the Ontario Loan and Trust Corporations Act to look very close to the federal act. On the other hand, it's not quite identical.
There are two very close sets of rules that still exist with regard to related-party transactions, which also can have unusual economic consequences that people wouldn't think, and other sectors as well. It's been characterized as everyone agreeing that proper constraints need to be visible with regard to related-party transactions and that all corporations in effect recognize they must be seen to be acting properly.
However, two not identical sets of rules are a real burden. They can block activity. They can actually block the purchasing of equipment in Ontario from Ontario manufacturers because it becomes almost insurmountable to figure out how to do it.
There is a need to harmonize. Frankly, I don't think the country is well served by there being separate regulatory powers in the same field at different levels. It is costly. It creates no end of effort to determine how a transaction must be done; in fact, transactions which, I don't think anyone here would disagree, create economic benefit and are no risk to depositors at all. There is a need for reform of that sector.
One of the things Canada Trust has advocated for some time is that federal trust companies should perhaps be exempt from that role and just governed by federal regulation. National Trust, on one hand, has no problem with Canada Trust and Household being that way, but has no desire not to have comparable powers as well. It is something that all three companies want to work more with this Legislature on, just to see if there is a way out of this.
Mr David Johnson: I wasn't sure quite what the bottom line was: that the solution is that the federal rules only should apply, or that somehow the provincial and federal rules should be brought together, harmonized?
Mr Gunn: There are two concepts. One is called designated jurisdiction, that a company which is regulated by one province should just be regulated by that province in its area of operation; that is to say, Ontario would only regulate the Ontario operations of Ontario companies, and the federal government would regulate the operations of federal companies. There is no net economic benefit to be gained by having two regimes.
I was very interested in a couple of things. First of all, it would be really foolish of me not to mention that Rowland Fleming is the president of National Trust, whose head office is in Stratford, Ontario, which is where I come from. Now that I have mentioned that, I'll go on to what I really want to talk about.
I like what you were saying in your presentation, two things that I thought were really nice and may even use as quotes. One was that you said how very pleased you were to see the changes to your own legislation outlined in the recent budget. It's nice to see the financial community say those kinds of things about a budget. Second, on page 2, you said, talking about the consultation process, "In short, the process was thorough and inclusive, and we see this appearance as part of that continuing process of consultation." Again I'm glad to see that, because it's something this government has tried very hard to do: get involved in consultation in a lot of pieces of legislation.
The interesting thing I want to ask you about is that you mentioned the flexibility of legislation versus regulations. That surprises me, because I've just come off the social development committee where we looked at legislation around tobacco, and time and time again we heard members say: "But it's not in the legislation. Why are we leaving it for regulations?" Now you've come forward and talked about responding to changes quickly through regulations and not enshrining it and putting it in stone in legislation, talking about the flexibility of legislation versus regulations.
Is it just in this particular sector in which you think that would work, or do you see that as being something we could look at in all pieces of legislation? I am a process person, and that's why I wanted to know.
Mr Gunn: From a theoretical standpoint, the position the trust companies are taking comes from many years of working with a tight set of rules. In addition, one of the other features that happens within this industry is that the companies have the experience of seeing many sets of rules from many jurisdictions.
In Canada and abroad -- in the United States and in Europe -- Canada Trust and National Trust are indirectly regulated through the Basel accord, an international banking agreement made by the central bankers of several countries. From this, the industry has come to the conclusion that while people can be quite comfortable with the situation being in stone, it is a better arrangement, if it can be worked through, to move details from legislation into regulation, that it can work. In theory, in any case, it appears to work effectively elsewhere in the world on financial services. Potentially it could work well in other sectors.
The Chair: The next presentation this morning is by the Investment Dealers Association of Canada, Mr Donald W. Grant, vice-president. I remind you that you may use all the time allotted to you for your presentation, or you may want to save some for questions and answers.
The Investment Dealers Association very much appreciates the opportunity to appear today before your committee as it reviews Bill 134. As you are no doubt aware, our interest in Bill 134 is aimed primarily at a tag-along section of the legislation that was added on, not part of the credit union and caisse populaire legislation. It deals with the definition and recognition of self-regulatory organizations.
From a background perspective, the North American and indeed British approach to securities regulation is not one of direct government regulation, such as exists today with the banking system in Canada, nor is it, of course, purely self-regulation. It is rather a cooperative regulatory system, which is a close and necessarily interdependent relationship between, in this case, the Ontario Securities Commission and, on the other side, the IDA and the Toronto Stock Exchange in Ontario.
The IDA is the national self-regulatory association for the securities industry. It's not particularly large. We have about 100 investment dealers in our membership and about 20,000 employees across Canada. Sixty-seven of those 100 members are head-officed here, and 10,000 of the 20,000 employees are here, so the presence is quite strong in this province. We carry out our activities through district councils in all provinces of Canada, and we operate out of branches, with the head office in Toronto and branch offices in Calgary, Montreal and Vancouver.
The association's mission is one we don't take lightly. It is to foster efficient capital markets by encouraging participation in the savings and investment process and, most important, by ensuring the integrity of the marketplace. Absolutely everything we do at the association is driven by these goals. Efficient capital markets are critical to all Canadians because they channel our savings into productive investment, providing the financing for new plants, new equipment, new technologies and other business ventures upon which our jobs and our incomes depend.
Broad participation in the capital market is important, then, to the efficiency, depth and the liquidity of our markets, and public confidence obviously is a key to having that participation as broad as possible. How do you foster public confidence? It's through a regulatory environment that ensures timely disclosure and full dissemination of information to investors and establishes proper and fair rules of business conduct. Public confidence is also generated by a recognition of the financial stability of the participants in the marketplace. Effective regulation is therefore critical to both financial stability and to a broad public participation.
A visible, safe and comprehensive regulatory regime is necessary to build and maintain that investor confidence. Unlike some of the predecessors here that I heard this morning, we believe the Ontario regime, through the Ontario Securities Commission, for regulating securities in this province is indeed a fine machine, working very well and in the interests of investors in Ontario. It's widely accepted that the self-regulatory system is second to none in terms of comprehensive securities regulation and investor protection.
You try not to use these acronyms or these initials, because I'm sure the level of understanding isn't high for at least some of you, but the SRO concept in our industry is very simply that the four stock exchanges and the IDA comprise the SRO system in Canada. It all comes under the regulatory umbrella of the Canadian investor protection fund, which up until several years ago was known as the national contingency fund.
Provincial securities commissions rely upon the SROs to carry out a wide range of responsibilities for ensuring that their members maintain sufficient capital and adhere to strict rules of professional conduct. The SROs discharge this important responsibility by prescribing comprehensive safeguards designed to ensure the solvency of their members, including audit procedures, minimum recordkeeping requirements, financial reporting and disclosure rules, margin rules, and minimum net-free capital and insurance requirements, all of which, I must point out, are much higher standards than those that are prescribed by government legislation for direct regulation undertaken in other areas. These responsibilities of the SROs are conducted under the general oversight of provincial securities commissions, and disciplinary actions taken by the SROs are reviewed by the commissions.
You might ask, why would we have a self-regulatory system at all? There are a number of advantages over direct government regulation. First, I would point out that self-regulation has been demonstrated to be an efficient and cost-effective system of regulation. It relieves the strain on the already overtaxed resources of government, permitting government to focus on strategic policy issues and not direct business activity.
Under the SRO system, the securities industry, not the taxpayer, bears virtually all of the cost of the ongoing regulation of licensed investment dealers and stockbrokers. Those two categories of registration by Ontario securities legislation are required to have mandatory membership in the IDA and the Toronto Stock Exchange, respectively.
Second, the combination of knowledgeable industry representatives and professional staff working together is critical to our process. Trained industry personnel have an expertise in developing effective rules and regulatory procedures that you won't normally find at the government bureaucratic level. Professional staff supervise the conduct of industry participants, identify potential problems and infractions at an early stage and devise prompt, workable solutions.
As an addendum, our tribunals are three-person tribunals, made up of two industry people from the particular district involved in the allegations, and the third is a person selected from the public who has some legal background, such as a retired judge or a law professor or whatever. That person, the public person, chairs that panel.
Third, self-regulation permits a higher degree of investor protection, as the securities industry is able to establish and enforce standards of business conduct at levels above those which, I think you will understand, governments can practically prescribe.
The fact that a loss caused by the insolvency of a member firm is borne directly by the securities industry itself -- there is no government subsidization -- is a substantial incentive for the self-regulatory system to ensure both that the standards are high and that the rules are enforced strictly. Further, losses go beyond financial loss to a reputational loss, which is of paramount importance in the financial services industry, which is indeed based on trust relationships.
The IDA believes the system of cooperative regulation between the governments and the SROs is essential to maintain and improve the integrity of the marketplace and ensure that public trust is not jeopardized.
While the Ontario Securities Act provides the OSC with the power to recognize stock exchanges, as it has the Toronto Stock Exchange, it does not currently provide the commission with the explicit power to recognize self-regulatory organizations other than exchanges. There are some areas of the act that permit limited recognition in areas of appointment of auditors, financial review and things like that, but it does not allow for the delegation of responsibilities, as it does with the Toronto Stock Exchange. Accordingly, the IDA cannot be fully recognized under the act.
Notwithstanding that, the IDA for many years, certainly for as long as I can remember and probably known to many people here at the table, has been carrying out activities in Ontario as an SRO. Indeed, we've done this with encouragement from the OSC, which in 1987 wrote a letter to the IDA requesting that we conduct ourselves as though we were SROs and as though we were formally subject to commission oversight, and that we establish regular lines of reporting and communication with the commission, lines of communication and reporting that we really had in place many years before the request. The IDA submits its rules to commission review and approval and is prepared to abandon or alter practices which the commission opposes, and we do in fact do that.
The IDA functions in six of Canada's provinces where there is as yet no statutory recognition. On the other hand, we operate in British Columbia fully recognized under statute, and there are provisions in Alberta, Nova Scotia and Quebec for such recognition.
However, we haven't yet gone through with our efforts for recognition in those three provinces, pending developments right now in an initiative to change the framework under which we operate in Canada. You'll see reference to that below and also in an exhibit I have attached to the submission.
The Investment Dealers Association of Canada could normally have been expected to continue operating as an SRO in the various Canadian provinces either through statutory recognition or by informal agreements or formal agreements such as we have with the Ontario Securities Commission. However, three developments have threatened our continued ability to discharge our regulatory responsibilities and effectively have made recognition of the SROs very critical to our continued operation in Ontario.
The second is the recent lawsuit by Cantor Fitzgerald against the OSC and the IDA, which questioned the commission's authority to approve our bylaws and thus for the commission to rely on us as an SRO.
Finally, there have been court challenges to the OSC's jurisdiction, including the Ontario Court of Justice decision in favour of the penny brokers in respect of OSC policy 1.10. This makes it clear that there must be a sound legislative basis for the OSC's delegation of regulatory powers to the IDA, such as currently exists for the TSE.
If the association is to continue to be an effective SRO, the authority under which it regulates, the standards which it seeks to impose and the rules which it seeks to enforce must be beyond question.
Accordingly, we urge this committee to endorse quick passage of Bill 134 in order not to jeopardize the IDA's ability to continue carrying out its comprehensive system of securities regulation and investor protection under the oversight of the Ontario Securities Commission.
That concludes my remarks. I will say again that I am very happy you invited us to attend here. We're grateful for that and for Ms Mellor's yeoman work in rearranging and juggling schedules that we might appear.
I have no problem with the IDA being involved in an SRO, but I do have a couple of concerns. I'm sure you know I was the minister responsible for bringing in the loan and trust act in 1988. One of the things I noted at the time was that Ontario was the leader in that particular initiative. The province of New Brunswick adopted our act in total, including the typos. In Alberta, the minister at the time said it was ridiculous that we would bring this in, that it wasn't necessary, that they had the situation in Alberta well in hand and everything was fine. Of course, British Columbia had its own ideas, and we all know the reputation that particular exchange has.
The concern I have is a statement you make on page 3 that "self-regulation permits a higher degree of investor protection, as the securities industry is able to establish and enforce standards of business conduct at levels above those which governments can practically prescribe."
I have no problem with the enforcement standards; it probably would be more efficacious to have you do it. But I don't think you could do the establishment of the regulations better, because of the overview the government has. The problem I think the industry would have is that it would look at what the industry was doing and try to make it such a level of regulation to make sure that most of the people in the industry could comply. But if the government were to establish those regulations, it could take a look at exactly what their function is, which is consumer protection and investor protection, and then delegate it in conjunction with a cooperative self-regulation, as you've prescribed, that the IDA and the securities commissions would take the on-line responsibility of supervising and enforcing all of those regulations.
Mr Grant: Maybe I could deal with this on two levels. The first is that what you're not challenging is our ability to enforce something uniformly across the country. I think you're saying we may not be able to prescribe rules of as high a standard as the direct government regulator, in this case the government of Ontario, could do.
I find that very puzzling, because the system I describe of cooperative regulation indeed has the checks and balances that the government needs so that we wouldn't develop any legislation that is contrary to the public interest. That's number one.
