Notes for an Address to the Annual Meeting of the Federation of Canadian Independent Deposit Brokers

11 October 2002

BY

J. P. Sabourin
President and Chief Executive Officer
Canada Deposit Insurance Corporation


Introduction

Thank you for those opening remarks. It is always a pleasure for me to be here. I have been invited to address this conference on more than a few occasions. Indeed, I've been here a sufficient number of times that this year's conference agenda describes me as a "constant" in your industry.

While I would have preferred the adjectives used to describe some of your other speakers today – words like "enlightening", "sizzles" or "knocks your socks off" – I have resigned myself to the description of being perennial. After all, given the startling events of the past year, perhaps being described as "constant", along with the institution I represent, could be considered something of a compliment.

The Past Year

What a year it's been!

First, we saw the bursting of the dot-com and telecommunications bubbles. This set in motion what has been an erratic rollercoaster of a ride on the markets that has vaporized some $6 trillion in the market valuation of North American stock markets. Then we experienced the devastating shock of September 11th. As well as causing deep insecurity that persists today, the attack had a direct impact on important sectors of the economy, like the airline and travel industries, and restrained capital spending.

This was followed by a war – a war on terror, which resulted in Canadian casualties. We have seen heightened security measures for this country that are unprecedented since the Second World War. Indeed, when we in Canada seriously contemplate the possibility of weapons of mass destruction being smuggled through our ports of entry, you know the world has changed. That world has also seen the collapse of the Argentine economy, a historic low point in Middle East affairs, and now there is further talk of war.

In uncertain times like these, it is natural to look to institutions for the security they provide. And what has the past year taught us on that?

• The sixth largest energy trading company in the world – Enron – found to have falsified its financial statements for at least the past five years, becoming the largest corporate bankruptcy in American history.



• Arthur Anderson, one of the "Big Five" international accounting firms, found guilty of obstructing justice and is disappearing.



• WorldCom, one of the globe's largest international telecommunications companies, with operations in 65 countries, admitting to accounting fraud and filing for bankruptcy.

And there have been a string of other accounting and securities scandals – Adelphia Communications, Global Crossing, Tyco International – even that domestic symbol of the 1990s, Martha Stewart. No one would have said a year ago that these large, international firms could fail, and yet for all intents and purposes they have.

Lessons

What is one to conclude from these events?

First – what we've always known to be true is that in life one can expect the unexpected.

Second, in terms of the security of institutions, one can't take anything – or any of them – for granted. It now seems that no corporation is too big to fail. This is especially the case in today's interconnected, global financial world where events in one place can have speedy consequences in others. And once again we have seen that impropriety and failure of corporate governance can lurk in the largest of organizations with the most impressive of reputations and logos. Being big or being small provides no immunity. It's just that the bigger they are, the harder they fall and the more lives are affected.

A third lesson is "buyer beware". This year many financial consumers learned this lesson the hard way, and they have become wary. They have been given a stark reminder that there is real risk in the grown-up world. Those who have lost large investment savings, and those who feel betrayed by false claims, are not about to reinvest their money casually.

What are they looking for? They want the straight goods. They want honesty. And they want security they can trust. But let me be very clear. I am not standing here predicting the system is teetering. In fact, our Canadian financial system is in very good shape. Indeed, it is one of the strongest in the world. And that despite the fact that Nortel is now a penny stock, the telecom sector is in trouble, and that countries such as Argentina have defaulted on their foreign debt. Still, there are many reasons to be optimistic.

The telecom sector was funded by and large by the market. Banks that had exposure to telecoms or to foreign debt have done the prudent thing and taken provisions for these loans. They have done this and they can weather the storm; they are quite capable of absorbing the shocks without putting into question their future viability. They are indeed managing their risks well.

As for CDIC, we too are managing our risks. We are refreshing our contingency plans not because we are worried or are expecting a failure in the near future. We are getting ready because it is our job - our mission -, to be prepared. The market is ever changing and evolving. It develops new technologies, new products and new services and CDIC, as a prudent risk minimizer, must adapt with the marketplace.

