Thursday 28 April 1994

Committee schedule

Financial Services Statute Law Reform Amendment Act, 1993, Bill 134, Mr Laughren / Loi de 1993

portant réforme de diverses lois relatives aux services financiers, projet de loi 134, M. Laughren


*Chair / Président: Johnson, Paul R. (Prince Edward-Lennox-South Hastings/

Prince Edward-Lennox-Hastings-Sud ND)

*Vice-Chair / Vice-Président: Wiseman, Jim (Durham West/-Ouest ND)

*Caplan, Elinor (Oriole L)

*Carr, Gary (Oakville South/-Sud PC)

Cousens, W. Donald (Markham PC)

Haslam, Karen (Perth ND)

Jamison, Norm (Norfolk ND)

Kwinter, Monte (Wilson Heights L)

*Lessard, Wayne (Windsor-Walkerville ND)

*Mathyssen, Irene (Middlesex ND)

*Phillips, Gerry (Scarborough-Agincourt L)

*Sutherland, Kimble (Oxford ND)

*In attendance / présents

Substitutions present / Membres remplaçants présents:

Elston, Murray J. (Bruce L) for Mr Kwinter

Johnson, David (Don Mills PC) for Mr Cousens

Owens, Stephen (Scarborough Centre ND) for Mr Jamison

Also taking part / Autres participants et participantes:

Ministry of Finance:

Abols, Imants, solicitor

Atcheson, Beth, director, financial services policy branch

Glower, Harvey, senior manager, financial services policy branch

Owens, Stephen, parliamentary assistant to the minister

Savage, Lawrie, superintendent of insurance

Smart, Joan, vice-chair, Ontario Securities Commission

Clerk / Greffière: Mellor, Lynn

Staff / Personnel: Campbell, Elaine, research officer, Legislative Research Service

The committee met at 1020 in committee room 1.


The Chair (Mr Paul R. Johnson): Today we have at least one housekeeping item that we must deal with; that is, rescheduling a committee meeting. Because of the Ontario budget day, Thursday, May 5, 1994, we as a committee will not be meeting and we'll have to arrange for another day to compensate for that.

Mr Stephen Owens (Scarborough Centre): I suggest, given that May 5 is budget day, we just drop the hearings into the subsequent dates.

In the subcommittee meetings we had scheduled June 9 as an as-needed day. Perhaps we could just use that as the cutoff day with respect to the clause-by-clause and finishing up the bill.

The Chair: Is everyone agreeable to that? Okay. Is it still everyone's understanding that we will do two full days of scheduling of witnesses?

Mr Owens: As necessary or as needed.

The Chair: We have an agreement then for using June 9 to compensate for the removal of May 5, and we will have two full days of witnesses scheduled if needed.

Mr Murray J. Elston (Bruce): Will the government still have the money to carry on after May 5?

The Chair: I have no doubt that will probably occur.

We do have one additional housekeeping item and that is the fact that the coalition of caisses populaires and credit unions would like more than we have scheduled, and that's a half-hour, for witnesses. We have a suggestion that we schedule them for a 5 o'clock appointment on one of the days and they then would have up to an hour to make a presentation. I was wondering if that was agreeable to committee members.

Mr Owens: I'd like to support that suggestion. If each individual group was coming forward, there would be four presentations, so as the Chair indicates, if we can schedule at 5 o'clock and move till 6, I think we'll be able to accommodate the coalition quite nicely. There has been a tremendous amount of work done by the credit unions and caisses populaires and they feel there's a significant amount of material they would like to present to the committee. I think it will be well worth the time.

Mr Elston: I have to oppose, as I may have received a list of all the people who have been put on the list, but I don't have it, so it's pretty hard for me to know how the coalition actually corresponds with other people.

The Chair: No one has the list yet actually.

Mr Elston: Okay. So I don't have to apologize for not having it with me then. To be quite honest, I think we should probably take a look at the list. I have no problem in looking at providing extra time for the coalition. In fact I think if there's one thing we have done in this place, unfortunately, it is that we have restricted far too much people who have an extremely important interest in this type of legislation from giving us a full view of what's happening. I agree that we should try to get some more time. To be quite honest, if we could take a look at who's signed up now, we could go over that as another item of business as soon as this is dealt with. I'm happy to see the coalition given more time.

The Chair: As I understand from speaking to the clerk, all other witnesses have been agreeable to the half-hour time period. It's been the coalition of credit unions and caisses populaires that has requested additional time because it feels a half-hour is not enough time.

Mr Elston: In fairness to a lot of the witnesses, this has happened far too much. It happened before this administration took over, where everybody thought this should be a very efficient sort of process. People are told generally: "You will either get 15 minutes or 30 minutes. How do you like it?" Most think that's their option, and to be quite honest, I think it's part of our committee problems these days, but it's not anything we should argue here. Let's give the coalition some more time, but I would also like to see the rest of the list so we can actually see who's on it and who's not on it.

Mr Owens: The deadline is 5 o'clock today and we can either have a conference call or get ourselves together on Monday after question period and review the list as has been confirmed as of 5 o'clock today, if that's acceptable to you.

Mr David Johnson (Don Mills): These are the people who responded, and the coalition is here.

Clerk of the Committee (Ms Lynn Mellor): Yes.

Mr David Johnson: So there are four groups that want extra time.

Clerk of the Committee: Yes. They were members of the coalition.

Mr David Johnson: They're all members of the coalition. There was an organization representing the smaller credit unions. I guess that's number 6 here, Ontario Association of Small Credit Unions. You're telling me that they didn't ask for additional time then.

Mr Owens: They did.

Clerk of the Committee: They did originally.

Mr Owens: If I can maybe just doublecheck with ministry people, is the association of small credit unions not part of the coalition as well, or is this an independent -- there are two independent groups.

All three parties have agreed that we would like to get this wrapped up and back into the House for third reading, and that while we certainly want to be generous and we want to get as many people in for as long as they need to speak, we do want to get the bill back.

Mr David Johnson: Sure, we all want to get this through, but democracy is a wonderful thing and we want to hear from these groups. I think Mr Elston's comments are somewhat appropriate that sometimes it appears you have no choice.

We are hearing two days, so one group could have 5 o'clock one afternoon, the other group 5 o'clock the other afternoon. But are there other groups that may want a little extra time? We may have the time, you know, without getting into a panic on this, if we have two public days.

Mr Owens: I don't think anybody's getting into a panic, Dave. I think we want to ensure that given the agreement with, again, all sides of the committee and with the industry that we need to get this done, it's important that we do at the end of the day finish the bill. We're not trying to restrict time. If it's available, yes.

Mr David Johnson: It's also important that we give people the opportunity to be heard.

Mr Owens: If the time is available, then we don't have any difficulty in scheduling people.

Mr David Johnson: I think the best course of action would be to somehow communicate with the groups or understand what groups want and then try to schedule that in. That may be all possible, and that would include the coalition getting more time. I think it may include the association of small credit unions getting a little more time as well.

The Chair: Mr Johnson, if I could just remind you that we as a committee agreed that we would have two days of hearings, that becomes a finite amount of time, and how we divvy that up I guess is more the question than anything.

Mr David Johnson: Sure, but hopefully we can divvy it up so they can get the time they need and that will happen.

The Chair: That would be most appropriate and agreeable. I have no doubt.

Mr David Johnson: I'm sure we'd all seek that objective.

Mr Kimble Sutherland (Oxford): If we have a shortage of time, of course we could change our minds and sit next Thursday morning and that would allow more people to come in.

Mr Elston: I'm happy to be here. Some other people were not as happy to be here, but the opposition party will be here, the Liberals will be here on Thursday morning if you want to do it.

The Chair: I would remind members that there is an opportunity for lockup for a pre-examination of the budget.

Mr Elston: I understand that, but the offer has been extended by Kimble, and, listen, I --

The Chair: No, just in case members forgot, I just wanted to let you know that. If the committee wishes to have witnesses before the committee next Thursday morning, all the members have to do is agree to that.

Mr Gary Carr (Oakville South): Being somebody who was there in the beginning, the reason we didn't want to give the smaller credit unions extra time is because it would set a precedent. If we'd done it to one, I think the precedent has already been set, and they have a long presentation. I think I made the point in the subcommittee, because they'd gone before Mr Cousens and done a long, wellthought-out presentation.


I think Mr Johnson's suggestion would be appropriate. We don't need to extend the number of days. Let's just add the other group, the smaller credit unions that want the extra time, on one of the days past 5 o'clock as well. Let's do it with the other folks who would like that time, and the case is fairly simple. We'll just go a little bit longer in the day and keep the same amount of days, those two groups, because we can't now go back to the smaller ones that requested first and say, "I'm sorry." That would be my suggestion and we're off and running.

Mr Sutherland: Can I just get clarified, though, what he's saying. By sitting longer in the day means sitting till 6 o'clock, or does he mean sitting past 6 o'clock?

Mr Carr: No. Most days have been only scheduled till 5 o'clock, so we go till 6.

Mr Sutherland: That's fine, that's no problem.

Mr Carr: We'll work a full day.

Mr Sutherland: There's no problem sitting till 6.

The Chair: I would just remind the committee members that we have a number of people who wish to be before the committee and they would all like more time. Very directly, they would all like more time, so what we have done as a committee is we have tried to fairly appropriate the time to the witnesses, and I think we've done that reasonably. I think we've honoured their requests up to this point in time, and probably we should live with that and get on.

Is the information clear to the clerk?

Mr Carr: As clear as it ever gets around here.


Consideration of Bill 134, An Act to revise the Credit Unions and Caisses Populaires Act and to amend certain other Acts relating to financial services / Projet de loi 134, Loi révisant la Loi sur les caisses populaires et les credit unions et modifiant d'autres lois relatives aux services financiers.


The Chair: Our next order of business is indeed Bill 134. We have a briefing by the Ministry of Finance, and our first remarks are from Mr Steve Owens, parliamentary assistant to the Minister of Finance.

Mr Owens: I'm hoping we can do something about the noise outside so that we can all hear each other without having to yell.

I welcome people to committee this morning. I'm pleased we're finally able to be here today, and I don't propose to repeat verbatim the points that I made during second reading of this bill in the House, but there are some things that are important to repeat, as well as to perhaps make some comments on some of the issues that were raised during the second reading debate.

It's important that members of the committee and the community understand the reasons for the passage of this bill. Clearly we want to strengthen the ability of Ontario's financial institutions to compete and grow in the marketplace. We want to strengthen the ability of Ontario's financial institutions to contribute to the economic development in communities across the province. We want to ensure that our regulatory and prudential controls keep pace with our reform initiatives so that the Ontario public remains protected and the government uses its regulatory resources in the most effective way possible and, finally, to ensure that in all we do the interests of Ontario consumers and depositors are protected.

I also want to address, as I mentioned, some of the issues and concerns that were raised during second reading. I felt that the discussion that took place at second reading was both constructive and helpful, and I do want to take the opportunity to welcome Dave Johnson, the member for Don Mills, to the committee. His input will be much appreciated.

In terms of the cooperative and constructive approach that has characterized Bill 134's progress so far, I've also asked staff to discuss the directions we're considering taking in the regulations which will supplement the legislation. I hope this will help the committee get a fuller picture on how Bill 134 will operate.

With that, I'd like to touch upon some of the key issues that were raised during second reading.

Firstly, there was some concern raised about our proposal to let credit unions issue shares to the public. Questions were raised like: Would this change the character of credit unions and member ownership? Would credit unions be subject to hostile takeovers? How would the public be protected?

I think most members would acknowledge that all financial institutions need capital to grow, to develop, to ensure solvency and to support their lending. The credit union movement certainly made it clear to us that they need the ability to issue shares to the public.

But I do want you to know that the new shares will be non-voting, non-membership shares. The principle of one member, one vote will still define credit unions and caisses populaires in Ontario. Credit unions and caisses populaires themselves will decide whether to issue shares and they will set out the restrictions and conditions attached to these shares.

If a credit union wishes to issue new shares only to its membership, there will have to be an offering statement approved by the director of credit unions and caisses populaires. This is used quite successfully today in other cooperatives. If a credit union wishes to sell shares to the general public, it must comply with all the requirements of the Securities Act.

These features will (a) help credit unions raise the capital they need, (b) preserve the unique nature of the credit union movement and (c) provide the public with a high level of protection.

With respect to the questions raised on the impact on smaller credit unions, the question again: Would the bill have the effect of driving small credit unions out of the field? I guess the issue with respect to the smaller credit unions: Does this bill favour large credit unions?

Bill 134 is designed to strengthen the ability of all credit unions, large and small, to operate in the marketplace as they choose, given the interests of their membership. The legislation is both enabling and empowering. It provides credit unions with the tools they need should they desire to enter new lines of business; it does not require them to do so. Small credit unions have successfully carved out niches and can continue to do so.

In fact the bill contains a number of features that will be particularly helpful to the smaller units. The expanded role of leagues will enable smaller credit unions to participate in larger loans through syndications. Leagues will be permitted to issue shares to members of credit unions and will be able to use the money raised to support credit unions with lower capitalization. The regulatory and approval system is being streamlined, which should lower costs for smaller units.

Members will know that the financial services marketplace is highly competitive and is changing rapidly. Members will also know that the number of small credit unions has declined over the years as a result of amalgamations, plant closures and changes in the community's membership. These changes are not driven by legislation. In fact our legislation should strengthen the system, small and large credit unions, as it faces the marketplace.

Another issue raised at second reading was whether the identity of credit unions would be diluted by the provisions of the bill allowing credit unions to expand their membership base. Our proposals are designed to strike the appropriate balance between flexibility and maintaining the credit union's identity. Credit unions need the flexibility to respond to the changing population patterns and to respond to clear cases of consumer demand without having to go through a complex, time-consuming regulatory practice.

We want to ensure that a business or a person living "on the other side of street" of a credit union's bond of association can become eligible for membership. Under the current system, it can take up to a year for these membership changes to go through and, in our view, that's far too long.

We want to prevent dilution of membership as well. Please note that Bill 134 provides that a credit union's board can accept potential members up to only 3% of the current membership base. Members within the original bond of association will still clearly control the institution. Also, Bill 134 requires that any significant change to the bond of association will continue to require approval of the membership.

Again, it was noted during second reading the area of insurance retailing by credit unions was an issue of concern for credit unions. Bill 134 takes a somewhat different drafting approach than the federal government to achieve the same result. As members will know, the issue of insurance retailing by deposit institutions is a particularly sensitive issue in the financial services sector.

