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Ottawa, August 15, 1995
1995-063
Proposed Financial Sector Regulation
Notes for a statement on Bill C-100 by the Honourable Douglas Peters, Secretary of State (International Financial Institutions), to the Standing Committee on Finance of the House of Commons
Ottawa, Ontario
August 15, 1995
Delivered text is official version
Mr. Chairman, Honourable Members: I welcome this opportunity to discuss with you Bill C-100 - the legislation we have introduced to enhance the safety and soundness of the Canadian financial system.
Let me say right off that I deeply appreciate your decision to hold these hearings despite the Parliamentary recess.
The legislation covers a lot of ground - and that is because the financial sector is a complex, diverse and dynamic part of our economy. By starting your review process now, you will be able to focus in on substantive issues and concerns in a speedy, disciplined fashion when Parliament resumes sitting.
The measures included in C-100 flow from a series of basic principles, as outlined in the White Paper issued last February. Our subsequent consultations have left me more convinced than ever that these principles - and the fundamental shift in the philosophy that some of them represent - make this legislation a vital and valid turning point in our approach to regulation.
There are four key principles underlying this fundamental shift that I want to emphasize today. These are:
- That ownership of financial institutions is a privilege, not a right;
- That early intervention in, and resolution of, institutions experiencing difficulty should occur;
- That financial institutions must operate with sufficient incentives to solve their problems in a timely manner; and
- There must be appropriate accountability and transparency in the system.
Underlying these principles is an even more basic assumption -- the supervisory and regulatory system is designed to protect the rights of depositors, policyholders and creditors. The system cannot prevent every failure. If we tried to do that, we would limit the potential well-being of the financial sector, and limit the growth of Canada's economy.
The simple fact is, no regulatory system can forestall any institutional failure unless it is given the authority and resources to oversee all management decisions, and unless institutions are severely restricted in the loans and investments they can make. But the price of such a failure-safe system (even if it did work) would be to strip the industry from contributing to the dynamism, growth and evolution of our economy.
Our goal is to achieve a balance between the safety and soundness of financial institutions and yet allow the innovation and risk taking needed for a productive, growing economy
We also want to ensure that the rights of policyholders, depositors and creditors take precedence over the interests of shareholders. In recognition of these rights the legislation sets out an early intervention policy. This will allow OSFI to take control of a troubled institution earlier than at present.
Under the new regime, the Superintendent will be given the authority to close an institution before capital is depleted. In addition, the function of the Minister will also be affected. I will continue to be a key part of the process, but my role will be to determine whether or not it is in the public interest to close an institution. I will no longer have to come to an independent view on its solvency. This is more appropriately the task of the regulator who is involved in regulating the institution's day to day activities.
I want to make clear that this is a measure that focuses as much on problem prevention as resolution.
Under the proposed legislation, troubled financial institutions will understand that OSFI will take action if its concerns are not dealt with promptly. In addition, OSFI will be backed up by the introduction of a framework for risk-based deposit insurance premiums which will allow CDIC to vary premiums on member institutions depending on an underlying assessment of an institution's risk. These measures provide incentives for institutions to alter their course - a change that will strengthen the safety and soundness of the overall financial system.
This is the essence of ownership being a privilege, not a right.
This legislation stakes out the clear position that if an institution is facing difficulty, owners do not have the right to continue in business until they hit the "brick wall" and cannot pay liabilities as they come due.
And there is an important corollary. If an institution must be closed, it is far better to do so while there is still value in it, so that losses are reduced.
That is why the proposals included in C-100 will amend existing legislation to permit OSFI to obtain a winding-up order sooner.
I want to emphasize OSFI's role is not - and cannot be - to micro-manage financial institutions. Nor do we deploy an army of examiners to scrutinize federal financial institutions. This legislation puts responsibility clearly in the hands of management and boards of directors.
As well, further provisions will provide more flexibility to restructure, under court supervision, the affairs of insurance companies in liquidation. The result will be that the liquidator will have greater scope to enhance value within the estate, and improve the recovery on assets - to the benefit of policyholders and creditors.
