- Consulting with Canadians -

Great-West Life Assurance Company Submission in Response to Finance Canada's Large Bank Mergers in Canada:

Submission to the Government of Canada by The Great-West Life Assurance Company

in response to questions raised in the Government's response to Large Bank Mergers in Canada: Safeguarding the Public Interest for Canadians and Canadian Businesses a report of the House of Commons Standing Committee on Finance

and

Competition in the Public Interest: Large Bank Mergers in Canada A report of the Standing Senate Committee on Banking, Trade and Commerce

December 30, 2003

---

Introduction

This is the initial submission of The Great-West Life Assurance Company in response to the invitation by the Minister of Finance for written comments in connection with the Government's desire to finalize financial sector consolidation policy in Canada. Specifically, the Government has asked for comments on its guidelines and related policies governing the review process for mergers among large banks, that is, those with more than $5 billion in equity.

Great-West Life appreciates the opportunity to participate in this process. It is anticipated that as the review process evolves, Great-West Life may make further submissions. Great-West Life will also be pleased to be available for consultation.

Founded in Winnipeg in 1891, Great-West Life is a leading insurer in Canada, offering a broad portfolio of financial and benefit plan solutions for individuals, families, businesses and organizations. The company provides a wide range of retirement savings and income plans; as well as life, disability and critical illness insurance for individuals and families. As a leading provider of employee benefits in Canada, Great-West offers effective benefit solutions for large and small employee groups.

Together with its subsidiaries, London Life and Canada Life, Great-West serves the financial security needs of more than 11 million people across Canada. Together, the companies have a leading market share in all of their product lines and a multi-channel distribution system that provides access to Canadian consumers in communities of all sizes. This distribution system encompasses 975 Great-West financial security advisors who distribute Great-West and third-party products; 2,850 Freedom 55 Financial security advisors who distribute London Life products, Great-West and third party products; 2,800 Investors Group consultants who distribute Great-West products; 8,700 independent brokers and 2,600 representatives of intercorporate partners who distribute Great-West products; and 52 managing general agent (MGAs) contracts with Canada Life as well as approximately 3,000 brokers and 21 national accounts who distribute Canada Life products.

Great-West, London Life and Canada Life are committed to community initiatives across Canada. Their corporate giving programs contribute towards and encourage long-term, sustainable initiatives in the areas of education, health and wellness, arts and culture, and community programs.

In addition to its domestic operations, Great-West is a supplier of reinsurance through Canada Life Reinsurance Ltd. in the United States and Europe, and through London Reinsurance Group Inc. in the U.S. and European markets. Great-West Life and it subsidiaries have $109 billion in assets under administration.

Great-West Life is a subsidiary of Great-West Lifeco Inc. (TSX:GWO), a financial services holding company with interests in the life insurance, health insurance, retirement savings and reinsurance businesses. Great-West Lifeco has operations in Canada and internationally through The Great-West Life Assurance Company, London Life Insurance Company and The Canada Life Assurance Company, and in the United States through Great-West Life & Annuity Insurance Company and The Canada Life Assurance Company. Great-West Lifeco and its companies have more than $157 billion in assets under administration, and are members of the Power Financial Corporation group of companies.

Responses to Specific Questions

Cross Pillar and Large Insurance Company Mergers

Question Given the changes that have taken place since the Government established its policy with respect to the large demutualized insurance companies, should the Government consider a policy change to allow these companies to merge with each other and/or with large banks?

Great-West Life Response

The current regulatory regime was changed quite recently and is still evolving. Accordingly, participants are still adjusting to the most recent round of changes. Further changes could provoke unanticipated market disruption which could ultimately hurt consumers in terms of product access and price.

In response to the most recent changes, consolidation in the insurance industry has continued. Sun Life (recently demutualized) announced that it has completed its integration with Clarica (recently demutualized). Great-West Life is currently in the midst of integrating with Canada Life (recently demutualized), and Manulife (recently demutualized) announced its intended combination with John Hancock.