Members will also know that the bulk of the financial services sector is regulated by the federal government. In their financial reforms of 1992, the federal government established the benchmark rules in the area of insurance retailing by deposit institutions. These rules permit deposit institutions to undertake certain authorized insurance activities, but by and large prevent them from selling or promoting insurance in their branches.

These federal rules are detailed, complex and, as I have noted, have become accepted marketplace standard. When we introduced Bill 134, we made it clear that our goal was equivalency with these marketplace standards. We would permit credit unions to undertake the same kinds of activities that banks and trusts could, but no more than that.


We also made it clear in this area, and indeed in all of our financial service reform efforts, that we did not want to build in statutory barriers that would be difficult to move in the future. Members will know that it's taken nearly 20 years to change the Credit Union and Caisses Populaires Act, and this wait has not been helpful to the movement. Members will also know that the federal government will be reviewing and amending their financial services legislation in 1997. If we build barriers into our credit union legislation now, we could be hurting our own provincial financial institutions in the future as their federal competitors gain more powers.

In Bill 134, we have built a legislative framework that does two things:

(1) It provides that credit unions cannot undertake insurance activities unless those activities are prescribed by statute.

(2) It provides a sufficiently broad range of regulation-making to allow us to match the federal rules in this area.

I am very pleased to say to you that after nearly six months of detailed discussions with the movement and with the insurance industry, we have been able to satisfy all parties that our goal of equivalency with the federal rules has been satisfied.

In terms of life agent reform, members will know that Bill 134 contains three important components. I've spoken of the credit unions and caisses populaires reforms, and the bill also contains significant amendments to the Insurance Act and to the Securities Act.

Both sets of reforms also reflect the government's commitment to modernizing Ontario's financial services legislation, strengthening the ability of the industry to compete in the marketplace, and ensuring the public is protected through the most efficient and effective use of our regulatory resources.

The amendments to the Insurance Act reform the regulation of life insurance agents in Ontario. Bill 134 establishes a legislative framework that will enable us to introduce a higher standard of education in the industry; adopt a more flexible licensing system with more targeted standards and requirements for agents; allow greater flexibility in the life agent workforce to allow the industry to better respond to changing consumer demand; strengthen consumer protection standards in this industry through a variety of means, including an agents' code of ethics; and clarify and strengthen the industry's responsibility for the conduct of its agents.

Many of our life agent reform directions will be put in place through regulation. Again, I have asked staff to go through the initiatives in detail with you today.

These life agent reform are the product of at least four years of consultation with the industry, with agents and consumer groups, and they represent much-needed amendments to the Insurance Act. I will say that it's taken approximately 40 years for these changes to be made.

The third part of Bill 134 will strengthen the framework of securities regulation in Ontario. The Securities Act has not been rewritten since 1978 and has not had significant amendments since 1987. Since then, our capital markets have evolved rapidly with constant innovation. These amendments will update some important parts of the Securities Act and are intended to enhance confidence in Ontario's markets as a safe place to invest.

Bill 134 updates the Ontario Securities Commission's power to investigate alleged misconduct and its remedial powers to deal with misconduct when it's found.

The amendments also provide the Ontario courts with new powers where there is a breach of the securities laws. These amendments will permit the OSC to fully recognize self-regulatory organizations such as the Investment Dealers Association of Canada and to assign to them registration responsibilities, subject to oversight by the OSC.

The bill also amends the Toronto Stock Exchange Act and the Toronto Futures Exchange Act to extend disciplinary jurisdiction of the exchanges.

All of these securities amendments in Bill 134 will further enhance the effectiveness of securities regulation in Ontario. It will further help to ensure that Ontario remains as a centre of capital markets in Canada.

With respect to the omnibus nature of the bill, there was a question raised on the bill and perhaps what is the central theme and, thirdly, would the government consider other financial services amendments?

On the last question, absolutely. The government will introduce amendments to the Insurance Act in response to requests by the farm mutual industry. I believe that both parties will be able to support the amendments we have developed in consultation with the Ontario Mutual Insurance Association.

Like credit unions and caisses populaires, Ontario's 51 mutuals are based on the principles of cooperation and self-help. They are owned by their members and they play an important role in the economy of communities across rural Ontario. Like credit unions, they face statutory restrictions that are limiting their ability to compete in the marketplace and their ability to serve their membership.

At the start of clause-by-clause hearings in this committee, I will be tabling motions to amend the Insurance Act portions of Bill 134 to make a small number of very important reforms which will strengthen the ability of farm mutuals to remain competitive and, at the same time, ensuring that our prudential controls remain strong to protect Ontario policyholders.

I know that farm mutual insurers have been speaking to members on both sides of the House about the amendments they're seeking and I'm pleased that both opposition parties have indicated support in principle for such amendments.

Again, in terms of briefing both government colleagues and members of the opposition, we will certainly endeavour to do that before clause-by-clause.

As you can see, Bill 134 is a large and very complex piece of legislation. It deals with important matters affecting the vitality of financial institutions in Ontario and addresses a range of issues that have gone unresolved for a number of years.

Since the bill was introduced in December 1993, we have been consulting closely with the industry, and the response to the legislation has been very positive.

In their review of this complex statute, groups such as the credit union-caisse populaire coalition and the Canadian Bankers Association have made a number of very useful suggestions about how this bill can be improved. We've considered these suggestions very carefully.

I want to let members know that we'll be coming forward with a number of proposed amendments to the bill which make an already strong piece of legislation even more effective. It is the plan of myself and my government to send the proposed amendments to the opposition members of this committee early next week so that members will have an opportunity to review and ask questions before clause-by-clause begins.

When I moved that Bill 134 receive second reading, I noted that Bill 134 was a step in our efforts to reform Ontario's financial services legislation. Bill 134 is not intended to be comprehensive financial services reform, for, as members all know, there still is a huge task ahead with respect to this issue and could not be included in a single bill. Bill 134 is a first step and it is a significant step.

Other work remains to be done, and I know that members have asked and will continue to ask about work with respect to the loan and trust reform. Let me say that we have been working very closely with the trust industry to identify reforms that will help them play a stronger role in providing capital for business growth and development in Ontario.

Our talks with the industry have been very useful and they have helped us clarify and develop our policy. I hope we'll be in a position to move forward on loan and trust reform in the near future. I understand that the loan and trust industry will be making presentations at this committee and I'm looking forward to hearing their representations and listening to their suggestions.

At this point, I'm going to leave off and ask that staff begin the technical briefing.

Mr Elston: Mr Chair, it may be okay for Mr Owens to ask if his staff can start, but I would like to make a couple of comments about his introductory remarks first.

The Chair: By all means, Mr Elston.

Mr Elston: He's gone through a list of I think some of the items that we raised during second reading debate. One of the items that I had asked for, before we get into the technical briefing around the bill, was the briefing on the status and health of the credit unions and caisses populaires, because I think it's extremely important for us all to know that all are now in a good, healthy condition financially. As you know, through the early 1980s, starting in the 1970s for some and through the early 1980s when the high interest rates hit, some were caught. There was a new attempt to try and stabilize their financial circumstances.

I'm wondering, Mr Owens, if you would be prepared to allow Harvey to give us the certificate of approval of the financial health of the credit unions and caisses populaires so that then we can dispense with that as an issue, because it really is an issue when you talk about expanding services. I don't know of many credit unions whose members don't come into their meetings and say, "Are you sure we can actually do this to the people who are advocating expanding the menu of services?" So, for us, it's important to get the Good Housekeeping seal of approval, and perhaps if we could start there and then go into the bill, that would dispense with some of the issues, anyway, around some of the sections.

Mr Owens: I would like to thank Mr Elston for his question. It is an extremely important question. I'll turn the floor over to Harvey Glower from our ministry.

Mr Harvey Glower: I'm going to just give you a very brief outline which dates back to 1985. Since 1985, it's our view that the system's stability has strengthened quite significantly. The assets have more than doubled, from $6 billion to over $12 billion; the reserves and the capital in credit unions and caisses populaires have grown from less than 1% of assets to over 4% of assets; and since 1987, as well, both the number and the size of the deficits in the system have declined.


In 1987, for example, there were 90 units with deficits of approximately $87.5 million and between 1987 and 1993 we had identified approximately 90 new deficits. As at December 1993, however, we now have 59 units in surplus, 51 units were merged, 63 units are currently under dissolution and then of that total of 182, there are only nine units in deficit presently with a total deficit position of $1.4 million out of a total asset base of $12.5 billion.

So the surplus in credit unions and caisses populaires right now is 3.36%. That compares extremely favourably with trust and loan companies of 0.73% and with the chartered banks of 2.97%.

Mr Elston: The reason we're sort of getting into this, of course, is the whole issue about who's going to be propelled to do certain things, because there is competition inside the leagues and the organizations, as you know. Can you give us the number of credit unions, that now exist?

It's my abiding interest, and it was when I was over at the ministry, in seeing what I thought was an unfortunate decline in the number of units, that there appeared to be a drive to, rather than stabilizing and achieving good local representation in the credit unions, achieving a much easier regulatory framework for managing local organizations, ie, it's better to have one bigger one with several outreaches than it is to have a whole lot of small ones. That has been my position. You and I have talked about it, and I used to talk a lot to OSDIC about it because I felt that it crashed and burned too much. I thought it was actually removing some of the independence of the credit union movement, and I still believe that now, because it's my view that a number of people, unfortunately, are being forced to amalgamate when they could be renovated.

That's a bias of mine. I fully admit that. But I need to see what the numbers are like, because it's my view that the numbers of independent credit unions, that is, independent in the sense of having their own operation as opposed to be merged or amalgamated, are declining, and this ought not to be, in my view, the public policy of the province. I think we should have the independent organizations, if possible.

Mr Glower: There are a number of issues that you've raised. Just to give a bit of a highlight in terms of the composition of the various groups, Credit Union Central of Ontario currently represents 440 credit unions with 745 business locations, so that would include branches.

La Fédération des caisses populaires de l'Ontario, which operates primarily in eastern and northern Ontario, currently has 43 units with 66 locations, and I think they've only declined by one over the last five or six years. L'Alliance des caisses populaires de l'Ontario currently has 14 units -- they've increased by one -- with 23 locations, and the Association of Credit Unions, which are primarily large independent credit unions who are not associated with any league and other unaffiliated credit unions, has 32 units with 102 locations.

The primary decline, therefore, has been in the members of Credit Union Central of Ontario. A lot of that has been due to the deficit units. Of the nine deficit units today, eight of them are still members of Credit Union Central of Ontario.

In the majority of the cases, even over the last number of years, it's been Credit Union Central of Ontario's policy to work with the deposit insurer to prepare the plans as to whether one of their members would ultimately be merged, amalgamated or dissolved. In the majority of the cases, even though there's been a decline in the number of units, the asset transfers that have taken place have been with other credit unions so that there is a very small amount of assets that are lost out of the credit union system to somewhere else.

The asset base and the membership base: The membership base has remained relatively flat because of increases and decreases, but the asset base has grown. As I mentioned, it has doubled. So we are not losing assets even though there have been deficits and ultimately mergers and asset transfers.

Mr Elston: We could probably go on with this for some time. Harvey and I, and others, have on some occasions.

I regret that the test is becoming asset-oriented as opposed to service-oriented, which of course is what the nature of the credit unions is. I know all of our sense of strength has to have some kind of benchmark for us to proceed on. I understand that the renovation plans which were put in place in the 1980s all tried to elevate the level of reserves and the whole thing, but for me, a measurement of success in the credit union organizations and the caisses populaires should not be first and foremost the size of their asset base or any of that. It should be in the ability, which is where they came from initially, of the organizations to regionally or, in the best sense of the word, parochially manage financial matters for their local citizens.

I see us being driven far too much at this stage by trying to implement an easy template for regulation of them, and as a result, losing or taking from them their ability to be flexible and independent in the way they issue credit to their members. That's really been their chief and most beneficial function to this point, being able to manage in a more personal and personable manner in smaller locations the credit issues of the area.

I just raise that as a big concern, because when you take a look at what's happening, it's making a lot of the organizations, particularly the larger organizations, look very much just like another bank, if they happen to have large assets, or just like trust companies if they happen to be more mid-range size. I just want us to be careful, because while Steve said, "We're not changing the nature of the credit unions," I have a view that it isn't going to be easy for them to remain in their same characteristics for very long with the way they're being moved.

Mr Glower: If I could just make a couple of comments, I think most of the credit unions and caisses populaires would probably argue that we've provided them with an easy template. If anything, I think we've been fairly vigorous to a certain degree in limiting their growth to the extent that they have their surplus and capital built up. Even though their assets have doubled, as I pointed out, their reserve, which is their strength, their actual base is what has increased. When you actually add in the equity shares or their membership capital base, they are at approximately 3.94%, and that's starting from a base of about 1% in 1985. So that's been significant.

In spite of our regulatory prudential nature, the loan growth -- well, it's primarily in the loan growth. I guess it's our view that they're really still serving their members. That's probably evident from the fact that their asset base has grown so much and that obviously they are still providing a very useful service and a very important market niche.

Their ability to identify their members' needs is also evidenced in their very low delinquencies. I'm sure most people, whether it's from their own personal experience or reading in the press, would know that the loss experience in credit unions is nowhere near what we read about for the banks and the trust companies and their other competitors.

Mr David Johnson: From the numbers that you gave us, we are looking at just over 500 units, Credit Union Central, caisses populaires etc today. Is that correct?

Mr Glower: It's 520.

Mr David Johnson: If we were to go back 10 years ago, what would that number have been at that point?

Mr Glower: It probably would have been about double; about 1,000 units 10 years ago.


Mr David Johnson: There has been quite a shrinkage, through amalgamation primarily, I guess.

Mr Glower: Strictly in the number of units.

Mr David Johnson: Through the member for Bruce's questions and your answers, I wasn't entirely sure. Is there a changing attitude towards the smaller credit unions, the very small ones? Is there a feeling, a concern, a thrust to support amalgamation of these units?

Mr Glower: From the regulatory point of view, I don't think there is any one thrust or another. A lot of the decline in the number of units has also been as a result of voluntary dissolutions, where the members themselves decide that. If their credit union today is not their primary financial institution and they want to be serviced by a different financial institution that is not a credit union, they would undergo a voluntary dissolution and usually take the reserves that have been built up with them.

The regulator itself has no particular course of action. In fact, I think the 80-20 rule -- and I'm just looking for the numbers here -- operates right here, where 80% of the credit unions, in terms of numbers, represent 20% of the assets. So the majority of the credit unions in fact are, if you will, small credit unions.

