George D. Anderson, President and CEO, Insurance Bureau of Canada
A PROPERTY/CASUALTY INSURANCE PERSPECTIVE ON FINANCIAL REFORM
Chairman: David Edmison
President, The Empire Club of Canada
Head Table Guests
Bill Whittaker, Partner, Lette Whittaker and an Honorary Director, The Empire Club of Canada; Peter Salloum, Regional Manager, Pension and Savings, Sun Life of Canada; Carlos Ferreira, grade 12 student, Parkdale Collegiate Institute; The Rev. Canon Harold Roberts, Rector, St. Timothy's Church, Agincourt and a Past President, The Empire Club of Canada; Lillian Morgenthau, President, Canadian Association of Retired Persons; Marty McConnell, Past President, Life Underwriters Association and Partner, Creaghan, McConnell Group; Mark Daniels, President, Canadian Life and Health Association; Margaret Scrivener, former member of the provincial Parliament for the riding of St. David, member of the firm Martin & Meredith Limited Real Estate and an Honorary Director, The Empire Club of Canada; Ronald Goodall, Partner, Goodall & Peacock and a Past President, The Empire Club of Canada; George Cooke, President, Dominion of Canada General Insurance; Joanne Brown, Executive Director, Insurance Brokers Association of Canada; Bob Gunn, Chairman, Insurance Bureau of Canada and President, Royal Insurance; and Dan Thornton, Senior Vice-President, The Co-Operators Insurance Group.
Introduction by David Edmison
Baseball fans know that baseball players must be alert and focussed to win games. Errors can be very costly. The result of a game, however, can be determined by decisions which have little to do with the players or their abilities. The arbitrary decisions of the umpire can determine who is a winner and who is a loser. There is an old story about three umpires asked what they do for a living. The first said: "There are balls and strikes and I calls em." The second umpire gave it a little more thought and said: "There are balls and there are strikes and I calls em as I sees em." The third umpire, after considerable thought said: "There are balls and there are strikes, and they ain't nothin, until I calls em as I sees em."
The financial industry, like baseball, requires an umpire or regulator to determine what's fair and what's unfair. Currently there is considerable debate among the players in the industry, as to what is the appropriate "strike zone." Soon a white paper will be released by the federal government and new banking and insurance legislation is expected to be passed no later than March 31, 1997.
The banks were allowed to enter the insurance business, with certain restrictions, in 1992 through changes introduced to the Bank Act. They want to expand their presence by selling insurance directly through their branch networks and they maintain that more competition means greater savings to consumers.
The insurance industry is yelling "foul," feeling that handing over more power in this area to the big six banks will not necessarily "even the playing field," and could in fact reduce competition. No matter what the outcome, industry observers agree that the concept of "direct" insurance will not go away and point to recent successes in other countries.
With us today to discuss the implications of changes in the regulatory environment is George Anderson, President and CEO of the Insurance Bureau of Canada, a position he has held since 1992. The Insurance Bureau of Canada represents 230 federally registered property and casualty insurance companies, and nearly 110,000 employees of the industry. Prior to joining the IBC our guest held chief executive positions in the trust industry and in 1986 joined Central Mortgage and Housing as President and CEO.
During his time at CMHC, the Auditor General of Canada cited the Corporation as one of the eight best-performing federal government institutions. In 1989, Mr. Anderson received the Canadian Home Builders Association Award of Excellence for service to the Canadian building industry. One year later CMHC was selected by The Financial Post as one of the best companies to work for in Canada.
During his distinguished career Mr. Anderson has earned numerous honours including "the business communicator of the year" by the International Association of Business Communicators--only the second Canadian to receive this distinction.
Mr. Anderson serves on the National Council on Crime Prevention. He is Chairman of the Toronto Civic Employees Pension Fund and the Toronto Firefighters Fund. He also serves as a member of the advisory committee of Parklane Ventures and is a member of Carlton University Advisory Council.
Our guest is active in a host of community organisations including the United Way, the National Mental Health Fund, Junior Achievement of Canada, and the Canadian Council for Christians and Jews.
Mr. Anderson also has an abiding interest in baseball and is a part owner and Chairman of the Shareholders Committee of the St. Catherines Stompers--a class "A" farm team of the Toronto Blue Jays. In his important role with the Insurance Bureau of Canada, Mr. Anderson will do his best to ensure in the present debate on financial regulation, that the industry he represents is not stranded in left field.
Ladies and gentlemen, would you please welcome our honoured guest Mr. George Anderson.
The federal government completed an exhaustive review of the legislation governing Canada's financial institutions in 1992. The next round of review is in 1997. This may seem a long way off, but the debate on possible reforms is already taking shape.
Unfortunately, it may be taking the wrong shape. Instead of looking at the big questions about how all the pieces of the financial puzzle fit together, it seems to be shaping up so far as a rather narrow debate about banks selling insurance. As you may know, in 1992 the government permitted banks to own insurance companies and to sell life and general insurance, as long as they followed certain fair competition rules. The banks were not allowed to sell insurance in their branches or to use their massive databases to target market insurance customers. These rules were put in place to protect consumers and to ensure that banks competed on a level playing field. The banks want these 1992 rules lifted. Many others want the rules to stay.
