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The following is an excerpt from the:


Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 36 - Evidence - Afternoon Sitting

TORONTO, Monday, November 2, 1998

The Standing Senate Committee on Banking, Trade and Commerce met this day at 1:00 p.m. to discuss the present state of the financial system in Canada (Task Force on the Future of the Canadian Financial Services Sector).


Senators, our next witnesses are from the Investment Dealers Association of Canada.

Senator David Tkachuk (Deputy Chairman) in the Chair.

The Deputy Chairman: The Investment Dealers Association of Canada is represented today by Mr. Joseph Oliver and Mr. Ian Russell. My understanding, gentlemen, is that you have distributed a summary of your brief which you will present, and then we will go to questions. Please begin.

Mr. Joseph Oliver, President and Chief Executive Officer, Investment Dealers Association of Canada: Ladies and gentlemen, I am Joe Oliver, the president and CEO of the Investment Dealers Association of Canada. I am joined today by Mr. Ian Russell, Senior Vice-President, Capital Markets.

We very much appreciate the opportunity to present our views on the future of the financial services industry, of which our members are a critical part. How legislators deal with the task force recommendations will affect the future direction of this vital industry. It will also determine the impact on the Canadian people and our economy as we move to the new millennium.

We have filed a formal submission and I plan to summarize the key points. Of course, we are ready to answer questions.

I will provide a brief background on the industry and the association. The IDA is Canada's national, self-regulated organization for the securities industry. Our mission is to regulate the business activity of member firms and also the selling practices and proficiency requirements of investment advisers. The association also represents the industry to regulators, governments, the Bank of Canada, and the public.

There are 184 member firms, including large, full-service firms, as well as medium-sized and smaller houses, providing a variety of financial advice and trading and underwriting services to retail and institutional clients from coast to coast. Some of them are integrated and bank-owned. Others are independent. Some are Canadian affiliates of foreign security firms and banking organizations.

The size and growth of the industry is significant. Regulatory capital is $8 billion; client assets have reached nearly $350 billion; and there is much product innovation and liquidity, which is critical to the market's viability.

Our industry plays a key role in the Canadian economy and member firms directly employ over 34,000 people. For the last three years, we have raised between $15 billion and $20 billion in equity capital which is, proportionately, double the amount of equity capital raised in the United States. Individuals increasingly rely on our industry to provide the capital they need for retirement.

It is important to realize that Canada is shifting from a nation of savers to a nation of investors. Mutual fund assets have grown from $33 billion in 1987 to something in the order of $275 billion this year. For the first time in history, we are approaching a point where Canadians will have nearly as much invested in mutual funds as in savings accounts and GICs. That represents a real sea change in market participation, with 38 per cent of the Canadian public currently involved in the market. Individuals realize they must increasingly rely on their own resources to provide for the future, rather than on the government. It is critical, therefore, that the industry operates fairly and efficiently, because Canadians are depending on us as never before.

As to the specifics of the task force recommendations, as a general proposition we believe that enhancing competition within the financial services sector is in the best interest of all Canadians. Our industry is not nearly as large as other industries, or as our competitors in the United States, Europe and Asia, but we welcome competition, provided there is a level playing field.

We feel competition leads to competitively priced financial products and services. That benefits consumers, enhances innovation in the marketplace, is efficient in terms of forming capital, and provides the greatest potential for employment. We are therefore pleased with the emphasis on stimulating greater competition, and urge you to move expeditiously on the recommendations.

Our focus is on issues that directly affect the securities industry, such as opening up the payments system and harmonizing regulations. The former is favourably addressed by the task force. The latter is also referred to, but depends to a very large degree on provincial securities commissions, and on the developing relationship between OSFI and the Canadian Securities Administrators, or CSA.

Other issues often impact profoundly, but indirectly, on our industry. Issues such as mergers, ownership, power structure, and foreign competition, impact directly on the banks. Understandably, we are more concerned with the first set of issues than the second.

I will briefly review our reaction to the key proposals. We strongly support the proposal that non-deposit-taking institutions should join the Canadian payments system, provided they meet reasonable criteria for solvency, liquidity, and regulation. Our member firms should be eligible for membership in the Canadian Payments Association.