If I use a cutoff, for example, of $10 million in assets, it's about a 60-40 split; 60% of the credit unions represent assets under $10 million per unit. I think the evidence supports the fact that the majority of our units are still small units, and their reserve base is among the strongest in the system.

Mr David Johnson: You mention the word "reserve." I didn't expect to be here today at this point yesterday, so forgive me if I'm a little bit behind, but one of the concerns that I've heard -- maybe we should be getting into this later but we've sort of started into it here now -- is that as a result of this bill there is a changing attitude towards the reserves that will be required on hand, depending on the different risk assessment or something like that. There is concern that this will impact on the smaller credit unions.

I think the claim is that the smaller credit unions know their members, they work in the same business, that sort of thing, and the default level, the claim -- I don't know what your statistics show, but the default level with most of the smaller units is much lower. You don't dare default on the guy working across the bench from you sort of thing, because you've got to come into work and see him day after day, so there's a great deal of pressure to keep up on payments. If there is a change in the reserve structure, it may actually impact more on the small credit unions than on the big ones.

Is that so, number one, and if it is, isn't that sort of a disincentive for the small ones and doesn't it substantiate maybe a feeling that there is a thrust against them?

Mr Glower: We've done some homework. I think Mr Cousens may have raised this during the debate. The effect of adopting what is called the risk-weighted capital approach is benefiting the majority of the smaller units. I'll show you how it benefits them in a moment, but obviously the historical performance of the system as a whole -- I think I've sort of indicated that the balance is towards smaller units, in any case. That's where the majority of the lending is, in the consumer lending. To the extent that some of those units are a bit larger, they would get into mortgage lending.

The loan loss experience has been positive in the credit union system overall, so we are also assigning what would be a lower risk-weighted amount for credit unions as they might for banks and trust companies. That would be an 80% risk-weighting as opposed to 100% risk-weighting, because of that stronger approach, the knowledge of the members and what not.

In any case, the benefit to the smaller units is as follows: For units under $1 million in assets, we have found that there are nine units which do not comply with the current requirements and in fact they will comply with the risk-weighted system approach. The four units that currently comply will in fact not comply under a risk-weighted system. So for units under $1 million, there is a benefit of five: five more units will in fact comply.

For units under $5 million in assets, 18 credit unions and/or caisses populaires which do not currently meet requirements in fact will comply and eight units that currently are in compliance will be below the risk-weighted system measurement, so a net benefit there of 10. All other units within these two groups, and I don't know the number off the top of my head, will continue to comply with the new requirements.

So those that we are currently monitoring for a specific reason of not complying -- in fact there is a net benefit and everybody else who is complying today will continue to comply under the new methodology. So there isn't that benefit, and it's not detrimental.

The Chair: I just want to interject at this point and that I have no problem with the way things are going. However, the committee did have an understanding that we would have our technical overview of the bill this morning, and we were going to take basically about an hour for the technical presentation and about an hour for questions and answers.

It's just more difficult as we do it piecemeal than it is to go forward with the whole presentation of the technical overview and then use the rest of the time for questions and answers.

So if I could have the indulgence of the committee, I think we should continue with the technical overview by the staff from the Finance ministry and then we will have some time left for Qs and As.

Mr Owens: If I could just ask the members of the opposition a quick question with respect to their amendments. Do you have any idea when your amendments will be available to the committee?

Mr Elston: If I may, we were kind of waiting to see the amendments which are being proposed. For instance, we were being told that the mutuals amendments would be considered. I've held off in doing anything; obviously, you're going to bring them forward. So I can't bring forward amendments when I know you're going to have a package. You told me yesterday there would be maybe 27 items. It seems rather reckless of me to go around and then try and guess which ones you're going to bring in.

Mr Owens: Some 127.

Mr Elston: Sorry, 127. I now stand fully corrected.

Mr Owens: Thank you for shortening my --

Mr Elston: That now will bring in nine more units into compliance and it will lose 18 more. I don't have them ready. My considerations of amendments would be on the basis of some of the presentations and just how much there is concern around the direction that we'll be going, but obviously, the mutuals is one area I was going to be very interested in. So I'm not prepared to do it, but as soon as I can, I will share those with everybody here, obviously.

Mr Owens: My understanding from the ministry perspective -- and maybe folks from the ministry can clarify for our purposes -- our amendments should be ready by Tuesday, Wednesday of next week.

Mr Imants Abols: They will be ready by the end of the week. That means I'll have them in my hand this Friday, but I'd like to review them before they're sent out. Definitely by the beginning --

Mr Owens: So they will be ready early next week.

Mr Abols: That's right.

The Chair: Do you know who is talking now?

Mr Owens: Imants, please introduce yourself.

Mr Abols: My name is Imants Abols. I'm legal counsel with the office of legal services for the Ministry of Finance.

I just want to add one gloss, if I may, to the last comment about the concern about the shift from -- if I may, Mr Chairman -- emphasis on reserves to emphasis on equity capital. I think it's important to understand where the pressure for that comes from. It exists today in the absence of this new regime and it will continue to exist despite this new regime because the reserves are built up, as committee members can appreciate, from the profit margins that credit unions can generate in selling their product, and because they're faced with the same competitive pressures that all financial institutions are faced with today, those profit margins are shrinking.

The advantage that other financial institutions have is that they have other ways of accessing other forms of capital and thereby maintaining and growing that cushion that all businesses need to survive difficult times and to prosper in good times.

Giving the ability to credit unions to access capital markets is really a plus for all units, whether large or small. In the case of small units, it's true that there may be certain economies of scale that they can't manage, that they can't go out on their own and access this capital, but the act does provide an ability for leagues, on behalf of their members, to issue a security and create a pool of capital that would be shared by all members of that league.

So it isn't a pressure that's being generated by this act; it's a pressure that exists there and is being generated by the marketplace, and our view is that this new regime will help them deal with those pressures.


The Chair: Thank you very much. At this time, if you have a planned presentation, I would suggest that we proceed with that. I would ask the presenters if they would please identify themselves for the purposes of the committee members and for Hansard prior to making comments; not every time, just the initial time.

Mr Sutherland: A clarification, Chair: The committee is sitting this afternoon?

The Chair: Not as I understand it, Mr Sutherland.

Mr Sutherland: Okay.

The Chair: We had an understanding among the committee members that, because of today, there was a need for some members to get back to their ridings this afternoon in a timely fashion, as I understand it.

Mr Sutherland: I guess my only comment is, we're having the presentation, then you're saying an hour for questions afterwards.

The Chair: That wasn't something that was pre-arranged.

Mr Sutherland: Yes. It's just that we're not going to sit next week, so the hour for questions is going to be two weeks from today. Is that what we're --

The Chair: No, no. I believe some of that presentation has already been made; maybe I'm wrong. But I think we should undertake to get under way and see how much time's left.

Mr Sutherland: Okay. The committee is adjourning at 12, though; correct?

The Chair: The committee certainly has all the decision-making power. If they should, for some reason, decide that they want to sit this afternoon, we'd have to see about arranging that.

Mr Sutherland: I guess if we're going to do that, we should, before they start the presentation, make that decision as to whether the committee will be sitting this afternoon.

The Chair: First I'll ask the clerk if that presents any technical problems. No? No, there are no problems with that. Is everyone in agreement with sitting this afternoon?

Mr David Johnson: How long are you going to be?

Mr Abols: An hour.

Mr Jim Wiseman (Durham West): I've got three hours of questions.

The Chair: So it looks like there's an agreement, then, at this time that we will come back following routine proceedings this afternoon.


The Chair: I suggest we start and we have an agreement to come back this afternoon. Does that cause a problem for the staff of the Finance ministry? No? Then I suggest that at this point in time we start.

Ms Beth Atcheson: My name is Beth Atcheson. I'm the director of the financial services policy branch in the Ministry of Finance. What we propose to do is introduce the presenters. We will then go through the three areas in the bill and then move to questions, if there's any time left in this portion, and we would be pleased to come back this afternoon.

On my immediate right is Joan Smart, vice-chair of the Ontario Securities Commission, who will deal with the securities portion first; Lawrie Savage, the superintendent of insurance, who will deal with the life agent reform portion of the bill; and Harvey and Imants have already introduced themselves.

Ms Joan Smart: The amendments to the Securities Act are generally intended to provide some updating to the act and also to address some developments in the capital markets and the law, such as the charter. The amendments are really in three main areas: first of all, amendments to the investigatory and remedial powers of the commission and the courts; secondly, amendments with respect to recognition of SROs, self-regulatory organizations; and thirdly, there are several amendments to the Toronto Stock Exchange Act and the Toronto Futures Exchange Act dealing with their disciplinary powers.

What I propose to do is walk you through the bill pointing out the sections where some of the significant changes have been made.

First of all, in the definitions section, the definition of an associate has been changed, so relatives and spouses will only be associates if they're living in the same house. The significance of this is in the insider trading provisions where there's some limitation now placed on those provisions.

Secondly, the definition of the director has been changed to recognize the executive director, who for some time has been the COO of the commission.

There has been added a definition of market participant and a definition of Ontario securities law. These definitions are significant when you come to the sections dealing with compliance reviews and remedial powers of the commission.

Part IV of the act, dealing with the executive director and secretary, is largely a housekeeping provision which addresses the fact that the executive director is now formally recognized.

Part VI, which is "Investigations and Examinations," is somewhat more significant. First of all, investigation orders: The proposed amendments to section 11 clarify the scope of the investigation powers of the commission. Under that section, the commission can order an investigation with respect to any matter it considers expedient for the due administration of the securities law or the regulation of the capital markets in Ontario or in another jurisdiction. The latter authority is important given that securities transactions tend to be interprovincial and international in a lot of cases, and this is consistent with the increasing effort to cooperate and coordinate securities regulations.

Mr David Johnson: Are you going through the bill when you're talking about this?

Ms Smart: Yes.

Mr David Johnson: Could you give us the page number you're on when you do that, just as you continue, if it's possible? It would be easier to follow.

Ms Smart: I, unfortunately, have my copy out of the OSC book, which doesn't have the same page numbers.

I'm at page 155.

Then over on page 156, I'm now at "Financial Examination Orders." Currently, the commission can examine the financial affairs of a recognized clearing agency, registrant or reporting issuer and the books and records of custodians. The proposed amendments clarify and broaden the current audit power to permit the commission to order a financial examination of any market participant.

In section 13, which deals with the powers of an investigator or examiner, which is on page 157, currently an investigator can seize and take possession of documents, and he can do that without a court order. The amendments will require that a judge of the Ontario Court grant an order, but the search-and-seizure powers are broadened somewhat.

Moving over to page 159, sections 17 and 18, which deal with the use of compelled testimony, under those sections the commission can order that compelled testimony be disclosed, but it can only be disclosed on prior notice to certain people set out in that section. Secondly, limitations are placed on the use that can be made of compelled testimony. For example, it can't be disclosed to a police agency without the consent of the person who gave the testimony and it can't be used in certain provincial court prosecutions.

Part VII, which is on page 160, which deals with recordkeeping and compliance reviews: The amendment will extend to all market participants the present duty of registrants and certain others to keep books, records and other documents necessary for the proper reporting of their business transactions and financial affairs. The commission will also have the power under this section to go out and conduct reviews to determine whether Ontario's securities laws are being complied with.

Part VIII on page 161 dealing with self-regulation: Currently, the OSC has the power to recognize stock exchanges and clearing agencies, and in some limited respects can recognize the Investment Dealers Association. Up until now, our supervision of the Investment Dealers Association has been done largely by an agreement that we've had on an informal basis with it. This section of the act will give the commission the full authority to recognize and supervise self-regulatory organizations. Currently in Ontario, there are really only two operating: one is the Toronto Stock Exchange and the other is the Investment Dealers Association.

The amendments in that section will also permit the commission to delegate to the SRO certain of the registration responsibilities. We intend, by doing that, to gain some efficiencies in regulatory structure. Of course, that will be subject to supervision by the commission.


Turning to section 122, which is at page 169, the offences section, currently where a company is found guilty of an offence under the act, a director or officer who permitted, authorized or acquiesced in the commission of the offence may also be found guilty. This section is being amended to eliminate the requirement that a principal actor be found guilty. So now a director or officer can be found guilty even though the company itself isn't charged. That's to deal with situations such as the situation where a company is no longer in existence at the time the charge is laid.

There's also been a definition added on page 170, of "loss avoided." The significance of that is that there can now be a fine for insider trading, which will be calculated on either the profit made or the loss avoided.

Turning to the commission remedies, page 171, section 126, dealing with interim preservation of property, the commission currently has the power to make an order freezing assets. Under the amendments, the commission will be able to freeze assets when it considers it expedient for the due administration of the securities law or the regulation of the capital markets or to assist in the administration of the securities laws of another jurisdiction or regulation of their capital markets. However, such an order has to be reviewed by a judge of the Ontario Court as soon as practicable and, in any case, no longer than seven days after the issuance of the order.

At page 172, section 127, currently the remedies that are available to the commission where there has been misconduct in the marketplace tend to be fairly substantial, such as orders to take away someone's registration or orders removing their exemptions, which has the effect of basically taking them out of the capital markets. There have been several new remedies added here which are intended to be more appropriate in certain circumstances.

First of all, when the commission is satisfied that a market participant hasn't complied with the securities law, it will have the power to make orders requiring that the market participant provide or not provide or amend a report or any other document.

Secondly, when the commission is of the opinion that it's in the public interest, it can make an order that a market participant submit to a review of its practices and procedures and institute changes or that a person or company be reprimanded.

At section 128 on page 174, the amendments significantly expand the range of remedies that are available to the Ontario Court (General Division) on an application by the commission. Currently, the courts do have the authority to make orders directing compliance with a decision of the commission or with the legislation. A number of new remedies are added here. Where there's been a breach of Ontario securities law, for example, the court will be able to make an order prohibiting someone from being a director or officer of a public company or ordering disgorgement.

Mr Elston: Excuse me a second. When I was listening to Ms Smart providing us with the information, are there any of these items which are going to be subject to amendments to the amendments that you've just gone through? For a second you were talking about "the amendment will." What you meant was the section in here that is amending your current act will allow you to do anything.

Ms Smart: Yes.

Mr Elston: Are you going to tell us if there are going to be amendments proposed in your section of the act where we do this technical briefing? The problem for me is that I find this quite helpful, but if there are going to be some other changes that are floating through the securities part, maybe at the beginning of the next presentations by the others, they could say, "There are going to be some sections that we're proposing amendments to," and enumerate those so we can put a little asterisk beside them.