Now this is an important issue. For the average Canadian, it probably seems more like an industry turf war than a major issue of public policy. Indeed, the debate about the next round of reform is in some danger of becoming simply a contest between bankers and insurers played out on the business pages of newspapers and in the committee rooms on Parliament Hill.
That would be unfortunate because it sidetracks the debate away from more fundamental issues. To my mind, the question to be resolved is not simply whether the banks should get more insurance powers. The real question is: "What kind of financial services industry do Canadians want?" We seem to be moving quickly towards a financial services sector that is dominated and controlled by a few large institutions. Five Canadian banks are taking control not just of banking, but more and more of the entire range of financial services in Canada. This concentration of banking power is unprecedented in our history, and indeed, in the industrial world of the G-7 countries.
I think we need to pause for a moment and ask how this affects the Canadian consumer. One line of argument says that the consumer interest is best served by letting financial institutions fight it out in the marketplace. I often hear policy makers in Ottawa say that they are not in the business of picking winners and losers. They prefer to see this contest among financial institutions resolved in the iron cauldron of the free market. The thought behind this notion is that the institutions that best serve the consumer will prevail.
To this, I say that that is an interesting idea in theory. But in actual fact, we have never really tried it in Canada. The current dominance of the few banks has little to do with the natural outcome of a freely functioning market. Our financial services market is, and will continue to be, very closely regulated by government. Our market is, in fact, a direct product of government policy stretching back over many decades.
It is the result of government policy openly and deliberately designed to help Canadian banks achieve pre-eminence. The operative model is not--and never has been--free market competition among equals. The model we have chosen is one which, on the one hand, has incrementally opened up other financial sectors to the banks, while on the other hand, ensuring that the banks themselves are not equally open to competition. Despite what the theory may pretend, this is what the practice has been. The legislative framework developed many years ago gave Canadian banks extraordinary privileges and protection. These include limits on foreign competition, protection from takeover, de facto control of the payments system, and deposit insurance and liquidity support from the government and the Bank of Canada. That protection is still in place today.
Now I do not wish to seem unappreciative of some of the advantages of this policy. I'm not saying, for example, that the traditional stance favouring a few strong Canadian banks was wrong-headed from the start. A strong and profitable banking system is fundamental to economic development. Also, our pro-bank policy was prompted in large part by a desire to protect the savings of Canadians. I have no quarrel with that. Indeed, we can be proud of the stability of our banking system.
But times change. Perhaps we are now starting to pay too big a price for this policy to continue unchallenged. Perhaps now is the time to ask if the traditional policy framework--one that guarantees pre-eminence to just a few institutions--makes sense anymore. At the very least, I think we should be cautious about making any more significant, one-sided reforms in 1997 that exclusively favour the banks. We have seen a number of those reforms in recent years and the history of these changes reveals a relentless pattern.
In the 1970s, the mortgage business in Canada was spread between the life and bank and trust companies. Banks were small players. Today, the banks have by far the largest share of this market. In 1987, the rules were changed to allow banks to own securities dealers. Today, they have 70 per cent of this market. In 1992, the rules were changed to allow banks to own trust companies. Today, there are only two independent trust companies of any size left. The banks have most of the rest of that market. In total, the assets of the top banks jumped an incredible 52 per cent between 1991 and 1995. The degree of concentrated financial clout that these institutions now possess is greater than the major banks in any other G-7 country.
Even the Auditor General has raised concerns about this trend, about its implications for competitiveness, and about what it means for the consumer. Does this concentration of power hurt competition? Some theorists argue that it does not. After all, for most of its history, Canada has endured oligopolies and closely held entities in many industries. Five or six companies in a single market may be enough in theory to ensure good competition. Bankers themselves say that a handful of Schedule I banks makes for a fiercely competitive banking scene. Of course, the same bankers argue that 220 companies competing in the property and casualty industry aren't enough to make the insurance industry competitive, but let's not get sidetracked into an argument about numbers.
The real standard of competition is not the number of companies competing, but rather how they competehow the institutions in a specific market really behave on a day-today basis. What does the behaviour of the banks tell us about competition?
Until very recently, the banks operated what amounts to a "closed shop" through the Interac System of automated teller machines. Just last December, the federal Director of Investigations under the Competition Act charged that the banks "abused their market position" to control that system, and that "as a result, competition has been lessened substantially in the Canadian market."
The banks are continuing to deny life insurers access to the Canadian Payments System. Insurers argue that bank control over this cheque clearing and settlement system is generating windfall profits for the banks. The banks are able to get fees from the insurers and their customers to process payments generated by the insurance industry. Because they control access to the system, pretty well everyone else is in what amounts to a captive market.
