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Reforming Canada's Financial. Services Sector – What Needs to. Follow from Bill C8. DAVID W. PETERS. School of Business. Lebanese American University.

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Critical Essays on Canadian Public Policy / Essais critiques sur les politiques canadiennes d’intérêt public Reforming Canada’s Financial Services Sector – What Needs to Follow from Bill C8

Reforming Canada’s Financial Services Sector – What Needs to Follow from Bill C8 DAVID W. PETERS School of Business Lebanese American University Beirut

DOUGLAS D. PETERS Financial Consultant Toronto, Ontario

La nouvelle legislation fédérale réglementant les institutions financières a été présentée au Parlement sous le nom de Projet de loi C38 et un projet similaire, le Projet de loi C8, a été présenté à nouveau et est devenu loi au printemps 2001. Cet article offre une analyse critique de la nouvelle législation. Cette législation ne prend pas en compte les importantes recommandations de la Commission MacKay. Elle néglige les intérêts des consommateurs et retient les règles anti-compétitives qui concernent l’assurance et la location d’automobiles. Elle complique encore les rapports avec une nouvelle Agence Financière pour les Consommateurs et propose de supprimer la limitation de la propriété à 10%, en usage jusqu’à présent. Cette législation ne répond pas aux objectifs définis dans le Livre Blanc du gouvernement. New federal legislation regulating financial institutions was introduced into Parliament as Bill C38 and a similar bill, Bill C8, was reintroduced and passed into law in the spring of 2001. This paper is a critical analysis of the new legislation. The legislation does not address many of the important recommendations of the MacKay task force. It ignores consumer interests and retains the anti-competitive rules for insurance and automobile leasing. It adds complications with a new Financial Consumer Agency and proposes to remove the 10 percent ownership restrictions, which were valuable in past years. This legislation fails to meet the objectives of the government’s White Paper.

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504 David W. Peters and Douglas D. Peters INTRODUCTION

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he most extensive review of financial institution legislation was introduced into the House of Commons in June 2000 as Bill C38 (House of Commons 2000). That bill, however, died on the order paper when the election was called in the fall of 2000. With a new government elected, a new bill, Bill C8 (House of Commons, 2001), was reintroduced. This new bill is essentially the same as Bill C38 but with some minor amendments. Bill C8 was passed by Parliament in the spring of 2001.

by both customers, competitors, and the financial institutions themselves. It was felt that a more intensive study was needed to prepare the structure of the financial institution legislation for the twentyfirst century. The White Paper of June 1996 set up a Task Force on the Future of the Canadian Financial Services Sector (ibid.). That task force, chaired by Mr. MacKay reported in September 1998 (Canada. Department of Finance 1998). Bill C38 followed from the recommendations of the MacKay task force, the Commons committee’s deliberations on those recommendations (House of Commons 1998), and the government’s White Paper of June 1999 (Canada. Department of Finance 1999).

BACKGROUND TO THE LEGISLATION There have been a number of important events that preceded this most recent piece of legislation. Major changes were made to financial institution legislation in 1992. Those changes were the culmination of a long series of discussions and finally resulted in a set of bills that treated the banking, insurance, and trust sectors in a similar manner. This legislation was slated for review in only five years (the previous Bank Acts were subject to ten-year reviews) as the major changes needed to be considered more quickly, in case they were not working effectively. The legislation was reviewed by White Paper in 1996 and legislation, Bill C82, followed in 1997. Most felt that the changes in 1992 were effective. Thus, Bill C82 made a number of important changes but, in effect, it left the basic structure unaltered (House of Commons 1997). When the White Paper was released in 1996 there was one important additional factor (Canada. Department of Finance 1996). Major changes in the technology, competition, and the internationalization of markets were in the offing or already present. Some of those factors already present at the time were the great changes in the availability and use of financial derivatives, the increased use of electronic payments and the decreased use of cheque payments, and the greatly reduced cost of communication and computers as well as the increased computer usage CANADIAN PUBLIC POLICY – ANALYSE DE POLITIQUES,

