|
|
|
|
|
|
|||||
      
|
Ottawa, May 30, 1996
1996-041
Ottawa, Ontario
Château Laurier Hotel
May 30, 1996
Delivered text is official version
Ladies and gentlemen: I am very pleased to be here to speak to you this afternoon. It is always a pleasure to meet the people who operate the world of financial institutions that we as government regulate, but do not run.
I can talk about globalization, but you folks do globalization.
Earlier this week the Conference Board of Canada released a study that found that your industry (life and health insurance) generates 47 per cent of premium income from operations outside of Canada. That figure is particularly impressive when contrasted with the United States, where the number is five per cent, or France, where it is some 20 per cent.
This is the type of 'service' export that Canada's long-term growth will depend on.
And we as regulators want to ensure that we foster an environment that not only permits this kind of performance, but actually encourages it.
That's why I bring to the process of regulatory revision something that I call the Hippocratic approach.
You will be aware that medical doctors take an oath first formulated long ago by Hippocrates, an early practitioner of the healing arts. Not all of you may know, however, that the Hippocratic oath begins with the starkly simple phrase: "First, do no harm."
I have always found this phrase reassuring when I place myself in the hands of a doctor, and you just might get similar assurance from the fact the phrase is part of the vocabulary of this policy maker.
It is in part in this frame of mind that I am approaching the upcoming 1997 review of financial legislation.
I would like to talk to you today about this review and what you can expect of it. And then I would like to spend some time discussing where we go after the review.
As you know the changes introduced in the 1992 legislation governing federally-regulated financial institutions were very far reaching. This explains why it was decided that the statutes would be revisited within five years.
Two main goals were set at the start of the 1997 legislative review process. The first was to determine whether the changes made to the legislation in 1992 were functioning as intended. The second goal was to establish whether this legislative framework remains adequate, given significant developments occurring in the financial sector in Canada and internationally.
From the very start I thought the review would turn out to be a sort of mid-course correction. It appeared to me that if, in seismological terms, the 1992 reform was "The Big One", then 1997 would prove to be too soon to be creating a large aftershock.
In pursuing the review the Department of Finance consulted extensively with a wide variety of stakeholders on the update to 1992 legislation.
The Standing Senate Committee on Banking, Trade and Commerce also received submissions and held committee hearings on the legislation.
The overall assessment, I would suggest, was that the legislative framework is generally functioning well and should remain largely intact.
This is not to say that 1992 was without impact. Quite the contrary. It has permitted and indeed required that there be major adjustment among financial institutions.
Your own industry is a case in point. Major consolidation is underway.
Just recently, London Life Insurance Co. purchased some of the Canadian business of Prudential Insurance Co. of America. Prior to that, Mutual Life purchased the Canadian operations of Prudential Life Assurance Company of England and Manufacturers Life Insurance Company merged with North American Life Assurance Co.
When industry is going through a shake-up driven by policy reform and global forces, it would be a bad time to introduce more large changes. That's my view about the present.
And this view in part explains why some widely-discussed changes will not be coming out of the 1997 review.
As you are all well aware the 1996 Budget Speech announced that the policy of not permitting deposit-taking institutions to market most insurance products through their branches would not be altered as part of the 1997 review.
I am sure however that this issue will be raised by stakeholders again in the process leading to the next review of financial institutions statutes.
But to stick for the moment to the current review, I have to say that there were aspects of the consultation that I found disappointing.
Some stakeholders took what I found to be a very narrow view on issues.
In any future reviews I would like to find a way of ensuring that the process makes it possible for participants to consider the common good in parallel and in equal measure with particular interests. We all harbour generous perspectives, and I would like to make it easier for them to come forward.
In particular, I believe that the concerns of Canadian consumers must be the focal point of future reviews. I care much less about which financial institution gets which "piece of the pie" than I do about the effect of these decisions on people, on consumers, on clients.
Unfortunately, in my view, consumer concerns have been all but lost in the consultation process.
Rather, we have witnessed intensive behind the scenes lobbying, largely by industry-based forces that seem focused solely on protecting and expanding their turf.
To be frank I am somewhat surprised by the degree and style of lobby campaigning in which some stakeholders have indulged. While I expected issues to generate much discussion and interest I did not fully expect the intensity of the lobby campaign that we have witnessed since I launched the review process in March of last year.
In this heated environment it has been hard to reach a consensus on what policies would best serve Canadians as we head into the 21st century. Quite honestly this has largely been the reason for the delay in bringing forward the expected policy paper.
I believe that we must define a framework now that will ensure future reviews are open to all stakeholders, particularly ordinary Canadians, and that all can have their voices heard. We need a framework that ensures the focus of the debate remains on the broad issue of what type of financial sector will best serve Canadians.
The further process
Carrying the process further is important. Financial institutions are essential to our economic success as a nation. They fund the mortgages of Canadians, insure our homes and automobiles, attract and invest our savings and provide loans to consumers and businesses across the country.
Financial institutions employ over half a million Canadians. The strength of our institutions contributes to a world class financial system in Canada.
The first questions to ask, it seems to me, are: Do we need to do anything to maintain the benefits of our enviable system, and if so, what?
It all comes down to questions of structure. What should be the structure of the financial sector for the 21st century? What policies should accommodate that structure?