Access to the payment system would enable security firms to offer chequing privileges on client accounts directly, and would create a more level playing field for security firms to compete with banks for client business and financial assets. It would also enable our customers to fully engage in electronic commerce through direct access to the Interac system.

We also agree that entry barriers for foreign banks, especially prohibitions on branching, and capital requirements, should be eliminated or substantially reduced. This would promote a more competitive banking sector.

We are pleased that the task force agreed with our submission that federally regulated institutions should be given the flexibility to organize into holding company structures. This would level the playing field on minimally regulated businesses such as wholesale leasing and financing.

The IDA committee's original submission to the task force supported a change in the "big shall not buy big" policy, although we acknowledge that some member firms do not agree with this position. I think you have confronted that issue already. The task force recommended that federal authorities vet the mergers to preclude adverse consequences for competition, and that is the position of our association.

The task force also recommended more flexible accounting rules to facilitate acquisitions in both domestic and foreign markets. In our view, the rapid integration of capital markets in North America necessitates that the Canadian Institute of Chartered Accountants aligns Canadian accounting rules as much as possible with U.S. GAAP, particularly in respect of business combinations. We also believe that the provincial securities commissions should permit some flexibility for listed Canadian companies in applying Canadian and U.S. accounting rules. The goal is to give those companies more scope to undertake mergers and acquisitions and thus facilitate expansion. It would put Canadian companies on an equal footing with their U.S. competitors.

We do not believe that investor protection would be compromised by this move. There are often differences without a policy rationale, and conformity or harmonization is in the interests of the Canadian capital markets.

The task force recommends abolishing special capital taxes on financial institutions. If that is not feasible, it proposes more uniform application of capital tax and shifting the tax burden to corporate profits, and we agree with that thrust.

On a subject more directly related to our field, the task force recommends that governments work to eliminate overlaps in prudential regulation, both between federal and provincial governments, and among the provincial governments and the securities commissions.

The collapse of the four pillars enabled banks, insurance companies, and securities firms to offer retail and institutional clients a wide range of products and services. They include debt and derivative products, private placements, mutual funds, and segregated funds. The result is significant differences among institutions in capital rules and sales practices. In some cases, there are regulatory gaps, weak protection for consumers, and increased financial risk for institutions. The different rules often resulted in an unproductive shifting of business to organizations which were believed to be subject to more lenient regulation. This phenomenon, known as "regulatory arbitrage," weakens the overall integrity of the financial system.

We urge the provincial and federal regulatory authorities to achieve greater consistency in regulation. Market participants carrying out similar financial functions should be regulated in the same way.

In fact there has been greater cooperation between OSFI and the securities regulators over the last few years, particularly over banks' securities affiliates. It is important to minimize regulatory overlap, since the IDA has regulatory responsibility for financial and sales compliance of these bank-owned affiliates.

OSFI obtains information from two sources, the banks' own internal audits and the IDA's financial compliance reviews. There are ways to enhance the process so that the IDA can meet OSFI's need for comprehensive and timely financial information, as we have discussed with them.

If both the securities commission and OSFI use the Investment Dealers Association as the single self-regulator, duplication can be avoided and compliance reviews of investment firms limited to one external auditor.

The task force also recommends that securities salespersons meet appropriate proficiency standards that can be harmonized across provincial jurisdictions. Currently, federally regulated institutions that sell securities-related products to the public are not always subject to the same proficiency standards as our member firms.

The IDA is Canada's only national entity with delegated responsibility for securities regulation and investor protection. As a result, it is in a unique position to assist the Government of Canada and the provincial authorities in coordinating and meeting consumer protection goals and policies in the securities field.

At the request of the CSA, the IDA recently assumed responsibility for establishing and managing the Mutual Fund Dealers Association of Canada, the MFDA. This is a self-regulatory organization for fund distributors that will be jointly governed by IFIC and by the public directors. Banks and other federally regulated institutions selling mutual funds will be required to join the MFDA, as will their 50,000 individual registrants. This is a very large and important regulatory endeavor.