LEGISLATION AND POLICY FRAMEWORK: BILL C38 AND BILL C8 There were a great number of changes proposed in the original Bill C38 and the new Bill C8. The announcement of the bill stated that the changes included measures to promote efficiency and growth, measures to foster greater competition, measures to protect and help consumers, and measures to improve the regulatory environment (Canada. Department of Finance 2000). These are a useful set of objectives and many have been well established. As well, they are a good set of objectives for examining the new legislation.

Efficiency and Growth The old ownership rule that one shareholder (or a related group of shareholders) can own only 10 percent of the stock of a schedule one bank was to be changed. For banks with equity capital over $5 billion an investor may own up to 20 percent of any class of voting shares or 30 percent of any class of non-voting shares. The reason given was to enable these institutions to enter into share exchanges, alliances, or joint ventures. A new facet was to be the provision for regulated non-operating holding companies. The intent was to allow financial institutions more latitude in the arrangement of their affairs. But the holding VOL. XXVII , NO . 4 2001

Reforming Canada’s Financial Services Sector – What Needs to Follow from Bill C8 companies would still be regulated. The legislation proposed that a broader range of investments would be permitted, including e-commerce investments. Choosing the holding company option could raise tax issues and the Department of Finance stated that they would work to make such a conversion tax neutral. The legislation proposed that there would be a formal merger review process for banks with over $5 billion in equity that will include public input, reviews by the Competition Bureau, the Office of the Superintendent of Financial Institutions (OSFI), and importantly, the Commons Standing Committee on Finance. If conditions were placed on a merger, the legislation would have provided sanctions that could be imposed.

GREATER DOMESTIC COMPETITION The bill proposes a number of changes in ownership rules that were intended to increase domestic competition, such as there would now be three classes of banks based on the size of equity: large being over $5 billion, medium $1 billion to $5 billion, and small being less than $1 billion. Large banks would be widely-held and subject to the rule that would limit individual holdings to 20 percent; 1 medium-sized banks could be controlled but must have a public float of 35 percent; small banks would have no restrictions. Existing schedule one banks would be subject to the widely-held rule, unless the minister approves a re-categorization. The newly demutualized insurers would have no mergers or acquisitions until 31 December 2001. During this transition period, limits would be placed on individual holdings of shares of demutualized insurers of 20 percent for large companies and 10 percent for small companies. In 2002, demutualized insurers with equity over $5 billion would be required to be widely held but others could be closely held. To increase the number of new entrants the bill proposed to reduce the capital requirements for a new financial sector entrant to only $5 million capital rather

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than $10 million. But each entrant would still be subject to a “fit and proper” test. Credit unions were proposed to be allowed to set up “a single national service entity” to improve their national structure outside Quebec. Foreign banks have been operating in Canada for decades and this legislation recommended only conforming changes to the existing policy framework.

Consumer Interests A major change was proposed in the establishment of a Financial Consumer Agency of Canada (FCAC) and a Canadian Financial Services Ombudsman (CFSO). This new agency was proposed to monitor the consumer-oriented provisions of federal statutes and would have penalty-imposing abilities. The CFSO was to replace the Canadian Bankers Association Ombudsman. The banks would be required to join the CFSO along with other federallyregulated and provincially-regulated financial institutions which would be eligible to join. The legislation attempted to address the problems of access to financial services and the provision of low-cost accounts. Banks would be required to open accounts and cash federal government cheques when the individual had “basic” identification. Further, regulations would be set up to require banks to supply low-cost accounts. Under this bill, notice would have been required to be given before the closure of a bank branch. The government proposed that new regulations under this bill would be directed toward greater disclosure to consumers of the risks and costs of financial services. The coercive tied-selling provisions of the Acts have been extended.

