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Committee proceeding on the possibility of the merger of Canadian Banks
Banking, Trade and Commerce
Tuesday, October 6, 1998 (p.m.)
Senator Joyal: I would like to address my question to Mr. Hunter, and it relates to your statement at the bottom of page 5 and the top of page 6, in relation to the competition in the U.S., where you say that the services you would like to provide are available from participants in your industry in the U.S.
We have been told by representative of the banks that one of the key factors for their plea for major changes is the invasion of the Canadian market by the American mutual fund companies. Of course, Fidelity is always the example that is put forward. I am surprised that I did not find in your brief any kind of allusion to your competitors, and to the fact that, as we are told, the Canadian market, in terms of mutual funds in the forthcoming years, will face much more severe competition than it has faced in past years. You have had the capacity to report spectacular growth for the last 10 years. I would have expected that you would have come to us to ask for some protective measures because the rules of the game have totally changed over the last 10 years and you face competition worldwide. I do not hear from you or read from you anything in that regard. Am I wrong?
Mr. Hunter: No.
Senator Joyal: What makes you so optimistic about the future, while some other key players in the market fear foreign competition?
Mr. Hunter: There are two things I would mention. Blake and AGF and Trimark and MacKenzie have always had foreign competition. Templeton, which may be as big as, and is certainly as formidable a competitor as, Fidelity, has been in this country competing with us for 10 to 15 years, so we have always faced big competition. We also face it from our banking counterparts in Canada. We do not view this as an international issue. We view this more as bringing our paradigm up to date with what is happening in the world so that we can compete.
What we are really saying is that we just want access so that, if we are competitive and serve our consumers well, serve all the agents who sell our products well across Canada, we will have a chance in this particular market-place as well.
The electronic movement of cash will be a critical service to the end investor, whether he is in Quebec City or in Victoria. We want to be able to move that cash effectively and efficiently and on an overnight basis for the investors as they make calls on it.
Mr. Goldring: Perhaps we do not sound alarmist because we have total confidence, as Mr. Hunter said. We have faced foreign competition before. We also have a strategy to deal with it. All we are asking for is a level playing field. We would leave two key messages with you. The first is that we need a level playing field. That means that we have to be able to have access to the payments system, as well as to Interac, without having to pay the amortized cost to build up the system. In other words, we need to be treated equally.
Our second key message relates to timeliness. We require these changes to be made as quickly as possible. I reiterate the example that I read you, and I have here the press release from the Royal Bank. It is no coincidence perhaps, but they are where we have to go if we want to allow adequate competition and sufficient alternative product for Canadian investors.
Those are the two key messages. We need action quickly; and we need to be allowed in on a very cost-effective basis. We are looking for a fairly fundamental change in policy, not fine-tuning of the rules.
Senator Joyal: I do not want to start a discussion with the chair but you were barred from being a member of it. The chair cannot have it both ways. You are barred from being a member and then you are being accused of just wanting to enjoy the benefit. There is some qualification to that statement, Mr. Chairman.
I want to come back again to your answers to my question because it is very important for us to evaluate the condition of the market in the forthcoming years. Even though no one has a crystal ball, we can all appreciate that, if you had appeared six months ago, the prevailing economic conditions would have been certainly different from what they are today and might be tomorrow.
Your reasoning seems to be the following: Put us on the same footing as our competitors from the U.S. here in Canada and we will be able to beat them on our ground. Is that fair?
Mr. Hunter: Yes. Whether we will be able to beat them or not, as long as we are treated fairly, we will walk away from this table happy because we think we can compete. We certainly compete in a big block of our business, the equity mutual fund business. We are very competitive there, but the money market side is dominated by Canadian banks, and Canadian banks dominate the market for government securities as well, somewhat as a result of that business.
Senator Joyal: Since you created Comcheq, are you aware whether the system that you have been putting together -- and that has been sold to CIBC -- has been improved substantially? Did they do R&D to make the system better, or did they make any fundamental changes in order to make it a different product than the one you sold them?
Mr. Loewen: They have not really done so. They have added some personnel systems, but essentially CIBC bought Comcheq because its own system was in deep trouble. Our payroll system had always run on mainframes, but we had been able to convert it to run on micro-computers. The main reason they bought us was because it would allow them to take this mammoth system off their mainframe and process it on micro-computers. While the same staff that I worked with at Comcheq is still there and handling the developments, the emphasis has been on converting existing systems rather than on working on new innovations.
Senator Joyal: You now operate the TelPay service. Is a similar kind of company or service system available in the U.S., and do you think it might one day compete with you for the same market?