The IDA and the four stock exchanges have also proposed a standard for member firms' employees wanting to call themselves "financial planners." This initiative addresses the public interest requirement that individuals using the designation possess a high degree of proficiency and experience. The public thinks people using the term have it, but that is not always the case. Our goal is to develop a standard that obtains regulatory approval and is accepted outside the securities industry, so there can be a uniform standard across the country.

The integration of the financial services industry, particularly the formation of financial conglomerates, the "disintermediation" of personal savings into mutual funds and the impact of globalization, all these trends represent a significant challenge to Canadian policy-makers, and the challenge is to encourage efficient and competitive financial institutions, fair play for consumers, and efficient and liquid markets for issuers and investors, and the IDA stands ready to assist in this critical task.

Senator Oliver: A number of witnesses who have appeared before the committee have told us that the MacKay task force report is deficient in that it suggests that foreign banks would be prepared to come into Canada if just a couple of minor changes are made.

In your brief on page 4, you say, under the heading, "Facilitating New Entrants to the Market":

We agree that barriers to entry for foreign banks, notably prohibitions on branching and capital requirements, should be eliminated or substantially reduced. This would promote a more competitive banking sector.

However, some foreign banks have told us that the cost of going into branching is much too high, and that it is really not what they want to do. They are much more interested in commercial and corporate banking in large urban areas. That being the case, do you think that the entry of foreign banks will create competition across the board and across this country?

Mr. Oliver: We do not believe that this will appeal to every major foreign bank. However, the issue is whether it will appeal to some, and therefore, will engender the sort of competition we are looking for.

The threat of it happening will, of course, encourage Canadian banks to be as competitive and as consumer-oriented as possible, but we are not, by suggesting an opening up of competition, saying that it will guarantee that foreign banks will come in but, generally speaking, that is the approach which leads to more entrants, greater efficiency, and a broader choice for consumers.

Senator Oliver: If it costs $750,000 to start up a branch, and if it takes five years before any profit can be seen, not many good companies will be willing to wait that long, or is that not the case?

Mr. Oliver: Clearly, a number of large foreign banks have the economies of scale to set up branch banking in a less costly way than someone else would if they were starting from scratch. However, I cannot comment on those specific numbers other than to say that they seem rather high.

Mr. Ian Russell, Senior Vice-President, Capital Markets, Investment Dealers Association of Canada: I agree with my colleague Mr. Oliver, but I believe that the way in which foreign institutions offering retail services will come into Canada will be quite different from the paradigm we have seen in the past where, as you say, costs made it very prohibitive. I think ING Bank is an example of a bank coming in through the electronic Internet to offer banking services.

That has proved to be fairly effective in building a retail business. They have been successful in doing that. I would see other foreign institutions penetrating the retail market in the same way.

Senator Oliver: Mr. Baillie just said -- and it coincides with what a number of witnesses have told us -- that one of his impressions from reading the MacKay task force report is that, if all the recommendations were implemented, there would be too much regulation and too heavy a regulatory burden, quite apart from the normal regulations that deal with coercive tied selling and privacy, and so on.

One of the recommendations is that there be legislation to ensure that banks, should they get into selling insurance in their branches, and so on, do not get involved in coercive tied selling.

Do you find that there is an overabundance of new regulation proposed in the task force report and, if so, what areas do you think should be left to market forces?

Mr. Oliver: I think we require a mix.

Clearly, the recommendation of a holding company structure would permit the banks to escape regulation to the extent that the business activity would not otherwise be regulated on a free-standing basis, and that is a movement in the other direction.

The suggestion related to tied selling is not unduly coercive because, clearly, there is a fundamental distinction between tied selling and cross-selling and, as long as the definition is a reasonable one and does not permit cross-selling, then you would be permitting the banks to offer a range of products and to give a benefit to consumers in terms of choice and having them take advantage of some of the economies of scale of the banks without forcing them to participate.

Senator Oliver: The MacKay report deals with coercive tied selling. Can you comment on that?

Mr. Oliver: Yes. No one can really object to a rule which specifies that you cannot coerce customers to use one service if they want to buy another one. I do not think that is excessive.

In our industry, we are very mindful of the fact that the Canadian capital market, while a very efficient, well-respected and well-regulated market, is small. It is about 2.5 per cent of the global capital market and probably declining because of the emergence of India and China, which are so large that even a tiny percentage increase can have a major impact on the size of the global market.