Improving Regulation There are a number of provisions in the bill directed at improving regulation. These included improvements to the organization of the Canadian Payments Association (CPA), particularly a more representative board. The bill also proposes new powers for the OSFI, including the power to remove directors and senior officers and impose financial penalties.

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506 David W. Peters and Douglas D. Peters The bill converts many applications that formerly required ministerial approval to be approved by the Superintendent. Finally, it provides for a five-year review of the legislation.

established before as useful criteria. They provide a good set of criteria for looking at whether the new legislation, Bill C8, will provide Canadians with the best legislative framework for financial institutions.

The important question to consider is whether Bill C8 meets the criteria set out by the government itself for sound financial institution legislation and where further changes to the bill and government policy ought to be made.

These criteria are consistent with the objectives of the MacKay task force. The task force based their recommendations on four main themes: (i) Enhancing Competition and Competitiveness; (ii) Empowering Consumers; (iii) [meeting] Canadians’ Expectations and Corporate Conduct; and (iv) Improving the Regulatory Framework. Their report used these themes as the headlines for the recommendations in their report (Canada. Department of Finance 1998, pp. 14-16).

CRITERIA FOR SOUND FINANCIAL INSTITUTION LEGISLATION The government White paper, issued on 25 June 1999, which preceded this legislation, begins by stating the objectives of the government in their framework for the future of the financial institution sector. It states that: •

financial institutions must have the flexibility to adapt to the changing marketplace and to compete and thrive, both at home and abroad, in order to retain their role as critical sources of economic activity and job creation;



vibrant competition is necessary to ensure a dynamic and innovative sector and that individual and business consumers have a range of choice at the best possible price;



consumers, regardless of their income or whether they live in an urban or rural area, and individual businesses, whether they be large or small, should receive the highest possible standard of quality and service; and



the regulatory burden should be lightened wherever possible, consistent with prudential and public interest objectives (Canada. Department of Finance 1999, p. 10).

This is an excellent set of objectives for Canada’s financial institution legislation. Indeed many have been CANADIAN PUBLIC POLICY – ANALYSE DE POLITIQUES,

DOES BILL C8 MEET THE GOVERNMENT’S CRITERIA? By these, the government’s own objectives, the legislation that followed from the White Paper fails on many counts. It fails to give consumers the benefit of competition in both insurance and automobile leasing, and instead retains the anti-competitive rules that benefit only the insurance companies and the largely foreignowned automobile leasing companies. Instead of reducing the regulatory burden, it greatly increases it with a new Financial Consumer Agency of Canada to deal only with the banks and not with other financial sector institutions that offer services where consumers are clearly in greater need of protection, such as insurance contracts, mutual funds, leasing contracts, and securities trading. There is increased complexity: both the replacement of the 10 percent ownership rule as well as the complexity of capital structures brought about by the holding company proposal.

Failure to Eliminate Anti-Competitive Rules The MacKay task force strongly recommended that the two major anti-competitive rules, in place in the present financial sector legislation and regulations, preventing the banks from selling insurance in their branches and engaging in the leasing of automobiles, be removed.2 The task force stated: VOL. XXVII , NO . 4 2001

Reforming Canada’s Financial Services Sector – What Needs to Follow from Bill C8 Linkages between banks and insurance companies ... have been common in Europe for many years.... In general banks are allowed to underwrite and distribute insurance products with little or no limitation in most European countries, and they can distribute but not underwrite insurance in most of the United States. We have seen no evidence that markets have been seriously disrupted in these countries by bank distribution of insurance.... On balance we believe that consumers will benefit from more choice and that to deny choice would be contrary to the public interest (Canada. Department of Finance 1998, p. 95). It is clear that the task force sees that removing these anti-competitive regulations that prevent deposittaking institutions from selling insurance in their branches and using customer information to market insurance would benefit the Canadian public interest. By allowing banks to sell insurance and engage in leasing, Canada would be moving closer to the European-style universal financial institution concept. 3 A universal financial institution is one that operates like a financial services supermarket, offering all the various services, including commercial banking services, investment banking services, trust services, insurance services, and leasing services. The universal banking concept provides more choice and convenience for the consumer as all financial services can be purchased at the same location. The concept is widespread in Europe. Laws in countries such as France, Italy, Portugal, Spain, and the United Kingdom allow banks to sell insurance, although they can only underwrite insurance contracts in a separate subsidiary (Canada. Department of Finance 1998, p. 95). The MacKay task force recommendations are sensible and meet the test of promoting the consumer interest. The thrust of its recommendations (which the government seems to have ignored) is simply to offer the public more choice, lower prices, and improved access to important services.

