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Ottawa, December 7, 1995
1995-103
Notes for remarks by the Honourable Doug Peters, Secretary of State for International Financial Institutions, to the Canadian Turnaround Management Association (Ottawa chapter)
Ottawa, Ontario
December 7, 1995
Delivered text is official version
Ladies and gentlemen: I am delighted to be here. You've provided a timely opportunity to talk about some issues affecting all Canadians - and which may have a special resonance for many of you here.
It is surely a given that one of the fundamental buildings blocks for a strong economy is a dynamic, responsive financial sector. So, I want to share some thoughts on the long-term vision that will underlie the upcoming 1997 review of federal financial regulation.
Deficit progress
But there's another topic I want to touch on first - the issue of one of the most important "turn-arounds" in recent Canadian history. And that's the sustained progress we're making on federal fiscal renewal.
When we came to office, the federal deficit was almost 6 per cent of Canada's GDP. And this was exacting a terrible penalty.
It was pressuring interest rates higher. It meant that taxes could only go up. It was jeopardizing our economic sovereignty. And it was adding to a national debt that today gobbles up about 36 cents of every federal revenue dollar in interest charges.
These are the reasons why our government has mounted the largest assault on the federal deficit in Canadian history. An assault that's succeeding!
Last month, we announced that the deficit for our first full year in office was $37.5 billion, or 5 per cent of GDP. That's a $4.5 billion cut in the deficit. Just as important, it was $2.2 billion below the target we set.
Over this year and next, we intend to cut the deficit to 3-per cent of the economy - or $24.3 billion. And we have absolute confidence that we will hit this mark.
This confidence is based on the growing benefit of the structural reforms we've made to federal spending - $25-billion worth (over three years) in the 1995 budget alone.
It also reflects the fact that, while economic growth this year is well below what everyone expected last winter, interest rates are also well below our February budget forecasts. So, while revenues are squeezed, our interest costs have come down significantly.
We're proving that we can transform commitment into concrete action and real results. And yesterday, we extended that commitment.
A further target
Finance Minister Martin announced that the deficit for 1997-98 will be brought down to 2 per cent of GDP - or approximately $17 billion.
There is a very important point I want to make about that $17-billion deficit mark. And that point, the government's new borrowing requirements on money markets that year will be under $7 billion.
It is such borrowing requirements that define the deficit for many governments, such as the U.S. And when we bring ours down to $7 billion, that will be less than 1 per cent of GDP - the lowest level for Canada's federal government since 1969.
Let me make clear that even this target is only a way-station on the road to our ultimate goal - eliminating the deficit entirely.
Yes, there are critics who say we should be moving to this point even faster. But what may be appealing in theory can be counter-productive in practice. As Paul Martin said in yesterday's statement:
"Our goal is not simply to get the deficit down, it is to keep it down. That requires considered and careful reform - and implementation. That is something a slash and burn approach precludes - something a measured strategy assures."
The 1997 review
There is much more I could share about yesterday's economic and fiscal outlook statement. But rather than echo what Paul Martin set out so well, I want to move on to the issue of financial regulation and the 1997 review.
I should point out that the two topics have a lot in common. Deficit reduction is a vital foundation for Canada's sustained economic health. And so is a proper system of regulation for our financial sector.
And in both areas of activity, we believe in a strategic approach that strikes a careful balance between short-term needs and long-term goals and benefits.
The 1997 review of federal regulation for the financial sector grows out of the extensive reforms introduced in 1992. At that time, it was clear that the fast pace of change in the business environment would require that we revisit the regulations in five years.
And already, our consultations on the 1997 review have shown a number of areas where change may be required. But before raising a few specifics, I thought I should first situate the review within the larger context of Canada's financial institutions regime in the 21st Century. In other words, where do we want to be by the year 2020?
There are a number of symmetries for that target year I've chosen.
To start, it takes us a neat quarter century ahead.
But more significantly, 2020 is the optometrist's shorthand for excellent vision.
Of course, we in government - perhaps especially in Finance - are often accused of having 20-20 vision in hindsight only. But today I would like to try and reverse that and attempt to sketch a longer-term future as clearly as I can.
So what is a realistic vision of the future we want to build? Obviously, it's one based on the surging forces of change we all live with daily. Forces that include accelerating technological evolution. Significant demographic transformations. And, of course, fast-growing globalization.
Given the sweep of these forces, I will make no attempt to forecast the micro-details of the financial sector situation in 25 years. That is just common sense, not a cop-out.