For instance, I ask myself whether there is such a thing as an optimal size of institution, or an optimal number of institutions.
Some have argued that we need to have fewer but larger institutions that compete internationally, complemented by smaller niche players.
Others maintain that in order to foster competition and innovation in the sector it is best to have a large number and variety of players.
Where you come down in this debate has serious implications.
I believe that as a general principle Canadians would be proud to see Canadian institutions being successful abroad. But would they be happy if this was at the price of reduced competition at home? Not likely. So we have to establish whether one necessarily implies the other.
The question of ownership is another problematic structural issue. The federal government has long supported the concept of widely-held ownership, for Schedule I banks and mutual life companies, for example.
Some now are raising concerns that the widely-held policy is inhibiting capital accumulation and the entry of new market players. Are these claims valid and should the widely-held policy be reviewed?
Technology too will change the structure of the financial sector. How far will electronic highways such as the internet, and services such as electronic banking, push the envelope of change? Will an investment in bricks and mortar, or in becoming a large institution, remain an advantage?
What will be the effect of technology on how regulators carry out their jobs? Will regulation continue to confer a "franchise" value on the regulated?
These issues will need study and careful thought.
Decisions will need to be made, but not before thorough analysis is conducted and proper public consultations take place. This process should occur within an agreed-upon framework.
In my view there are five fundamental parameters that should frame any discussion of the future of financial institutions. These parameters will not surprise many of you here today, they are fundamentally the same principles that I outlined at the CLHIA CEO's seminar in November.
Security is key
My outlook on this larger picture 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 security doesn't mean stasis. We don't want a financial system that has sacrificed all risk taking - and, in turn, all dynamism - in the name of dependability. There must be an appropriate balance.
Since a secure financial system is critical to the well-being of any sovereign state, I've placed this attribute first.
Efficiency and competitiveness
Next, I would list efficiency and competitiveness - at home and abroad - as attributes that must be the hallmark of the 21st Century Canadian 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 you to withstand foreign competition here at home, and to seize new opportunities in offshore markets.
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 the achievement of significant financial institution size in the international arena must not take precedence or otherwise impact adversely on the primary attribute - security - nor on the next attribute I want to cover: consumer choice.
Offer real choice
To me, competition today and tomorrow means that consumers must have real choice and not be held hostage by a constrained industry. Additionally 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.
Consumers must be able to obtain the service they require and deserve within a reasonable distance, and at a reasonable price.
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 role of the regulatory system is not to micro-manage companies or sectors. Nor is it there to prevent the occasional corporate failure that stems from normal competitive forces. And governments should be careful about 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 and final attribute that financial institutions should enjoy. 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. There can be a patchwork approach to regulation, as well as higher costs, public and private, of unnecessary duplication and overlap.
We understand how important this can be for you. You need to deal with it every day in your operations, and you ultimately live with the cost and frustrations.
The 1997 Review
So how does the current review fit in all this? Well the simple fact is that we are facing a very concrete timetable. Parliamentary approval and Royal Assent to legislative change must be obtained by March 31, 1997, when existing legislation reaches its sunset point. And while the public debate has thus far focused on a few "high profile" issues there are some neglected but important issues that must be addressed.
Consumer Issues
We are considering improving the consumer orientation of the legislation in a variety of ways. Consumer groups have told us that privacy of information, particularly in this era of rapid technological progress, is important.
Disclosure and understanding of fees is also important. Consumers want to know that they are getting their financial services for the best price possible. To facilitate this consumers need to be aware of the many options and the variety of prices available to them.
Consumer groups have told us that low-income Canadians need improved access to financial services, and we should work with consumer groups and the industry to ensure they get this access.
Easing regulatory burden on financial institutions
I believe we should act to reduce the regulatory burden on financial institutions. Regulations are important for the financial sector. They protect consumers and set out rules of the game so the sector can operate smoothly.
The Speech from the Throne last February committed government to taking appropriate action to promote a proper climate for economic growth and job-creation.
The government wants to ensure that regulatory requirements are clearly defined, and that delays are minimized when regulatory approval is required.
For example, industry is calling on the government to reduce overlap and duplication between federal and provincial regulation. Another area involves streamlining the self-dealing regime.
In addition we are looking at the number of approvals required, and who must provide them.
Fine-tuning the legislation
On legislation, we are looking at adjustments that could affect joint venture arrangements and access to capital for mutual insurance companies.
Reviewing the payments system
During the consultation period a number of stakeholders, including CLHIA, raised the issue of access to the payments system. This is no longer a matter of plumbing. The stakes have gone up. Payments are now a business power matter, an access matter, but of equal importance a safety and security matter.
I believe that this issue will need study and careful thought.
The Senate Banking Committee and House Finance Committee have already expressed interest in holding hearings on the Policy Paper, which I will release next month. I expect the Parliamentary hearings to start in the fall. This will give interested parties ample time to consider the paper and put forward thoughtful submissions.
Based on these hearings and other feedback, we could then move to tabling formal legislation later in 1996.
As you see, our tight timetable does not allow for a lot of slippage. But while the timetable is tight, I am confident we can put together a package that, in conjunction with the measures contained in C-15, which has been approved by Parliament, will allow the Canadian financial system and the federal regulatory environment to continue its positive evolution.
Thank you.
|
|
||||
| Last Updated: 2004-03-21 |
|
||||