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Perhaps the best argument in favour of allowing banks more leeway in the insurance field is that they are more likely to use more efficient distribution systems than are the existing insurance companies. Coopers and Lybrand mention that insurers see that Canadian banks tend to focus on direct response marketing and other non-traditional methods of insurance sales (1998, p. 29). Insurance companies have been slow at changing their distribution channels because of fears of alienating their existing broker networks. The Globe and Mail for July 2000 announced that the Toronto-Dominion Bank was going to have coffee cafés in many if not most of their branch offices (The Globe and Mail 2000). Can one imagine some rational reason that allows banks to sell coffee in their branches but not insurance? The task force also strongly recommended that deposit-taking institutions be allowed to lease automobiles. The statement read: “Our review of international experience showed that banks in most developed countries are not restricted from automobile leasing, and that the financial arms of the major manufacturers are active internationally in competition with the banks. Canada appears to be the only developed country where bank leasing powers have been a major policy issue” (Canada. Department of Finance 1998, p. 98). The task force wrote that “The financing arms of automobile manufacturers, which have an estimated 70 to 80 per cent of the market, dominate the light vehicle leasing market in Canada” (ibid., p. 97), and stated that “in accordance with the vision of the financial sector that we believe will best serve Canadians, we recommend that the restrictions on light vehicle leasing for deposit-taking institutions and life insurance companies be removed” (ibid., p. 98). The current pricing of automobile leasing services raises some questions about the competitiveness of the industry.4 The implied interest rate in the leases of small, subcompact automobiles is often

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508 David W. Peters and Douglas D. Peters higher than the implied interest rate in leases of the more expensive automobiles. Is this a logical result in a competitive market? It might be if the users of compact cars were more likely to default than users of expensive cars or if compact cars depreciate at a faster rate than expensive cars. Casual observation of used car prices suggests that most cars depreciate at a similar rate except for very expensive luxury cars and some sports cars. It would be interesting to see if this difference in implied interest rates continued if the banks were allowed into automobile leasing. One would think not. Vertex Consultants Inc. have found interesting evidence on the competitiveness of automobile leasing and lending markets in Canada and the United States. In 1997 the average interest rate on automobile loans in Canada was lower than the same rates in the United States, 7.42 percent in Canada versus 8.41 percent in the United States. The reverse, however, was true about leasing rates. The average implicit interest rate on automobile leases was higher in Canada than in the US, 9.42 percent in Canada versus 8.34 percent in the US (Vertex Consultants Inc. 1997, p. 2). These recommendations of the task force that the government set up to provide a pathway for the financial sector in the twenty-first century should not be ignored by Parliament. We suggest that the removal of anti-competitive rules would be in the best interest of Canadian consumers.