Mr Elston: Oh, I see there may be some technical difficulty. If some sections are going to be added obviously for the Ontario mutuals, that's not going to be a difficulty. We're not going to ask you to enumerate every section to be amended. But when Joan's going through this, which I find quite helpful, if there is some word tightening to be done or if there are some other things that are going to help, maybe you could just highlight those for us. Or maybe at the end of your presentation you could say, "There will be a proposal for three or four more changes," or whatever.

I notice in Steve's presentation, he said that some of the presentations by some intervenors, the Canadian Bankers Association and others, in the discussions have helped in narrowing a band of concerns. In fact, I see that some of those presenters or some of those people who were put on the list to be presenters have not now asked to be on, presumably because there are going to be some changes.

I don't want to make the task any more onerous, it's just that if some of these sections are going to be changed, then obviously the questions we have may evaporate. That's all.

Ms Smart: As far as I'm aware at this point, there will be some amendments to the securities section. I don't think any of them are very significant. In fact, most of them are things like "comma by" and changing the wording, but not significantly changing the meaning.

Mr Elston: I know that when you get down to the final words, the comma and the one-word change sometimes drive the corporate and securities people up the wall. In any event, that's helpful. Just as long as we know that generally speaking the overall is going to stay generally as the presentation is. It helps.

I was just driven by the sense that 127 amendments are going to fall on us next week and we're now going to have to search through to see whether or not the compliance is general or whatever with the technical briefing we're getting today. I'm just trying to make it easy on ourselves. I guess that's what I was asking for.

Mr Abols: What I could perhaps suggest is that we already have a table of contents listing all the sections that are going to be amended. The table of contents doesn't tell you how it's going to be amended. You have to see the motion itself.

Mr Elston: But that will be helpful.

Mr Abols: I could bring that in this afternoon and circulate it to the members.

Mr Elston: Great.

Mr Abols: It's not up to date. There are still a few more amendments coming, but it lists virtually most of them.

Ms Smart: The next section I'd refer you to is 129.1 at page 177, which deals with the limitation period. The existing limitation period in the act requires that a provincial court prosecution be commenced within one year of the date on which the facts on which the prosecution is based first came to the knowledge of the commission, and a commission hearing must be commenced within two years of that date.

The amendment will change both the length of the limitation period and the test when it begins to run. Although the length will be extended to five years for both court and commission proceedings, the date on which the period begins to run will be the date of the occurrence of the last event on which the proceeding is based. This will be a more objective test.

The next section I'll be referring to is 152 at page 180, which is an application for letters of request. The proposed amendments to the Securities Act will authorize the commission to apply to the Ontario Court for an order appointing a person to take evidence of a witness outside of Ontario for use in a proceeding before the commission, and providing for the issuance of a letter of request to those judicial authorities requesting their assistance.

The amendments will also provide for reciprocal assistance by our courts. Again, this is important given the interprovincial and international nature of securities transactions.

Turning to the amendments to the Toronto Stock Exchange Act and the Toronto Futures Exchange Act at page 183, the Toronto Stock Exchange and the Toronto Futures Exchange currently have no jurisdiction under their statutes to initiate proceedings against former members and against officers, directors and employees of current or former members of the exchange who are no longer in the business. As a result, a member, director, officer or employee can avoid disciplinary proceedings just by resigning. The amendments to the TSE and TFE acts will extend the disciplinary jurisdiction to cover that kind of situation.


Ms Atcheson: If questions on this portion of the bill are limited, we could take them now, or everyone could come back this afternoon if there's a preference.

The Chair: I'm certainly in the hands of the committee. If there's a sense that we should just complete the technical overview, then we should probably do that.

Mr David Johnson: I don't have any questions.

Mr Elston: I do have a couple, actually. I'm not sure just how close they are to technical in the sense of particularly the new powers, the delegation. I understand that the Investment Dealers Association of Canada, for instance, is an organization that generally does cross-country regulation in some large measure, and I guess I'm looking for assurance that this series of amendments is compatible with its role in other jurisdictions, in fact that there is a harmonization at least of its role from one province to another. I know we have reciprocal agreements, which you just mentioned in the last few comments, but do these basically allow for harmonization of our rules and applications across the provinces?

Ms Smart: They do to some extent. The IDA is formally recognized as an SRO in some of the other jurisdictions. British Columbia would be an example. In some of the provinces the IDA has been delegated registration responsibilities, again like British Columbia. I expect there will be more of that.

Mr Elston: Is there a sense that when they're doing their delegated jobs in each of these provinces the jobs are generally going to be the same? Are they generally the same in Ontario as they are in BC, for instance, that it's as important, in doing their job, that the jobs they have to do in each of the provinces are similar, in other words, if they can be consistent, I guess, with their client groups in each of the provinces, as it is to say that it's the same organization doing the regulation, if that is clear? It may not be. In other words, Murray Elston can be a regulator in Ontario and he can be a regulator in BC and in Alberta, but if I do a different job of regulation in each of those centres I'm really not doing the same job, although I'm a regulator in each of the provinces. I was basically saying, do they do the same thing in Ontario under their authority as they do in BC, as they do in Alberta, as they do in whatever other jurisdiction?

Ms Smart: I don't think I could go so far as to say that currently or even under these amendments they will do exactly the same thing in each jurisdiction.

Mr Elston: Does it permit evolution towards harmonization? Do these amendments permit them to evolve to doing the same job?

Ms Smart: Yes.

Mr Elston: Harmonization is still the big concern in terms of financial markets from one side of the country right to the other.

Ms Smart: Yes.

Mr Elston: So these would permit that to occur.

Ms Smart: Yes. The IDA, as you may know, also has an initiative under way where it hopes to take over from some of the exchanges some of the self-regulatory function in terms of member regulation, and the IDA is very anxious to get recognition in Ontario as a first step towards that process which will allow it to do more across the country.

Mr Elston: As long as it's permissive, I think it's probably, from my point of view, at least the beginning of the evolution and it will allow them to move in a direction that's flexible enough.

Ms Smart: Yes.

Mr Elston: The second question: I'm not just too sure how far we can take this part of it, but since there are going to be securities issued by credit unions, the role, for me, of the IDA or others in viewing the documents supporting the issuance of new securities, has that been worked out between your organization and the credit unions' organizations to know who is going to be responsible for the public review?

I know what Mr Owens said in his remarks, which was that offerings to the general public will be subject to Securities Act materials. But that, from my point of view, doesn't really answer my question, because I'll tell you, I could easily ask anybody who's interested to buy a $1 share in any credit union and then I'm not part of the general public.

I want to know what sort of guidelines or issues are to be raised or have been raised between the securities side of the regulator and credit unions to ensure that, as a matter of convenience, I can get around having to issue a prospectus to somebody who is not now a member by merely asking a prospective investor to buy a $1 share in my credit union.

Ms Atcheson: I think that question should be answered first with respect to what is in the bill relating to credit unions and then we can come back to the securities side of it, if there's more.

Mr Elston: The reason I wanted to ask the question was because basically you could avoid having to issue a prospectus, and the prospectus is needed because a general issuing to the public has to go through a whole series of tests as to the public's right to know about the issuer. From my point of view, it's just necessary. As long as the question is taken as notice, then we can come back and make sure that there have been very secure arrangements made among the organizations in the Ministry of Finance to ensure that there isn't a way of getting around the requirements publicly.

Ms Atcheson: The bill requires -- I may not get the terminology exactly right -- for those offerings to members only, as opposed to members of the general public --

Mr Elston: Oh, I know what the difference is.

Ms Atcheson: -- an offering statement which has regulatory review -- just let me finish -- and the securities commission has actually been represented on the work team. What we expect is that there will be a great deal of similarity between the review of the offering statement and the review of a prospectus.

Mr Elston: Are they going to be the same?

Ms Atcheson: I think probably the fair answer to that is that they're unlikely to be exactly the same, because the groups are different and the circumstances of issue are different, but around the fundamentals of disclosure and protection of the people buying, I think they will be the same in result.

Mr Elston: I guess that begs the question, why is somebody who is a member not entitled to the same protection in terms of disclosure of detail as a member of the general public? My point is that there should be no difference in class, because everybody, even a member inside, should have the absolutely fullest disclosure of the condition or circumstance of the offering party, but what this regimen has set up is currently a differentiation between a member and the broader public in terms of right to know.

Basically, why wouldn't you just have one document, is what I'm saying, and then you don't have any problem with having to test whether it's going to be general public or not general public. Then you won't have to deal with the mischief of saying, "If you just buy a share, you can invest in us by viewing this document. If you won't buy a share, then we've got to prepare this much more and it's going to be expensive," and all that. So why don't you just have one document?

Mr Abols: First of all, you're presuming a number of things when you question the utility of having these two different regimes. I think Ms Atcheson has addressed the part about, is it going to be that significantly different in terms of consumer protection or investor protection? On the fundamentals, I think the answer is definitely no, it's the same standard of disclosure: full, true and plain disclosure.

But you also have to recognize that of course within a certain context that means something different. I think it's unfair to minimize the importance of becoming a member, because as you know, no doubt, even under the traditional securities regime, there's a differentiation made -- and Ms Smart could perhaps speak to this -- depending on who is the potential investor, whether it's a private placement investment and so on. If you use that analogy and look at the credit union side, becoming a member means something. It doesn't just mean paying a dollar; it means you have access to certain information, you have a right to certain information about the credit union in terms of annual financial statements, access to inspecting some of the records of the credit union.

On that side, membership does mean something more than simply paying your money and then calling yourself a member. It does entitle you to certain rights. It does entitle you to achieve a certain level of knowledge through access to information, participating in annual meetings and so on.


I would add, just on a more technical note -- and we'll perhaps get at it in a more fulsome way when we look at the provisions -- in deciding whether to receipt or approve an offering statement, the director is left with a significant degree of residual discretion: He can refuse to receipt the offering statement if it's not in the public interest to do so.

Those are sort of magic words, very broad words, but they can sort of address the problems you suggest where it becomes patently obvious that what a credit union is doing is simply trying to avoid the rigours of the Securities Act, but in effect really making a general offering to the general public.

If there are concerns of that nature, I suggest there are legal mechanisms whereby, by default, in those instances, a credit union could be forced to return to the securities regime.

Mr Elston: Could I ask, Joan, do you know offhand, if you can help us, what the difference in cost would be? The issue, of course, would be you have to file a prospectus with the securities commission. It has to be available and obviously there'd be a fairly big expense in all of this.

If you knew what the cost issue was -- I just have this strange feeling that once you set up a series, and I understand there are a couple of dualities in existing securities markets, then they're going to be used. I guess if you convince people that there's going to be no difference in substance to a document which they issue inside, ie, you prepare one document and it could be acceptable, for instance, for public offering, then you're not going to get into the big issue. It's going to be full, true and whatever --

Ms Smart: Plain.

Mr Elston: Of course, they're never plain; I've read some. You have to be fairly bright to even go through and you have to have some understanding of what happens. In all of those circumstances, why wouldn't you just say, "One document," and the one document should be acceptable for public filing if people had to go outside the membership for raising capital funds?

Ms Atcheson: I think you've put your finger on something that we did investigate, which is the cost of going through the prospectus route. To the best of my knowledge, it's only been done by credit unions in British Columbia, but the cost is significantly higher than the offering statement route.

Mr Elston: The top four credit unions, so to speak, in Canada are all from BC, if I understand, if you look at asset size. In any event, as long as you can assure me that the director is going to have considerable assistance from the securities commission in reviewing these things and making sure the tests are met and that people are going to be able to avoid, as a matter of convenience, the full disclosure, then that's okay. The mischief is there in the wording, currently. The issue is whether we as legislators want to deal with the mischief that is possible or whether we just leave it as a mischief that is possible.

Mr Abols: Let me just address that. Again, there's a presumption there is a mischief to address here or there's a concern about potential mischief. The facts, I think, speak for themselves, though. We have an offering statement regime already in place under the Co-operative Corporations Act and you have similar regimes in other provinces. I'm not aware of any evidence that suggests, under that regime which we use as a model for the credit union's offering to its members, there have been problems, that people have been defrauded or complained about not knowing what they have purchased. The facts really speak for themselves. The offering statement regime has demonstrated that it does work and does work effectively.

Mr Elston: All I want is the undertaking, or at least the understanding, of the people who are advising us that there is no mischief to occur under the amendments. If you're going to say first that all the credit unions are in good shape, I find that okay, and if they're all going to be able to give full disclosure under these and there won't be a problem, then I'm happy with it.

Ms Smart: One thing I should clarify: I think you asked if we had worked out with the IDA the review of these documents. The IDA will not be delegated under these amendments authority to review disclosure documents. That is not part of the amendments. That is something that is done at the commission, not by the IDA. The IDA's role tends to be more regulating its members in terms of capital and business --

Mr Elston: Actually, I guess I should have been more clear on that. The IDA's question when I met with them at one point was, does somebody who does offer these through their credit unions become a member? Are they issuing securities for the purposes of regulation? What is the status of a credit union that offers share capital even to their members? What is their status if they once filed?

They are, as I understand it -- the idea is that the credit union is going to sell its own materials, basically sort of sell them over-the-counter type stuff. Over-the-counter sales, it seems to me, are of interest to us. Who does regulate the person who actually sells those securities? I think I'm about to get another answer from another part of the organization.

Mr Abols: You're asking the credit union questions. That's why I guess you're getting the answer from us.

Mr Elston: Except that it's a securities-oriented issue. Here's the problem. As I raised it in my second reading debate, and I don't mean to extend this too long, but the issue is, who is going to look after the regulation of the offering party?

I don't want somebody at the end of the day saying, "Well, it really was theirs because this is a securities issues," or, "No, it was theirs because it was a credit unions issue." I just want to be sure that the regulatory nature of the member offerings or the general public offerings are well understood before we get ourselves into it; otherwise, we'd better make sure that we become clear as to when who is involved. That's the nature of my questions.

Ms Atcheson: The bill was intended to be clear on this point, which is that when the offering is to members, the responsible regulatory entity is the director; when the offering is to the general public, it is under the Securities Act. We will clarify the issue of the status of issuers, but I suspect what we'll find is that they are not dealers. The fact that a financial institution issues shares does not make it a dealer, and we will give you the correct reference for that.