But what I believe I can describe with confidence is the basic attributes of the Canadian financial sector in 2020 that we should want to see entrenched. Because, as many champion athletes will tell you, it is by consciously 'imaging' the future you want, that you have taken a critical step to making that future real.
There's another advantage to this imaging process. If we can set out simple, clear goals and attributes, these can be used as criteria against which policy proposals and decisions can be measured.
I don't want to sound like the latest Pollyanna business guru. Pragmatism sometimes dictates that detours are unavoidable. Objectives can conflict, and require trade-offs. But at least, if we have set out a clear template-future, we have a better chance of recognizing when we stray too far off course. And it gives us the compass needed to get back on track.
Security is key
And the future I see - the fundamental objective we must work to - starts off with the word security.
The 21st Century financial system for Canada must be secure - in the sense that the consumers and depositors and policyholders will have every confidence that their assets are secure.
But I would add one rider: this must be security that is commensurate with the risk that is inherent in the different types of investments, deposits or insurance policies. In other words, security doesn't mean stasis.
We don't want a financial system that sacrifices all risk taking - and, in turn, all dynamism - in the name of dependability. There must be an appropriate balance.
Efficiency and competitiveness
Next, I would list efficiency and competitiveness - at home and abroad - as attributes that must be the hallmark of our 21st-Century financial system.
We live in a world where traditional borders, boundaries and time-frames are often becoming irrelevant. International currency flows exceed US$1.2 trillion a day. Thanks to telecommunications, financial managers and traders now not only do business globally, but on a 24-hour-a-day basis.
The trend towards globalization and liberalized trade in financial services means that Canadian firms are facing stiffer competition in Canada and abroad. Efficiency - and its close cousin, innovation - will be the vital engines that will allow your industry to meet and beat that competition.
And there's an important corollary to the efficiency-competitiveness challenge that I should touch on.
Both at home and in offshore operations, we need institutions of an adequate size to compete effectively and to weather downturns in the economy. They must be capable of raising capital for necessary, often-large scale initiatives, and to cover significant risks.
Let me add, however, that while we need institutions with a competitive "critical mass," this must not take precedence or otherwise impact adversely on the primary attribute I've highlighted - security.
Just as important, we must make sure that financial concentration doesn't jeopardize the next attribute I want to cover: consumer orientation and protection.
Consumer commitment
To me, a commitment to consumers is both the starting-point and finish-line for any competitive business. You compete through providing customer service. And satisfied customers are a core measure that your business is a competitive success.
But this dynamic carries some real bottom-line implications.
I believe that competition today - and in 2020 - means that consumers must have real choice and not be held hostage by a constrained or tightly held industry. And that industry must effectively and efficiently deliver financial services and intermediation between savers and investors.
The key word here is real - in the sense of reasonable and realistic.
This competitiveness does not translate into the need, say, for a bank at every intersection. It does mean that the consumers must be able to obtain the service they require and deserve within a reasonable distance, and at a reasonable price.
And we must make sure that factors such as growing concentration, and especially technology, do not jeopardize other areas of public interest and consumer rights. In particular, we need to be very sensitive to the issue of privacy, and ensure that personal data is not mis-used or abused.
Let the market do its work
The fourth attribute for the future as I see it, is a system that sets out clear and fair rules of the game - and then lets the players get on with the job.
In other words, the regulatory system is not there to micro-manage companies or sectors. Nor is it intended to prevent the occasional corporate failure due to normal competitive forces. And governments should be careful of intervening in purely business issues. We're not there to merely provide preference in the marketplace through legislation or regulation.
Jurisdictional co-operation
There is a fifth, final attribute that financial institutions should enjoy 25 years from now. They must operate in a regulatory environment marked by effective co-operation between federal and provincial jurisdictions.
Canada is a federation. Our provinces have much greater autonomy than their equivalents in virtually any other industrialized nation. This can be a dynamic source of creativity, diversity and choice.
But without mutual recognition and co-operation, this environment can create obstacles to real efficiencies, and thus to Canadian competitiveness. This includes a patchwork approach to regulation, as well as the cost, public and private, of unnecessary duplication and overlap.
We have been consulting with the provinces on ways to ease this burden, and strengthen co-operation. I believe we're making progress, and that you'll see some of the results in the 1997 review.
So far, I've sketched out the attributes that Canada's financial system should display for 21st Century success. And this takes me to the 1997 review of financial legislation itself.