It is important to allow these and other combinations to proceed to completion, prior to contemplating any further changes in the regulatory environment. Further combinations and consolidations of large companies will likely lead to greater concentration of market shares in the hands of fewer and fewer players, which could ultimately affect consumer choice.

Specifically, if there were a policy change allowing the two remaining large demutualized insurers to merge, this would very likely lead to significant reduction in competition due to the resultant concentration of market share across all product lines. Such a merger would also increase the potential for monopoly/oligopoly pricing by the merged entity.

There are concerns about allowing banks to merge with insurance entities, based on the banks' track record when they acquired most of the major players in the brokerage and trust industries, in response to earlier regulatory changes that enabled these acquisitions. Independent brokerage and trust industries are now barely existent in Canada. If banks were to be permitted to acquire insurers, it could lead to the end of an independent insurance industry as well.

The Canadian consumer continues to await fee reductions and credited interest rate increases that were reasonably expected to arise as a result of the brokerage and trust acquisitions and the banks' resultant scale advantages. However, there is no need to wait for branch closings. The media regularly report on the impact of proposed branch closings on communities of all sizes. These in turn directly limit access for less mobile Canadians, including the elderly and those with special needs, as well as those living in rural communities.

Insurance products are very successfully distributed through a model that differs from the one used in the banking industry. The insurance distribution model is premised on independent personal advice from a licensed qualified professional. This individual typically meets with his/her client at a time and place that is convenient to the potential client. There are no "hours of operation" or branch offices in this model, and access is available in most small, rural communities, not just in large urban centres.

Banks and insurers operate with fundamentally different distribution models that have become a part of their corporate cultures. If banks were to be permitted to acquire one of the large insurers, then based on this cultural difference, banks might conclude that the current insurance distribution model is inappropriate. There is a risk that banks would wish to move to the branch/teller or internet based style of distribution. These models have not proven to be effective approaches to distributing complex long term financial products. The branch distribution approach is not currently permitted under the Bank Act. In an attempt to control costs, banks could, if permitted, potentially disenfranchise or worse wind down the independent advisor distribution channel, which would have the deleterious effect of restricting consumer access to insurance products and eliminating thousands of jobs from the economy. The Canadian Life and Health Insurance Association (CLHIA) currently estimates nearly 75,000 independent licensed life insurance agents serving the needs of Canadians in communities of all size.

If banks and large demutualized insurers were allowed to merge, the resulting institutions would be so large that their influence on public policy and opinion could be very powerful. The Government might find itself under extreme pressure to remove the Insurance Business (Banks and Bank Holding Companies) Regulations under the Bank Act which prohibit banks from marketing insurance products in their branches. Removal of these regulations could, among other things, contribute to tied selling practices. If these regulations were removed, the resultant mega-companies would have an unprecedented and insurmountable advantage over those entities that did not merge.

Accordingly, Great-West Life believes that it is too early in the lifecycle of the current policy changes to consider any further changes.

Question In this context, should large cross pillar mergers and mergers among large insurance companies be subject to a public interest determination by the Minister of Finance in addition to the standard regulatory review process involving the Competition Bureau and OSFI?

Great-West Life Response

In the current regime, OSFI addresses prudential concerns and the Competition Bureau looks at marketplace competitive matters. Great-West Life believes this to be very effective at fulfilling the regulatory review required. Great-West Life further believes that the Minister should consider each merger proposal on its own merits without imposing a fixed set of criteria.

In fact, the Minister's clarification of the five areas of "public interest"^[1] does not really apply to the insurance industry. For example, access to insurance products is provided through a wide range of channels involving personal intermediaries, not machines or physical branch offices, and most intermediaries represent more than one company. Intermediaries serve communities of all sizes, not just large urban centres. There is not the same concentration among insurers as there is among banks. Most insurers manufacture and distribute many products which further broadens consumer choices.