Number two, because it is a combination of industry expertise and professional staff, I can't imagine how the government would have the expertise that could come close to establishing the high levels of regulation that are needed.
Mr David Johnson: Thank you very much for your presentation. I must say, in terms of the concept of self-regulation I agree 100% with what you're saying. The taxpayers are overburdened as it is, and you mentioned that. And the industry has the kind of expertise and knowledge, I'm sure you're entirely correct, that the government couldn't hope to have, and the cost, if the government were to have that, would be enormous. So I agree with the concept.
As I'm not terribly knowledgeable about the issues the IDA deals with today, could you tell me a little about the volume of the issues, without mentioning specific names, the problems or complaints you deal with? Is the IDA proactive, or are complaints brought to it in terms of action?
Mr Grant: That's a good question. I do appreciate your endorsement of self-regulation. It really begs the question of why there aren't more cooperative regulatory schemes in Ontario, not fewer. The systems the SROs have in terms of securities regulation are both reactive and proactive. I won't go into the reactive, because you asked me for the proactive.
(1) There is a comprehensive early warning system that is set up, comprised of monthly, weekly and annual financial and operational reports from member firms to assist in detecting problems so that prompt remedial action can be taken. There may be just too many of these reports that people do, but they have to do with inventories, finances, operations, margin rules, concentration rules. These reports are filed on an ongoing basis. That's number one.
(2) There are periodic surprise visits by our audit and examination staffs to the offices of member firms that we must conduct under the rules of the Canadian investor protection fund once every year. Those periodic visits, by the way, are part of about a 15-part program that covers all aspects of the firm's underwriting operations, research, trading, retail sales. But one thing it does is cover those reports I mentioned to you in the first instance, to ensure that the information that's being presented to us in our early warning system is good, viable information we can have some assurance about.
(3) There's one surprise audited financial questionnaire every year. Somebody said, "Financial statements on a surprise basis, that isn't too bad." But this is about a 25-page document that takes about, in some of the larger firms, 200 man-hours to prepare -- very costly, very informative, in surprising detail.
(4) These firms also get an annual external audit. Part of our audit program is to go in every year and review the external audit working papers to ensure that the audit is being carried out in conformity with our prescribed minimum audit requirements for external audits. Some of the other preventive measures are requirements that all the customers are fully paid, and that excess margin securities must be segregated and kept apart from all the other operations of the firm, and reported upon, in that first instance I gave you.
Ms Joan Smart: I just wanted to add something in response to the question from Mr Kwinter. Under the cooperative system of regulation, the government can make rules and have them enforced by an SRO. Similarly, the OSC can go to the SRO and make requests that it put in place a bylaw.
If you look at subsection 21.1(4): "The commission may, if it's satisfied that to do so would be in the public interest, make any decision with respect to any bylaw, rule etc of an SRO." That's intended to include the ability of the commission to go to the SRO and say, "We think you should be putting in place a bylaw to deal with this problem that's come to our attention." I think that responds a bit more to Mr Kwinter's question.
I was very interested in your mission statement, especially "Efficient capital markets are critical to all Canadians because they channel our savings into productive investment providing the financing for new plants, new equipment, new technologies and other business ventures upon which our jobs and incomes depend." That was a very interesting comment in your mission statement. Since you had so much detail about what you do, I thought I'd throw in a little about your mission statement too.
However, I'd like to make a quick comment. You came to the government some months back stating the importance of giving the Securities Commission the ability to recognize the IDA as an SRO. For a government which has been accused of failure to understand and respond to businesses, the quick response time by my government would seem to contradict this. Would you agree with that?
Mr Grant: I would agree, definitely. Of course, though, I mentioned the three items that provided an additional sense of urgency, and I commend your government for the way it responded to that urgency.
Our first presenters are the Ontario Mutual Insurance Association. Would you please identify yourselves for the purposes of Hansard and the committee members, and whenever you're ready you may proceed. I'll remind you that you have half an hour and you may want to leave some time for questions and answers at the end. Please proceed.
Also taking part in the presentation today are Glen Johnson, president of OMIA; Ed Pellow, who is the manager of South Easthope Mutual in Tavistock and is also past president of the Farm Mutual Reinsurance Plan Inc; and Catherine MacLellan, the business consultant who has worked with us on this project over the last few years.
Mr Glen Johnson: The Ontario Mutual Insurance Association is comprised of 51 purely mutual insurance companies in Ontario, often referred to as the farm mutuals. The purpose of our presentation is to support amendments to Bill 134 which would result in a few key changes to the Ontario Insurance Act which our members require to compete effectively in a changing financial services marketplace.
There are 51 provincially registered farm mutuals in Ontario. All of these companies are members of the Ontario Mutual Insurance Association. Most have been in operation for over 100 years. They operate strictly in Ontario.
All policies of the farm mutual companies are participating policies, meaning that each policyholder has the right to vote at general meetings. These companies are guided by boards of directors elected from among the policyholders. Directors are typically farmers and small business operators from the community.
The farm mutuals provide a broad range of property and casualty insurance to their owning policyholders, including farm, residential, auto, commercial and farm accident protection. Through a unique ownership structure, they can match the service of almost any other property and casualty insurance company.
The individual companies range in size from assets of $360,000 to over $50 million. Collectively, these companies have $530 million in total assets. Total collective policyholder surplus stands at over $320 million. Premium income for 1993 was $209 million. Few insurance organizations would compare to the financial stability of Ontario's farm mutual system.
While there is healthy competition between neighbouring farm mutuals, there is a strong spirit of cooperation across the province. By working together, these small community-oriented insurers have expanded their service area to most lines of property and casualty insurance. For 1992, they collectively ranked 11th in Ontario for premium volume for all lines, fourth for property insurance and 16th for automobile insurance.
In 1959, the farm mutuals formed their own reinsurance company, Farm Mutual Reinsurance Plan Inc. This was one of the first Canadian-owned reinsurers and today is one of a very few Canadian-owned reinsurance companies in operation. All farm mutuals reinsure exclusively with FMRP. This company has grown to assets of $138 million and unappropriated surplus of over $40 million. From time to time FMRP refunds surplus to its members.
In 1975, the farm mutuals formed their own guarantee fund, the fire mutuals guarantee fund. Through this guarantee fund, all of the $320 million of surplus within the farm mutual system stands behind any one company. This provides protection to the owning policyholders for any outstanding claims in the event of financial difficulty. However, there has never been a failure of a member of the fire mutuals guarantee fund. Ontario's farm mutuals are cognizant of their reputation as mutuals. In a few cases, prior to the existence of the fire mutuals guarantee fund, the Ontario farm mutual system went to the aid of policyholders of mutual companies which had encountered financial difficulty on a gratuitous basis.
It is through this spirit of cooperation that the Ontario farm mutuals hope to address the new challenges of the changing financial services marketplace. We have developed a strong market niche in communities throughout the province. Now, while we are strong, we must plan for the future. We operate strictly in Ontario and must have the ability to compete on a level playing field with our national and international competitors. In addition, credit unions, which operate in many of the same rural communities as our members, will receive expanded powers through Bill 134.
We recognize that the financial services marketplace is changing. Lenders are making inroads into the insurance marketplace. The federal Bank Act now allows banks to own insurance companies and retail certain insurance products to their bank customers. Provincial governments are modernizing statutes which govern provincially regulated financial institutions.
In 1990, OMIA formed its financial services committee to give serious study to how these changes would impact the farm mutual system. This issue has had a high profile at every general meeting of our association over the past four years.
A comprehensive, seven-phase study was conducted. This study included an intense process of consultation with the individual member companies. Surveys indicated that the members have a strong interest in being able to offer such financial service products as term deposits, life and disability insurance, annuities, RRSPs, RRIFs and other financial products to the existing client base.
At our general meeting in November 1993, the membership, by a 90% vote in favour, passed two resolutions which instructed the OMIA to move forward with action which would allow the members to collectively own a subsidiary financial institution or financial institutions which would allow them to provide a broader range of services in the future.
To be able to move forward on this project, the farm mutuals need a change to the Ontario Insurance Act which would permit them to own a financial institution subsidiary or subsidiaries. This is a power which our competitors already enjoy.
Because mutual insurance companies are owned by their policyholders and have no shareholders, they cannot form upstream ownership links with other financial institutions. We are only able to diversify by expanding in-house activities or through downstream ownership of other financial institutions.
The amendments: Currently, the Ontario Insurance Act restricts the ability of farm mutuals to own subsidiary companies. We are only permitted to own downstream property and casualty insurance companies. In general, we require this section of the Ontario Insurance Act expanded to allow our members to own a broader range of subsidiary companies.
We appreciate the support which our members have been shown as they presented their concerns to MPPs from all parties across the province. Through the association, our financial services committee has worked with the Ministry of Finance on an acceptable solution. We appreciate the cooperation which has been shown by all parties and hope that you will support the proposed amendments which will:
(1) Amend the Insurance Act to permit farm mutual insurance companies, which are members of the fire mutuals guarantee fund, either individually or jointly as a group, to own subsidiaries which would be prescribed in regulations. These prescribed classes of subsidiaries would include financial institutions, service corporations and corporations engaged in ancillary businesses.
We support the requirement that investments must result in control of the subsidiary by the farm mutuals, individually or as a group, through voting shares of the subsidiary. Our intention is to move forward in a steady, well-planned fashion as has always been the practice of the farm mutual system. Our members require that of us.
We recognize that any investments in subsidiaries must be approved by the commissioner of insurance, and the appropriate terms and conditions will be set. We recognize that the regulators will need to approve appropriate business plans before approving any new powers for the farm mutuals.
In addition to allowing the farm mutuals to expand their service area to other financial services, the amendments which we are seeking through Bill 134 would also allow our members to jointly own subsidiary companies which could provide advisory services to the mutuals themselves. Examples of these types of companies include data processing services and loss adjustment services.
(2) Amend the Corporations Act to clarify that all Ontario-incorporated insurance companies including farm mutuals have full powers to network the financial products or services of other financial institutions.
(3) Amend the Insurance Act to permit general insurance agents of farm mutuals, which are members of the fire mutuals guarantee fund, to sell the products of other farm mutuals and of another insurance company subsidiary of the farm mutuals.
The farm mutuals have been an important part of the fabric of Ontario for over 100 years and have served their communities well. We recognize that we cannot adopt a business-as-usual approach for the future. The competitive environment will not be business as usual. Intense competition will result in lower rates for most types of property and casualty insurance. Other financial institutions will be moving towards providing one-stop shopping for their customers.
We need these few key amendments in order to grow and remain competitive in a rapidly evolving financial services marketplace. We need to move forward with our preparations for the future. We cannot afford to be held back while our competitors are making their preparations for the future.
Our competitors already have the powers that we are seeking. We see Bill 134 as the only viable route to give the farm mutuals the legislation which they need within an acceptable time frame. The changes which we have requested are not extensive changes. They've been well researched, and prudential concerns have been addressed.
The farm mutuals have developed a strong market niche in rural and small-town Ontario. They recognize the impending changes in the financial services marketplace as a whole and are striving to maintain their market niche. They recognize that there will be increased competition for rural and small-town customers by other insurers and other financial institutions which are increasingly able to network their existing products with insurance products.
Mr Kwinter: Is it contemplated that these downstream ancillary services would be the same kind of cooperative effort, or would every single mutual fund have the ability to go out and set up its own individual subsidiary?
Mr Pellow: I think it would be possible for them to have that ability, but they would have to meet the requirements financially and so on to do it. It would be very unlikely that would happen inasmuch as it would require that cooperative effort you mentioned to capitalize most of those. It would depend a little bit on the nature of the business and the service that this subsidiary company was providing for the mutuals and what capital it required to provide that service.
Mr Kwinter: If the regulators set a minimum capital requirement for setting this up, be it either a trust company or whatever it is they were going to do, you would have no problem if that required either all of the mutuals to band together or groups of them to meet those requirements?
Mr Gary Carr (Oakville South): The amendments here that you've talked about, what is your understanding of the government? Is the government supporting them? You mention in there that you've talked to them. Are they going to support the amendments? What have they said to you?
Mr Glen Johnson: Our concerns that we weren't able to own any downstream subsidiaries other than a downstream insurance company, those were our concerns that we presented to the MPPs across the province, and as I say, we've had good support from all three parties.
Mr Owens: I don't have any particular questions. I do want to thank you for your presentation. In terms of the mutual assistance -- pardon the pun -- that we've given each other, there have been a number of rural members like Paul Klopp, the Minister of Agriculture's parliamentary assistant, Pat Hayes and my colleague to the right, Paul Johnson, who, when he's not being neutral as Chair, was quite active in caucus in terms of the lobbying effort.
I'm pleased that we're able to do this for the farm mutual and for the rural community as a whole. I think that these amendments are much needed and I certainly appreciate the work that has gone into these amendments from your perspective as well.
Mr Glen Johnson: I'd just like to express our appreciation for the reception we received all across the board. As I said, we feel Bill 134 is our only route to get this in the near future and we sincerely hope you'll carry through and actually do it.