Mr Abols: Yes, that's correct. There are specific exemptions to the Securities Act that are ancillary to changes in the credit unions act which grant exemptions to certain parties. I will just add, though, maybe as another level of comfort, that once a credit union is in the securities regime, as I understand the workings of the Securities Act, it remains in that securities regime. Once it is issued securities under the securities regime, it becomes a reporting issuer for all time.

Mr Elston: So once in, always in. So if there was a reason to try and avoid getting in in the first place, that would be it.

Mr Abols: What it suggests, though, is that a credit union, when it does decide to make a public offering and enter the securities regime under the Securities Act, has to really weigh the consequences of that. Because then it can still make offerings under our offering statement regime, but for all intents and purposes, it will probably have to also comply with the commission's requirements as a reporting issuer, which means filing updates on changes.

Mr Elston: Going back to an earlier question, wouldn't that make it really sort of more intense pressure for somebody to say: "Gee, Murray, you have some money to invest in us. Why wouldn't you just buy a share, keep us away from all this other expensive rigmarole. Become a member, and then you can buy the shares"?

Ms Atcheson: Could we just answer that in a practical way?

Mr Elston: I thought that was the practical way, actually.

Ms Atcheson: Well, the core regime is really the offering to members by way of an offering statement. Our expectation is that the number of credit unions that will actually go to market under the Securities Act is extremely small and probably this is going to happen very, very slowly over time, so that the core regime is actually consistent with what the core regime has been, which is the offering statement to members.

In other words, we don't see it the other way around, that everybody's going to move under the Securities Act in order to avoid going the offering statement route. We see that what the act does is really in many ways maintain the system of today while allowing those credit unions, the small number of exceptional credit unions that are in a position to go to the public to go to the public, but with the full protection.

I might also say that under the Securities Act, apart from the cost of going under the Securities Act regime, they will have to look very closely at their operation because of the relationship between members and non-members. We expect that the number who will take up that option is extremely small and will develop over time, so that the core regime is really consistent with what the core regime has been.

Mr Elston: I support the idea of their being able to go ahead and do it. I just want to be sure that the regulators have it clearly in their minds who is going to be responsible. I also want it to be extremely well understood by the people who are members of the credit unions that, for instance, Murray Elston, who may not have any other dealing with a credit union, could become a member of their credit union for the purposes of assisting with their capital appreciation.


That's possible, right? Murray Elston could go into the credit union in Durham -- I don't know if the folks in Durham are going to start issuing share capital -- and buy a share and then pay down $250,000 and buy non-voting, but participating, shares to help them build up their capital levels. There is really no test to figure out whether Murray Elston is really a member or not a member, because once I buy that share I am a member, fully participating in the organization.

I am as a result a member not of the general public, but of the limited public to whom this one document, which I can take a peek at, is okay. I could have actually got this from a friend of mine who's over there, saying: "Listen, Murray, we want to issue some capital. We know you have a few dollars left over. The social contract didn't take all your money away from you. As a result, we think that you should buy a few shares."

I'm saying, "What have you got?" They say: "Here's the document. Here it's approved by the director of credit unions. This is really all you need to know. Come on over and join up. You've got to buy from us. You've got to come into our office. Buy a share and then you can buy under this type of disclosure."

"I don't really want to join your credit union. I hardly ever go to Durham. I don't mind getting a dividend from you on my shares." "Listen, if you don't come in and join up, then we've got to go through a whole rigmarole and it's too expensive."

That is there. If I were wanting to avoid an extremely costly adventure, it would be to avoid doing a public offering, but I would do private recruiting of more members, basically. That's what's sitting in the back of my mind. Obviously, you can tell I'm a little preoccupied by it, but it doesn't seem to me that --

Beth, you can talk about how this regime is set up. It is exactly set up like that, but the practical nature of the way the sales are made, if somebody decides to go this way, will be person to person, "Join and buy some shares," as opposed to having a giant public offering.

I would avoid it if I could. I would avoid going into the Securities Act; it makes really good sense not to be involved there. But it doesn't take much. A dollar will buy me a membership and then I can avoid all the expense. If I was an investor out there, I'd say: "That's good common sense. Why would you pay more if I can buy in otherwise?"

Ms Atcheson: The disclosure will be there, and I think Imants has spoken to the standard of disclosure. Even under the full Securities Act regime, the fact that there's a specific standard of disclosure doesn't mean that people will make -- people still make good and bad investments. I think the key is that we've built the standard of disclosure into the system.

Mr Elston: So why don't we have the same disclosure document for each? That takes me right back to the initial question, why isn't it one document? There doesn't seem to be a rationale not to. If it's going to be basically the same, why don't you make it the same? Then everybody knows what the test is. The securities commission knows what the test is. The director knows that basically he will be reviewing the test for complete disclosure on the same basis as if this were a public offering.

That's my question. I don't care how they do it, I can understand them avoiding the Securities Act. But why don't you just have one test and then two regulators can be ad idem totally with respect to what the document provides?

Ms Atcheson: It is in fact one test. The difference is under which act you fall.

Mr Elston: Why isn't it the same for both, though?

Ms Atcheson: It is slightly more complicated than that in the sense that the test is the same, the document will be essentially the same, but there's a difference if you fall under the Securities Act. If you fall under the Securities Act, a whole number of other rules come into play that we didn't think were necessarily appropriate in every case where credit unions wanted to offer to their members. It's really as simple as that. We can go back and give some examples.

Mr Elston: But that obviously presumes that every member is fully aware of everything happening inside his or her credit union. That isn't always necessarily the case, right? Isn't that the presumption that is made here?

Mr Glower: It's their obligation.

Mr Elston: It's their obligation, I understand, Harvey.

Mr Abols: It's no different than the presumption that when a person gets a prospectus he reads it and then he's fully informed about the investment. We can't guard against people not exercising their own common sense and good judgement and adopting some prudence in making investments.

Mr Elston: So is there something really wrong with having one document that could become both a prospectus and an inside offering document? I don't understand what the problem is. If they're going to do the same thing, why don't you just have one document, and then you have one format and you go through the whole list of things that people should know in one place at one time as opposed to saying, "Here's our general offering, but you should know from the general meeting that the following issues were discussed."

Ms Atcheson: I think that's entirely possible in the sense that the offering statement at the end of the day could be very much like the prospectus. I just want to be careful that it's not, though, the same as saying that it's the whole securities regime reflected in that document, because there are very specific rules in the Securities Act that are not being applied to offerings by credit unions. The standard of disclosure is the same, but --

Mr Elston: But the items to be disclosed are not?

Ms Atcheson: Yes. I'm now talking about things like rescission rights around membership. What we've done is taken the standard of disclosure and the disclosure issues but not brought in the whole of the complex securities regime, which we did not think was appropriate in the case of offering to members.

I agree that you're focusing on the document and I think our answer back is that the document, vis-à-vis the standard of disclosure, vis-à-vis the types of disclosure, will be very similar. But what we will not be doing, because it's not just a question of the document, is importing all of the Securities Act rules into offerings to members. That's why the distinction was there. It was thought that in public policy terms it made good sense for credit unions to be able to do things with the same standard of disclosure but without the whole securities regime being applied when they're dealing with members.

We can give some examples of this. They tend to be very technical rules around the treatment of members and non-members, because what the Securities Act regime does really is focus more on the treatment of non-members and preferences around those issues, and it didn't make sense to import all of those.

I think the answer is, the document will be very much the same, but I don't want there to be misunderstanding that that means the whole Securities Act regime thereby will be coming in under the Credit Unions and Caisses Populaires Act, because that won't be the result.

The Chair: Mr Elston, are you nearly satisfied with --

Mr Elston: No, I'm not satisfied, but I think we've taken the discussion as far as we can.

The Chair: Prior to lunch, we have.

Mr Sutherland: We've taken it more than that.

Mr Elston: No, I don't think we have taken it more than that, because the issue at the end of the day is, how much protection does a person buying a security in any ongoing financial organization have to be told about the financial status?

The Chair: And you posed those questions and answers were forthcoming from the ministry, and to the extent that they were --

Mr Elston: No, I'm finished with that, except I guess just to say there won't be any amendments proposed for the securities side of it, that we'll deal with the issues of regulating the issuance of securities by credit unions to clarify the issues I've raised?

Ms Atcheson: No, because when a credit union offers under the Securities Act, it will be subject to the full Securities Act regime, and it's not proposed to change that.

The Chair: Given the fact that we've come to the end of a substantial part of some discussion here and we only have about 30 seconds to go before noon, I'm going to recess this committee until approximately 3:30 this afternoon, following routine proceedings.

The committee recessed from 1159 to 1546.

The Chair: This afternoon we are continuing with our briefing by the Ministry of Finance.

Mr Elston: I had the pleasure of speaking briefly, after the proceedings this morning, with some of the ministry officials around some of the questions, and I think there are some materials which might be helpful at a particular time. I'm not sure whether the ministry officials are ready to provide any of that material, but certainly there are things that are happening to the regulations which I know are not yet drafted.

There are some examples of some things that already have been done in some of the other areas around the issuance of shares. Also, a fairly strong statement has been made to me with respect to it being a tough procedure in relation to getting approvals for the issuance of shares either way, whether it's through the Securities Act, which is more formalized, or whether through the internal membership sales.

I just wondered if there is anything available. We talked a little bit about it earlier. Perhaps we could have a bit of an update on some of those items for the committee. I think we're generally on the same wavelength, and it's a matter of perhaps getting some of the materials made somewhat more public, at least on the record. Ms Atcheson and others have gone a long way to satisfying me with some of their intentions, in any event, around making sure there aren't problems associated with issuance of shares.

The Chair: Is there at this time any written documentation that could be shared with the committee with regard to the concerns Mr Elston raised this morning, or is that something we should anticipate later?

Ms Atcheson: I'd make two suggestions. The first is that we give you some indication of the types of things we anticipate having in the Ontario regulation. I would not be comfortable recommending that at this time we share that draft reg, because it simply isn't in the shape --

Mr Elston: Actually, it wasn't a draft reg. I think Harvey said he had examples of what was being done with the cooperative shares.

Ms Atcheson: That's right. The second thing I was going to suggest is that we actually table some precedents, that we table the Ontario co-op rules around offering statements, that we also table the Quebec precedents so that you can see how another jurisdiction does it. What we might do now, if it would be helpful -- or we can actually probably go so far as to put this in writing.

Mr Elston: Put it in writing.

Ms Atcheson: Okay. Then we'll do a little document on this with the precedents attached.

The Chair: Thank you very much. Pursuant to that, we would like to proceed with your briefing as you had planned it or as you see fit.

Ms Atcheson: We are assuming that that brings the closure for this portion, the securities part, and we will move on to "Life Agent Reform." Lawrie Savage will take it away.

Mr Lawrie Savage: First of all, I'd just mention that with regard to possible amendments to these amendments, we don't expect to have very much at all. There might be a couple of things of a quite technical nature relating to the wording of what's in the bill, but nothing of substance.

Second, just by way of background, I should say that the rules that relate to life insurance agents now are basically all set out in regulations to the act. For that reason, most of the provisions of Bill 134 relating to life agent reform are enabling provisions relating to new regulations or to removing some parts of the act. But essentially, the substance of the life agent reform provisions will be via regulation. Of course, we will be going through a clause-by-clause examination of the bill, but I thought that to give you an overview and an understanding of what the proposals are, it would be better to focus on what the proposals are rather than what's in the bill because, as I say, the bill is really enabling.

I should say also that the current system, just to put these new changes in some context, really spells out in quite a lot of detail, through regulation and by some references in the act, exactly how life insurance products are to be distributed in this province. It has a lot of rules: Agents have to work full-time; they have to be sponsored by one life insurance company; they can't sell the products of any other life insurance company.

What we're doing in these proposals is changing the focus away from this very specific stipulation of how the product is to be sold to a regime where the agents will have much more responsibility to follow certain rules and standards of conduct, where consumers will be in a stronger position with regard to the purchase of life insurance, there'll be more disclosure, there'll be additional protection in terms of fidelity bonding required by the agent, the people who are selling the products will have to be more qualified, and so on, and I'll explain how those things are going to happen.

Really, the idea is that we want to provide more protection for consumers, more convenience for consumers and a wider range of choices. That will also lead to more flexibility and potential innovation for insurance companies and agents in the distribution of these products, which is important, given all the changes taking place in the financial sector right now, particularly in this very competitive area.

With regard to the specific highlights of the proposals, education is a cornerstone of what we're talking about here. Life insurance agents will have to have higher standards of knowledge. We're going to a two-step licensing proposal. In the current situation, an agent applies for a licence, writes an exam, and then they're off and running and they can be an agent from then on. What we're proposing is that the initial exam would be somewhat more difficult, but not unreasonably difficult, and then they would go into a period of two years where they would gain experience. It would be similar to an apprenticeship.

At the end of two years, they would have to write a more difficult examination, which would focus on properly analysing consumer needs, focus on understanding the code of ethics that will apply to the agents, and it will also focus on analysing the advantages and disadvantages of different types of life insurance products. That will be called level 2, after the two-year apprenticeship type of period.

Once an agent reaches level 2, they will be subject to a different regime in terms of the rules that apply, and I'll spell those out a bit more in a few minutes. Continuing education will also be a requirement for the agents, and it's not now; as I say, an agent gets a licence and then they're on their way. But this is an area where the products are very complex and they've been evolving quite rapidly over the last few years, so all the agents will have to participate for a specified number of hours, as a minimum, each year in continuing education.

As I mentioned, agents right now are all required to be sponsored by one life insurance company. Under the new rules, only level 1 agents will be required to have a sponsor. In other words, the new ones who come into the system start out with a sponsor, but with the increased level of consumer protection and the higher professional standards that will be applicable to these agents once they reach level 2, and also the demonstrated higher level of knowledge they'll have, the level 2 agents won't be required to be sponsored.

I might say, though, that there's nothing to prevent an insurer that wants to sponsor its agents from continuing on with that system. In fact, most of the changes we refer to here are permissive. In other words, it's opening up additional options but it's not requiring any company to utilize those options. They can continue to sell business in the way they've been doing previously if they want to.

Part-time sales: Agents are presently required to work full-time in the sale of life insurance. This will be changed so that part-time selling will be allowed. For level 1 agents, if they want to combine part-time selling with some other occupation, that occupation has to be in the financial services business. The reason for that is because we are talking about this two-year period as a kind of apprenticeship. If a person could work part-time but also be driving a taxi or working in a department store or having some other job, he may in fact not be gaining any experience in the sale of financial products. That's why there's a requirement that if, during the first two years, the level 1 agents want to combine part-time work with another occupation, it would have to be in financial services.