Increasing the Complexity of Ownership Rules The proposed legislation substantially increases complexity in two areas. The first is the more intricate ownership rules; these should be looked at carefully and the supposed benefits weighed against the additional problems that they present in reality. The second is the complexities of the move to holding companies. This move raises some prudential concerns. Perhaps these holding companies are necessary in a more complicated world but they do have some important and substantial drawbacks. CANADIAN PUBLIC POLICY – ANALYSE DE POLITIQUES,

Over 30 years ago the new banking legislation set out ownership rules that required banks to be widely held. It did so simply by requiring that no single shareholder or group of related shareholders could own more than 10 percent of a schedule one bank. That rule has allowed Canadian banks to expand their capital bases, increase their business assets and to develop into the huge businesses they are today. It does not appear to have inhibited their growth in any noticeable way, nor has it hindered their ability to raise capital. Indeed, Garvey and Giammarino (1998) tested the effect of ownership restrictions on the cost of capital of Canadian banks. Their results indicated that ownership restrictions in Canada did not increase the cost of capital of Canadian banks. The 10-percent rule has been very useful. It has ensured that banks follow sound practices in order to protect depositors. It has prevented any one individual or small group of related individuals from effectively controlling a major bank, and thus precluded any large-scale self-dealing. The lack of ownership rules was highly problematic for the trust company industry in the 1980s where large-scale selfdealing resulted in large loan losses and trust company failures. The result was that the Canada Deposit Insurance Company was required to pay the price.5 The 10-percent rule has probably helped the schedule one banks finance their growth. Stockholders have had confidence in the stewardship of the major widely-held banks. Investors would likely have been more sceptical and more concerned about the stewardship of banks and about the possibility of self-dealing by a significant shareholder in a management position if the rule had not been in place. It has given the minority shareholders in the equity markets a sense of security because no controlling shareholder can take advantage of a controlling interest. Now a much more complex set of rules that are different for small, medium-sized and large banks, as well as other financial institutions has been VOL. XXVII , NO . 4 2001

Reforming Canada’s Financial Services Sector – What Needs to Follow from Bill C8 proposed. These rules would allow individual ownership of the large banks to expand to 20 percent. Would that make it possible for one individual to ultimately control the operations of a major Canadian bank? The move to 20 percent makes no intuitive sense. Why would it be better for Canada to have a single shareholder hold 20 percent of a bank’s stock? If the objective is to allow a single entity to control a major Canadian bank, then the restriction should be removed entirely. A move to 20 percent merely raises the possibility of control while maintaining the fiction of being widely-held. While there is no specific percentage ownership in a publiclytraded corporation that guarantees control, the accounting profession has often regarded 20 percent or more ownership of voting shares as representing effective control.6 The possibility makes one concerned that this change in ownership rules might not be in Canada’s best interest. The change in rules for the medium-sized institutions makes the singleperson ownership of a majority of the shares, and thus absolute control, of a medium-sized bank, such as the National Bank, a possibility. Another rule change would allow the incorporation of smaller banks with a much smaller amount of committed capital and this is put forth to encourage competition. But it also raises prudential concerns. In the 1970s, some smaller banks were chartered as were a number of local trust companies. These were also set up to encourage competition but actually provided little if any competition for the major Canadian banks. The recessions of the 1980s and 1990s put most, if not all, of these institutions in jeopardy or in default. There are substantial problems in running small financial institutions, not the least of which is the inability to diversify the portfolio of assets. If these smaller institutions are to be encouraged, Canada will have to employ far more bank inspectors and monitor the activities of new institutions carefully. One of the strengths of Canada’s financial system has been the low cost of regulation. Canada employs (on the basis of either population or the level of bank assets) a small fraction of the number of financial institution inspec-

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tors as does the United States, where there are numerous small banks. And, thus, the cost of inspection and prudential regulation is much lower in Canada. With many new and smaller banks, that will certainly change and the costs of regulation will increase substantially.