This is why we must place constant emphasis on corporate governance. It is boards of directors that represent the ultimate front-line of problem prevention and good management.
Bill C-100 takes important steps to strengthen the effective, independent corporate governance that is a vital part of a strong prudential framework.
The legislation proposes that the Superintendent will have the power to designate certain directors as "affiliated" - for purposes of the requirement that one-third of the directors of an institution be unaffiliated.
Secondly, a proposal will prevent the board of a financial institution from being identical with an unregulated parent firm. This will help ensure there are directors of the institution who will focus on the regulated institution's interests alone.
Finally, the legislation will empower the Superintendent to veto the appointment of directors and senior officers of a troubled institution. Incidentally, I should point out that a similar authority exists in the U.S.
Mr. Chairman, Honourable Members: I have highlighted just a portion of the provisions under Bill C-100.
Other changes include enhanced disclosure of financial information by institutions and OSFI; and legislation improving the design and operation of the major clearing and settlement systems to minimize systemic risk.
Before concluding, I want to draw your attention to legislation that will not be brought before this Committee and the House.
As you know, the White Paper also addressed the challenge of strengthening protection for life and health insurance policyholders in the event of corporate failure.
There was no question that the industry's CompCorp had done a good job in dealing with the failures of two federally regulated life and health insurance companies. But it was also clear that improvements were needed so that those responsible for this vital function had the tools and resources to deal with new pressures that may emerge in the future.
I was prepared to have the private sector accommodate this challenge, rather than introducing a new federal bureaucracy. But I made it clear that a revised Compcorp would have to display a number of different features. These included:
- Revised corporate governance, including a board that is independent from industry;
- Greater access to privately financed resources;
- The capability to speedily levy higher assessments, if necessary, to meet commitments to policyholders and deal with a member-firm's failure; and
- An ability to facilitate "going concern" solutions (that keep troubled firms alive when possible and cost-effective) or support "soft landings" that minimize industry and consumer disruption.
Recent amendments to Compcorp's bylaws deliver the changes we were looking for, and I can now announce that there are no plans, at this time, to proceed with legislation for a government-instituted Policyholder Protection Board. I would of course be prepared to go forward with the creation of a government Board in the future if it became necessary.
Let me close by putting the legislation in context. Bill C-100 is being put forward for the continuing success of the supervisory and regulatory system, which must evolve with market trends and respond to current experience both here and in the rest of the world. The thrust of the legislation is clearly "safety and soundness." And these improvements in safety and soundness will build on our recent experiences with financial institutions that have failed.
This underscores why I feel it is prudent to make these changes now, rather than wait until the 1997 review of financial sector regulation - which will deal with a broader, more comprehensive range of issues.
Canada has a world-class financial system. But it is a sector subject to surging technological, economic and competitive change at home and across the global arena.
This legislation does not complete the process. There are a number of very important challenges ahead that the Committee will want to consider in the broader process toward renewing the legislation in 1997. In this regard, I have asked for submissions from all interested parties for the end of June on any matter related to the four federal financial institution statutes. So far I have received about 25 submissions from industry associations, consumer groups, financial institutions and individuals. I am currently reviewing these for common themes and approaches.
I intend to follow-up with discussions with all interested parties during the Fall to allow for a full exchange of views.
These consultations will provide guidance for a policy paper which I intend to release sometime in early 1996. The policy paper would then be followed by further consultation before we table legislation for passage early in 1997.
I wanted to act now, however, on the issues included in Bill C-100 because the legislation enhances the safety and soundness of the system. When steps can be taken to improve on it, to diminish risk, I believe it is important to get on with those changes right away.
I believe that Bill C-100 will help Canada's financial sector preserve its world-class stature. The measures we have proposed strike a critical balance between protecting the rights of depositors, policyholders and creditors and facilitating economic activity.
Thank you.
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| Last Updated: 2002-11-26 |
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