Once they get to level 2, however, they could have another job if they wanted to and it wouldn't have to be restricted to financial services. That's because they've demonstrated that they have quite an extensive level of knowledge, they're involved in continuing education and basically have shown that they have what it takes to be a good life insurance agent.

By the way, I guess I should mention that some life companies have said to us, "But we don't want our agents to work part-time." Here again, this is permissive. There's nothing to prevent those life companies from saying to their agents, "We don't want you to work part-time." It's just that we don't think there's a public policy reason for the government of Ontario to prohibit people from working part-time in this business. So that will be an opportunity that opens up. There are people who for one reason or another can't work full-time, and being able to work part-time in the sale of life insurance could be something that could be very attractive to those people and open up additional employment opportunities.

Multilicensing: At the present time, agents can hold a life licence plus one other type of licence. What we're proposing is that in the future they could hold the licences that they can be qualified for. If they can qualify and meet all the standards to sell mutual funds and to be a securities dealer and to sell life insurance, we don't think there's any arbitrary reason why they shouldn't be able to do that. In fact, in other professions, those kinds of arbitrary restrictions don't apply. You can be a doctor and a lawyer or an engineer and an accountant and so on as long as you meet the requirements. That's the same idea here.

That will provide additional convenience to the consumer and it will also provide a more stable business basis for the agents, because one of the problems in this business is that there's very high turnover. About 80% of the agents who come into the system are gone after four years. That's not good for consumers, because it means you don't have people with a lot of experience who are dealing with consumers a lot of the time. If they can sell more products, that will help them to have a more viable occupation and it may reduce the turnover in the industry.


At the present time, we have quite a long listing of occupations that can't be combined with a life insurance licence. The idea there is that these are occupations where people are in a position to exert undue influence on people to buy life insurance. An example might be a medical doctor. When you're just about to go in for your triple heart valve surgery, the doctor says, "Would you like to buy a life insurance policy?" So some of those things are specifically prohibited, but the list is very long and it includes --

Mrs Elinor Caplan (Oriole): What about just before you get on an airplane?

Mr Savage: Maybe that should have been on the list.

Mr Wiseman: We're just hoping for no self-fulfilling prophecies.

Mrs Caplan: Yes, but if the analogy is accurate, in effect we do have exactly that situation.

Mr Wiseman: Provided he isn't selling it to you.

Mr Savage: Yes, that's right. What we are proposing to do, although we would still keep a few occupations where there clearly is a very significant conflict of interest or opportunity to induce unfairly people to buy, is just to have a provision in the regulations that says no agent shall use undue influence or coercion in the sale of life insurance and also that there cannot be a conflict of interest in the sale of life insurance.

That's the approach that's followed in most other professions. Rather than trying to spell out all the particular occupations where a conflict of interest or coercion could arise, and as has been pointed out, there are many, we will just have a provision that says that any agent who is using undue influence in the sale of life insurance could lose their licence.

Mr Elston: Does that include a loans officer at a financial institution?

Mr Savage: That's a good point. That will actually be on the list of prohibited occupations. People who are employees of deposit-taking institutions will not be able to hold a licence to sell life insurance.

Mrs Caplan: So there's a sense of coercion. That's part of the reason.

Mr Savage: Yes, that's right. That's the main part of the reason.

Mr Wiseman: Are MPPs still not to be allowed to be licensed to sell insurance?

Mr Savage: MPPs were on the list. Are they still on the list? Yes, they're still on the list. Too bad.

Mrs Caplan: How about used cars? Are they allowed to sell those?

The Chair: Please, Mr Savage, continue. Please try to ignore the interjections, although some of them are amusing.

Mr Savage: We're also planning to introduce a code of ethics that all the agents would be governed by. This would set out fundamental principles they should keep in mind when they're out there in the field.

One of the problems we have now is that we may find an agent is engaged in some kind of reprehensible behaviour, but they can look and say, "Where does it say I can't do this?" If we have a code of ethics which says, for example, that every agent shall act in the best interests of the client and the consumer, then if they're not acting in the best interests of the client and consumer, it will be contrary to the code of ethics. Another principle that would likely be in that code of ethics is a know-your-client rule, similar to what applies to securities dealers, so that a life insurance agent will have had to make reasonable investigations about what a person's financial situation is when they are selling a life insurance policy.

I mentioned putting the consumer in a stronger position. We'll also have specific disclosure requirements for agents when they're dealing with consumers. They will have to disclose that they are licensed life insurance salespeople. This is something we get complaints about now. People come in under the guise of calling themselves, say, a financial planner or a financial consultant and sell the person something, and that person may think they've bought some kind of investment and only discover later that it's an insurance policy, and they say, "But I didn't even know this person was a life insurance agent." So they have to disclose that they are licensed life insurance agents.

They will also have to disclose any other licences they hold. If they happen to be a licensed mutual fund agent as well, they have to disclose that. They also have to disclose which life insurance companies they are authorized to represent. The consumer will then be put in a position of knowledge in terms of where this agent is coming from and what their motivation is likely to be.

We'll have a specific provision as well that a life insurance agent can't hold themselves out in a way that's likely to be misleading to the public. The reason this occurs now with the new rules is that previously, when every agent was a career agent, there was no room for confusion. But now we are going to probably have people calling themselves life insurance brokers who will represent a large number of life insurance companies. Once that happens, you don't want people to be able to put up a sign calling themselves life insurance brokers if in fact they are an exclusive agent of one life insurance company. That would be holding yourself out in a way that's misleading to the public.

We're going to place a duty of care on life insurers in terms of recruiting agents and monitoring the behaviour of agents when they're out in the field. The present rules apply only to the agents themselves, so when an agent or a group of agents is involved in some nefarious activities, there's not much we can do to go back to the insurance company that's sponsoring those people. The new rules will say that every company must maintain reasonable policies and procedures and standards to ensure that the agents are knowledgeable and that they are acting reasonably out in the field. It doesn't mean they have to be looking over their shoulder every minute, but they do have to have reasonable training programs in place and so on to make sure the agents are maintaining reasonable behaviour.

What we're doing there is shifting the emphasis away from the regulator. Right now, some companies say: "You're the regulator. If there are problems with these agents, that's your problem." We want to make sure it's also their problem.

Additional protection for consumers: I think I mentioned that all agents will have to have errors and omissions insurance as well as a fidelity bond, or there may be a requirement to belong to a compensation fund, which some of the other provinces have. If a consumer ends up somehow being defrauded, what can sometimes happen is that they somehow fall between the cracks and none of the companies can be held responsible, and yet the consumer certainly wasn't to blame. We want to have these fallback mechanisms to deal with that.

Probably most of the substance in Bill 134 itself dealing with the life insurance provisions has to do with the life insurance council. The way the bill is structured, it says a life insurance council may be recognized, and this would be a self-regulatory organization that would take over the licensing and the day-to-day regulation of agents, but the bylaws and resolutions of such an organization would be subject to approval by the superintendent. So we wouldn't be losing control of what's happening in the regulatory sense.

I guess 75% of what's in the bill is really setting out how that organization would be structured. It would be structured along the lines of other provincial organizations. Here in Ontario, on the general insurance side, we have the Registered Insurance Brokers of Ontario, which is a self-regulatory organization. It functions in a way that's quite similar to the way this life insurance council would function.

One other provision -- a series of provisions, actually -- deals with replacement activity in life insurance. At the present, if you have a life insurance policy and a salesperson approaches you and convinces you that you should buy a different life insurance policy and replace the one you have, you have to fill out a form. It discloses some information about the old policy and the new policy, but it isn't necessarily very effective in terms of what it's supposed to do. What it is supposed to do is make sure that the consumer understands there may be some disadvantages in replacing this policy, because some of the older policies had tax advantages or other advantages that the new policy may not have. Because these are complex products, the idea is to try to make sure the consumer understands what's happening.

Some in the industry have advocated that the -- and I should say also that here we're dealing with products where there is a big first-year commission for the agent. On the one hand, you want the public to be able to replace insurance policies if it's to their advantage to do so. On the other hand, we have to realize that there is an incentive to churn business and that some life insurance agents will go and sell a lot of policies and then they'll change companies and go back and tell their clients, "Now, this is a lot better product." The clients may very well say, "Oh, okay"; they trust their life insurance agent, they buy the new product and of course that generates a lot of new commissions for the life insurance agent.


In the new rules, we try to strike a reasonable balance, and instead of placing obstacles in the way of replacement, which is one approach that some in the industry I think would advocate, we really put more responsibility on the agents and the companies for making sure that these replacements are not inappropriate to the circumstances of the consumers. We have a number of ways of doing that. The form, which is prescribed by regulation, will be made much more clear. It'll be written in plain English, it will feature a number of important consumer tips that people should bear in mind when they are replacing policies and so on, and also some of the other things I've mentioned: the increased duty of care on insurers, for example, and the code of ethics for agents will also reinforce the importance of dealing properly on their insurance replacements.

Agent licensing: This is kind of a technical thing, but right now agents' licences are issued for one year only and then they all renew. They all expire on the same day, which is kind of an odd way to do it and administratively very difficult. What we propose is that in future, agents' licences would be for two years and they would expire on the agent's birthday, so it would make a more even distribution of work.

Also, there's a provision for networking regulations. This is a provision to enable the government, if it feels that it will be necessary, to prescribe regulations governing how institutions would network each others' products; in other words, enter into arrangements to sell the products of different institutions, and those regulations I don't think will be drafted right at this time. But the authority is there to draft them if it seems necessary.

That's an overview of the life insurance provisions, and I guess we'll be coming back to questions or comments.

Mrs Caplan: Actually, I have a few questions. As you know, because I'm sure you read everything I had to say about this in second reading -- nobody's laughing, so I am assuming that they did read it -- I'm quite supportive of the proposals in the area of certification and improvement of education and competency for life insurance agents.

One of the questions I had was, did you consider the concept of a separate act? One of the concerns I had, and I raised this on the second reading debate, was that this is buried inside another piece of legislation and I think diminishes the importance of the creation of a self-governing regulatory regime, which will in fact place responsibility and accountability not on the regulator but on the companies and on the agents, and I think that is a good thing. But to have it buried inside a piece of legislation in an omnibus bill I don't think does justice to the importance and the significance of these steps that you're taking. Why would you not put it in a separate act to govern life insurance agents or the industry?

Ms Atcheson: I'd like to go back. Minister Charlton announced, in the fall of 1992, a review of all of the financial services legislation in Ontario, with the exception of the Securities Act, which in fact, from that time, was a very large undertaking, and at the same time announced that the credit union piece would be first. That had always been the intention of the government.

What it was decided to do, when credit unions were going forward, was to bundle with it everything else that was ready. That's what really forms the basis of Bill 134. We took whatever had been through disclosure to the public, extensive consultation, whatever. Interestingly enough, the same stakeholders in many ways have different primary interests, but whenever you do anything in financial services now you tend to be working with all of the same stakeholders across the whole sector. They may have some things that they're more interested in and less interested in in the bill, but we did the most coherent thing at the time, which was to take everything that was ready and bring it together, because all of the same stakeholders were involved in all of those same issues.

Mrs Caplan: Having been involved with the regulated health professions legislation, which gave to each of the professions a separate act, I thought gave greater clarity as far as the public interest was concerned and was more transparent in enhancing the public interest, both from an educational point of view as well as -- you know, if you're a life insurance agent or you're interested and you phone up and say, "Is there an act governing the life insurance industry?" the answer is not as clear or easy to access. So it was along those lines.

There is still time for you to bundle it that way, and I think there would be agreement, or I hope there would be agreement, not to delay it in any way. That's not the intention. But certainly I would hope that you would consider perhaps putting it all together with the heading of An Act to Regulate the Insurance Agents. But that was our only suggestion, not a question.

The question I have is on churning. I know that this is one area where the industry has been very vocal about wanting in fact stronger and tighter regulations or processes. They really don't believe that the proposals in the legislation will respond to the concerns of churning, and they've suggested that the proposals you've made are going to make the matter worse. So I'm wondering how you reconcile what you're doing with the industry's concerns, who are saying, "Make it better; don't make it worse."

As a corollary to that, are there any penalties that you've identified in the legislation should anyone have a legitimate case of churning which they can bring forward?

Mr Savage: To answer the second part of the question first, there are a number of things. Under the code of conduct, code of ethics that we mentioned, a person would lose their licence or could lose their licence for non-compliance with the code of ethics. We would expect to have a specific provision in the code of ethics dealing with replacements. So that's about the most significant penalty we can levy, to take away the person's ability to earn their livelihood.

Mrs Caplan: Because we haven't seen the code of ethics yet, and there's nothing in the legislation --

Mr Savage: Yes, I understand that.

Mrs Caplan: That's the reason I raised the question. That's good to hear.

Mr Savage: But on the other part of the question, I think you have to appreciate the different interests that are afoot here. As I mentioned, we want to make sure that consumers have the ability to replace policies, because many times it's in their interest to do so. But at the same time, we don't want to see churning.

Some of the companies in the industry have sold policies over the years, and times change and ways of thinking about these things change. Whole life policies are generally more expensive than term insurance policies. You know, 10, 15, 20 years ago, companies sold a lot of whole life policies. Now many consumers are looking at their insurance needs and concluding that term insurance would be satisfactory for them, and term insurance is generally much cheaper. The typical replacement activity that we see is somebody replacing a whole life policy with a term policy.

So, if you were a company that was selling whole life policies, what you want to do is make sure that replacements don't occur. So what you would like to see is a regime that makes it very difficult to replace life insurance policies and puts a whole lot of red tape and bureaucracy in the way of the consumer. That's where we have to strike a balance. We don't want to interfere with legitimate replacement activity, and in many cases it is legitimate. At the same time, we want to be able to take action against agents who are churning and who do not have the best interests of their client in mind.


I think the majority of the companies in the industry support the middle road that we've followed here. The kind of replacement form that we're talking about in the future and which is drafted -- there's a working group set up and working on it right now -- is a much clearer form. It provides much better disclosure. With the other provisions that we have, we feel very confident that it will provide a much better control over the problem.

The Chair: If there are no other questions, if the Finance ministry would proceed with its briefing.

Mr Glower: I'd like to briefly take you through the changes to Bill 134 governing the credit unions and caisses populaires. I've tried to group these into five themes. First is a theme that modernizes the corporate structure and governance of the credit unions and caisses populaires. The second theme is one that enables access to new sources of capital through the sale of equity shares and debt instruments to members and the public. The third theme is prescribing capital adequacy and liquidity standards which we believe are comparable to those of other governing financial institutions. Fourthly, the theme is enlarging the range of permitted businesses. The last theme is providing mechanisms whereby credit unions and caisses populaires can provide assistance to weaker units to improve their performance and viability.