INCREASED REGULATION THROUGH THE FINANCIAL CONSUMER AGENCY OF CANADA The proposed new agency will be charged with the responsibility of enforcing the consumer protection rules in all the federal financial institution legislation. But, in effect, the federal government only regulates the banks in consumer issues. The provinces regulate the trust, insurance, and securities businesses. The new federal ombudsman (CFSO) will take over the duties of the present ombudsman of the Canadian Bankers Association. These moves may seem a reasonable step, despite the fact that the former represents a major increase in the regulatory burden for financial institutions. One must also remember that only the banks are regulated on consumer issues by the Government of Canada. One might ask whether there are more unresolved complaints about the banks than about other financial intermediaries. This question was examined by Ekos Research Associates for the MacKay task force in 1998. They found that 9 percent of respondents in a telephone survey had a serious problem with the financial institution where they do their primary banking; 36 percent of those problems were unresolved. They also found that for insurance companies, 7 percent of respondents had had a serious problem in the past year and that 50 percent of those remained unresolved. Thus, there were slightly more unresolved complaints with insurance companies. The most common complaint about the banks was accounting errors whereas the most common complaints about the insurance companies related to the size of reimbursement for claims (Ekos 1998, pp. 3136). The lack of clarity in some insurance contracts,7 the problems with comparative shopping for a lease

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510 David W. Peters and Douglas D. Peters contract, the various questions about mutual fund costs and commissions, and the questions about the manipulation of securities markets would lead one to conclude that the customers of other financial intermediaries are in more need of protection and an ombudsman than are bank customers. The development of a federal government ombudsman may, however, be confusing to the public generally. There is already a Canadian Bankers Association (CBA) ombudsman as well as an ombudsman in each chartered bank. To replace the CBA ombudsman with a federal government ombudsman would only make sense if there had been serious problems with the CBA ombudsman. If the present system has worked reasonably well, then why make the change? One interesting innovation is the invitation to provinces to bring their financial institutions under the new FCAC and the invitation to other federal and provincially chartered financial institutions to join the CFSO. Had the writers of Canada’s constitution 134 years ago envisaged the financial markets of today, they would surely have put all financial institutions under federal control and not just the banks. One can hope that the new agency and the federal ombudsman will expand their scope to include areas of provincial jurisdiction. A particular example of the complexity of Canadian regulation comes to mind in the recent revelations of the market manipulation at the asset management arm of the Royal Bank of Canada. Here is a federally chartered and regulated bank, accused of breaking provincial securities regulations in the operation of their pension fund management; these pension funds are regulated by both federal and various provincial governments. The Ontario Securities Commission’s judgement against the Royal Bank of Canada could possibly have caused prudential concerns for the bank. Thus, one regulator’s decision could have caused concerns for another regulator. In addition, some of the pension funds, regulated by other jurisdictions, might have been affected. It is not easy to see how the competing interests and legislative responsibilities of differing regulators can be adjusted.8 The CANADIAN PUBLIC POLICY – ANALYSE DE POLITIQUES,

supervision of the asset management section of that institution may belong to many provinces as well as the federal government. This is a clear example of regulatory duplication and confusion. It should also be noted that the areas where additional and firmer regulation in the financial sector is needed are largely in areas under provincial jurisdiction. These would include mutual funds, financial asset management, and the sale and trading of securities. But it is also true that the major players in these fields are federally chartered and federally prudentially regulated financial institutions. The existence of prudential regulation in the federal jurisdiction and consumer regulation in the provincial area causes both confusion and duplication. The new legislation takes a tiny first step to improve this irrational situation, but one would hope that major further steps could be taken.

FINANCIAL INSTITUTION MERGERS – MEASURES NEEDED TO ADDRESS CRITICAL ISSUES AND EMERGENCY SITUATIONS The legislation proposes a series of hurdles for the approval process of the merger of any major financial institution, including banks. The proposed process is an interesting one. It includes not only the scrutiny of the Superintendent of Financial Institutions and the Competition Bureau but also hearings by the House of Commons Standing Committee on Finance as well as a full public interest statement by the merging institutions. The final say, however, remains with the minister of finance. It should be noted that the Canadian chartered banks were not subject to the Competition Bureau’s investigation until 1970 and that there have been no mergers of the major chartered banks since the 1950s. Mergers among business firms are typically classified as either horizontal, vertical, congeneric, or conglomerate. Competition policy is usually favourable toward vertical, congeneric, and conglomerate mergers. Vertical and congeneric mergers are VOL. XXVII , NO . 4 2001