The fundamentals cannot be changed. We will never be a huge capital market in the world but we can be as efficient and as competitive as possible. If we are not, we really will become a backwater.

So regulation should keep a focus on its mandate. In the case of securities, it is inventor protection. It should not extend itself. There should only be enough regulation to achieve the purpose.

Senator Oliver: Then the market should take over.

Mr. Oliver: Yes. The burden of proof should always be on the regulator to justify from a public policy perspective what is being suggested and what would constrain commercial behaviour.

Senator Oliver: I would like to know what your organization's position is on the MacKay task force recommendation that banks be allowed to sell insurance in their branches and also get into the auto leasing of light vehicles.

Mr. Oliver: This area is a little outside our field and I think that we generally support those recommendations, but it is not really directly related to what we do.

Senator Oliver: Do they sound like they are banking functions to you, financial functions?

Mr. Oliver: They are financial functions. We have heard a hundred times that banking functions are what people declare them to be. I mean, the nature of banking is in the process of change as the integration proceeds apace. So I suppose traditional descriptions of what it was are not necessarily a prescription for what it ought to be.

Mr. Russell: Senator, you talked about the chapter in MacKay regarding empowering the consumer, the list of potential rules and regulations, tied selling, coercive behaviour, privacy protection and disclosure proficiency. I think that it is inevitable that as financial institutions generally offer a wide range of products, that it becomes important to focus on their dealings with their clients in those particular areas.

In Mr. Oliver's remarks, I noted a real potential here for the federal regulators to work closely with the CSA, the Canadian securities administrators, who have the oversight for the market conduct of securities firms that are selling complicated products. They have a lot of expertise, particularly in the areas of disclosure and proficiency requirements. Some efficiencies may come from regulation that could come from profitable collaboration with the provincial regulators.

Senator Di Nino: First of all, how many members are in the IDA?

Mr. Oliver: There are 184.

Senator Di Nino: And all the major bank-owned investment dealers and brokers are part of it?

Mr. Oliver: Yes, they are.

Senator Di Nino: Is membership in IDA based on size of company and payment of fees per se?

Mr. Oliver: No. There are certain specific objective criteria. In most provinces there is either in law or effectively in practice a requirement that a securities firm be a member of a self-regulatory organization. That can be either the IDA or one of the exchanges.

In Ontario, a policy, which is put out for public comment, will achieve that same result. We expect perhaps another 50 firms to be joining the IDA in the next year or two. Every firm that puts itself out as a securities firm will be subject to the same rules and monitored in the same way as every other firm. That creates a level playing field of investor protection as well. It is the secondary point of competition.

Right now, I would say that about 95 per cent plus of the business in the country is done by IDA members.

Senator Di Nino: I am trying to determine whether the banks have an undue influence on the organization because of their predominance in size, as far as the major institutions in your industry are concerned.

Mr. Oliver: The banks have not exerted a direct influence on our association. Their subsidiaries are large and important members of the organization but I have not encountered a bank agenda being advanced by these firms. They are important and responsible contributors to the governance of the organization.

Mr. Russell: Roughly speaking, Senator, in terms of the structure of the industry, as Mr. Oliver said, there are 188 member firms in the IDA, of which six are bank-owned members. They would account for roughly half of the capital in the industry. So there is a very sizeable share of the industry that is made up of individual firms. Therefore, the bank-owned dealers do not dominate the SRO system in Canada.

Mr. Oliver: The other thing I should say is that we have a very elaborate governance structure, which involves district councils. We have some 700 people in the industry participating in a variety of committees. Our board is highly representative of all the regions in the country. We have quite a few informal rules that assure that there is sufficient rotation between bank-owned and non-bank-owned chairmen and that we have a board and an executive committee that reflects the diversity of the industry.

Senator Di Nino: Thank you. I have two specific questions on your report or on your presentation. On page five you say that the Canadian Institute of Chartered Accountants "should conform Canadian accounting rules as much as possible to U.S. GAAP."

