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Ottawa, October 10, 2002
2002-083

Speech by the Honourable Maurizio Bevilacqua, Secretary of State (International Financial Institutions), to the Toronto Board of Trade

Toronto, Ontario

Introduction

I’d like to thank the Toronto Board of Trade for providing me with this opportunity. Today I’d like to talk to you about our economy, the future of the financial sector and, especially, how this sector is crucial to our economic future and to raising the standard of living of all Canadians.

Canada has a strong financial services sector and capital markets. They have played a key role in our economic development. The challenge before us is how to make them even stronger, more competitive and more dynamic in North America.

Quite frankly, there is no better city to discuss these issues than Toronto, which is the home of the largest cluster of financial services in Canada.

This city has the sophisticated knowledge infrastructure to help achieve the future potential of the financial services industry. With more than 100 languages spoken on its streets, Toronto not only speaks the language of business, it speaks the language of every major market in the world. Out of half a million people working in the Canadian financial services sector, 176,000 of them can be found right here.

To really understand where we are headed, we have to appreciate how far we’ve come as an economy and as a nation in recent years. In London and Paris recently I told the story of Canada’s economic renaissance. It’s a story we should all be telling.

First, let’s look at the nation’s finances.

A decade ago we faced chronic deficits and a galloping debt that was squeezing the private sector out of financial markets.

Today the story is dramatically different. The federal government has posted five consecutive surplus budgets. We have paid down more than $40 billion in debt and our debt-to-GDP (gross domestic product) ratio is below 50 per cent from a peak of 71 per cent. And, rest assured, it will continue to fall.

As a result, we restored our credibility with financial markets around the world and have regained our Triple-A credit rating. This Canadian accomplishment has created what I like to call a "virtuous cycle" – surpluses lead to debt repayment, which reduces interest payments, which improves our fiscal situation further.

But business also benefits from this virtuous cycle. Ten years ago large government deficits were crowding out private sector financing that could have gone to innovative, emerging businesses. Now there is more room for our capital markets to flow financing to Canadian businesses, resulting in growth and liquidity in our capital markets, such as the corporate bond market. Thanks to a reduced government debt presence, businesses have a greater opportunity to benefit from Canadian and foreign investments.

Our progress is equally impressive when compared to other nations. For example, Canada will be the only Group of Seven (G-7) country to record a surplus this year. Nothing puts this fact in sharper focus than to compare our fiscal situation with that of the United States. A forecasted surplus of $231 billion this year in that country has turned into a deficit of $165 billion. And these U.S. deficits are expected to stretch well into the future.

But that’s just part of the Canadian story.

Our economy is now more diversified, innovative and stronger than ever. Our level of foreign indebtedness, as a share of GDP, has shrunk dramatically, from 45 per cent in the mid-1990s to under 19 per cent today. For the first time Canada’s foreign indebtedness is lower than that of the U.S. As well, despite the uncertainties in the world economy, we’re leading the G-7 in growth this year, and the International Monetary Fund and Organisation for Economic Co-operation and Development expect us to do the same next year.

Clearly, this is good news: good news for all Canadians, and good news for the financial services sector. It means this sector can count on a Canadian economic and fiscal platform that is more secure, stronger and more vibrant than it was less than a decade ago.

An innovative financial sector will play a pivotal role in the future growth of our economy and the everyday lives of Canadians, whether it’s arranging mortgages for homebuyers, providing commercial loans for small and medium-sized enterprises or syndicating large debt issues for our biggest corporations. And a well-functioning financial services sector is crucial for any business that wants to succeed in the North American and global economies.

In no small measure Canada’s economic success is due to the sector’s ability to change – to transform itself – so that it can continue to meet the needs of consumers and businesses alike in a rapidly changing environment.

Make no mistake, our government understands that. I understand that. As the Chair of the House of Commons Finance Committee for five years, I listened to what you had to say. And we initiated a series of legislative changes – demutualization, foreign bank branching and Bill C-8, our financial services reform package – all designed to promote safe, efficient, competitive and growing financial institutions.