Reforming Canada’s Financial Services Sector – What Needs to Follow from Bill C8 typically pursued because of promised synergies, not reduced competition, while conglomerate mergers are pursued for risk diversification. Competition policy typically views horizontal mergers unfavourably when they result in a significant reduction in competition. A merger between two large banks would be considered a horizontal merger, whereas a merger between an insurance company and a bank would best be classed as a congeneric merger, where the merger is being pursued for reasons of marketing synergies. The regulation of mergers should be more open to congeneric mergers and be tougher on horizontal mergers. But Bill C8 proposes the opposite. For the government to accept a horizontal merger, the parties proposing the merger should be required to show that the merger results in a negligible reduction in competition, or that the target firm does not have the ability to earn adequate profits to satisfy its shareholders without a merger. In his press statement declining the two sets of bank mergers, the finance minister quite correctly set out the requirements for mergers of two major Canadian banks. He gave three reasons why the proposed mergers failed to meet the public interest criteria for approval: “ The mergers would lead to an unacceptable concentration of economic power in the hands of fewer, very large banks. They would result in a significant reduction in competition. And they would reduce the governments policy flexibility to address prudential concerns” (Martin 1998). The finance minister went on to say that he would not consider any further bank mergers until a new policy framework was in place and when the new framework was in place: “new proposals will have to demonstrate ... that they do not unduly concentrate economic power, significantly reduce competition, or restrict our flexibility to address prudential concerns” (ibid.). One can assume that these criteria continue to be operative as this legislation becomes law. The procedure set out in Bill C8 would have been useful in handling the recent merger proposals but might not be as useful in other instances. The most

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recent spate of mergers included the Canada TrustToronto Dominion Bank, the merger of the Bank of Nova Scotia with National Trust, as well as the declined mergers of the Bank of Montreal with the Royal Bank of Canada and of the Toronto-Dominion Bank with the Canadian Imperial Bank of Commerce. All of these were unusual for Canada in that they were mergers of two existing, viable financial institutions. In the past, many mergers, if not most, were mergers of one institution in serious trouble being taken over by one sound institution. The time horizon in such mergers can be short, sometimes just over a weekend. The legislation would almost certainly result in a delay of over several months as a parliamentary hearing would be required. In the cases of most previous mergers, that would have been an impossibly long time-span. There should be a method of short-cutting the hearing process to ensure that, should a serious situation arise as it undoubtedly will in the future, a quick resolution of a serious problem can be made. The prolonged period of analysis and public input may be both appropriate and rational in the case of mergers of two strong and feasible financial institutions but not when one of them is in difficulty. At some time it may be necessary to approve a merger in a matter of hours, not months, and there should be a mechanism for doing so.

CONCLUSION The MacKay task force was set up to develop a pathway for government regulation and supervision of Canada’s financial institution sector for the twentyfirst century. The report of the task force sets out an orderly set of recommendations which would, if adopted, bring Canada’s financial sector a legislative background that would prepare it for the new millennium. Unfortunately for Canadians, the government has chosen to ignore many of its important recommendations. The introduction and passage of Bill C8 and its preceding White Paper have left Canada’s financial

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512 David W. Peters and Douglas D. Peters sector with more regulation and the same anticompetitive rules as before. This makes the important financial sector less able to meet the challenges of the new century. It also penalizes the Canadian consumer, who should have more choices in financial services. One can only hope that there will be further regulatory changes and that the government will realize that in legislation, interests of consumers should come first.