It is interesting how you phrased that. It was not the other way around. As you know, there is some argument going on between the CICA and GAAP, particularly relating to the accounting of goodwill and other areas. Why did you choose this?

Mr. Oliver: Let me respond to that. I have had a fair amount of interest in this issue. The IOSCO, which is the International Organization of Securities Commissions, is an organization that represents all the securities commissions around the world. Affiliated with that organization are the self-regulatory organizations and stock exchanges.

I happen to chair a committee of those affiliated members, and we have been discussing this issue. The issue of international accounting harmonization may not be a barn-burner to the press, or maybe even to the public, but I have to say that it is an important question.

There is no doubt that the American rules have an influence because of the size and the dynamism of the U.S. capital market. So what we are looking for is sort of an accounting Esperanto, a common numerical language that people can understand around the world. When they pick up a prospectus or an annual report or a quarterly statement from a company in Germany, it has the same meaning as it would if they were reporting under Canadian or U.S. rules. That is not the case.

There is the Daimler-Benz example, where they were showing a profit in Germany, but under U.S. rules they would have shown a loss.

So what is an investor to think of that? While that whole effort is going on, we, in Canada, have to decide where we will position ourselves. They are 10 times our size. We should not be compromising on matters of principle. We should not see our basic values eroded but I have to say, on a matter of an accounting rule, does it really matter? I think the key thing is that we sort of eliminate the differences where, as I say, there is no distinction, and let us get on with it. There is a little bit of pride. There may be a bit of proprietorship on the part of our accountants. But the bigger interest in the capital market surely is served by rules that are more similar. We cannot get the elephant necessarily to go our way. You have to distinguish, it seems to me, when it is important and when it is not.

Senator Di Nino: Your opinion is very useful because this is obviously an issue that we are discussing. I take it then that you are not in agreement with the CICA that, for the purposes of proper disclosure or more fully disclosing items, the Canadian system would be better. Obviously, you disagree with that.

Mr. Oliver: On that particular one, it could well be that the Canadian approach is sounder. It also happens to be the approach taken by more countries around the world. But the fact is that the U.S. market is the most important. Our banks face competition from the U.S. banks, and our banks are put at a disadvantage. Should they really be put at a disadvantage for accounting rules, for the purity of an accounting rule? I think not.

Mr. Russell: Senator, if I could just add to this. In Canada, we are in the middle of a North American trading block under the free trade agreement.

As a consequence, there are increased integrated capital flows between all three countries. Our capital markets have been integrating dramatically over the last four or five years. It seems to make common sense that accounting rules, whatever they are, have to be the same. They have to be harmonized to promote the free flow of goods and services and efficient capital markets. In that process, markets do not wait for accountants, unfortunately.

That is why we are suggesting that if the U.S. GAAP does not look like it is changing to international GAAP, which may be a higher standard, then perhaps, in the interim, we should go to U.S. GAAP in the interest of harmonization.

Senator Di Nino: Thank you for that. I have one other quick question on another subject. You talked about opening up the payments system to allow the investment dealers to enter, obviously, for the purposes of allowing you to be more of a deposit-taking type of institution; is that correct?

Mr. Oliver: Well, yes, in order to level the playing field and broaden consumer choice, I guess. There would be an advantage for a brokerage client to be able to use a debit card and to take money out of an account that has cash in it.

Mr. Russell: Senator, in effect, our members already have client deposits in another name. I mean, client deposits contain significant amounts of cash, so it would be an opportunity for clients to have that opportunity.

Senator Di Nino: I understand that. Let us assume that that happens. Would you also like to be a member of the Canada Deposit Insurance Corporation?

Mr. Oliver: There has been no request to that effect. I guess the reason is that we have a Canadian investor protection fund, which is now up to some $150 million. It is not quite like a guarantee by the Government of Canada, but the fact is that no individual has ever lost money as a result of the bankruptcy of a member firm.

We have done elaborate statistical and actuarial analyses. We feel very comfortable that the fund, the way it is constructed with the backstop of the members, will be adequate, going forward. The members have put the money in and it has not cost the public anything to build a fund, nor has it cost the public anything to discharge the obligations as a result of this limited number of bankruptcies. So far, the system is working quite well.