Our Shared Role

These developments have a direct bearing on the important role that you – the members of this Federation – play in our financial system, as advisers to consumers on the vast range of investment products available on the market today.

They have a bearing on us at CDIC as well as part of the country's financial safety net. It is our mission to protect Canadians against institutional failure by providing deposit insurance, to act as a risk minimizer and to contribute to the strength of Canada's financial system.

CDIC's purposes are much the same as yours – to assist consumers and to foster financial stability. And our clients are the same as well. They are ordinary Canadians who place their savings in the hands of others, and, in doing so, have a right to expect the highest level of professionalism in the financial services industry.

I believe we also share the obligation of calming consumers in uncertain times. For nervous consumers who can't get the balanced, and objective information they need, we can be a force for greater stability. It is important for us and other players in the financial system to work to maintain that confidence. Not with vague assurances, but with the facts, with professional service, and with a constancy that can be counted on.

At CDIC, we do this by assessing risk in our member institutions; by being prepared to intervene quickly if difficulty arises; by handling consumer inquiries and by informing the public more widely about deposit insurance.

Partnership

In short, there is common ground between us, and, over the years, we have worked well together in creating a partnership. You in particular have helped us at CDIC to inform consumers about the benefits and limitations of the federal deposit insurance system.

Research tells us that a significant number of financial consumers do not receive their deposit insurance information from CDIC member institutions. They receive this information from independent professionals, like you, in the financial services sector.

We consider this Federation to be a major stakeholder for us, and we take pride in our working relationship with you. Most importantly, this relationship provides a foundation on which to meet the challenges we will face together in the years ahead. Among others, two of these challenges stand out.

Demographics

Jeff Brown may have touched on the first this morning. It has to do with the needs of an ageing population and the implications of demographic change for Canada's financial system at large.

At present, an increasing number of Canadians are facing some of the toughest investment decisions they will make in their lives. The baby-boom generation is dealing with a conjunction of financial issues that can include the disposal of their parents' assets – homes too large with the departure of children – the future needs of grandchildren – the skyrocketing costs of higher education – quality of our health care system and the reality that retirement is around the corner.

Those faced with these issues need sound and straightforward advice. Most don't have the time, or the energy, to become market savvy, or to peer endlessly into computer screens keeping up with today's world of investment and finance.

The financial needs of the elderly, whose numbers are rapidly increasing, have given rise to a whole field of specialized advice. The aged can often be overwhelmed by difficult financial choices and retreat into a conservatism that may not be in their best interests. They too need sound and straightforward advice.

My point is that as more of the population ages, the role of providing guidance, independent and professional advice is becoming increasingly important. We, at CDIC, are very pleased that the Government has established the Financial Consumer Agency of Canada. The mandate of the new agency is to provide Canadians with the straight goods on financial products and services. Its first commissioner, Bill Knight, is a member of the CDIC Board and a very welcome addition. His years of experience in the Canadian credit union movement has added to the depth of discussion around our Boardroom table.

CDIC and other federal agencies are working closely with FCAC to avoid overlap and duplication of services. CDIC is providing call centre services to FCAC and we are currently looking at new opportunities to launch joint consumer education programs.

Financial Literacy

The second challenge we face relates as much to the present as it does the future. Time isn't going to make things any easier in the financial marketplace. With the advance of technology and the increased interconnectedness of financial institutions, it's going to become even more complicated. The same will be true for the range and sophistication of financial products offered to the public as financial institutions compete.

Today's consumers, and, in particular, the generation of tomorrow, will need to be more financially literate in order to navigate the choices available. They will need to be more knowledgeable, and they will need clear, accurate and balanced information in order to make the decisions advantageous to them.

At CDIC, we see this as an important objective. Consumer education and awareness will need to provide clearer information on complex issues. In other words, information must be readily available and presented in a way that the average person can understand. There is an enlarged role here for all of us.

And this is an extremely important role because, what we are ultimately dealing with, is the accumulated wealth of an entire generation being passed on to the next. These are substantial assets that must be handled carefully because they affect the future of subsequent generations, the health of our economy and the strength of the country itself.