Mr. Loewen: Yes. Checkfree is quite a large company in the United States. It operates very much like we do, although there are some differences. The company is coming into Canada, but I do not know whether it is coming in with bill payment in particular. The more significant development is the alliance between Microsoft and First Data Corporation in the United States. First Data has done bill payments and handled bank processing for many years in the United States. They are allying with those two, creating a company called MSFD, and they are causing worry for the Canadian banks right now. I understand some agreements may already be in place.
Senator Joyal: In the near future do you expect that there will be substantial differences of competition context or environments for your company, or services like yours, in Canada?
Mr. Loewen: That is right.
Senator Joyal: If the changes which you have asked for are not implemented, do you fear that your position could be jeopardized in a greater way than it would be if the status quo were maintained?
Mr. Loewen: We have been pretty persistent in the past and somehow things never work as well as they should. I would not say that we would go out of business. Quite frankly, something like the Revenue Canada situation, where we may not be able to offer a whole range of payees, is a bigger threat than a competitor is.
I am not worried about Microsoft an a competitor. I just believe it would be better for Canadians to have the opportunity to make a choice. The banks have a similar payee base to the one we have, and they are perfectly free to turn that payee base over to anyone. At present, it looks as though they will turn it over to Microsoft.
Senator Joyal: In other words, you are not concerned by the competition that you might get from abroad; you are more concerned about the rules prevailing here in Canada.
Mr. Loewen: That is my concern. I would like to see lots of competitors. In fact, I would like to be here representing an association, not an individual company.
Senator Joyal: I should like to come back to page 4 of your brief where you refer to the Basle Committee on bank financing transparency.
One of the arguments that major banks and institutions have been putting forward to support consolidation of the sector is the capacity for the Canadian institution to have access to global markets or the capacity to enter new markets.
In view of the experience of the late 1980s -- banks making investments in fields such as real estate -- do you feel the obligation of major financial institutions to disclose information about their investments and activities abroad is enough to meet the objectives of the MacKay report concerning the protection of their shareholders and consumers generally?
Mr. Rutledge: That is a tough question to answer completely. Certainly, individual needs for information can differ significantly. However, what we are all driving for, as is the Basle report, is disclosure of information that enables the reader to assess exposure to risk. Combine that with the management of the organization discussing what your risk practices are, your policies on risk, and how the board of directors ensures that those policies are respected.
That is the best we can do at this point in time. Whether it is enough will remain to be seen. It would certainly be an improvement from where we are currently in the world, generally speaking.
Senator Joyal: Do you not think that if financial institutions have access to our level of capital, they will try to re-invest it somewhere else? Should we not pay greater attention to how the practice of accounting could be refined in order to provide for easier access to risk evaluation of the activities of those institutions abroad?
Globalization, as we have seen it in the last several months, carries not only benefits but also risks. As much as we can establish new rules to allow Canadian institutions to better compete internationally, we must develop a capacity or potential in Canada to evaluate the risks we are taking abroad too.
We must be as concerned about globalization as we are about ensuring competition. Otherwise, the whole system will not serve the interests of the country.
I have the impression that we still have some way to go before we achieve results from the efforts that we should be making.
Mr. Rutledge: We have made great strides in the information that is set forth in financial statements and in the notes to the financial statements. That information is very much along the lines of your wishes. Perhaps it is not going fast enough -- perhaps it is not in as much detail as you would like to have it -- but it is certainly moving in the direction that you are seeking.
One of the cases that I would mention and one that I think this committee is very interested in is the whole area of derivatives. We have come down with an initial accounting standard that requires disclosure of information on derivatives. Some people have said it is difficult to understand the process. This is a very difficult area to begin with. It is difficult to make simple.
We have not yet agreed on measurement standards with regard to derivatives. However, we have come down on the side of disclosing the process and disclosing information that sets forth risk. That is along the lines of what you are considering. When you talk about globalization, we must see more geographical information and a matrix and geographical line of business. We will see that.
Ms Smith: We do have a new accounting standard on segmented reporting which encourages more disclosure of information along the lines of business and geography. It is starting to move.
Senator Joyal: Are those not mentioned in the Basle committee report?
Mr. Rutledge: They meet some of the objectives of the Basle committee. The Basle committee is going further than that. The Basle committee is talking about internal performance measurements by management that are more than just financial.
Ms Smith: I should also add that this is not actually the purview of the Accounting Standards Board. Another committee has been set up by the CICA, because it is not really accounting related. However, there is a committee called the criteria of control committee which is working on the concept of risk -- what it is, how it can be managed, how directors are part of that process. It is also working on external reporting of risks that are key to enterprises -- not necessarily restricted to financial institutions but looking at all entities. It is doing research in that area. The work of that committee will get you closer to the concerns that you have raised.