Mr. Russell: The protections are the same as the CDIC, $60,000 cash and $500,000 in unregistered securities.

Senator Di Nino: In the immediate future, you would not be looking for admission into the CDIC.

Mr. Russell: It would not make sense, I do not think.

Senator Callbeck: Welcome Mr. Oliver, Mr. Russell. I just want to ask a few questions about the complaint mechanism or procedure regarding investment dealers.

I am not sure whether that is something you get involved in or whether it is left up to the provincial securities commissions.

Mr. Oliver: We do get involved, and I would be happy to describe the basic procedure. We would tell a client who has a complaint with a financial dispute or some other dispute with a broker to follow a number of steps. The first is to try to resolve it privately, quietly. Usually it can be done that way. If it is done in a less contentious way, it often could be done quite quickly.

If that does not work, then they should move up to the management of the firm perhaps, depending on the size of the firm, the office manager, sales manager or the president of the company.

If that does not work, register the complaint with the Investment Dealers Association. We would look at it, see whether a formal investigation is required; if it is, we would pursue that. We have a number of mechanisms to address the issue, including disciplining the firm and the individual up to the point of removing the individual from the business.

If there is not satisfaction at that stage, then the individual can go to the local securities commission.

Now, in addition to that, we have an alternative dispute mechanism in two provinces and will soon have one in Ontario and hopefully within a year in the rest of the country. The procedure would be optional for the client but obligatory for the firm and would address financial disputes of up to $100,000. It would be an arbitration system run by a third-party arbitrator, with rules of procedure that are recognized as appropriate. We would like to amplify that with the mediation system and perhaps a rapid third-party evaluation system.

The objective here is to provide a less costly, more rapid, less contentious system for people who have complaints or financial disputes. For the economic reality is that it is very difficult for an individual to use the court system in any productive way for disputes of under $100,000. This would give the individual that opportunity.

There has not been a huge demand for it in Quebec or British Columbia to date, but I think it is an important process to put into place.

It has taken us a bit of time to implement in Ontario because of the difficulty in finding a highly reputable third party to do it for us. We did not think it was appropriate for the IDA to do it because the optics would be that perhaps the process is not objective.

The Deputy Chairman: Is it more difficult to find someone highly reputable in Ontario?

Mr. Oliver: No, that was not the implication, although I can understand why you might have read that into it.

In Quebec and British Columbia, there are government-supported arbitration centres. Quite frankly, there is not much money in running it.

In the United States, it is effectively obligatory for the client and it is run by the National Association of Securities Dealers, which is sort of the SRO equivalent of the IDA.

So for their troubles, first of all, they are criticized as being biased even though there have been analyses to suggest that they are not. Also, from time to time they are sued because there is no ability to appeal an arbitration. So, out of frustration, people who have lost decide to sue the organization that is running the system.

We think that finding someone, a third party from outside, to handle it makes a lot more sense for everyone. That is what is taking a bit of time. But we are virtually there and I think that is an additional mechanism, senator, to deal with complaints.

Senator Callbeck: The MacKay report lists a number of recommendations for federal financial institutions, but they also make a suggestion that the federal and provincial institutions should have one simple redress system.

Do you think that is possible and what do you think of that?

Mr. Oliver: I think the issues are somewhat different. I would have no problem with the banks using a comparable sort of system if they want to. I think that what we are trying to do is set up an alternative dispute resolution system which is fair, inexpensive, easy to access, and has a certain degree of expertise.

The problems that arise tend to be suitability issues. When people complain, it is typically because they have lost money; they feel that they should never have invested in individual stock. It was just inappropriate for them. They cannot sue merely because the market has gone down. However, they can ask for redress if, let us say, they are of limited means or on a fixed income and if somehow a wild, highly speculative resource company was recommended to them.

That kind of issue arises and so a certain amount of specialization and expertise works well. I am not acquainted with the nature of the disputes for the banks. I suspect that they have to be somewhat different.

Mr. Russell: I think, if you look at it historically, the kind of financial products that banks and other financial intermediaries offer the public had an unchanged par value. When you bought it, it had a certain value, and when it matured it had a certain value. It did not carry any market risk and it did not carry credit risk either, to the extent that it was backed by a quality, federally regulated institution.