I believe much progress has been achieved. But I also believe that, working together, we have a golden opportunity to build an even stronger Canadian financial services sector and more dynamic capital markets in a way that benefits all Canadians.

Policy That Works

Specifically, in the time I have today, I’d like to talk about other areas of financial sector reform and how we are moving ahead. They are:

• the need to strengthen investor confidence;

• Canadian securities regulation;

• access to banking services;

• the formation of holding companies; and

• information technology.

The Need to Strengthen Investor Confidence

The first area of concern is the need to strengthen the confidence of Canadian investors, an issue the federal government takes very seriously.

We’ve all witnessed the aftermath of the various accounting controversies in the United States. But while they occurred in the U.S., the resulting investor insecurity is not limited by borders.

Quite simply, maintaining public confidence in our capital markets is crucial for economic growth. Strong, trusted capital markets are essential to allow our nation to realize its full economic potential, our businesses to expand and innovate, and our citizens to achieve their personal dreams.

Strong capital markets require investor confidence. And strengthening this investor confidence requires early, effective and coordinated action from all participants: the accounting profession, corporate leaders, stock exchanges, regulators and governments.

I’d like to be clear on this – while our system of corporate governance has real strengths, it must be improved. It must adequately reflect new standards that people are demanding.

We have identified five elements that are essential to investor trust and confidence:

• First, companies must have strong corporate governance. We believe a board of directors has to be independent from management.

• Second, management must be accountable. We believe chief executive officers and chief financial officers must certify their firm’s financial statements.

• Third, financial reporting must be improved. We believe disclosure must be complete, transparent and timely.

• Fourth, there must be a credible audit process. We believe auditors must be independent and there must be effective oversight.

• Fifth, there must be stronger enforcement. We believe enforcement must be an effective deterrent.

Governments, regulators and the private sector have been working on these five areas in recent months. I am releasing today a comprehensive record of actions taken by market participants. This record will be updated regularly to reflect future actions.

An important step taken so far is the creation of the Canadian Public Accountability Board. It is a cooperative action of regulators and market participants which will set high standards for auditing in Canada, and ensure those standards are met through effective enforcement.

So progress is being made. It must continue. We now need to address some tough issues:

• To what extent are the measures in the U.S. Sarbanes-Oxley legislation relevant in Canada?

• To what extent should corporate governance practices be legislated, regulatory or voluntary?

• To what extent should we differentiate between the corporate governance requirements of small and large firms in Canada?

• To what extent should we differentiate between the corporate governance requirements of widely held companies and those with controlling shareholders?

The Senate Committee on Banking, Trade and Commerce will be resuming its hearings on this issue in the coming weeks. It will provide a useful forum to debate these important issues I’ve just set out, and I plan to appear before that committee.

As we noted in the recent Speech from the Throne, the Government "will review and, where necessary, change its laws and strengthen enforcement to ensure that governance standards for federally incorporated companies and financial institutions remain of the highest order."

To be effective, we need a coordinated approach with the federal government, other governments, regulators and the private sector. But let’s be clear – this is an urgent issue, and the federal government will use all the levers at its disposal to strengthen the confidence of investors in Canadian capital markets.

Strengthening Canadian Securities Regulation

Now, in terms of moving forward on strengthening the financial services sector in particular, many investors and businesses have told us they’re concerned about our fragmented regulatory structure. We’ve been told it’s an obstacle to growth.

In the Throne Speech, the federal government announced its intention to work with provinces, regulators, business leaders and market participants to ensure Canada has an efficient, effective system of securities regulation, one responsive to the needs of regional capital markets and emerging public companies.

As a first step, we appointed Harold MacKay as Special Representative on Canadian securities regulation. Mr. MacKay is charged with identifying how we can best proceed to strengthen this crucial area.

His challenge – and it’s a daunting one – is to define a process that will lead to a modern and efficient securities regulatory system, one that inspires investor confidence and supports competitiveness, innovation and growth. He will provide his report by November 15. Mr. MacKay brings considerable experience, having served as Chair of the Task Force on the Future of the Canadian Financial Services Sector.