The Chair: The next presentation this afternoon is by the Ontario Association of Small Credit Unions, if Bud Whitmell, president, and Murray Tighe, vice-president, would please come forward. I hope I pronounced your names properly. Please make yourselves comfortable. Whenever you're ready, if you would identify yourselves for the purposes of Hansard and the committee members, you may proceed.
Mr Bud Whitmell: Thank you, Mr Chairman, honourable members. My name is Bud Whitmell. I'm the president of the Ontario Association of Small Credit Unions. Murray Tighe is our vice-president. We thank you for the opportunity of appearing here today. I would also like to give special thanks to our MPP for my area of Parry Sound, Mr Ernie Eves, for making the arrangements. In the interests of time, I'll get started right into our brief.
Our association was formed by a small group of small credit unions in 1990 because we were concerned about the rapid decline in the number of small credit unions and what we saw as a movement away from the true credit union philosophy.
In the beginning, credit unions were formed by small groups of people pooling their funds together to help each other, as for many credit was not available from the banks. Most credit unions began with assets of less than $100. Their motto was a smiling man holding an umbrella. Raining down on him were the words, "Illness," "Hard times," "Financial distress." I questioned why the man would be smiling with all of these things happening to him. I was told he was smiling because he was going to his credit union and he knew that he would get help there.
When I first became involved in the credit union movement, I was given a training manual that had a lot of questions and answers to it. I guess the one that most attracted me to serving my credit union was the question, "Who is the best person to serve on the credit committee, the man running a machine in a plant or the controller of the company?" The answer was the man running the machine in the plant. The reason he would be best suited to serve the credit union, either on a credit committee or the board of directors, as opposed to the controller of the company was because he could more easily relate to the needs of his co-workers than could a professional.
As credit unions grew and became more sophisticated, that motto was discarded by some and replaced with a new motto: "Not for profit, not for charity, but for service." That too, more recently, was replaced by the new, modern hands-and-globe symbol. Some credit unions had grown to sizes perhaps beyond anyone's expectations. It became clear that the current act did not meet the needs of these near-banks, nor were the regulatory powers equipped to deal with them. The large credit unions wanted and needed new rules, and so did the regulators.
The larger credit unions, with assets in the hundreds of millions of dollars and memberships in the thousands, many of them personally unknown to the credit union employees, found that the machine operator in the plant didn't have the expertise to deal with this new situation. So they recruited professionals from the banks. The ministry in turn recruited examiners from the banks.
This seemed to work fine, except for the hundreds of small credit unions that had not evolved. We were still way back there with that smiling man and his umbrella and the machine operator from the plant serving as a director or as a credit committee member. Shortly after the Program for Change came out, and the implications of it, one small credit union wrote a letter to the ministry. A line from it said, "The very rules that are supposed to save us are going to put us out of business." That is exactly what happened.
There were over 1,000 credit unions in Ontario 10 years ago. There are now fewer than 600. An article in Credit Union Central's Spectrum in 1989 predicts that by the year 2000, the number of credit unions will be 300. It is not the large credit unions that are disappearing; it is the small ones.
In your package, I've given you a copy of that article. Just one other quote from it says that he "found a trend which hints that by the year 2000 the number of credit unions in Ontario will be 300." This was in 1989. "That's about half what it is now."
From the analysis, we can see that big credit unions are getting bigger while small ones are either getting merged with other ones or going out of business. The future will be one of fewer but larger credit unions.
Why is this happening? At workshops we have had at each of our meetings over the past four years, our members have identified the same two biggest problems facing small credit unions: (1) getting volunteers to serve on their boards and committees and (2) coping with ministry paperwork and reports.
I've attached a copy of one of these directives which, I've been told by the author of it, Mr Poprawa, who, I understand, is back here, is very simple and straightforward and anyone should be able to understand it. I have been managing my credit union since 1979 and I have a great deal of difficulty reading the thing, let alone understanding it.
This is nothing new to Harvey and Andy. I've told them that before. I ask that, if you read nothing else in the package, some time you would read that and tell me if you think the machine operator in the plant or the truck driver really can understand that and follow its directions. Its intent is very good, by the way; it's just very difficult to read and understand.
In the attached article concerning mergers, a general manager involved in 16 mergers states: "I believe that the credit union system's market share problem can be corrected to some extent through mergers. If limited-service credit unions merge with full-service ones, then we can pull business away from the banks and the trust companies."
Also in that attached article, the very last part of it, he says, "There are a lot of small credit unions that are doing an excellent job with limited resources, but they just can't offer a full-service package." I may add to that, nor do they want to. This credit union started in my basement, which was fine, and I guess rather common back then, but you just can't do that today.
Mr Murray Tighe: I represent the Goodyear employees' credit union in Bowmanville. We've been operating for 37 years. We're about $1.7 million in assets. In that time we have never had a loss. We always have paid dividends. We do not have bankruptcies or anything like that. I am the manager and, incidentally, my office is still in the basement.
Mr Whitmell: There appears to be an obsession with being big and getting bigger. We regularly get the report of the 100 largest credit unions: the latest one I have attached for you there, just to show you. I have yet to see a report on the 100 credit unions that have continued through the years to keep that man with his umbrella smiling.
We're not the only ones concerned with the disappearance of small credit unions and their philosophy. In an article in Spectrum commemorating Central's 50th anniversary, Central's full-time general manager, who was appointed in 1947, Mr John Hallinan, stated:
"Credit unions are dominated by professional bankers. Many of these people don't know the historical background of the movement and focus on profit instead of service. We have gradually devolved into just another industry."
We wish to stress that we support our colleagues in finally getting the act that they feel they need to compete with other financial institutions in the marketplace and we wish them well. However, the act they need to survive is going to speed up the death of those of us who do not wish to compete in the marketplace with the banks. We do not wish to deny them the act they need to survive; we are sure they do not wish to see us die so that they can live.
What, then, is the solution? I have mentioned this to Harvey and others in the ministry several times. Before you can find the solution, you have to identify the problem. The problem, as we see it, is that the ministry officials are attempting to do the impossible. It is not possible to make a set of rules for a $700-million credit union that can also apply to a $700,000 credit union. It is like trying to make rules for a small family corner store and then applying it to Eaton's in Yorkdale, or vice versa. They are just too different.
That is the problem we are currently facing. We have a set of rules, the current act, designed to meet the needs of small credit unions and clearly not adequate to meet the needs of the modern larger units. But the solution is not now to make a new act to meet the needs of the larger units that is unacceptable to the smaller units.
To me, the solution is obvious: Allow a one- or two-year phase-in period for the new act. Allow credit unions, during the phase-in time, to determine which act they prefer to operate under. By the end of the phase-in period, the number opting for the old act would determine whether or not it warranted keeping.
Alternatively, the two acts could be combined, the new act being part A, the old act being part B. Credit unions could then choose which portion they preferred to be regulated under. There may be other solutions, but it must be clear that it is not possible for both groups to survive under the same set of rules.
Having said that and hoping that some consideration will be given to our suggestion, by the way, I wish to also make clear that we don't think the old act is perfect either. It has a few flaws, but we can live with it, with a few changes.
The director of credit unions has been given extraordinary powers without a third-party appeal process. The appeal to the Commercial Registration Appeal Tribunal in the current act has been replaced with an appeal to the director. The concern we have with that is if the director makes a ruling concerning our credit union and we don't agree with it, he says, "Fine, you can appeal my ruling, but you're going to appeal it to me." If he has already made his ruling and he has already researched it, I doubt very much he's going to change his mind.
Page 22 in what I have -- I'm not sure what page it would be in what you have -- is dealing with the formation of new credit unions. Any group of 20 individuals can form a credit union, provided the minister is satisfied that certain criteria are met.
Number 4 of that says, "The credit union will be operated responsibly by individuals who, by virtue of their character, competence and experience, are suited to operating a financial institution." I'm very confused by what "competence and experience" means. Would the man running the machine in the plant be considered competent and experienced or would it have to be someone with a banking background? I'm not sure.
Number 5 says: "The incorporation of the credit union will serve the best interests of the cooperative financial system in Ontario." I thought the purpose of the credit union was serving the membership that formed it.
On page 55, section 85, dealing with capital adequacy, subsection (2) says, "A credit union shall comply with the regulations governing adequate capital and liquidity." But nowhere does it tell us what adequate capital and liquidity is. I understand there are some regulations coming. At this stage we may agree with that, but who determines what "adequate" is?
We have some concerns about recommending the approval of an article like that when we don't know what it means. If it means 3%, 5%, maybe; if it means 60%, we're not so sure. It just seems very wide open and will be dealt with. I'm not sure how regulations come into effect, but I understand they don't come through the House. I'm not really sure how.
"(a) if there are reasonable grounds to believe that the credit union is not complying with the requirements of this act and the regulations concerning the management of risk in making loans and investments and in the general management of credit union business."
It doesn't define what are adequate risk management procedures. If those are the procedures that are carried out by the machine operator from the plant, fine. If they are requirements made out from a recruit from the banks, which were for ever turning down the people who formed credit unions, then they're going to be turned down by their credit unions as well.
On section 87 -- and I'm not sure what that deals with; I just pulled that page out -- it says, "Decision final." You have an appeal to the director, and if you're not happy with the appeal to the director, you may appeal to the superintendent of insurance. It says, "The superintendent's decision is final and shall not be stayed, varied or set aside by any court."
I guess that one bothered me a bit because we would assume the decisions that he or she made would be made in an appropriate manner so that they probably, quite likely, would be upheld by the court. So why would there be a fear of having it proceed to a court unless maybe they felt the decision wouldn't be upheld?
The last one, and I think this is the section that frightens me the most, is the enforcement section. Very broad powers have been given to the director to do virtually whatever he or she chooses. In section 237, the director can make an order ordering any person to "(a) stop doing any act or pursuing any course of conduct."
I believe in that part he would have to identify the course of action or the act that the person was doing and then say, "Stop doing it," but clause (b) says he can make an order ordering any person to "do any act or pursue any course of conduct." That, to me, is very wide open. As I say, I had about 30 or 40 pages, but I just pulled those few out.
Mr David Johnson: I thank you very much for your presentation, Mr Whitmell and Mr Tighe. I have a letter for you here, actually, so I better pass that along before I forget it. It's from a mutual friend of ours. Just toss it over.
The Chair: If we were going to allow the Ontario Association of Small Credit Unions a full hour, then we'd have about 15 minutes per caucus, but we may not require all that time. So I would just like to start off with some questions, and if it gets out of line, of course, I'll let you know that.
Mr Whitmell: If I may mention, I was speaking with Jonathan Guss and I said I'd give him the last 15 minutes of my time, providing he devoted it to the issues of small credit unions; he assured me he would.
I must say I share the concern that you're expressing with regard to the small credit unions. In my mind, there's been no doubt that they have been a great credit to many communities across the province of Ontario and they've provided a great service to a great many people. I have expressed this in the House, having been associated with the East York credit union as the mayor in East York and knowing the people involved with that particular credit union, fine people who have run that credit union well -- as the vast majority of small credit unions have been run -- and certainly have provided a great service, primarily to the employees of the borough of East York. I think the assets are somewhere between $2 million and $3 million, as I can recall. My recollection is that there was some $200 or $300 that was put aside for defaults.
I think you, Mr Tighe, have expressed that your experience has been an excellent one: no defaults and no difficulties. That's certainly been the experience in East York. A lot of that has to do with the fact that the people work together, they know each other. In terms of a risk assessment, you know the person you're dealing with. No large bank could possibly assess the person who's coming in for a loan to the same degree as the small credit unions can because you work with those people day in and day out, and they're on the other side of the bench or at the desk in the next office. That's certainly an excellent point for the small credit unions, plus the fact that, who would want to default on their neighbour next door?
Mr David Johnson: No one. Whereas if it's a larger institution, then that philosophy -- is that the word you've mentioned here, "philosophy"? There's a philosophy of the small credit union, certainly no question about that.
Mr Whitmell: Again, I'm not that familiar with the parliamentary process, but as I said, I don't think it's fair to expect the large ones to operate under the current act; it just doesn't suit them. But I don't think that to meet their needs ours should be thrown away. We're quite content with the current act.
Mr David Johnson: So you're essentially saying perhaps that the way this would shake out is that many of the small credit unions would choose to operate under the existing act, whereas the larger ones -- I'm sure Mr Guss will say he represents smaller ones as well as bigger ones, but you don't represent any of the bigger ones, and perhaps the bigger ones that he represents would go under the larger act. Have you put that suggestion to the ministry staff?
Mr Whitmell: No, I haven't. In fact, I've been putting this process together over the last few weeks and I've called several of the members of our executive, and we, through discussions, came up with that. We really didn't know what the solution was, but we knew that the current act was probably fine for us.
I was talking to a credit union a couple of weeks ago, and had they not told me they were $30 million in assets, I would have never known that they were bigger than $1 million. A lot of them do share our philosophy. That's why I suggested to leave it open and let them choose. I don't think you should be able to jump back and forth every second week, but over the term of two years those who want to try the new act -- we've already tried the old one -- if they say, "Yes, I like it," and at the end of that time if the majority or there's none, except perhaps our little group, who are happy with the old act, then that would certainly send a clear message.