Because of what is happening in the financial marketplace and the distribution of a wide range of products, in fact, financial intermediaries are distributing to their clients products that have market risk and credit risk.

I think MacKay is really anticipating a problem that will inevitably be there because clients will buy products that they do not understand. They will buy products that fall in value and there will be a lot of issues related to customer redress and that whole process has to be worked out within the context of the federally regulated institutions. As Mr. Oliver has said, it is quite refined in the securities industry.

Mr. Oliver: The other thing I should say is that there is clearly a restructuring going on at the banks. The Royal Bank just last week indicated a restructuring of their organization into a wholesale and retail bank.

So the integration proceeds apace and, as a result of that, I think that bank members of the IDA will have to offer the same kind of arbitration service to their clients as RBC Dominion Securities. So it is coming their way.

In addition, the MFDA, I would think, should contemplate the same kind of structure. It only makes sense, since a large number of the salespeople selling mutual funds are bank employees. They would be caught up in that, too.

So inevitably the financial institutions will be involved in the type of ADR services that we offer but they may well want to maintain a different kind of service for matters relating to what used to be purely banking.

Senator Kroft: Thank you and welcome. I have just one line of inquiry. The MacKay report indicates that your association is one of those groups that has expressed interest in being part of the payments system. You have certainly put it in as one of your objectives.

I have read in your expanded business power section that you think they should join, provided they meet reasonable criteria. It seems to me, as you read it, I heard a little bit of extra emphasis on the word "reasonable."

It seems clear to me that there is a huge range of size within your membership and that size probably reflects differing capacities.

I am just a bit curious as to how this would play out. If you go to the lowest level that would be appropriate for your smallest members, that might then move out of an area that is satisfactory broadly in the payments system.

I am just not sure how you would go about that, and that leads me to the next part of my question. Would it be an all or none thing or, if not, then obviously you set up certain competitive advantages. I am just wondering how you would handle this first.

Mr. Oliver: I guess the emphasis on reasonableness related to some comments that I had heard made by other witnesses in some of the questions by your committee on that issue. I think if you are setting up criteria, they should not be used as a barrier to keeping everyone out.

But I am not prepared today, I have to say, to give you a detailed answer into what these specific criteria ought to be.

Mr. Russell: If I could just elaborate a little bit on that. I think what we had in mind in terms of access to the payments system and participation on the payments system committee was that those institutions must meet proper regulatory standards. Clearly, federally regulated deposit-taking institutions meet the criteria.

Once you move away from deposit-taking institutions, then you may have to adopt somewhat different criteria, but the fundamental bottom line is that the institutions must meet high standards of regulation, whatever they do. We certainly had in mind that all members of the IDA member firms should potentially be members of the payments system because they are all subject to the same standard of regulation. This includes the large bank-owned dealers, the large independents, and the very small firms that, for example, while they carry very little capital, are limited in the business and the risks that they can still carry on.

Whether the small members of the IDA would actually join really gets to the question of the distinction between whether they meet a regulatory standard and whether they meet the economics to join the system because, clearly, there will be significant expenses involved in providing that service to their client. So many small members may decline to join.

But I think what we had in mind is that, at least on regulatory criteria, they should all be equal in terms of meeting the standard.

Senator Joyal: Thank you, Mr. Oliver and Mr. Russell. This morning we had as the first witness a CDIC representative and I wonder if you had an opportunity to read the brief or to be briefed on it.

Mr. Oliver: No. I am sorry, I did not.

Mr. Russell: No. I did not.

Senator Joyal: I would certainly be willing to give you a copy of it. One of the points they made is that in opening the payments association to the life insurance versus the investment dealers and mutual funds, they saw much broader complexities of system. I will quote their conclusion on page 10:

Another factor is trying to assess the extent to which this proposal carries with it potential for a huge increase in the government's financial commitments.

As I understand, the investment business in Canada is divided among 184 members. As you have said, each one is equal in your association. Now, a vast majority of the regulations under which you perform are provincial regulations. You are not all in the same position as the banks in terms of deposit taking nor in the same position as life insurance in terms of subscriber commitments. Could you help us with some of the parameters within which you can work out those difficulties within a reasonable period of time? After all, we do not have a national security commission that would at least streamline and harmonize the regulations into a coherent, efficient and quick way. You are probably concerned about the recommendation. You would like to see that proceed as soon as possible. It is in your business interest to do so.