Of course, achieving our goals requires the cooperation of all governments, and we remain committed to working with all stakeholders so that we create the securities regulatory system our nation needs to stay competitive in the global marketplace.

Strengthening investor confidence in Canada and streamlining the Canadian securities system are key goals for this government. But also important is the "unfinished business" of improving existing legislation to enable each financial institution to serve the needs of its customers in Canada and around the world.

First is access to basic banking services.

In 1998 the MacKay Task Force concluded that access to basic banking services "should be a shared responsibility of government and financial institutions." We agree.

And we are introducing regulations that require banks to open accounts and cash federal government cheques for any individual who meets basic identification requirements. At the same time, we will also ensure that those regulations are consistent with the security concerns and obligations we now face following the September 11^th tragedy. As such, we must find ways to improve the integrity of identification systems in Canada. I’m confident that, by working together with the financial services industry and with consumers, we can meet both objectives – better access and improved security.

Holding Companies

Another key area in our reform agenda is the need to make the creation of holding companies easier.

We understand that, in a rapidly changing global environment, our financial institutions must have greater flexibility to reorganize their operations in ways that make good business sense.

Before Bill C-8, our regulations imposed corporate structures that had fallen out of step with the times and that were not necessarily justified on prudential grounds. That is why we will streamline transactions and regulatory approvals for holding company conversions into a single mechanism. This will give financial institutions greater opportunities for growth while preserving the safety and soundness that Canadians rightly demand.

Information Technology

Finally, let me turn to information technology, an area critical to financial institutions.

One of the reasons Canada is so well positioned to excel in today’s information economy is the leading role our financial institutions have played in integrating technology into services for Canadians.

Canada’s technologically advanced payment system is, quite simply, a competitive advantage. Our efficient, nationwide access to automated teller machines and Internet banking is unequalled in the world. For example, roughly 60 per cent of Canadian Internet users have banked online, compared to just 29 per cent in the United States.

Looking ahead, we want our financial institutions to remain at the forefront of technological advances. They are an essential driver of innovation in our information economy, and have been a true Canadian success story. In fact, an important aspect of our competitive advantage in this area depends on investments by our financial institutions in technologies and technology producers.

Now, we want to make it possible for them to build on their success. We want to make sure they have the tools that will keep Canada in the lead in the race to develop and commercialize innovations in the financial services sector.

Our regulatory approach will do this. It will enable financial institutions to adapt sophisticated technologies and make new financial services possible. We will also loosen the constraints keeping federal financial institutions from investing more freely in a broader range of non-financial information technology activities.

I’m pleased to say that, in these areas of access to banking services, holding companies and information technology, we are moving quickly. The regulatory process required on all three will be completed early in the new year, giving our institutions the means to help power the economy of tomorrow.

Conclusion

We’re all facing new economic realities in this new millennium. They demand that we be clear in what needs to be done together to help Canada prosper. Where more work must be done to drive our economy further, we must do it. Where opportunities to build on our success exist, we must pursue them.

Ten years ago, when faced with seemingly impossible challenges, we could have given up. But we didn’t. We took control of our nation’s finances. By working together, our fiscal and economic environment has never been stronger, the opportunities for "growing Canada" never better.

Canada’s financial services sector has an unprecedented opportunity to innovate and grow.

Strengthening confidence in our capital markets can pay enormous dividends to individuals and businesses, from one end of this country to the other.

With the right mix of policies, the right corporate vision, the right strategies and the will to work together, we can take Canada further and achieve more than ever before.

That is the surest path to a stronger and more dynamic Canadian economy. It is the best guarantee of growing economic benefits, of high-quality jobs this sector has always generated and, ultimately, of a better standard of living for all Canadians.

I’m confident that together we can meet this challenge. That together we will make the right choices. And that together we will seize the golden opportunity we have before us today to help Canada continue to succeed in a fiercely competitive world.