This is important from a larger perspective as well. Consumers are a powerful force in our financial system. They are a strong source of competitive discipline. They force financial institutions to hone their competitive edge and to maintain efficiency. Markets in which consumers function well are markets that maximize benefits overall.

Canada's economic strength relies on the ability of its citizens and Canadian businesses to stay abreast of the development and adoption of new and innovative financial methods and products. These are the lifelines of the most competitive businesses.

Furthermore, knowledgeable consumers provide stability to the financial system and the economy at large. Their knowledgeable use of financial products and services spreads risk throughout the system and helps stabilize the economy.

Thus by working together in future to both inform Canadians about deposit insurance and the financial products and services available to them, both this Federation and CDIC will be contributing to the strength and stability of Canada's financial system.

That is at the very heart of our mission at CDIC.

Other CDIC Initiatives

I'd like to take a few moments to describe some initiatives CDIC has been taking in the past year to strengthen its preparedness and contribute to the stability of Canada's financial system.

First, internally. As I mentioned earlier, we have seen compelling evidence this year that seemingly excellent businesses and institutions can nevertheless be vulnerable to poor management and sudden changes in economic conditions. Accordingly, we at CDIC have been working on contingency plans to ensure that if we are ever called upon we can meet the needs of depositors.

During the past year, we expanded our risk assessment capacity and now conduct regular risk analysis of our member institutions. Our risk assessment function now benefits from frequent updates on environmental issues affecting our members. CDIC risk managers and examiners from the Office of the Supervisor of Financial Institutions meet on a regular basis to exchange and review information on all member institutions.

We have also strengthened our technological capacity. A major emphasis has been to improve our access to relevant information, primarily through Internet-based technology. We have undertaken a review of our security systems, and have made a number of improvements to CDIC's analytical capabilities and communications channels. For example, a new data warehouse system provides CDIC employees with a single point of access to a variety of information related to member institutions. As well, we have enhanced our systems to allow member institutions to electronically file information with us.

Furthermore, in planning for contingencies, we are very conscious of the need to have employees fully prepared to meet the issues that might arise if a member institution was ever to fail. It should be noted that the last failure of a CDIC member institution was in 1996 and many of our newer employees have no experience in dealing directly with the issues that arise. Consequently, we have instituted a program to familiarize new employees with the important issues that accompany a failure, with the aim of sharing accumulated knowledge and experience.

Standards of Sound Business and Financial Practices

Our efforts to promote the stability of Canada's financial system also involve initiatives with our member institutions. CDIC's mandate was expanded in 1987 from being a paybox to being a risk minimizer. Accordingly, we introduced a policy to intervene early in the affairs of a member institution experiencing difficulty. We also instituted a differential premiums system designed to provide financial incentives for becoming a low risk member.

We have learned over the years that corporations do not fail principally because of fraud or other illegal practices, although the past year has shown this can still happen. We have found instead that failures are due largely to mismanagement, particularly at the corporate level. Recent experience of the Federal Deposit Insurance Corporation in the United States has confirmed this.

Consequently, CDIC has developed Standards of Sound Business and Financial Practices aimed at enhancing corporate governance practices and sound risk management systems in our member institutions. This past year, following a consultation process with members, industry associations, regulators and interested parties, CDIC completed the modernization of its Standards and streamlined its reporting program for member institutions. Members will report to CDIC on adherence to the new Standards beginning this year.

In updating the Standards, we achieved three main objectives:

• Align the Standards with current management practices at well-run institutions;



• Recognize that organizational structures and management processes vary among member institutions depending on factors such as size, geographic diversity and business activity;



• And, ensure consistency and compatibility between the Standards and federal or provincial statutory and regulatory requirements.

A process is now being developed to ensure that any new requirements for modernization will be dealt with on an ongoing basis, with periodic independent validation of the Standards and its related reporting program by external experts.

Increasing Public Awareness

In terms of our external environment, CDIC continued its efforts over the past year to increase public awareness of deposit insurance.