Mr David Johnson: I would like to redirect some of your questions to the ministry staff at this time perhaps, and that might be most instructive during the time we have. I wonder, Mr Chairman, then, I don't know who I'm directing this to; to the gentleman up there probably. I think it might be a little more technical, with all due respect to my colleague.
Mr David Johnson: All right, we'll give it a shot. For example, the last question that was posed, then, Mr Parliamentary Assistant, was with regard to the enforcement powers of the director. Mr Whitmell has indicated that in section 236 -- I don't have it right here; I guess if I looked it up I could find it -- the director can make an order to any person to stop or to do any act or to pursue any course of conduct. That seems fairly broad. I see you looking over next door already.
Mr Glower: This particular enforcement power is a fairly broad enforcement power and would normally be applied in a situation where other enforcement powers either may have not worked or which would apply in a very particular circumstance. For example, the director may have said, "I want you to dispose of a particular loan," or, "I want you to stop taking deposits," or, "I want you to limit your capital growth" or your asset growth or whatever and there have been continuous infractions. This is a much broader power, but the power of course gives the person on whom that order has been issued a couple of appeal options.
Firstly, there's a right to a hearing with the director of credit unions. Following that, there's a right to an appeal to the superintendent of deposit institutions, who is the, if you will, ultimate regulator, the ultimate authority at the regulatory level. Subsequent to that, to the extent that the superintendent varies or confirms or revokes that appeal, an appeal lies to a court from an order issued by the superintendent. So there is a full judicial process available to any credit union that may be issued an order of that type.
Mr David Johnson: Can I just back up from there then and say that we've heard the presentation from the small credit unions, and there's a philosophy with the small credit union movement that is very close to home, that they know their people, and that is the essence of their service. I don't know how to phrase this exactly, but does the ministry staff recognize that philosophy?
The concern is that through the regulations that are being set up, the legislation that's being set up, the director perhaps having these powers or perhaps not, the superintendent's decision being final, this philosophy is going to be submerged and it's going to make it very difficult for the small credit unions to survive. I wonder what your response to that is, because I think we'd all like the small credit unions to survive; they're providing an excellent service close to home.
Mr Owens: I appreciate your question and I wanted to address, in terms of my response to the association, this issue. It's a very interesting philosophical question with respect to small and are things changing and will the nature of the small credit unions be diluted or negatively impacted by this legislation.
It's the view of the government and the minister and myself and most folks in the credit union movement -- I would say that this group doesn't agree -- that in fact, because the legislation is permissive in nature, the smaller credit unions may or may not choose to engage in the kind of business that will be allowed under this act. The presentation talked about a phase-in and an ability to choose acts. In fact, we have built in the choice to the smaller credit unions to participate.
Yes, there has been a shrinkage in the smaller credit unions over the last number of years and that's simply because there have been failures and there have been voluntary mergers in order to keep credit unions viable. But the ministry and the government strongly believe that the small credit unions will not be negatively impacted by the legislation and that in fact the regulatory regime that Mr Glower speaks of is not an onerous regime.
On the issue with respect to the worker on the shop floor that Mr Whitmell addresses, if I can suggest that the workers on the shop floor at Algoma Steel in Sault Ste Marie walked into a company that was selling for approximately $1.50 a share, bought the company, the same workers, and the shares are now trading at approximately $21. These are not workers with a master's in business administration; these are people like you and a lot of people around this particular room.
The coalition group that is representing all of the credit unions and the caisses populaires has been in discussions with ourselves in proposing models for liquidity as well as for capital. Right now, the present system says that every single credit union must have at least 10% of its assets held in liquidity.
There are a number of models that we are exploring which one could recognize that that stays the same as part of the new statute. Another option that we are looking at is that credit unions that belong to a league or an association of credit unions have access to a pool. There may be a certain validity in recognizing that belonging to that pool in fact reduces the need to have a 10% level. We don't know what that magic number is yet; we haven't figured that out.
There are other ways of looking at liquidity, and we've proposed one on a risk-weighted basis. The same as we have a risk-weighted asset model, we are looking at a risk-weighted liabilities model, a risk-weighted deposit model, as a new way of measuring liquidity. As that regulation is developed, we will then be able to say what is adequate vis-à-vis the regulation.
Mr David Johnson: Mr Whitmell has made the point that perhaps having all the credit unions under one act is equivalent to having a corner store in one of the big Eaton stores, governed by the same act. Is it possible that, for example, the definition of adequate liquidity is something that should differ for the small credit unions vis-à-vis the larger ones?
Mr Glower: Well, it's certainly an approach that we've taken. In Mr Whitmell's submission, he talked about this interest rate risk management. What we did there, and this is something that could be done with liquidity, is we had two different phase-in periods, not necessarily by the size of the credit union but by the complexity of the credit union. Now, the complexity generally transferred to smaller credit unions without a particular cutoff in asset size, so there is a longer phase-in period for those people to understand and look at their operations and figure out how it applied.
On the liquidity proposals, we could do something similar vis-à-vis a phase-in period. In fact, one of the options on the table is to have one of two different types of measures for credit unions. If they have the technology to measure, a more sophisticated or different way, for example a risk-weighted way, they could use that. They could go that route or they could go the flat route, and I'll use an example of 10%, which is the current system. We are looking at that as a possibility, again not by size but by complexity of balance sheet, if you will, and complexity of operation.
Mr Whitmell: It had to do with the formation of new credit unions. I think, Harvey, it would be safe to say in the last 10 years there haven't been a large number of new credit unions formed; probably half a dozen at most, probably less.
Mr Glower: The response there is that there is a section in the statute that allows the director of credit unions, after the fact, in other words once a board has been democratically put into place, under certain circumstances, to question the fitness, character and competence of a board of directors.
This is a very lenient test, if you will, in comparison to the Ontario Loan and Trust Corporations Act where in fact the superintendent of deposit institutions is responsible for assessing the fitness, character and competence of a board of directors' member prior to that individual becoming a director of a loan and trust company.
We've had experience with certain problems in some credit unions over the past. This is a power which obviously we will have to exercise very cautiously and definitely be accountable for. It is a power there to ensure that directors live up to their standards of duty and care. It is a power there to ensure that directors are well trained, informed, educated as necessary and are aware of their liabilities under the statute. The experience in the past shows that this sort of power is necessary in those limited circumstances when that level of care is not being exercised.
Mr Jim Wiseman (Durham West): You say you run your credit union out of your basement. Could you give me an idea of the kind of loans that you make? Whom do you make the loans to and what are they for?
Mr Tighe: I'll qualify that office bit. Goodyear allows me to have an office in the plant where I interview the people. All of my computers, records etc are in my basement at home, but I have an office where I meet the members in the plant. You wanted to know the loans?
Mr Tighe: Our personal loan limit is $20,000, and our mortgage loan limit is $50,000, which puts us into the realm of just home improvements more than people buying houses. What further question was it?
Mr Wiseman: The brief says, "As for many, credit was not available from banks." A large number of people in my riding would say that nothing's changed there; they still can't get credit from the banks.
Mr Tighe: I had a person, he was a young man, married with three children, and he wanted to buy about $5,000 worth of furniture. The banks wouldn't have anything to do with him. I'd better not say the name of the company, but when he investigated its interest rate, they told him it would be somewhere between 18% and 30%.
Mr Wiseman: I've been told that trust companies and banks will not write loans under $5,000 because it's not worth their while. I guess this leads me to where I was going with these questions. I guess for many, many people, your credit union would be almost the last place where they could get a loan under $5,000. Is that correct?
Mr Wiseman: I think I understand some concern here that with this legislation it might be forcing small operations such as yours to act in a way that a big operation would, and that would terminate the possibility of your making these kinds of loans. Am I understanding this correctly?
Mr Whitmell: I think that we are being pushed. This isn't the act. If I have misinterpreted or misrepresented it, it isn't this act that is causing the problems, and the new powers that are being given are not our concern. I think what is finally happening is what has been happening over the last five years through ministry directives and the OSDIC bylaws and their manual that are now being incorporated, as well as these additional powers. It was quite accurately said that we don't have to use them if we don't want to. All the new things being added are permissive and we appreciate that fact. We're just saying the practice.
The example that I give, as I've been talking to the Liberal critics and the Conservative critics about it, and I put this example to a ministry official and he agreed with me, is if I have two classes of borrowers, one the family man who works hard all his life, has been at the same job for 15, 20 years probably -- as I say, my father did. He always earned $200 a year less than it took to feed his family of six, struggling by, but so basically honest that you wouldn't even need loan documents. If he owed the money, he paid it. Say he wanted to borrow $4,000 to buy a $4,000 car, because he just wasn't able to save up. He's giving us $4,000 collateral on a 10-year-old car that's really worth nothing to anyone else but that's all he can afford to buy, but he has a good reputation and a good record.
Then we have another borrower who always has borrowed in the past. We've always had problems collecting, but he's investing here, he's investing there. He goes to Las Vegas, he makes money, but every loan we've ever had from him, we've either had to go through a co-signer or a repossession of his security. So he has a $30,000 Cadillac and wants $10,000. Who do I lend my money to, the guy with the $30,000 Cadillac with $10,000 in security or the man who wants $4,000 with a $4,000 car as security that probably on the market would be worth $2,000? And I'm supposed to jump for that security and I'm to turn this man down because he should have 25% of the money in there. I think those are the kinds of people we're trying to help. I quite often say that I'm not in the used car business, that we're here to lend money to people who pay it back. But I am not really allowed, under the regulations, to lend that money to that member unless he comes up with some more security, but he hasn't got it, except his good character.
Mr Whitmell: We have always said that we have the three Cs of credit granting: character, capacity and collateral. A memo that came out from the Credit Union Central group defined the three Cs of credit granting as collateral, capacity and character. We still believe in the old character first, capacity second, then collateral. If you meet the first two, hopefully we can find something that meets the third. But it's not the act; it's the current practices that are making this difficult for us. That's my opinion.
Mrs Haslam: There are a number of questions I was going to ask. Were you consulted in this? I'm getting a definite opinion that you are and that you've met -- you know Harvey here. I don't even know Harvey.
The other thing that I was going to question you about was the permissiveness of the legislation. I mean, no one's forcing you to do what the big ones do. It's a permissive statute that therefore provides flexible business powers, so that will assist you, if you want, but it also will assist to serve both large and small. But I think you've answered that too, because you understand that. You understand that there's more of a permissive area about it.
Mrs Haslam: I also looked at your presentation. Talking about volunteers to serve on the boards, I was going to ask you about the number of credit unions, small ones, that have been closing down. My colleague Mr Owens mentioned that already and you said yes, it is hard to get people to serve on the board and that is a problem some people will have in small credit unions, and some of them are closing down. You're absolutely right. You are aware of that.
That brings me to one of my last ones, in two minutes, which is what I usually have as my time limit. Talking about the complexity of the business you're in, if I were a member of your credit union, I would expect you to be as well versed and as responsible with my money whether you were small or large. I question this idea of making a different aspect in legislation based on size, because it really isn't about size; it's about the complexity and how you manage my money. That's what, ultimately, the legislation has to look at: putting some safeguards in place for you to manage my money and the safeguards to say that the woman on the plant floor whom you got to serve on your board is competent and is following those things that are required in this legislation to look after my money.
I just wondered, don't you see that the legislation looks at both large and small but it's about complexity? What is your definition of "small"? Has your board come to a conclusion as to what is the definition of a small credit union?
Mr Whitmell: There are some credit unions which are $40 million, $50 million, $60 million whose philosophy is the same as ours, and I mentioned that earlier. I was talking to a fellow, and if he had not told me that he was $30 million, I wouldn't have known that he was because he's talking the same way that we are. I wasn't talking about the new powers, or whatever.
I've tried my best to find that manual that I had, because I thought it was so good. Why would they choose the man running a machine in the plant to be on the credit committee to determine whether his co-workers should get a loan or not? My answer with, I hate to say this, a banking background was, obviously the controller should be on the credit committee, just as you are saying. He's probably got a degree. He has a lot of financial knowledge. But the answer was, "No, the man on the floor." Why? Because he could understand when one of his co-workers said, "I can't make a payment this month because one of my children was sick and I had to take three days off work," or "The motor went out of my car." They can understand this, but the controller says, "What the hell's the matter with you?" because he's living on a fixed salary, probably a pretty big one, and he is able to manage those things, but sometimes the ordinary working person has a struggle just getting by. He doesn't have RRSPs and investments in General Motors and so on. His investment is in his home, his family and whatever he's got. So he can understand what perhaps the controller couldn't.
We are told, "Oh, no, nothing in this act is going to hurt you." I'm glad you raised this, because I can come back to Harvey. I see Harvey as the controller; certainly not the man running the machine in the plant. I understand he has a couple of initials after his name, and I think that's the point we're trying to make. I've known Harvey for a number of years and I don't question his sincerity, his integrity. When he says that, I know he sincerely believes it. If we're comparing the man running the machine in the plant and the controller, Harvey, who is telling me, "No, no, Bud, this isn't going to hurt you; everything is lovely there," I say, "Thank you, Mr Controller, but I say it is."