Under the first theme, the modernization of corporate structure and governance, there are a number of parts that deal with it, and I'll just highlight them. Part II of the act, dealing with the objects and powers, essentially identifies that the provision of financial services on a cooperative basis is the principal object of credit unions; they are largely confined to the provision of financial services. It also sets out the powers and objects of credit unions in that it confers on them the powers of a natural person, which enables them to engage in any business and exercise any powers incidental to that business, subject to any restriction in the act. As I said, the primary restriction is that they are confined to the provision of financial services. The general restriction relates in that it's to provision of financial services. It's primarily to members, depositors, subsidiaries and affiliates.

Part IV of the act deals with membership. It establishes the membership basis for credit unions, and that is subscription for membership shares. That entitles them to the right to vote at meetings on operational matters and for election of directors and committees. Also, a right of membership is based on the principle of one member, one vote. That has not changed. The second basis for membership that is established is the bond of association. In this bill, we are making allowance for a maximum of 3% of the total membership to include persons or unincorporated entities who fall outside their bond of association. This would enable credit unions to serve a larger market. As well, all levels of government are permitted to obtain membership in a credit union, and members who no longer fall within a bond will be able to continue to retain their membership for as long as they live. This part also sets out rules governing withdrawal from membership, as well as the expulsion of members.

Part VII sets out a number of issues dealing with directors and their duties, audit committees and auditors and board policies. With respect to directors, it establishes the duties and qualifications of directors, officers, auditors and members of the audit and credit committees. It also spells out in greater detail the qualifications of directors and committee members, codifies some of the liabilities of directors and officers, and provides a much more comprehensive scheme to deal with conflicts of interest.

Directors' duties of care and confidentiality are supplemented by a specific recognition of a director's duty of confidentiality respecting members' financial affairs. Directors have personal liability when their conduct falls below the standard of a reasonably prudent person, although a credit union could purchase insurance to indemnify and insure those directors if they've acted honestly, in good faith and in the best interests of the credit union.

With respect to the auditor, the bill extends the auditor role to include a duty to report on any transactions or conditions that come to the auditor's attention that would affect the wellbeing of the unit and that, furthermore, in his or her opinion are not satisfactory and would require rectification.

It also mandates the establishment of an audit committee, including reporting to the board, the auditor and the deposit insurer any misappropriation of funds or property of the credit union, as well as contraventions by a director, officer or employee of the act, the bylaws or the regulations.

Boards will now be required to establish investment and lending policies and procedures, as well as procedures to resolve conflicts of interest.

Investment and lending policies will have to be consistent with the policies that a reasonably prudent person would apply in respect of a portfolio of investments and loans in order to avoid an undue risk of loss as well as to obtain a reasonable return.

Part IX deals with restricted party transactions. As you can imagine, these could be very numerous, depending on how you interpret what a credit union's role is, or they could be few. This is something we are going to be dealing with through the regulations.

Part X deals with member meetings and voting. It deals not only with meetings of members, but because of the new classes of shares, it would deal with meetings of shareholders.

Members will be able to submit to the board proposals for discussion at general meetings which the board would be required to put on the agenda unless the proposal would fail to meet certain criteria.

We've also provided for telephone and electronic meetings by boards, and members will be able to vote in an election of directors or any other matter requiring their approval through either ballots cast by mail or through electronic means.

Looking at the second theme, enabling access to new sources of capital, I think we had a fairly fulsome discussion on that this morning, but I'll just review it to put it totally within the context.

As we've said, it establishes a new capital structure for credit unions so they will be able to issue non-voting shares in addition to the membership shares. This in our view will assist credit unions in increasing their capital base and also provide them with the financial resources to expand the services they provide to their members.

These shares will not have voting rights except in specified circumstances, and those would normally be circumstances that attach to the specific class of shares.

If the shares are sold exclusively to members, credit unions could opt to issue them under an offering statement regime which is subject to the director of credit unions' approval and is similar to that used today for cooperatives in the Co-operative Corporations Act.

If shares other than membership shares are offered to the public, a credit union would have to file a prospectus in accordance with the provisions of the Securities Act.

Issues of disclosure with respect to non-voting shares to members would be disclosed under an offering statement or under a prospectus if they are issued to the general public. Credit unions will also be required to make continuous disclosure to investors of all material changes in the position of the credit union and refile an offering statement every six months if a unit wishes to continuously offer its non-membership shares. The bill also establishes an opportunity for a second market in the case of non-voting shares.

Under the third theme of prescribing capital adequacy and liquidity standards, part VI deals with levels of capital and liquidity that a credit union must maintain. This is a much more flexible and modern regulatory regime for minimum capital requirements and is based on a percentage of a credit union's risk-weighted assets, as well as a leverage test of 30 times capital in order to promote retention of surplus earnings that have been built up over the period of years.

We also give the director of credit unions the authority to order a credit union to increase its level of capital and/or liquidity even in situations where a unit may already be in compliance. This isn't just to ensure the financial security of the unit, but as new products come on the market, the regulator has to be sure that the level of risk contained in some of those new products sometimes has to be offset by additional levels of capital, at least until the marketplace as a whole becomes much more familiar with these types of products.

Under the theme of enlarging the range of permitted business activities, there are some significant changes here. This is dealt with in part VIII of the bill.

Part VIII identifies the businesses and business activities that a credit union may undertake, as well as sets out the limits on credit unions carrying on the business of insurance, providing fiduciary services and making investments and loans.


Loans under the statute will be governed by a lending licensing regime which will include categories such as mortgage, consumer, institutional, agricultural and commercial lending. The bill will also grandfather current lending bylaws so that credit unions are deemed to have a licence equivalent to their present bylaw.

The changes in the investment area: The bill replaces the "legal for life" investment rules with a prudent portfolio standard, although certain qualitative and quantitative restrictions will continue to appear in the regulations. All credit unions will be required to establish minimum investment and lending policies and procedures that would have to meet prescribed standards.

On the borrowing side, the bill introduces for credit unions more detailed provisions dealing with the pledging of assets and the issuance of subordinated debt and will require the director's approval if credit unions wish to pledge assets to secure loans from their leagues.

With respect to guarantees, credit unions will be permitted to give guarantees, including letters of credit if, for prudential reasons, the guarantee is for a fixed sum of money and the guaranteed person has an unqualified obligation to repay the credit union.

I think we touched a bit on the insurance, but with respect to insurance, the regulations will be designed to prevent the retailing of insurance in branches by credit unions as well as prevent the use of customer confidential information to assist in the distribution of insurance policies, other than those related to credit products like credit-related life insurance and products such as travel insurance. Credit unions will also continue to be allowed to distribute group insurance products.

On networking and subsidiaries, credit unions will be permitted to enter into networking arrangements with subsidiaries and other prescribed entities and they will also be able to establish subsidiaries.

Under the fifth theme, dealing with mechanisms whereby credit unions may provide timely assistance to weaker units, we're looking at part XIV of the statute. This deals with the organization, responsibilities and power of the deposit insurer and a new thing called stabilization authorities.

Stabilization, briefly, is an important self-help safety net which enables credit unions and caisses to correct emerging problems prior to them growing and threatening the viability of a unit.

OSDIC, or the Ontario Share and Deposit Insurance Corp, will be responsible for the stabilization activities for all credit unions and caisses populaires, although the bill will also permit a league or a group of credit unions to apply to the deposit insurer to become the designated stabilization authority for its membership.

Stabilization authorities, regardless of whether they have been delegated the duty, or the deposit insurer will supervise credit unions that are in financial difficulty in order to help them correct business practices. Furthermore, they also may get involved in supervising the day-to-day management of a credit union, establish guidelines for the operation of the unit. Depending on whether it's the defaulter or the voluntary stabilization authority, they may also provide financial assistance to enable a credit union to continue its operations.

The deposit insurer role will continue in such that they will have the power to administer a credit union to help it to correct its problems and to continue as an ongoing business or to amalgamate it with another credit union or, lastly, to wind it up.

The deposit insurance reserve fund is there to finance all of the deposit insurer's activities, including statistics gathering, acting as the stabilization authority, paying the administration costs for voluntary stabilization authorities, administering credit unions, liquidating units and paying out deposit insurance claims.

There will also be a power for the deposit insurer to collect differential deposit insurance premiums, although these could not be assessed on the basis of belonging to a league or a stabilization authority.

The other parts of the act: For example, part I basically deals with definitions. Part II establishes the basic framework for regulating credit unions and provides for the appointment of the director as the principal statutory official.

Part XI gives the regulator the power to inspect and identify information that a credit union must file. Part XII provides the director of credit unions with broad enforcement powers so that in addition to specific powers which are contained throughout the statute, the director could also order a credit union to comply with any provision of the act to fix harmful business practices, dispose of unauthorized investments or loans and stop taking deposits and, if necessary, to suspend business.

Part XIII governs the incorporation of leagues and addresses certain issues which are unique to them. All the provisions of the act that govern credit unions also govern leagues, although there is a specific ability to exclude by regulation sections of the act making them applicable to leagues.

Part XV deals with dissolutions, amalgamations and reorganizations. We also have a more expeditious procedure for dissolutions in this area where a credit union has no assets and a minister is authorized to compel the credit union to amalgamate if the viability of the credit union is questionable.

Part XVI is the enabling authority for regulations, part XVII sets out the offences and establishes the penalties under the statute and part XVIII enables credit unions to enter into extraprovincial agreements with respect to the operation of credit unions in other jurisdictions. As well, there is an assessment power which would enable the ministry to recover costs of regulating credit unions.

That's three years of work in 15 minutes.

The Chair: Thank you very much for your comprehensive briefing. Are there any questions?

Mr David Johnson: I was told a story by one small credit union -- I can't recall which one it was precisely, to tell you the truth; it was several weeks ago -- of an instance where there was a Legion in a particular town, I guess it was, and this credit union was associated with that town. The Legion was a member of the credit union somehow. I don't know how this works exactly, but many of the members of course were members of the credit union.

The Legion came to the credit union, as I can recall the story, and needed an improvement to the building. The members were in good standing in the community and very reputable and respectable, and the credit union was delighted to be able to be involved, but there is some kind of ceiling, I guess, on how much can be loaned to a particular entity and the Legion's request exceeded this ceiling.

I guess (a) is that something that's controlled locally or is that something that's controlled through a provincial bill, and whatever letter of the alphabet I'm at now, is that something that has been addressed in this particular bill or is that a problem that will still exist?

The upshot of the whole thing was that the Legion had to be turned down and sent to a bank. I think the bank consented, but part of the arrangement was that the business shifted from the credit union to the bank, and I suppose many of the members followed suit. It was a little bit of a catastrophe for the credit union.

Mr Glower: Let me outline what we presently do and what the statute will do. Just for everybody's benefit, Mr Johnson refers to a particular Legion. A Legion, from a statutory point of view, is considered to be an unincorporated association. By virtue of being an unincorporated association, the liability for any business it transacts or conducts transfers to all the people of that Legion. So when the Legion would undertake to borrow money and if it should default, all the people belonging to that Legion would, for all intents and purposes, be on the hook for that default.

The present statute in fact sets out a cap of 1%, I think, of the capital of a credit union, which is in essence, from a prudential point of view, a very small number, which is likely why that Legion was turned down. We recognize that it is a very small number. It's a statutory cap, although they may have had a lower cap in their bylaws. I don't think they would have.

What we are looking at under the present statute, under Bill 134, is that, as with other types of loans, we have removed statutory caps from the bill. We have gone through and, in the regulation on lending, we are looking at different types of ultimate caps or limitations.

I'm sure the minister has said on more than one occasion that we have either removed and/or expanded -- and in the case of unincorporated associations we are looking at expanding. We are looking at expanding that to 1.25%, but before everybody laughs, that will also be on the basis of what's called the regulatory capital and deposits of the credit union, so to put that on the other side of the balance sheet which everybody understands: assets.


If a credit union had 3% in capital under the present statute, the one in operation, its limit would be 1% of the 3%, and under the new law, it would be 1.25% of the total assets of the credit union. So it's a significant improvement, but we would still reserve the right on the basis of the size of the credit union to lower the 1.25%. The 1.25% would be the maximum.

That still wouldn't guarantee that every single Legion could get those loans, but I hope people appreciate, from the prudential point of view, that we don't want to see members who also belong to a Legion hall be on the hook for a loan that they may not have realized was so large, and ultimately they would be personally responsible for.

Ms Atcheson: In fact it is standard in all legislation governing financial institutions to have rules, for instance, that limit exposure to single loans. The issue is where you set them so that you don't create burdens that aren't justified and have the benefits of the lending available, but it is certainly standard to have those types of single investment loans for prudential reasons.

Mr David Johnson: I'm sure. That only makes sense. I guess the situation here, though, looking at a credit union, particularly a smaller credit union where they know their people, in a case like this where they know the town, the members of the Legion, obviously good citizens, and my suspicion is they would want to be on the hook. I'm sure the decision to expand the Legion or improve the Legion, whatever it was, was taken with the full knowledge of all the members, and they would be good for that, so there's no question of being on the hook.

It just points out perhaps the difference between a credit union, particularly many of the smaller ones who have a good finger on their members, and a bank. In a bank you would perhaps not know the moral character or see the person at work every day or see the person in your little town every day and understand what the risk is as much as you would in a credit union. I don't know how you deal with that exactly, but it seems to me that a credit union should have a little more flexibility in that regard than a sort of traditional banking institution.

Mr Glower: I was going to say a couple of things. I think the example really points to the fact that we do have to broaden the limitations, which hopefully we have successfully done or I should say I know we've successfully done, because 1.25% of total assets is quite significantly larger than 1% of the reserves.

But for those situations we've also allowed credit unions now to -- well, they could have before as well, but I think it's a little clearer and a little more obvious. Credit unions and caisses will be able to get involved in syndicated loans. Just to make sure it's clear, syndicated loans would be a group of credit unions that essentially agreed to contribute to one loan. They would all put in, whatever their limitations might be, they would all make a contribution to that loan so that a member of any one of those contributing credit unions could then ultimately receive the loan. In your particular example, this credit union may have spoken with one or more credit unions and said: "This loan is beyond our capability. Would you want to be a part of this loan? We could syndicate it." Then the loan could have been made to the Legion.

That is something that's available today, although it may not be as flexible as we propose to allow it to be, but it certainly is an option that is there now and will basically be in the future.