As part of a five-year national campaign, we placed print ads in general-interest and finance-related magazines, and aired television advertisements on networks and cable stations across the country. A new series of television ads are now ready to go. We have also restructured CDIC's web site, which now includes an interactive subscription service for visitors who want to receive automatic updates on the Corporation's activities. The number of visits to our site has increased by 50 per cent over the previous year to 274,000. As well, we continued to provide information services to depositors, responding to almost 16,000 telephone calls during the year, an increase in volume of 22 per cent.

Our annual public opinion survey indicates that these efforts at increasing consumer awareness are having a positive impact. Sixty per cent of those recently surveyed were aware of CDIC; up from 47 per cent before our public awareness campaign got started. Moreover, the number of Canadians who incorrectly believe that mutual funds are insured deposits declined from 40 per cent to 32 per cent.

Our objective is to see further improvements in these figures as our public awareness campaign continues. We consider these consumer-related activities as an essential part of our efforts to contribute to the strength of Canada's financial system.

International Developments

As many of you know, deposit insurance has an international dimension. This is because Canada operates in a global economy, and many of our member institutions and their clients operate in many countries.

For us to undertake effective contingency planning at home, it is essential to develop and draw on international networks and experts familiar with the best deposit insurance methods being practiced abroad.

In turn, Canada provides advice and technical assistance to countries wishing to benefit from our experience. Last year, CDIC continued its collaboration with Hungary, Jamaica, the Philippines, Ukraine and Thailand, to name a few. As well, the Corporation provided advice on a cost-recovery basis to the Hong Kong Monetary Authority and the Central Bank of Malaysia on the design of their proposed deposit insurance systems.

CDIC has also been an active player in the work undertaken by the G-7 Financial Stability Forum. Last year, as Chair of the Forum's Working Group on Deposit Insurance, I had the honour of presenting our final report, which provides practical guidance on a number of key deposit insurance issues. This report has been accepted as the most comprehensive work done to date on deposit insurance. The Financial Stability Forum fully endorsed the Working Group's report, and many countries are now using it in the design or reform of their deposit insurance systems and practices.

This activity has contributed to the creation of an International Association of Deposit Insurers, which was established in Basel, Switzerland this spring. I am honoured to be its founding Chairman and President. Through our membership in the International Association, we have access to a worldwide network on deposit insurance, which fosters better training and knowledge transfers between practitioners. This and relationships that are developed all work to lend strength to our system here in Canada. There are two primary objectives of IADI. The first is to develop sound guidance to help deposit insurers become more effective. The second is to develop training programs that will enhance available deposit insurance skills.

CDIC's Financial Position

Finally, I would like to give you an update on CDIC's financial position. In the year ending March 31, 2001, CDIC saw a 3.8% increase in insured deposits totaling some $12 billion dollars. Our most recent figures show that insured deposits have risen again, this time by 2.2% or $8 billion dollars. CDIC now insures almost $350 billion in deposits held by its member institutions.

But that is only half the story. We have also been very prudent money managers. We now have more than one billion dollars in available funds to meet future obligations. We have also once again reduced insurance premiums for our members by fifty per cent. Institutions will now pay approximately $80 million in premiums compared to $500 million just three years ago.

All of this is to say that we are in excellent financial condition. Canadians should rest assured that our deposit insurance system is sound not only today, but also well positioned to meet whatever the future might bring.

Conclusion

Now, let me warp up. I have spoken this afternoon about some of the ways CDIC has been working to contribute to the strength of Canada's financial system. We believe that in achieving our mission, we are helping to maintain the kind of stability that we are not only enjoying today, but can expect to enjoy in the years to come. What is needed – and what financial consumers want – is ongoing stability, security and constancy.

Both the Federation of Canadian Independent Deposit Brokers and CDIC have an important role to play in contributing to these elements. Moreover, our roles will become increasingly important as our population ages, and as a younger generation and future consumers navigate the more complex financial marketplace now taking shape. Our two organizations share much in common, and we have worked well together in the past.

We at CDIC look forward to maintaining our partnership with you as we respond together to these challenges.

Thank you.

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