Mrs Haslam: Then I think we disagree. I want Harvey controlling who gets my money, because Harvey knows the risk factors involved. I wouldn't trust my money with Jim Wiseman, because Jim is friends with Wayne and I don't like Wayne, and he's going to give Wayne the money. I want Wayne to have more of an idea about the risks involved.
Philosophically, I can see -- I've been a member of a credit union for a number of years. I started out with the teachers' credit union. My father was in one of General Motors' credit unions. We've been in credit unions a number of times. I just see this legislation as protecting those people who put their money into credit unions.
I come from a rural riding where farm communities join together. The farm communities benefit from credit unions because they understand what a farmer needs in a line of credit. I see the benefits. I just don't see what you're saying about this type of legislation affecting you adversely. It allows for some protection, but it doesn't infringe on what you want to do as a small credit union.
Mrs Haslam: A number of them are not a big situation. Credit Union Central, if I'm not mistaken, seems convinced that the bill is flexible enough to allow the small and the large to work together. I'm just passing that on. There must be something they're doing for the small credit unions if they feel this is flexible enough for both.
Mrs Haslam: This morning we had someone come in who said that the flexibility of leaving it with regulations was appreciated, because when you look at a bill that won't be open for another 100 years, somebody was saying, then you need the flexibility to change. Think of a credit union and the loans it gave 100 years ago versus now. So you do need some flexibility in legislation, in regulations, and not just leaving it. I think there's a good balance there that is necessary. Thank you.
Mr Owens: I don't know if in the 60 seconds I have I can possibly change your mind with respect to our commitment to the philosophy of small credit unions. I believe it when you tell me that you're interested in lending a $5,000 loan to the person to go out to buy the furniture for his or her home. I'll tell you, if you're lending money to people to go to Las Vegas, it's a problem to begin with.
The minister himself, as a member of the Creighton Mine credit union, a small credit union in the minister's riding, is attuned both as a member of this credit union and philosophically to the needs of the small credit union. I hope you'll continue to work with your good friend Harvey to resolve some of the issues that you still see as being outstanding.
I was also pleased to hear you say, and maybe I'm wrong on what I thought I heard you say, that you don't have a problem with the bill; you don't have a problem with the powers that it grants to the credit unions as a whole in the province. It's our view and our commitment that we can maintain the integrity of the small credit unions that you represent as well as having a large measure of deposit security, as my colleague Karen Haslam pointed out.
Mr Whitmell: I was reminded by Joe Mahoney in my discussions with Jonathan that I first told him, when I talked with him yesterday, I'd give him 20 minutes of my time. Further along the way, it was 15 minutes and later it was 10. He said he'd better hang up before it got down to nothing. It looks like we're down to 15 now. He assured me he would use that time to get across his views on the small credit unions.
Just in response, Mr Owens, then in conclusion, I said that we are happy with the bill because it gives our larger credit unions, our colleagues -- and they're very helpful to the small ones. If you need advice, you can call them. They help you. I know Bob Clark very well from Creighton Mine. They do need better than the current act. We clearly understand that. The current act was made for small credit unions, because that's all there were. It's not fair to ask the large ones to continue operating under an act that they have long since outgrown, but we don't think it's fair to replace it with an act geared to them and then ask us to comply with an act geared to them. We are so totally different that it is virtually impossible to come up with a set of regulations.
That is our view. You cannot deny the fact that 10 years ago there were over 1,000 credit unions. They are down to 600. The report from the gentleman from Jet Power, which is a large credit union, says by that the year 2000, which is only six years away, we're going to be down to 300. The large ones are not disappearing; it's the small ones. As much as you tell us, "Oh, no, no, you don't understand," we do understand. We had hoped that through this process we could make enough of you understand how we feel, because we are very sincere in our concerns about our credit unions.
Mr Owens: I don't think I'm telling you that you don't understand. I think you understand very well, actually, what it is that you're saying and I think you understand very well what it is that I'm saying. With respect to the contention that there's been a downsizing in the movement, no one's going to dispute that. I ask you, however, to look at the reasons why there has been that kind of a downsizing. There's a whole range of reasons for that downsizing. It simply cannot be laid at the feet of larger credit unions that they are eating up smaller credit unions and that this bill will facilitate that process.
Mr Kwinter: At least. I'm very anxious to participate in this discussion. First of all, let me clarify that I'm very supportive of the credit union movement. I have been, and still am, a member of a credit union for at least 20 years. I do most of my banking through a credit union. I also was the minister responsible for bringing in Program for Change and I have the scars on my back to prove it.
At the time, I travelled the length and breadth of this province, meeting with the largest and smallest credit unions, and heard many of the arguments you've put forward. You have to understand the rationale for the Program for Change. At the time, and this really goes to the issue of how come there were 1,000 then and only 600 now, a great many credit unions, the large and the small, got caught in a horrible mismatch in the 1980s. Most of them at the smaller level were insolvent. I say that without fear of contradiction. They were in terrible shape.
There were complications because the large credit unions like the Hydro credit union were saying: "Why do we have to pay a percentage of our deposits to OSDIC when we're never going to default and the only people who are going to default are the little guys because they're not being run properly? What we are in fact doing is we are financing their ineptitude. As a result, we're not going to pay." We had terrible problems with that, if you'll remember, where they said, "Sorry, we are not going to pay our premiums because we are never going to default but these guys are."
So the trick is -- and without getting into the whole issue where there was mismanagement at the large ones as well as the small ones, where people were lending money to themselves or to their brothers or to their relatives, and all of those things that went on -- it really is an issue of consumer protection. Ms Haslam hit the nail right on the head. It doesn't matter whether you put your money on deposit in a little one or in a big one; you want security of that deposit. You want to make sure that deposit is going to be safe and that suddenly one day you're not going to hear that the credit union has shut down and you've lost your life savings because they got frittered away because of mismanagement. So this whole thing is an issue of consumer protection or depositor protection.
The credit union that I belong to is a bank. I can do anything at that credit union, basically, that I can do at a bank, and it has the added advantage, because it is a credit union, that it doesn't have to meet some of the requirements that a bank does, which is fine, because I think it does provide that personalized service. I walk in -- I don't go there very often because my wife does all of our banking; the reason we're involved is that she's a school teacher and her money gets deposited there, and that's how it works.
The point that I'm trying to make is that I understand the need to have some flexibility in the way you operate, but I don't see any flexibility in the protection for the depositor or for the consumer. I think that the depositor and the consumer have got to have the same protection, regardless of where they put their money.
You have characterized your operation as basically lending money to people who want to buy a car, who want to buy a boat, who want to buy a skidoo or want to do some home renovations, as if that is all you do, but you're also a deposit-taking organization. There are people who put money into your institution only because they get a little better rate of return on their deposit and they don't borrow any money and they require the same kind of protection anyone else requires.
That is the trick and that is why it's important that there be some standard of competence in the people who are managing those moneys. I haven't been as close to the credit union situation in the last few years because I left as the Minister of Financial Institutions, became the Minister of Industry, Trade and Technology and now I am the critic for Economic Development and Trade, but I am very sympathetic to a recognition that maybe some of the requirements and some of the reporting should be staged depending on the volumes of deposits that are being held, as long as there is no dilution of the protection for the depositor. I think the depositors should have the same protection, whether they're putting it into a credit union that meets around the kitchen table or whether it's into an institution like where I go that, as I say, is just like a bank. You couldn't tell the difference whether it was a bank or a credit union. I'd like to get your reaction to that.
Mr Whitmell: I don't disagree with what you're saying; I agree fully with what you're saying. That's why in the smaller ones, where you know everyone, you know who you're lending your money to; there's a bond. In my case it's community, but a very small rural community; in Murray's case it's the employees of his plant. I think we're very recognizing of that.
Our credit union just finished its 32nd year of operation. We have never, and I repeat never, lost one penny in those 31 years. Murray says they've written off probably $10,000 over 37 years; I think Mr Johnson says his credit union wrote off $200. We are very aware of those things. I think when you're lending money to people who know that they are borrowing their co-workers' money, and in my case and with every loan I give out people say to me, "Bud, I've heard the story 10 times before," I say: "You're going to hear it 11. This money does not belong to the Royal Bank or the Bank of Nova Scotia or the Toronto-Dominion Bank; it belongs to your next-door neighbour, your aunt, your uncle, your friends, your minister. That's whose money you're dealing with if you default in your payments."
We've had three bankruptcies and never lost a penny over them. They could have walked away. They said: "No, I will not. The credit union was there when I needed it, and I will not let the credit union down."
I would suspect that if a member of your credit union filed for bankruptcy, the money would not be repaid. We're very concerned about what you're saying, and I think that's why we are as successful as we are. We don't do it on the banking level; we do it on our knowledge of the people we deal with. We are concerned that the regulations that Harvey and his colleagues are applying on us as criteria for making loans are going to deny the very people we serve the credit that they have needed and so religiously repaid back.
I don't question Harvey's sincerity as he tells me that we don't need to worry about it. I see it happening. I've been involved in two credit unions within our association that were closed down -- Jonathan sees that clock going, I'm sure, as well as I do -- one was a particular plant where the employees were on strike. They didn't have any jobs. They needed money. Some of them went to the larger -- you said you can't tell the difference between the credit union and the bank -- and asked for a loan. They would not even fill in a loan application for them, wouldn't even talk to them. They said, "Come back when the strike is over." The response was: "When the strike is over, I won't need the loan. I need it now." "Sorry, we can't help you." That is a reality that is happening.
Unfortunately, not the new powers that are coming for credit unions but the regulations that are coming are saying to us, "You cannot lend to those people that you've been lending to," in Murray's case for 37 years and in my case for 31. We sincerely believe that, and we feel the crunch of it. Every time we get a ministry audit come in, we feel the crunch of what they are saying to us with the poor lending practices that we have. If our lending practices are so poor, why have I never written -- not me; I haven't been involved in it for 31 years -- why has my credit union never written off a penny? Why does Mr Johnson's only have $200 in there? Why in 37 years has Murray's only had $10,000? We must be doing something right. We must have been doing something right, but those people are being turned away. We wouldn't be here today if we did not sincerely believe that.
Mr Kwinter: I hear what you're saying, and I'm quite sympathetic to what you're putting forward. But in every bit of legislation, if we were to tailor the legislation to law-abiding citizens who never had a problem, there would be no requirement for the legislation.
Mr Kwinter: No, I'm not saying that. I congratulate you for your record and for your astuteness in the way you run it. What I'm saying is that historically, if you took a look at the credit union movement, and in some cases it was because there were fraudulent activities, but by and large even the most honourable and best-intentioned credit unions have made mistakes because the people running them did not have the competence to run them properly, and as a result they failed.
What I'm talking about is that there still has to be an element of depositor and consumer protection, and that is not to deal with the people who are running their operations efficiently, profitably and properly but to make sure that those people, even if they are well intentioned, have the proper restrictions on their ability, to minimize the risk to the depositor and to the consumer.
We have three examples that you've just cited. I'd like to be in a position of bringing in five where they've had a problem, and not only have they had a problem, the depositors have lost all their money, and for whatever reason OSDIC was not paying because it felt they didn't comply with the restrictions of OSDIC, and it was a disaster.
I remember, as a minister, I had people lined up all the time, not only with credit unions but loan and trust companies. I hate to remember the whole situation with Crown Trust and everything else that went on, and Re-Mor and the whole bunch of them. I had people suing me and the Ombudsman filing against me because we should have done something about that protection issue.
That is what this is all about. It is not aimed at those people who are running their operations properly. I hasten to add, it isn't even aimed at those that aren't, because I'm not trying to accuse anybody. It's aimed at setting criteria so that it minimizes the risk to the depositor and the consumer. That's really what it is. It's not aimed at the good guys; it's aimed at the potential problems and that's what it's there for.
Mr Whitmell: We understand. The only thing I would say is, you keep talking about the depositors. But they are members. It's a voluntary thing. They choose to belong to the organization and they know who their co-members are. They are an owner. They're not a depositor; they're an owner. Certainly, they have a concern that the people they elect to run their operation for them are the best they can find, but it's not an unknown thing. It's a membership organization and it's voluntary.
Mr Kwinter: If you get into the savings and loan situation in the United States and you get into the situation that happened right here in Ontario, where, "My God, he was my neighbour for 25 years. We used to go out bowling every night, and the guy absconded with my money. I can't believe it," I'm saying that you can't use that argument: "We know everybody. These guys are our friends. These aren't depositors; they're partners."
They are depositors, believe me. They're taking their money and they're entrusting it to someone whom they truly believe they can trust, but human nature being what it is, sometimes the person they think they can trust and who's been a stellar model in the community absconds with the money and they're left holding the bag.
The first thing they do is come back to the government and say: "What did you do about it? You had the obligation to regulate those guys. You had the obligation to make sure there was protection there and you didn't do it." That's what this regulation is all about.
The Chair: Again, being very much aware of the time, I would like to call the Coalition of Credit Unions and Caisses Populaires of Ontario to please come forward. According to our agenda, we have four presentations to be made. I would suggest to the presenters and to the members of the committee that we hear all the presentations concurrently and then we'll leave some time at the end for questions from the committee members to whomever they may choose.