Mr David Johnson: I want to move on to one last point. On that, I may say that in certain vicinities I guess that may make sense. My guess is that in rural parts of the province, I don't know how closely linked various credit unions are, and it may not make a whole lot of sense for them to syndicate because they may be geographically separated or something. It just may not be easy to do, so I suspect that this could be of limited value depending on where you are.

Another story that was told to me, and I don't know if this is just a comment or if this bill deals with it or not, but it's the story of two credit unions, one having difficulty having loans, I guess, that were either partially in total default -- in both categories, I guess: some perhaps in total default, some in partial default. That particular credit union was in deep trouble. Another credit union that in this case was nearby and had the -- what would we call him, the general manager, let's say?

Mr Glower: Yes, fair enough.

Mr David Johnson: The second credit union was stepping in to give assistance, but there is some mechanism in place through the province. Who would step in from the province?

Mr Glower: It could be ourselves or the deposit insurer.

Mr David Johnson: In this case the story that was given to me was that whoever it was that steps in from the province of Ontario came from Queen's Park, from the ivory tower, and didn't understand the local situation and spent six months -- the situation, far from improving, got worse and if only the nearby credit union B had been permitted to -- he was telling me: "I looked at their books. I went through them and I knew that these could be recoverable and these, with a little persuading, could be recoverable etc, and we could make this work out." But when the province stepped in, it got much worse and the amount of money that was lost was magnified.

My experience is somewhat limited, obviously, by the way I'm describing this, but is that situation dealt with here in the bill, or do you see some flexibility in terms of dealing with situations like that?

Mr Glower: I obviously can't speak to the specific situation, but I think the bill provides maximum flexibility. Certainly every situation is going to be different. I know that often what has happened is that when -- usually the deposit insurer does go in. They do make an assessment to find out what the worst-case scenario would be, and that's what is called the so-called liquidation value as opposed to the going-concern value. It's necessary for the deposit insurer to make that assessment in order to be aware of their own particular exposure.

I think the mechanism here, though, that I described with respect to stabilization should ultimately prevent the type of situation you've described from even occurring to begin with. In other words, it should not get to that level. The stabilization is intended to allow the deposit insurer or a league, to the extent that they agree to undertake that responsibility, to not only do upfront monitoring but, at the time they identify some declining trends, they can go in there either -- let's use the situation as to where it's the league that's doing the stabilization.

It becomes one of their own who is going in to now examine that credit union and investigate the declining situation and put in place solutions either through management or policies or, if necessary, take over the running of the credit union for a period of time, without the so-called government intervention, but to put it back on its feet and to take whatever measures are necessary to stabilize it or return its viability.

I think it's been a question in the past as to whether that flexibility exists today, but it is more than evident in this bill that flexibility is not only required but is present, and it's the whole gambit of stabilization.

Mr David Johnson: Has there ever been an argument that the government assessors lack the local sensitivity? Maybe I'm fishing around here.

Mr Glower: I'm sure it's been said once.

Mr David Johnson: Is that a concern, that there are so many different conditions across the province of Ontario?

Mr Glower: It's true that we obviously cannot be aware of all the local conditions. When we go in we are going in from the point of view that there's a depositor out there who's insured up to $60,000 and we want to make sure the depositor will recover the money. We try to be sensitive to local economic, or whatever, conditions, but that doesn't necessarily always translate into "Let's save this credit union at the expense of the depositors," or in fact at the expense of the rest of the system. If a credit union is going to have a problem, it is going to cost everybody else. I think the deposit insurance policy has been the least-cost solution to the deposit insurance fund.

Ms Atcheson: It is fair to say, I think, that all of the players in the system have an increasing commitment, though, to doing precisely that: to looking at amalgamations, rationalizations in a very different way as opposed to -- in other words, looking at the full range of options in the most helpful way possible. I think that's partly one of the supports for stabilization.


One still has to recognize there are always conflicting interests when any financial institution is in difficulty, but there's I think an increasing understanding and commitment to doing that. OSDIC will be here and I think you'll hear that from them as well.

Mr Gerry Phillips (Scarborough-Agincourt): My apologies if these questions have been asked earlier. Can you give me kind of a layperson's quick rundown on what new things the credit unions are permitted to do that they weren't permitted to do before?

Mr Glower: The first thing I guess that comes to mind with respect to bonds of association -- I'm just going to go through the overview, so this is in no particular order. With respect to --


Mr Phillips: He said "layperson language."

Ms Atcheson: I think we were clarifying the question. I think the question was directed towards the powers of credit unions.

Mr Glower: Strictly business powers?

Mr Phillips: I'm just trying to think, if I'm someone who wants to deal with a credit union, what new things can I get out of my credit union I couldn't get before?

Ms Atcheson: In terms of products, services, that emphasis?

Mr Phillips: Yes.

Mr Glower: We talked at length a bit, for example, about the purchase of investment shares. If I wanted to be an investor as opposed to strictly a member in a credit union, that would certainly give me certain opportunities to take my money, put it into the credit union for a different level of investment in the hope that it's invested back into the community.

On the lending side, certainly there is a broader ability -- and I think we addressed this a bit -- for credit unions to make not only larger loans but as well to syndicate loans and to participate, which is a form of investment, in loans, which again is questionable as to whether they could do that under the present statute.

On the networking side and the subsidiary side, credit unions now will be able to own subsidiaries, which would mean that, either through the ownership of subsidiaries or affiliated companies, they could network a lot easier services of other groups within the cooperative system or services beyond the cooperative system.

Mr Abols: A few smaller areas. For example, they will now be able to provide limited fiduciary services in the way of administering trust accounts for lawyers. Currently in the Law Society Act there's a list of financial institutions that can administer lawyers' trust accounts, and credit unions, for some reason, are not included in that list. We're going to put them in that list.

They'll be able to take institutional deposits from non-members. So, for example, if a local municipality or government wanted to park their money in a particular credit union for a time, they'd be able to do that.

Mr Phillips: It may be useful, if it's easily done, just for me to sort of understand what the new -- I'm just thinking of it from a consumer point of view, which is where I come from. What new can I get from my credit union?

Mr Abols: Essentially, I think the way to understand it is this notion of putting credit unions on a level playing field. Anything that the banks and trust companies are doing today, and all the new things that they're doing in the way of offering broader investment services, access to other types of financial products such as insurance or trust services --

Mr Phillips: I understand, but you understand this stuff well. I don't know --

Mr Abols: The point I'm getting at is that we're putting them in a position where they can do all those things. Today they can't largely because their investment powers are limited. Harvey mentioned subsidiaries. That's really the way the banks are now providing all these products.

Mr Phillips: But it would be helpful for me if you just say, "The credit unions can offer these services right now; under this, they can offer these services."

Ms Atcheson: You'd like an illustrated list, right?

Mr Phillips: Yes. You assume I know more than I do. I've no idea what banks really offer, so when you say they can offer what the banks do, I don't know what new they can do.

The second thing is, providing the mechanisms whereby credit unions can provide timely assistance to weaker units to improve their -- I wouldn't mind a layperson's explanation of just how that might work.

Mr Glower: That's the process that we call stabilization. Let me first try and define that for you, and that I think will help. Stabilization is what we call a process of monitoring an early action or intervention in order to preserve the viability of a credit union and eliminate any causes of decline in performance. That's what stabilization is all about. If a credit union is unable to operate profitably or has certain operational deficiencies, stabilization means we identify those trends, we identify the problems, and we implement certain actions to modify or eliminate those negative impacts. That is what the assistance to the weaker units is all about.

Who in fact engages in it is the second part of the puzzle. The statute basically says that OSDIC or the deposit insurer is the default stabilization authority. In other words, it is charged with the responsibility to undertake stabilization. OSDIC has the power to subdelegate that responsibility to what we call a league or a group of credit unions. For example, there are three leagues in the province, so any one of those three leagues could in fact say, "We want to be in this game." Subject to whatever standards OSDIC would set out, they could then undertake that responsibility.

Once the identification of the problems -- and that's the key part of stabilization -- has taken place, and in fact there is an actual problem, we can get into a process called supervision. This is laid out in the statute. A simple word is "curatorship" for supervision. It's essentially there to reduce the potential loss to the deposit insurer and the system as a whole, and impose whatever mandatory operating requirements may be required.

For example, they could ask a credit union to correct any practices that are contributing to a problem situation; they could ask the credit union's directors not to exercise certain powers that the credit union would otherwise have; they could establish operating guidelines for the credit union; they could order them not to declare dividends; they could order them to set different interest rates, either on the deposit or on the lending side; and, to the extent that it would be a league as opposed to a deposit insurer, they could in fact provide voluntary financial assistance, either repayable or a grant or whatever. These are the operating means to go in and say, "We've identified these problems, we see the declining performance and this is what's required to correct it and put you back on the positive track."

Mr Phillips: When you say "providing the mechanisms whereby credit unions and caisses can provide timely assistance to weaker units," is there any risk at all that down the road someone could say, "Our credit union was required to assist one that got into trouble and that's why things haven't gone as well for our operation," or is the healthy credit union completely protected here?

Mr Glower: What we have is really a universal deposit insurance system. What that means is that once the costs of fixing the problems are determined, everybody pays the same deposit insurance premium for those costs, and that's present today.

The so-called universality of deposit insurance will continue to the extent that everybody will still be required to pay deposit insurance premiums. The bill provides for a thing called differential premiums, whereby some credit unions will pay a lower premium, depending on the risk they present to the system, and other credit unions may pay a higher premium, depending on the risk they present.

I would characterize the fact that the healthy credit unions, to the extent they stay healthy, will present a lower risk and could benefit, if you will, from a lower premium. The idea behind stabilization ties in to risk-rated premiums; that is to say, if you are now part of the stabilization group, and everybody must be, the early intervention should limit or decrease the deposit insurance premiums for everyone and ultimately the costs, because deficits really should not occur in theory, but certainly in practice the rate at which they would occur is significantly diminished. That translates into lower premiums for everyone.


But if a group of credit unions decides that it wants to do this separate and distinct from the deposit insurer, by virtue of having done that because they know their members, as the francophones will argue, probably, in the public hearings -- the francophones say: "We know our members. We're a smaller group. We're uniform. We have one operating system. We sort of track every transaction that we engage in. When we engage in the stabilization, we are going to be successful." Now, you cannot get a risk-rated premium because you belong to that group, but you can certainly get a lower premium by virtue of the work that the group will accomplish, which has reduced the risk of that group.

Mr Abols: I would also point out that in terms of the direct funding that a group, either a league or the deposit insurer, would provide through stabilization, the deposit insurer, as a stabilization authority, cannot provide direct funding. The stabilization authority can only provide management advice, guidelines and so on. If a league or a group of credit unions decides to take on that stabilization function vis-à-vis its own membership, then it can voluntarily establish a fund and then assess its members to contribute to that fund. But it is a voluntary fund, "voluntary" in the sense that the leagues don't have to establish one, but if they do, then their members, of course, would be assessed.

Membership in a league is also voluntary and we do have a segment of the credit union movement that does not belong to a league. So they, by default, would be governed by the deposit insurer as far as stabilization goes. As I've mentioned, the deposit insurer cannot provide financial assistance through stabilization, so there would be no cost in that situation.

Mr Phillips: One last thing: On the leagues thing, what's the advantage of the leagues? I know what the objects of the leagues are, but what's seen as the role of these leagues and the advantage of these leagues?

Mr Glower: There are three leagues right now. There are two francophone leagues and one credit union league and a number of independent credit unions. I think the common advantages, because there are certainly different ones among them, are a couple.

One is, there are economies of scale in terms of provision of services: for example, cheque clearing, education, training. Those are the non-financial-type services that a league provides: product marketing, product creation, which then become uniform. Those are some common advantages.

On the financial services side, leagues act as the liquidity pool for credit unions or for their respective members. Just as the Royal Bank of Canada, for example, participates in the Bank of Canada and has all of its cheques cleared through what's called the Canadian Payments Association, credit unions, through their structure -- you've got the individual credit union, you've got their league and then there's what's called Credit Union Central of Canada and, ultimately, the CPA.

I'm going to mention them by name but leave them out of the picture -- a credit union central would be equivalent to the central bank. They are the central bank for their credit unions and then provide the types of financial services like clearing, liquidity; in other words, if a credit union is having problems in attracting deposits and has a super demand for loans, it can go to its league and say, "I would like to borrow some money." So there's that pooling of liquidity which is advantageous to everybody.

I mentioned loan syndications before and Mr Johnson questioned, "What if I'm off in a remote area?" In fact, this is another advantage if a credit union is a member of the league. If it doesn't seek out a neighbouring credit union for syndication, it can go to the league, which holds the liquidity of all the credit unions and can syndicate directly through the league, or use the league as its conduit to find another credit union through which to syndicate.

Credit unions today also have a lot of liquidity, which doesn't necessarily translate into bottom-line profits because of their very small margins. What they can do is they can buy what are called interest rate swaps. In other words, they can say, "I've got money that matures in a short term and I need money that matures in a long term," and the league can provide that offset for them.

Do you want me to go on? That's the general picture.

Mr Abols: They also provide day-to-day operational advice. Some of these credit unions are very, very small, and just in terms of keeping their bylaws up to date and in conformity with the act, they don't have the resources. They maybe can't afford legal services. Central has in-house legal counsel, and I understand one of its duties is to provide that kind of advice on an as-need basis. Probably the same applies to accounting issues and other operational needs.

Mr Phillips: I think I understand. It's the road to bigness and maybe inevitable, but it's --

Ms Atcheson: It isn't necessarily a road to bigness in the sense that it can accommodate any range of interests in the movement, but what it does do is provide an efficient way of operating as a system. In fact, every credit union system in every province does utilize the league structure, partly because of the advantages of the central banking. So it doesn't really force you to a result so much as it does accommodate a whole series of results.

Mr Phillips: In fact, you would argue just the reverse, if I use my judgement.

Mr Abols: No, but I would just observe the fact that if you look at the membership of Central, the biggest league, it is made up of, essentially, small credit unions. It's the independent credit unions that are the larger ones. So in fact it's an organization that fosters and promotes small, locally based credit unions.

The Chair: I thank everyone from the Ministry of Finance for making your brief before the committee this morning and this afternoon.

Mr Phillips: Even if there were further questions, you'd still thank them.

The Chair: Even if there were, I'd still like to thank you. If there is no further business, this committee stands adjourned until 10 am May 12 in room 151.

The committee adjourned at 1707.