Possible Guidelines for the Future Structure of the Canadian Financial Services Sector

Question Are there any market structure characteristics of the financial services sector which should be specified in advance of the Government considering merger proposals and, if so, what objective measure can be used in defining them?

Great-West Life Response

The current review regime (OSFI, Competition Bureau) is sufficient to advise the Government on merger proposals. In addition, the Minister's discretion forms a valuable part of the approval process. Extreme care should be exercised when considering advance specification of any structural characteristics since this could distort the competitive balance. For an industry in flux, it would not seem sound to codify too many qualitative tests. Rather, the Minister should consider each merger proposal on its own merits.

One structural characteristic of the insurance industry that deserves special attention is the advice-based distribution channel. In order to continue to provide access and choice to consumers, it is important that a strong independent advice channel be preserved. Today, there are nearly 75,000 individuals who are licensed to sell life insurance products in Canada and serve communities of all sizes. Canadians have greatly benefited from such a distribution channel that is not wholly influenced by a few large institutions like banks. Any merger review should ensure this channel is preserved.

Question In this context, for example, should the Government specify a minimum acceptable number of large institutions and, if so, should "large" be defined in terms of product offerings, geographic range, market capitalization, assets, equity, or in some other way?

Great-West Life Response

The existing restrictions on cross-pillar mergers provide one safeguard against over-concentration in the financial services sector.

It is not appropriate to set a minimum acceptable number of large institutions. The primary objective determinants of market structure should be the existence of robust competition, driven by domestically-owned companies, and the safety and soundness of those companies. Robust competition should exist and be fostered amongst insurers and amongst banks, in each of the distinct product segments in the financial services sector. Great-West Life believes that these determinants can properly be assessed by the Competition Bureau and OSFI.

Process for Reviewing Multiple Merger Applications

Question Should the Government establish a window of time, say 60 days, following receipt of the first merger application, after which all applications received during that time period would be considered together?

Great-West Life Response

The table below is reproduced from the Government's June 23, 2003 paper.

Market Capitalization of Ten Largest Financial Institutions (May 30, 2003)
No.	Financial Institution	$ billions
1	Royal Bank of Canada	39.0
2	Bank of Nova Scotia	29.5
3	TD Financial Group	22.8
4	BMO Financial Group	19.9
5	Canadian Imperial Bank of Commerce	17.5
6	Manulife Financial Corporation	17.3
7	Sun Life Financial	17.1
8[2]	Great-West Lifeco Inc.	14.6
9	Canada Life Financial Corporation	7.2
10	National Bank of Canada	6.1
Sources: Company quarterly reports and Globe and Mail reported share prices

As displayed above, the number of institutions in question is small and the size of these institutions is very large. The resulting market capitalization of any proposed merged entity would be extremely large from a domestic perspective. Furthermore, domestic market share would heavily favour this entity in many if not all product segments. When the Government is prepared to once again consider merger proposals among large financial institutions, the likelihood of applications to be forthcoming is thought to be quite high. It is therefore important for the review process to allow any interested parties to submit applications concurrently so that the Government can ensure the resulting state is balanced and the Canadian public is better served. With a market-wide perspective and a full view of the industries in question, the Government will be best able to make decisions that maximize competition and minimize associated market disruption that could result from any approved combinations. While the proposed 60 day "concurrent submission" window seems to be a reasonable time frame to allow for this, consideration should be given to a longer period.

Measures to Enhance Competition

Questions How can divestitures in any merger context be used to maintain or enhance competition in the sector and contribute to public interest objectives? Should specific policies be designed to guide the divestiture process?

Great-West Life Response

Forced divestitures are not an appropriate lever for the Government to use to maintain or enhance competition. This approach could significantly expose an institution to an expropriation of shareholder value which would very likely have an impact on the institution's safety and soundness thereby impacting its customers.