What happens to price competition in this captive market? According to Neil Quigley, a research associate at the Institute for Policy Analysis at the University of Toronto, such exclusive domain over the provision of settlement services inhibits external competition. So, at least with respect to the Interac System and the Canadian Payments System, there is reason to believe that competition is muted to put it mildly. There is more. The banks cannot argue convincingly that they compete very aggressively with each other in terms of price. Their core product prices--interest rates--are set centrally. Very rarely are the interest rates offered by the big five for loans or GICs "out of sync." When one looks at the degree of synchronisation of those rates, the word "competition" doesn't spontaneously spring to mind. After all, the parallel setting of these rates is an important component of national monetary policy.
Let's look at service fees. One would expect that robust competition would lead to the lowest possible charges for consumers--and some obvious correlation between the charges and the cost of providing the service. Yet what we find is that the service fee revenue of our banks has risen an astounding 9,500 per cent since the major banks began monitoring this in 1973. In that year, service fee revenue reported by our banks was about $21 million. Last year, it was over $2 billion.
Parliamentarians, small business leaders and consumers regularly complain that there seems to be no clear formula for how service fees are set. They seem to be set simply on the basis of how much the market will bear. The market, it seems, is often forced to bear quite a lot. As I said a moment ago, the issue isn't simply that five or six banks dominate the marketplace. It is how they achieve and maintain this position of dominance.
Perhaps it's time to question in a more vigorous way how we have structured our banking sector and its satellite systems. Perhaps it's time to ask whether the traditional assumptions about the need to protect our banks so fully from competition are still valid. And perhaps now is the time to look at the long-term consequences for the consumer of the absence of stiffer bank competition. The cross-ownership provisions of the 1992 legislation opened up new financial service sectors such as trust and insurance companies to the banks. By doing this, the legislation gave banks huge market power and unparalleled access to customer information. And in an age where information truly is power, this privileged access and control of consumer information give the banks an incredible and definitive advantage.
The fact is, the banks now have customer files that nearly rival the data banks of government. The ability to capture, use and control massive stores of information, coupled with their obvious local-market dominance, give the banks competitive advantages no other institutions enjoy. This combination represents an effective barrier to competition as the banks enter new markets and we all enter the age of information. There does not seem to be any obvious or convincing reason for further enhancing this huge advantage in 1997.
Another concern that needs to be addressed is the power the banks have to use credit denial as one way of achieving market dominance in non-banking sectors. A recent submission to the federal government by the independent investment dealers claims that after the banks got into the securities business, most of them stopped lending to independent dealers--although they continued to lend to their own in-house investment arms.
Does the power to deny loans to a competitor constitute an unfair competitive advantage? Is it an impediment against competing too aggressively with the banks? Is it, in fact, a structured conflict of interest? Is it too much to expect banks to lend freely to competitors? In cases like this, how are we to know that credit is denied for sound underwriting reasons and not for competitive reasons? The Insurance Brokers Association of Canada is deeply concerned about this. The thousands of independent business men and women who sell most of the insurance in cities, towns and villages across Canada could not survive if denied credit by the banks. As the brokers have often said, banks should help promote local commerce, not compete against it.
At the outset, I said that the 1997 financial services review should not be reduced to a case of bankers increasing their elbow room in insurance. The real issue is competition within the financial services sector as a whole. Resolving this issue in a way that favours more competition in the banking sector seems to me to be far more important to the consumer than extending the reach of banks further into other businesses.
If we resolve these broader issues of competition, it should be easier to deal with the specific issues such as banking and insurance. Speaking for the property and casualty insurance industry, I have no hesitation at all in saying this: we can compete with the best the banks have to offer in insurance provided that they compete with us on an equal and fair basis.
In fact, the banks can and do compete in the insurance market right now, under rules that ensure they do so fairly. The insurance industry has no problem with this at all. Where we have a problem is when the banks ask that the rules for every sector but their own be changed--changed so that they can use the overwhelming financial muscle which government policy has given them to potentially drive out competition. Insurers believe very strongly that, under the current scheme of things, the consumer will not benefit from such a move. We are not alone in this view.
So with the 1997 review, let's start to look at the broader framework. If we want to talk about how much power the banks should have to market insurance, fine--let's do so. But let's not get too fixated on this one question. Let us also ask whether the existing regime under which our banks operate really embodies policies that endorse fair and open competition and really lead to the results Canadians want.
It is not clear that the existing regime does that. Until it is clear perhaps we need to put a stop to this piecemeal approach to legislative change. For me, at least, there are enough grounds for concern to raise the flag of caution before rushing into more "incremental" changes in 1997--changes that would favour the banking piece of the financial services puzzle over any other.
The government will soon release a White Paper on the 1997 reforms, which will help to clarify many of these issues. That clarity will be welcome. Because these are not simply turf wars within the industry. They are issues that affect us all--and the ability of Canadians to access the best possible financial services in the future.
The appreciation of the meeting was expressed by Bill Whittaker, Partner, Lette Whittaker and an Honorary Director, The Empire Club of Canada.