The review process
We are well launched into the process.
So far, we have received over 30 submissions. The Department and I are currently concluding the Phase 1 of consultations with interest groups, and with the provinces. These should be completed by this month.
These consultations will serve as input into proposals for policy direction, which I expect to present to Cabinet for approval in early 1996.
I would then propose releasing a Policy Paper.
The Senate Banking Committee has already expressed an interest in holding hearings on such a Policy Paper, likely in the Spring.
Based on these hearings and other feedback, we could then move to tabling legislation later in 1996.
Underlying this schedule is a very concrete timetable. The simple fact is, Parliamentary approval and Royal Assent must be obtained by March 31, 1997 when existing legislation - the extensive 1992 reform - reaches its legislated sunset point.
I've spent time talking about the long-term benefits that a properly planned regulatory regime should deliver, and about the actual 1997 review process itself. Before concluding, I want to highlight some specific issues and concerns that I see on the table.
Insurance networking
One of the most talked about issues is that of insurance networking - selling - through bank branches. So I am going to begin with it.
As many of you are well aware this issue has been the subject of an intense lobbying effort by both the banks and the insurance sector. I expect to see this battle intensify over the next few months.
I'm not in a position to calm things down - for one side, at least - by anticipating what our government's ultimate position will be on who can or cannot sell insurance. The "jury" is still considering the testimony.
But one thing I can say is that we do recognize that the insurance industry is still working to incorporate many of the changes following from the 1992 reform package. And its doing so at a time when the pressures of competition and rationalization are continuing, and even accelerating.
These are factors that we will take into account in framing our final decision - because one of the key purposes of any regulatory regime is to encourage the health of all sectors in the financial services industry.
Corporate governance
Another issue that the review will have to address is corporate governance - the regulations concerning the role and responsibilities of corporate directors.
We believe very strongly that the role of regulators such as the Office of the Superintendent of Financial Institutions (OSFI) is not to micro-manage businesses themselves.
The fact is, corporate failures can and do happen in a open, competitive marketplace. And if you try to prevent any failure by making bureaucrats the ultimate masters of industry, you'll simply eliminate the risk-taking and dynamism that financial institutions must display for continued success.
Moreover, even if regulators were tasked for a more intensive supervisory role, they'd fail. Because we do not have - and can't afford - an army of examiners conducting exams on federal financial institutions.
Yet failures of financial institutions can have very negative repercussions. That is why a great deal of emphasis must be placed on effective corporate governance.
This is an issue that extends far beyond the financial sector itself. The Toronto Stock exchange has been active in examining and making proposals on governance. The Cadbury Report in the United Kingdom has offered significant suggestions on governance. And our own federal Industry Department is in the process of reviewing the Canada Business Corporations Act, which covers key governance provisions.
In conducting the 1997 review, we will aim to ensure that the rules applying to financial sector governance evolve in line with developments here and abroad. And we will look at areas where our rules may be more stringent than under the CBCA - and whether we need to continue or extend such differences.
The issue of privacy
There's a final area that our review will address that I want to highlight - one I've already touched on: the issue of consumer privacy.
We live in a world where technology is making it possible to acquire, correlate, share and apply information to an incredible degree. And while this can deliver many advantages, it also raises significant questions about personal rights and corporate ethics.
Of course, this is not a new issue, as it was discussed during the preparation for the 1992 reform of federal financial statutes. But at that time, the government looked to the financial services industry for self-regulation - and the industry responded. All of the major sector associations have developed modern privacy codes for their members.
The adoption of these codes has been beneficial. But we continue to be aware of the needs and concerns of consumers regarding the treatment of personal information. So we will be looking at this issue very carefully during the course of our review.
Conclusion
There are many more issues on our agenda for the 1997 review which I could discuss today. But the heart of our reform process is consultation and discussion - not lectures, or action by fiat.
And, given the amount of ground I've already covered, I'd rather stop here, and spend the rest of our time responding to your questions and comments.
So, in conclusion, let me emphasize my view that Canada currently enjoys a world-class financial system. But to make sure we sustain this vital asset, our regulatory system must reflect and be responsive to the evolving environment in which they operate, both domestically and abroad.
And we must keep an eye on the long term. While we may be regulating for today's financial institutions and for today's customers, it is the trends that will affect financial institutions and customers tomorrow that must - and will - guide our the review.
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| Last Updated: 2002-11-26 |
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