Not to suggest there is any particular order, but I do have the Credit Union Central of Ontario, l'Alliance des caisses populaires de l'Ontario, la Fédération des caisses populaires de l'Ontario and Association of Credit Unions of Ontario. I would suggest that if any one of you would like to begin at this time, that would be probably good. Maybe Mr Guss would like to start, and if you would please identify yourselves as it becomes necessary for the members of the committee and Hansard.
I am Jonathan Guss, chief executive officer of Credit Union Central of Ontario. I'm going to speak for a moment, and you'll be glad to hear, I'll do it in English, on behalf of the coalition, and then I'm going to speak for a few minutes on behalf of Credit Union Central, because each of the four groups represented by the coalition has a different emphasis on our 16 main points outlined in the brief.
We're delighted to be here because we need this legislation, we've been working toward it for the last 17 years, and because you, the three parties represented on this committee, have agreed to act quickly and in concert to deliver it expeditiously. We very much appreciate your commitment.
The coalition I mentioned is comprised of four organizations. The four of us at the table represent 500 of the 550 credit unions and caisses populaires in Ontario. We represent French and English, north and south, members of leagues and those who are not members of leagues, urban and rural, full service and traditional and large and small.
Perhaps I should highlight at the outset that over the past five years our system financial performance has improved dramatically, with average capital increasing from about 2% of assets to over 4% of assets. In general, we're benefiting from sound financial management -- I think we probably shouldn't be compared to bingos and trust companies -- and we have $12.5 billion in assets invested in Ontario today.
The people at the table with me are Pierre Lacasse, general manager of la Fédération des caisses populaires de l'Ontario, representing 43 caisses populaires; Joe Mahoney, president of the Association of Credit Unions of Ontario, representing 19 credit unions; Michel Paulin, general manager of l'Alliance des caisses populaires de l'Ontario, representing 14 caisses populaires, and myself, representing the 425 members of Central.
Each group is independent and distinct, as I said, with a very different constituency, and therefore each is going to speak for itself. We do agree on every point that's in our written submission, but each group has different priorities and different pressing needs and each has agreed to leave out of the written submission points on which we did not agree as a group.
I believe you will see from our submission that we've taken our work very seriously. We've travelled to 25 meetings in cities and towns all over the province to gather comments from our members, and in our submission I hope you'll find we've presented thoughtful but concise commentary. It represents hard-fought compromise on the part of all of us and our 500 members.
The chairman of our legislative committee, Warren Hanstead, is here. Warren's from Ottawa National Defence Headquarters Credit Union. Warren is also chairman of the board of Co-operators insurance group, the largest Canadian-owned general insurance company in Canada.
Jim Allen is here. He is the chairman of the Small Credit Union Council. The council is a central within Central and it represents the 243 members of Central that we consider to be small credit unions. It's all the credit unions that are $5 million or less. Jim's from Smiths Falls Community Credit Union.
There are a couple of other people here whom I just want to mention. From right here on College Street, we have Denis Tay of the Universities and Colleges Credit Union and Taras Pidzamecky of the Ukrainian Credit Union. The Ukrainian Credit Union is right next to the Bagel, so I think you should visit it at lunch some day. It serves, yes, the Ukrainian community, but also, thanks to this bill, the Portuguese community. So keep that in mind as one of the good things about this bill.
Also from our staff we have David Guiney, our general counsel -- he's worked with government doing much of the creative work on the legislation; Marilyn Hood, our director of public affairs, and Brigitte Torok from our public affairs department. I'm sure you'll see the three of them over the course of the next three or four weeks as you talk and consult, and they'll be glad to answer your questions.
Central is the association and the central bank for our members. Our members serve 1.2 million Ontarians. As central bank, we manage a pool of $1.3 billion in Central. Our members have $8.5 billion of the $12.5 billion that I mentioned, but each credit union in its own right is quite small relative to the banks and trusts. All of our credit unions are part of an integrated national financial network of 1,100 credit unions, where we have in the order of $40 billion of assets.
In the five minutes remaining for my presentation, I'd like to draw your attention to four issues. The bill does a lot for credit unions and caisses populaires, and for that we're grateful. With a few adjustments that we've outlined in this submission to recognize the uniqueness of the co-op system and to make the bill practical -- adjustments, for instance, on the rules about co-op affiliates, audit committees, appointment of receivers, loan syndications and leagues -- the bill will become a model for other jurisdictions, though we need those changes.
The four practical issues I want to touch on are: grandfathering of lending limits; OSDIC's line of credit from the consolidated revenue fund, which you heard about from Mr Poprawa this morning; the rules for subsidiaries; and the need to issue new forms of shares, which has also been mentioned.
I think I'll start with lending. We agree that licences should be required for lending, although we also believe that credit unions and caisses populaires -- especially small ones, Bud -- should not be required to apply for a licence for their core business, personal lending.
On the grandfathering issue, we had expected that the current lending limit for each credit union, a limit that has already been set by the regulator, would be grandfathered. We've seen a draft regulation that would in fact roll back lending limits, even for credit unions that are experienced at lending and well managed. This is a practical issue. We cannot stop doing business while regulatory exceptions are negotiated. The bill itself must grandfather current lending limits.
With respect to OSDIC, our deposit insurance agency, it currently borrows from chartered banks and from credit unions and caisses populaires. At present it borrows with a government guarantee that is limited to $95 million. OSDIC's federal counterpart, the CDIC, can borrow directly from the federal consolidated revenue fund. This saves the CDIC money and lends an air of confidence to its operations. This loan from the CRF is explicit in the CDIC legislation. This, too, is a practical issue. OSDIC needs the same explicit recognition in order for credit unions and caisses populaires to be competitive.
The bill provides special rules for subsidiaries. These rules are similar to those available to bank and trust company subsidiaries, but credit unions and caisses populaires tend to own companies cooperatively or jointly with other credit unions and caisses populaires. They need to own such companies in order to be able to provide full financial services. Because each credit union or caisse populaire is relatively small, it is most efficient to own such service providers as a group. These cooperatively owned companies or, as we call them, co-op affiliates, must be treated as equivalent to subsidiaries. This is a practical necessity. We can't afford to restructure the ownership of our co-op affiliates.
Capital, my final point, is the base upon which all businesses operate. Financial institutions require a solid capital base for solvency, a cushion against bad times; for growth; for product development and innovation; and for economic development of the community. It is essential for credit unions and caisses populaires to build that financial base.
The bill is excellent on this point. It gives credit unions the capacity to build capital by issuing new forms of shares, in particular non-voting preference shares. This addition to the legislation is most welcome; it is also essential to permit credit unions and caisses populaires to compete fairly in our very competitive marketplace. It will empower them to become a driving force in economic development of the community and in small business lending.
The bill permits sale of such shares to members, with full, plain and true disclosure through an offering statement. The bill also permits the sale of these shares to the public, with a prospectus issued pursuant to the Ontario Securities Act.
This is a safe approach for members and for the public. For members, it entails a review by the director of credit unions. The director also does the examinations and has full information about credit unions and caisses populaires, so he will know if the disclosure is true.
Also, members are owners, and therefore have full and continuous rights to disclosure about their credit union. This is a fair, I would say excellent, approach. It recognizes our need for capital, it doesn't compromise the democratic principle of one member, one vote, and it gives a stronger base for an economic development of the community. It should keep share issuance affordable for small credit unions if they want to get into that market.
M. Michel Paulin : Monsieur le Président, si vous permettez, j'aimerais adresser mes paroles en français. Je vous remercie également de cette occasion pour faire valoir nos points de vue sur le projet de réforme sur les caisses populaires et les credit unions.
L'Alliance des caisses populaires regroupe 14 caisses populaires et 27 points de service situés dans le nord de l'Ontario. Notre mouvement compte environ 57 000 sociétaires. Nous endossons en principe cette réforme législative.
Nos caisses populaires sont de petite et moyenne taille et toutes se dotent d'un lien d'association communautaire. Nos caisses populaires désirent ardemment préserver non seulement leur nature coopérative mais aussi leur héritage linguistique et culturel en développant les forces économiques du milieu.
Étant donné que nous nous retrouvons pour la plupart la seule institution financière dans la communauté, nous avons la responsabilité d'offrir tous nos produits et services dans les deux langues officielles du pays. Nous voulons continuer cette relation avec la communauté, mais avec une plus grande confiance que la loi pourrait nous accorder par une reconnaissance statutaire de nos origines francophones. Nous recherchons une protection du caractère distinct des caisses populaires qui nous permettrait de contrer l'assimilation de nos coopératives financières.
Tel que mentionné, nos caisses populaires sont majoritairement des petites institutions financières situées dans le nord de la province. Nous dépendons grandement de notre capacité d'agir en réseau afin d'atteindre la masse critique nécessaire pour investir dans la livraison des produits et services destinés aux sociétaires.
Le réseautage est critique à notre survie comme institution communautaire. C'est dans cette optique que nous avons créé des filiales coopératives qui ne sont pas dominées nécessairement par une caisse populaire ou credit union mais appartiennent à l'ensemble du mouvement coopératif, soit au niveau provincial ou national.
La notion d'influence n'a pas la même signification à cet égard. Ces filiales ont été créées pour répondre spécifiquement aux besoins de nos sociétaires. Il est donc d'une importance capitale qu'on puisse reconnaître ces filiales coopératives au même titre qu'un membre du même groupe dans le but de fournir une gamme complète de produits.
Nos caisses populaires affiliées regardent d'un bon oeil la possibilité d'émettre différentes catégories d'actions. Encore une fois, nous favorisons une approche réseau afin d'assurer que toutes les caisses populaires, peu importe leur taille, puissent bénéficier de ces mesures de capitalisation. L'accès à des marchés de capitaux permettra aux caisses populaires et credit unions de mieux se capitaliser durant les périodes de forte croissance et d'avoir accès à une autre source de liquidité pour alimenter les initiatives locales.
Les mesures de capitalisation prévues dans la loi permettraient également aux caisses populaires et credit unions d'investir dans des projets à long terme, tel que requis pour le développement technologique et des produits et services financiers, pour demeurer concurrentielles.
Cependant, nous demandons une extension de la période transitoire qui s'applique aux parts sociales. Nos caisses populaires exigent environ deux ans pour considérer les alternatives autres qu'une conversion des parts sociales actuelles à des dépôts. Advenant une décision de créer une nouvelle catégorie d'actions, les caisses populaires requerront une période raisonnable pour rencontrer les nouvelles exigences réglementaires établies par la loi et les communiquer aux sociétaires.
L'assurance-dépôts devrait demeurer en vigueur durant la période transitoire pour ne pas créer inutilement et sans fondement un climat d'incertitude. Il est important que cette transition soit accomplie d'une manière ordonnée.
Le projet de loi prévoit également que les caisses populaires et credit unions assument le rôle de mandataire dans la prestation de certains services à ses sociétaires. À première vue, il paraît que cette mesure créera des opportunités pour le mouvement pour participer de concert au développement régional par le biais de prêts syndiqués.
Cependant, la loi semble restreindre le consentement des prêts par les caisses populaires et credit unions à leurs sociétaires seulement. La loi doit pourvoir qu'un sociétaire puisse bénéficier de la syndication d'un prêt consenti par un groupe de caisses populaires ou credit unions affiliées au même réseau.
Je reviens souvent sur notre capacité d'agir en réseau. Nous aurons à faire preuve d'une plus grande solidarité au sein d'un réseau, soit au niveau régional, provincial et même national afin d'augmenter notre capacité de rejoindre avec encore plus d'efficience les besoins locaux. À cet égard, les centrales et les fédérations ont un rôle à jouer en complémentarité avec leurs membres affiliés et non pas en compétition avec ces derniers.
Nos caisses populaires affiliées l'exigent de l'Alliance. Elles voudraient que leur fédération les supporte dans la livraison des produits et services destinés aux sociétaires. Elles réclament donc que les fédérations et les centrales aient les pouvoirs nécessaires pour transiger avec les sociétaires des membres affiliés au même regroupement.
Les caisses populaires comme agent de développement communautaire se préoccuperont d'offrir les services financiers et contribueront à la survie des communautés ontariennes. Nous comptons sur une loi souple et progressive pour fournir les outils requis afin de jouer pleinement le rôle que les communautés attendent de nous.
Mr Joe Mahoney: Thanks, Michel. Before I begin my remarks on behalf of the Association of Credit Unions of Ontario, I would like to introduce, sitting directly behind me, my colleague Johanne Brunet, of the Civil Service Co-operative Credit Society. The association is a wholly volunteer organization, and without the help of people like Johanne we could not take an active part in proceedings such as these.
The credit union and caisse populaire system welcomes Bill 134 and requests your endorsement of this new Credit Unions and Caisses Populaires Act. As some of you may be aware, it is not a common occurrence for the four organizations that represent the overwhelming majority of Ontario credit unions and caisses populaires to act in concert. However, there is support for this new legislation from all sectors of the credit union and caisse populaire system. As such, the Association of Credit Unions of Ontario is here today in coalition with the three leagues to demonstrate that support.