Accordingly, Great-West Life believes that the primary determinants of the public interest are competition in the market, and the safety and soundness of the institutions involved in the acquisition of assets. Should a company chose to divest itself of assets acquired through a merger, this divestiture should be allowed to take place, subject to competitive forces and an appropriate review in terms of safety and soundness of the acquiring institution. A competitive market will provide the greatest possible range of consumer choice and rational pricing. Therefore, specific policies should not be developed for the purposes of "pre-determining" divestiture outcomes or for the purposes of restricting acquisitions of divested business units that would otherwise have contributed to a competitive market. The Competition Bureau and OSFI are effectively placed to assess the competitive and prudential merits of proposed divestitures and related acquisitions. No policy change or additional safeguards are required.

Questions Is the absence of ATM full functionality an important impediment to competition in Canada? Would the introduction of ATM full functionality permit smaller regional banking operations and new entrants to expand their reach and be stronger competitive forces in Canada?

Great-West Life Response

The absence of ATM full functionality is an impediment to full competition in the financial services sector for at least two reasons. Firstly, it restricts customers of one bank from accessing the full host of ATM functions via another institution's ATM. Secondly, it restricts access to insurance company products that are comparable to bank products.

The statutory regime established by the 1992 amendments to the Financial Services legislation expressly gives insurance companies broad powers to engage in the financial services business. They offer financial services to their customers and are specifically authorized to issue payment, credit or charge cards. Up until recently, insurance companies have not been active participants in this market. Historically, one of the reasons for this was that insurance companies could not provide their customers with access to their products through the extensive Interac network of ATMs and point of sale terminals because of membership restrictions. These impediments have, to some extent, been removed by passage of Bill C-8 and accompanying regulations which now allow life and health insurers in Canada to be eligible to participate directly in the national payment system as members of the Canadian Payments Association (CPA). More recently, Interac modified its eligibility requirements in a manner which now makes life and health insurers eligible for Interac membership.

The introduction of ATM full functionality could represent a positive development for smaller regional banking operations and also potentially for the insurance industry. Full functionality would remove existing impediments that customers of these entities face wherein the only available functionality is withdrawal of Canadian funds. For example, convergence initiatives involving insurers and banks have enabled insurance agents and brokers to offer deposit and loan products to their customers; however, access to those products is limited by the absence of full ATM functionality. Full functionality could increase the availability of related products by providing multiple access points for customers to use their accounts. This type of enhanced consumer access could enable insurers and other financial institutions to expand their customer bases, broaden their range of service offerings, and provide a competitive balance to banks. This could potentially lead to lower unit costs through increased volumes.

Question If full functionality does hold significant promise to add an important new element of competition in the Canadian financial services sector, what steps would the Government of Canada take to ensure that it becomes a marketplace reality?

Great-West Life Response

Currently, Interac and ATM processing does not fall within the scope of the Canadian Payments Association's (CPA) mandate. That mandate was recently expanded to provide that the CPA was responsible to promote the efficiency, safety and soundness of the clearing and settlement systems and to take into account the interests of users. Since introducing ATM full functionality appears to be in the interests of Canadian consumers, this is a matter that the Government may wish to refer to the CPA for further examination and recommendations.

---

[1] The Government's June 23, 2003 paper clarified that the Minister should consider the following five public interest criteria in making a decision on a proposed merger among large banks: (1) access to financial services in rural and low-income communities and by Canadians with special needs, (2) choice for small and medium enterprises and individual Canadians so that they would not be disadvantaged in finding capital and other financial services at a reasonable cost, (3) a more effective Canadian-based international presence and competitiveness and long-term growth prospects including growth in high quality jobs in Canada, (4) the deepening and broadening of Canadian capital markets, and (5) fair and reasonable treatment for employees during the transition period. [Return]

^[2] On July 10, 2003, Great-West Lifeco Inc. acquired Canada Life Financial Corporation. The combined market capitalization would place this entity as 4^th on the list [Return]