Could you tell us about the crash program you are putting together to help the government to implement those recommendations?

Mr. Russell: The only point that I would be prepared to make at this juncture, Senator, is that, first of all, there is already a precedent in the Canadian payments system to recognize provincial regulation. The Alberta treasury branch is a member of the CPA. They are regulated provincially.

So I do not think that in itself should be a barrier, but I also agree that securities firm are far more complex in terms of the financial business that they carry out, although financial intermediaries themselves are becoming much more sophisticated in what they do. I can talk more about the process here. We have been involved in the last month with the Department of Finance in terms of this review, providing them with a lot of background information on our industry, how it is regulated, our obligations as a recognized self-regulatory organization with the Ontario Securities Commission.

It seems to me that the department is working quite diligently and quickly in trying to develop the kinds of criteria that you are talking about, but at this point it would be premature for me to make a comment on what the criteria would be. I think they are just scoping that out at the moment.

Mr. Oliver: I have just one other point on provincial regulation. There has been in the last several years a major effort to harmonize the rules, and the approach to financial compliance and capital rules is effectively uniform across the country as it applies to security dealers.

Senator Joyal: It is as if the life insurance company would be in a better position at this point in time to be admitted into the payments system. The investment dealers and the mutual funds would be delayed, taking into account the implementation of a regulatory system.

Mr. Oliver: I would just say that other industries are unlike ours. Financial problems, bankruptcies and the issue of public money reflect on us.

So I do not feel that there is a need to delay in respect of the investment dealer community. But you need more detailed answers and we will be working on them.

The Deputy Chairman: I only have one question. You mentioned the competition for deposits and the fact that over the last while banks have gotten less money, and more people are investing. I mean, that is because interest rates are low and market conditions are good, right?

Mr. Oliver: In part.

The Deputy Chairman: Do we have a responsibility when we make our recommendations to look at the long range? In other words, do you think this is not a permanent part of our culture? I do not mean interest rates and investment because that is bound to change. But do you think, even if interest rates go up, that people will still be more prone to invest even when the market may be going down?

Mr. Oliver: You are asking not a cyclical-type question but a secular, structural one. When people start participating in the marketplace, it seems to be a demographic phenomenon that does not retreat other than in a certain cyclical way.

I mean, you can go back to the early 1960s, when inflation and interest rates were what they are now, but participation in the marketplace was very different. As I mentioned in my presentation, individuals are realizing increasingly that they have to rely on their own resources. They have more resources now. The demographics are obviously a major part of this whole phenomenon, and the demographics do not change overnight. It is one of the slower moving and highly predictable factors in society, obviously.

I think people are more knowledgeable and they look at the longer-term trends in the industry in the equity markets. Taking a longer view, it has been far preferable to have invested in the market in a prudent way than to have invested in savings accounts, although there are no guarantees. But that very much depends on individual circumstances and what the balance should be and so on.

So, no, I think this is a phenomenon that is likely to increase. I think individuals will be more involved in the market, if anything. That is not to say, that six months from now it may decline. In fact, mutual fund assets will be up to $325 billion. Now they are at about $275 billion. Part of that is just the 25 per cent decline in the market. I do not think it has net redemption, but that is the nature of the way the way the equity markets work.

Mr. Russell: Another way of coming at your question, Senator, is by looking at the way institutions are positioning themselves. The kind of structural changes that we are seeing, the acquisitions both in the Canadian and the U.S. markets, I think are indicative of corporate strategies that see this as a permanent secular change.

The amalgamation of Salomon Brothers, Smith Barney and Travelers into Citigroup really sets up a global investment commercial bank to offer a full array of products and services. I think that kind of structural change is a recognition that consumers are much more sophisticated and will demonstrate that over time.

In Canada, we have seen a steady integration of the investment dealer and the banks in trying to develop multiple product channels to meet their clientele.

The Deputy Chairman: There are no further questions. Thank you very much, gentlemen.

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