There was a time not so long ago when it took the intervention of the Minister of Financial Institutions to bring the four groups together in the same room. Now our need for new legislation to enable us to compete in the ever-changing financial marketplace has brought us together to ask for your support in passing into law the first new credit union act in 18 long and eventful years. During that period, credit unions and caisses populaires weathered many storms but continued to prosper and grow, thanks to the great confidence shown by their members, the people who make financial cooperatives a reality.
In the five-year period from 1988 to 1993, while system assets grew from $9.2 billion to the previously mentioned $12.5 billion, surplus and capital more than doubled, growing from $252 million to $526 million. The system is much stronger now and better able to handle the increased competition from far larger financial institutions. But we need your help to give us the legislation required to stay in the game with our federally regulated competitors.
The Association of Credit Unions of Ontario welcomes the new legislation and supports the continuing importance given to financial soundness through Bill 134. The Association of Credit Unions of Ontario is a strong believer in financial stability. As a group, we administer assets of more than $2 billion and have surplus in excess of $100 million, or more than 5% of our total assets.
The new legislation clarifies roles and will clearly define rules for financial stability. The bill is long overdue, and we are extremely pleased that the government has permitted the industry to participate in the process.
Insurance retailing has become a hot topic whenever financial institution legislation is discussed. Many of our members look to their credit union or caisse populaire as a trusted source for insurance products. Although the proposed new act does not broaden the existing powers of credit unions and caisses populaires in this area, it does provide for flexibility. The proposed new legislation is versatile enough to permit a change that would mirror any changes in federal legislation which may permit the retailing of insurance through bank branches.
Bill 134 provides for such changes by way of regulation, changes which could be implemented quickly and easily to keep credit unions and caisses populaires on a fair and level playing field. To remain competitive, credit unions and caisses populaires must not be left behind if such a change is forthcoming.
Any change has casualties, as escalating costs force businesses to consolidate their assets. As noted earlier and as Mr Whitmell also noted, the system has experienced considerable growth in assets and members, but we have seen our numbers reduced. Some were victims of the recession, which resulted in plant closings which eliminated their membership base. Others did not have the asset size or a broad enough membership base to enable them to continue to operate, and many merged with larger credit unions or caisses populaires.
Increased demands on human and financial resources can have a detrimental effect on the ability of smaller units to continue to provide vital financial services in areas where larger financial institutions cannot afford to operate. Often credit unions and caisses populaires are run on a volunteer basis, the essence of the cooperative movement. We believe the new legislation will benefit smaller credit unions and caisses populaires and make it easier for them to continue to serve their communities.
I might just make an aside here to mention that my position as president of the association is entirely voluntary. My day job is with the credit union that serves the employees of the Ontario government, where people like Harvey Glower are the men on the shop floor. Despite our large numbers, we care about our members and we're proud to lend qualified members any amount they may need, even if it is less than $5,000.
Another item of concern to credit unions and caisses populaires, large or small, is the assignment of lending limits. Loans are the lifeblood of our business. Without loans, credit unions and caisses populaires would not exist. An arbitrary rollback of an existing limit, which is a possibility in many smaller credit unions and caisses populaires, would have a devastating effect on the ability of that credit union or caisse populaire to continue to compete and to effectively serve its community.
It is essential that Bill 134 grandfather all existing loan classes and loan limits which are currently provided for in the Ministry of Finance-approved bylaws of all credit unions and caisses populaires.
A final point, before I conclude, with regard to an issue that has put the Ontario credit union system at a competitive disadvantage since the inception of deposit insurance in Ontario in 1976. All financial institutions in Ontario, with the exception of credit unions and caisses populaires, are insured by the Canada Deposit Insurance Corp. Ontario credit unions and caisses populaires are insured by the Ontario Share and Deposit Insurance Corp, affectionately known as OSDIC.
From time to time, it is necessary for deposit insurers to borrow funds to meet their mandated requirements. When the CDIC borrows, it has access to the comparatively inexpensive resources of the federal consolidated reserve fund. OSDIC has no such access to the provincial consolidated reserve fund and is forced to operate at a deficit or to raise funds from the private sector at considerably higher cost than the CDIC. As Mr Guss noted earlier, this is a cost issue. The higher the borrowing cost to OSDIC, the higher the operating cost to the local caisse or credit union. We hope you will correct this inequity in Bill 134 and provide the Ontario Share and Deposit Insurance Corp with access to the consolidated revenue fund for its borrowing requirements.
We wish to thank the committee for permitting us to come forward and provide our members' views on the new credit union and caisse populaire legislation. I would now like to pass the mike to my friend Pierre Lacasse of la Fédération des caisses populaires de l'Ontario.
Mr Pierre Lacasse: Thank you for this opportunity to appear before you. I would also like to take advantage of your translation services and make my presentation in French since, as you know, this is the language of most of our 200,000 members. As I'm the last one to speak today, I will try very much not to put you all to sleep -- with the help of the translator, of course.
Permettez-moi de vous signaler la présence avec moi aujourd'hui du président de la Fédération, M. Benoît Martin, ainsi que du vice-président, M. Fernand Bidal, et du directeur, crédit et gestion de la Fédération, M. Daniel Brault.
À titre de représentant de la Fédération des caisses populaires de l'Ontario, il me fait plaisir de clôturer cette présentation des divers groupes de l'industrie en soulignant à mon tour certains aspects de ce projet de loi qui soit méritent du support, soit justifient quelques ajustements.
Permettez-moi d'abord de situer brièvement notre groupe, qui se compose de 43 caisses populaires réparties à travers la province dans quelque 63 points de services, et dont les actifs atteignent 1,5 milliards de dollars. Notre sociétariat provient très largement de la population francophone et, à ce titre, nos membres et nos dirigeants ont particulièrement à coeur les enjeux touchant la protection de notre héritage culturel.
Malgré que notre communauté soit aussi fondatrice de ce pays, je n'ai pas besoin de rappeler aux membres de ce comité sa fragilité face à l'assimilation à la majorité dans cette province et à la nécessité d'avoir l'appui des dirigeants politiques afin de développer les institutions francophones.
Les caisses populaires jouent un rôle unique à cet égard, mais le milieu hautement compétitif dans lequel les institutions financières évoluent rend doublement difficile le respect des impératifs financiers et communautaires. Pour que cette force économique qu'est le réseau des coopératives francophones puisse jouer pleinement son rôle dans la communauté, il doit obtenir que sa mission soit pleinement reconnue et protégée.
Nous sommes heureux de constater l'ouverture démontrée par le gouvernement en reconnaissant, à l'article 19, le caractère distinctif des caisses populaires. En limitant l'usage du terme «caisse populaire» aux seules institutions qui offrent une gestion et un contrôle démocratiques en français, nos membres pourront encore davantage s'identifier aux caisses populaires pour contribuer au mieux-être de la communauté francophone.
La seule requête que nous formulons consiste à amender le paragraphe (5) de cet article afin que toutes les coopératives existantes soient visées par cet article. Tel que rédigé présentement, le paragraphe (5) défait la protection accordée au paragraphe (3). Il s'agit, semble-t-il, d'une erreur de rédaction que le Ministère propose de corriger.
Un autre aspect important de cette réforme législative traite de notre développement futur. Nous avons besoin d'un cadre législatif souple qui reconnaisse la forme particulière que prennent nos investissements coopératifs. Afin à la fois d'assumer leur autonomie et de répondre aux besoins financiers de leurs membres, les caisses populaires et les credit unions regroupent leurs forces pour procéder en commun à leurs investissements stratégiques.
Peu, sinon aucune de nos coopératives financières peuvent se lancer seules dans des activités connexes. Conséquemment, pour nous permettre de lutter à armes égales avec nos compétiteurs, notre loi doit favoriser la mise en commun des ressources en définissant un autre type de filiale, soit celle détenue par un groupe de coopératives. Cette forme de propriété intercoopérative n'a pas d'équivalent dans le monde corporatif. Il faut, comme dans d'autres provinces canadiennes, créer ces filiales coopératives, car tant du point de vue financier que fiscal, de tels organismes sont essentiels pour assurer notre développement futur. Ceci est particulièrement vrai à la veille d'une accélération du décloisonnement des services financiers.
Dans ce même ordre d'idée, nos coopératives ont aussi des besoins stratégiques en matière de distribution de produits et de services, puisqu'elles ne peuvent regrouper dans leur propre giron toutes ces activités. Elles ont besoin d'avoir accès aux produits d'autres coopératives ou sociétés, soient-elles filiales, affiliées ou non reliées, pour que les membres trouvent auprès de leur caisse populaire et leur credit union tous les services financiers dont ils ont besoin, exactement comme ils pourraient le faire avec une institution bancaire concurrente.
Il ne faudrait surtout pas penser que nos coopératives peuvent se contenter d'être des institutions secondaires occupant des niches spécialisées. Nous avons les mêmes impératifs technologiques et financiers que nos concurrents et, pour survivre, il faut être aussi performant.
Les articles 174 et 175, qui traitent des pouvoirs commerciaux, doivent permettre clairement à nos institutions de jouer un rôle dynamique, et ainsi distribuer les services financiers les plus variés possibles à leurs membres. Avec la disparition des quatre piliers tels qu'on les connaissait autrefois, les coopératives financières sont plus que jamais les seules alternatives aux banques et nos autorités doivent faire en sorte de les rendre les plus compétitives possible.
Laissez-moi maintenant traiter d'un aspect important qui affecte, lui aussi, grandement notre compétitivité, soit la sécurité financière du mouvement. Nous avons cherché depuis des années à trouver des moyens concrets pour améliorer cette sécurité financière. Vous êtes en mesure de constater les progrès immenses accomplis depuis les dernières années, mais il reste encore beaucoup à faire. Pour survivre, il nous faudra atteindre une plus grande discipline en matière de gestion financière afin de pouvoir jouer pleinement le rôle attendu par les membres au sein de nos communautés.
La sécurité financière dans notre monde coopératif passe, là encore, par des efforts concertés. C'est ce que nous appelons dans notre jargon la stabilisation. Il s'agit d'un mode de gestion axé sur des mécanismes d'entraide, où l'ensemble des membres d'un groupe supportent les unités plus vulnérables. En acceptant l'importance de resserrer la gestion de l'ensemble des membres de notre industrie, nous faisons preuve d'un degré de maturité remarquable qui résultera inévitablement en un système financier plus fort.
J'aimerais ajouter un commentaire suite à la présentation du président de la Société ontarienne d'assurance des actions et dépôts ce matin pour indiquer que l'industrie est en désaccord avec la perspective de préciser dans la loi le niveau que devrait atteindre le fonds de réserve d'assurance. L'approche actuelle de la loi nous convient très bien.
Ceci étant dit, certaines approches avancées dans la loi doivent être nuancées. Entre autres, il est injustifiable que l'assureur-dépôts soit responsable des fédérations. Elles reçoivent les dépôts de leurs membres qui paient déjà l'assurance-dépôts sur ces mêmes sommes. Une telle juridiction désavantage les caisses populaires et les credit unions affiliées à une fédération par rapport aux unités non affiliées. Elle accroît inutilement les coûts d'opérations, ce qui va à l'encontre de l'équité concurrentielle.
D'autre part, la loi donne de plus larges pouvoirs aux autorités réglementaires, mais cela ne devrait pas signifier que des abus puissent s'effectuer. Le directeur des caisses populaires et des credit unions peut accorder des dérogations à certaines unités en regard des différentes règles imposées par la loi ou par les règlements. En particulier, l'article 284 lui permet de placer une unité sous surveillance même si elle a accepté son plan de redressement, c'est-à-dire la demande de dérogation. Il s'agit d'un pouvoir exagéré qui rend inutilement craintifs nos membres face à des interventions réglementaires imprévisibles et abusives. Ceci va également à l'encontre des principes d'autoréglementation que la loi introduit.
Cette notion de surveillance utilisée dans la version française de la loi mérite d'ailleurs d'être clarifiée, car elle prête grandement à confusion. Il est important que l'on comprenne que cette stabilisation du système est réalisée par étapes, avec des niveaux progressifs d'intervention, et que le vocabulaire propre à chaque étape doit véhiculer la bonne connotation.
Le terme «surveillance» réfère à une fonction plus générale que le terme anglais «supervision», qui évoque beaucoup plus justement une forme de prise en charge et de réduction des pouvoirs. Nous croyons que le terme «direction» affirme plus clairement l'intention et nous demandons qu'il soit utilisé pour remplacer le mot «surveillance».
Enfin, pour rationaliser l'approche réglementaire, le pouvoir de régir les organismes de stabilisation devrait se situer au niveau du ministère par préscription d'un règlement et non résider dans le pouvoir de l'assureur-dépôts.
Notre fédération est prête, avec le plein support de ses membres, à prendre en charge ces activités de stabilisation. Nous pensons que cette approche est la plus efficace et la moins coûteuse. Nous sommes heureux que les autorités réglementaires soient sensibles aux souhaits des divers groupes de l'industrie désireux de prendre en main de plus grandes responsabilités visant à instaurer graduellement l'autoréglementation dans les coopératives financières. Notez que cette approche est parfaitement consistante avec nos valeurs coopératives qui préconisent, entre autres, la responsabilisation des individus.