NOTES This paper is largely based on a brief that the authors presented to the House of Commons Standing Committee on Finance on 4 October 2000 and a further brief to the same committee on 26 February 2001. Those briefs received helpful comments from Dr. Arthur Donner and Mr. G. A. Zypchen. 1The rule in the previous acts limited the ownership of shares in schedule one banks to 10 percent for each individual or related group of individuals or companies. 2The

Task Force on the Future of Canada’s Financial Services Sector, chaired by Mr. MacKay was proposed and set up by Secretary of State Peters’ White Paper of June 1996, titled 1997 Review of Financial Services Legislation: Proposals for Change (Canada. Department of Finance 1996). 3A

good description of the universal financial institution concept as well as the rules relating to product diversification in various countries is provided in Saunders (2000, pp. 476-515). 4It

is common practice to compare the present value of the cost of owning to the present value of the cost of leasing when deciding whether to buy or lease an automobile. The implied interest rate in a lease is the interest rate that equates the present value of the cost of owning to the present value of the cost of leasing. 5A

fairly comprehensive review of the failures is provided in Best and Shortell (1985). 6 Accounting Principles Board Opinion Number 18 recommends that investors use the equity method of accounting for investments in common stock when the investor has the ability to exercise significant influence over

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the policies of the investee. It recommends that an investment of 20 percent or more of the voting stock should lead to the presumption that the investor has the ability to exercise significant influence (APB 1971). 7Colbert,

Carty and Beam examine the readability of a number of standard agreements for financial services used by Canadian financial institutions. Based on Flesch Readability Scores, the average agreements for banking and leasing agreements were rated as “difficult,” while the average rating for both automobile and life insurance agreements and mutual fund prospectuses were rated as “very difficult” (Colbert, Carty and Beam 1998, p. 55). 8The case of the demise of Confederation Life provides an example of competing regulators having difficulty in coming to acceptable decisions. The regulators in Canada and the regulator in the United States (Michigan) had considerable problems reaching compromises on the distribution of assets of the failed insurance company.

REFERENCES Accounting Principles Board (APB). 1971. APB Opinion Number 18: The Equity Method of Accounting for Investments in Common Stock. March. Best, P. and A. Shortell. 1985. A Matter of Trust: Power and Privilege in Canada’s Trust Companies. New York: Viking Press. Canada. Department of Finance. 1996. 1997 Review of Financial Sector Legislation: Proposals for Changes. Ottawa: Supply and Services Canada. ______ 1998. Change Challenge Opportunity. Report of the Task Force on the Future of the Canadian Financial Services Sector. Ottawa: Canada Communications Group Inc. ______ 1999. Reforming Canada’s Financial Services Sector — A Framework for the Future. Ottawa: Supply and Services Canada. Canada. House of Commons. 1997. Second Session, Thirty-fifth Parliament, Bill C82, An Act to Amend Certain Laws Relating to Financial Institutions. Ottawa: House of Commons. ______ 1998. The Future Starts Now: A Study of the Financial Services Sector in Canada. Ottawa: Standing Committee on Finance, House of Commons. ______ 2000. Second Session, Thirty-sixth Parliament, Bill C38, An Act to Establish the Financial Consumer VOL. XXVII , NO . 4 2001

Reforming Canada’s Financial Services Sector – What Needs to Follow from Bill C8 Agency of Canada and to Amend Certain Acts in Relation to Financial Institutions. Ottawa: House of Commons. ______ 2001. First Session, Thirty-seventh Parliament. Bill C8, An Act to Establish the Financial Consumer Agency of Canada and to Amend Certain Acts in Relation to Financial Institutions. Ottawa: House of Commons. Colbert, J., H. Carty and P. Beam. 1998. “Practice: Assessing Financial Documents for Readability” in Consumers in the Financial Services Sector, Vol. 1. Report for Task Force on the Future of the Financial Services Sector. Ottawa: Supply and Services Canada. Coopers and Lybrand. 1998. The Property/Casualty Insurance Industry. Report for Task Force on the Future of the Canadian Financial Services Sector. Ottawa: Supply and Services Canada.

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