Je vous remercie de l'attention que vous avez portée à mes propos et à ceux des autres représentants de la Coalition des coopératives financières. Nous apprécions aussi l'opportunité de nous exprimer dans notre langue. Nous avons investi beaucoup de temps et collaboré pleinement avec le ministère et le gouvernement pour construire cette nouvelle législation. Conséquemment, nous osons croire que vous recevrez positivement nos recommandations de modifications, puisqu'elles ne visent qu'à accroître le dynamisme de notre loi.
Mr Owens: I'd like to begin by welcoming the coalition to the standing committee and thank you for the good work you've undertaken with respect to Bill 134. I'd also like to fracture Canada's second national language by stating, j'aimerais vous souhaiter la bienvenue à ce comité permanent. Il me fait plaisir de voir tous les représentants ensemble ici qui appuient ce projet de loi. Vous devez être fiers de votre bon travail. Je voudrais féliciter chacun d'entre vous : M. Guss, M. Lacasse, M. Mahoney and M. Paulin.
I'd like to ask Harvey Glower to respond to some very important issues raised, particularly by Messrs Pierre Lacasse and Michel Paulin. Before I do that, I'd also like to address the issues with respect to grandparenting -- I guess we've been calling it grandfathering all day; I'd like to move it into the 1990s -- and clarify that the grandparenting provisions of subsection 197(4) will be applied to lending limits as well as categories of lending. For any further explanation, I'll ask Mr Glower to comment on that or go directly to the stabilization issue.
First, there's the issue with respect to "supervision" and "surveillance" in French. We are very well aware of the potential impact of the translation, and a couple of suggestions have been made to us. One is to use the term "en direction" or "sous direction" for the term "under supervision," and the verb "diriger" for the verb "to be supervised" or "being supervised."
We have made certain representations already to the francophone legislative counsel. We will be phoning them once again essentially to impress upon them the importance and stress that this is the accepted terminology we would like to see in the legislation. That will be done very shortly. They don't work as late as we do, so it'll have to wait till tomorrow.
The next question I wanted to address was an issue raised with respect to section 284. If I understood correctly, there is a particular feeling that maybe the power for the director to order a credit union to come under supervision, in spite of the fact that a credit union or caisse populaire may have received a variation in capital requirements, is too strong.
It is our view that it's not a question of whether it's too strong. There are a number of situations where, in spite of the fact that a credit union or caisse populaire may have received a variation in capital, the nature of the problem that led to their requirement to ask for variation needs some other level of authority to look over or inspect or manage or co-manage, as the case may be. We want to make it clear that it is necessary to state that just because one has received a variation in capital, that does not continue to imply that one is now complying with the provisions of section 84.
I think OSDIC and Mr Poprawa this morning made it quite clear they wanted to ensure that a credit union could not continue to operate. I hope I'm not misquoting, unless it was under strict supervision or otherwise.
I'm not saying this is a response to that, but I think it's an indication that the deposit insurer and the regulator feel strongly enough that a variation in capital is not the answer, is not the clean slate; it's the first step in making sure that if supervision is necessary, there will be some form of co-management or curatorship to bring somebody out of the need to require variation in the future.
It's true that the bill does provide special rules for subsidiaries, and it is true that credit unions and caisses populaires do tend to own companies cooperatively or jointly with other credit unions or caisses populaires, a term we like to call a cooperative affiliate. We recognize that this is fundamental to the operations of a credit union. They do not survive today through the ownership of subsidiaries but rather through multiple joint ownerships of cooperative affiliates.
This is something that in a certain way has been recognized in the statute. There is a proposition to amend one section dealing with affiliates, but there's also a regulatory-making power which, for the purposes of the statute, would allow us to define what is a cooperative affiliate through the regulations. We know this is fundamental to the operation of credit unions. We cannot ignore it and we will not ignore it, because credit unions cannot operate without it.
In many cases, with respect to networking provisions, for example, credit unions will be allowed to network with subsidiaries, and we talk about "prescribed entities or persons." It is recognized that something like a prescribed entity that is a cooperative affiliate today is what credit unions are doing, and we intend to grandparent that notion right into the regulations.
Mr David Johnson: First of all, I would like to congratulate each and every one of you on excellent presentations. I'll do it in English only to spare you my French. Obviously, a great deal of thought has been put into this and a great deal of cooperation all the way around.
The point has been made with regard to the ability of OSDIC to access funds from the consolidated revenue fund. Mr Guss, you made that point. I'm not so sure that question has been addressed yet. Am I correct that it hasn't been?
Mr Guss: That's right. As I understand it, there is no change in the proposal with respect to OSDIC and its funding. We very much feel that it's a competitive issue and a practical one. We recognize that it can be dealt with without being in the act -- in other words, OSDIC can arrange a line of credit from the CRF even if it's not in the legislation -- but from our perspective, it should be explicit in the legislation, it has to be, for competitive issues. We are seen in the marketplace in a certain way. We have to be able to say, "Our protection is similar to that of other financial institutions." Also, there's the cost issue that was raised. It has to be absolutely clear to the Ministry of Finance officials that a line of credit for OSDIC was contemplated by the legislators. We don't want OSDIC to have to go in and negotiate it without it being in bold print in the legislation.
Mr David Johnson: Is this is more in the political vein? Mr Guss is saying it's important that it was contemplated by the legislators that OSDIC could access the consolidated revenue fund. Is that what was contemplated by the legislators?
Mr Owens: In terms of the issue with respect to the consolidated revenue fund, this has certainly been an issue of discussion both on the ministry level and in terms of the policy issues. At this point, the commitment I'm prepared to give on that, as I gave to Andy Poprawa this morning with respect to OSDIC and the 1% solution, is that we are prepared to continue to work with the coalition and work with OSDIC to come up with a mutually agreeable solution. I don't think there's any evidence to the contrary that the government does stand behind credit unions.
The question we are trying to resolve in conjunction with the credit union and caisse populaire movement as well as OSDIC is how best to ensure, first of all, solvency, so we don't have to get into the OSDIC or move into rescue mode; and also, if that does have to happen, what is the best way of doing it? What is the best way to protect depositors? The question is also, how can we work with the coalition and others to promote the safety and the viability of credit union deposits? We're continuing to work with the movement on those questions.
Mr David Johnson: I guess the question is, when does that come to a head? Maybe you'll address that later. In the presentation there's another question with regard to OSDIC, and it might be well to clear the air on that as well, the question with regard to providing financial assistance to a league for insuring deposits with the league. Mr Guss, your position is that OSDIC should not be responsible for doing that.
Mr Guss: That's right. It's our view that OSDIC has expertise and a mandate to work directly with credit unions. The leagues, however, do not pay an assessment or premiums to OSDIC for insurance and our deposits are not guaranteed. As well, their expertise is not in working with leagues. So we think it would be a mistake to have them play the role of the organization that would step in if the league did face financial difficulty.
There is a national Central which has expertise in everything that the leagues do, and it would be one of the possible candidates to step in and help out. As we have a line of credit from them and they have a line of credit from the Bank of Canada, that's a sensible place to turn.
If the provincial government wanted to appoint some entity to work with us, it should appoint somebody with the expertise in the wholesale financial markets, which is where we are active, as a central banker. We think it's very important that that be changed.
We've also made some suggestions about what role OSDIC could play; that is, if the provincial government did give a line of credit to a league to see it through a rough period, OSDIC could administer that line of credit. That mirrors the federal act, under which we also operate. Our Central is a hybrid organization. We operate under both federal and provincial legislation, and under the federal act the CDIC can administer a loan from the federal consolidated revenue fund to our Central, so we'd like to see OSDIC play a similar role at the provincial level. I won't go into more detail; it's fairly arcane and legalistic. But I appreciate the opportunity to comment on it.
There are a couple of points Mr Guss raised. First, with respect to the duplication of insurance on deposits, I don't think either the ministry or OSDIC would argue that we shouldn't be double-insuring the same deposit. In other words, the member places his or her money with the credit union and that's where the deposit is insured and that is the level at which the deposit insurance is paid. Obviously the credit union, either through membership requirements or through excess liquidity, redeposits that money into the league and then the league subsequently invests it. It would not make sense to double-insure that.
However, by virtue of the fact that leagues do invest moneys of the depositors within the financial marketplace, just as credit unions invest those depositors' money and incur a level of risk with their activities, leagues concurrently incur a level of risk with their activities. For the purposes of the statute, a credit union and a league are treated similarly. We think there must be a certain level of consistency within the regulation such that leagues and credit unions are administered both by the ministry and OSDIC in the same way.
The ministry still is the primary regulator of all three leagues, and to the extent that there is a problem with credit unions there is now a mechanism whereby those problems are to be addressed, first by the ministry and/or OSDIC concurrently, and we think that consistency should be applied to leagues.
Certainly where Mr Guss says that there is a link with the CDIC because Credit Union Central of Ontario is a quasi-regulated Central, if that's an appropriate term, if the CDIC could grant a loan through its line of credit, surely they would have some form of monitoring associated with that. At least two of our leagues, and, because Central is first incorporated in Ontario, all three leagues would have a similar relationship. If they were to receive some moneys from their deposit insurer, surely their deposit insurer would need some kind of monitoring to, first, determine that financial assistance was available, and then be able to attach some conditions to the financial assistance.
I don't think it's totally inappropriate that OSDIC's responsibility for leagues is in the statute. There are different ways of addressing the costs associated with that and it does not have to be through deposit insurance premiums. There are differential premiums for leagues and for credit unions, and there are different classes of credit unions and therefore there can be different classes of leagues. There are different mechanisms of addressing those issues.
Mr Guss: I don't want to address all those issues because time will pass and we won't accomplish our ends, so I don't think we should get into a debate. I just want to say that there is a difference between monitoring and managing. I would repeat that OSDIC has the expertise to manage a credit union but it doesn't have the expertise to manage a Central, with its broad scope of very different activities. I think the act should be changed to permit them to monitor if we borrowed from the consolidated revenue fund; that they can monitor. But the ministry, as a regulator, should choose someone with the expertise to manage a league, if it came to that.
I want to say that the leagues are all operating very soundly now and this isn't by any means an immediate issue. I think I should leave you with that very positive thought. We're all well capitalized and running very well.
Mr David Johnson: One last question, just a simple one about deeming everyone to have the licence. Has that issue been handled? You made the comment that all the current members should be deemed to have their licence.
We still have a problem with the fact that our units are submitted to licensing in some areas like consumer lending, because we would not expect a financial institution not to make loans. I mean, this is our basic business. We've been in that business for years now and doing it, I think, properly.
What the coalition agrees upon is that those licences should be required for commercial lending, because this is a new area. Although we've been involved in this area, in the past we've been involved on a limited basis. The maximum percentage of our assets that we can have in commercial lending right now is 15%. The new legislation will allow us to go further than that and participate more in the economic development of our communities.
Therefore, because it's a new area and because we still have to develop more expertise, we agree on that basis that there should be licences for commercial lending and possibly agricultural lending. But for the other aspects, we think it's bureaucracy and it should not be mandatory.
Mr Paulin: I just wanted to reiterate Jonathan's comments. We've proven our ability in making consumer loans, and the experience has been there. As Mr Lacasse mentioned, commercial loans require a higher level of expertise, and in that case the lending-licence regime would be appropriate.
Mr Guss: Your question was, have we got what we asked for? The grandfathering could in a way solve the problem. To be nice, I'll say that after we've seen the grandfathering clause, maybe we'll say it's taken care of. But I suspect that this is a different issue, and it's a very important one to the small credit unions because their natural business is personal lending. You have to ask, why do you need a licence to do what you were created and given a button, letters patent, to do? But it's there, and we thought it would be a good one for the small credit unions.
Credit unions and caisse populaires operate, I think you can tell, in an extremely competitive environment. Despite the legislative impediments, we're equal players with the banks and trusts in the Canadian Payments Association and in the Interac electronic banking system. We have people on the boards of both of those organizations.
We provide trust insurance and data processing services. We have a mutual fund company, and through our cooperative affiliates that we've created, we've managed to deliver all these things directly to our members. Our businesses have survived and in fact flourished.
We need the new legislation now. The banks legislation was changed in 1980 and again in 1992, and the federal trust and insurance legislation was changed significantly in 1992. Our current legislation is hopelessly out of date, and it makes it much more complicated for us to compete. It gives our competitors a clear competitive advantage.
In general, our system has matured tremendously. We've repeated that in different ways. For instance, we are among the bankers to the federal government. Our management is sound and it's increasingly well trained, but it remains very responsive to our local communities, to our members.
We are engaged in a business with inherent risks, but despite this, our system's financial performance has improved dramatically in the past five years, even during the recession, with system capital increasing, as I said earlier, from 2% to 4% of assets.
The legislation that the government has presented to you is excellent legislation, and we truly welcome it wholeheartedly. With a few changes recognizing the uniqueness of our co-op structure and making it more practical, you can make it model legislation. We encourage you to agree to do that in your deliberations.