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HSBC's Submission in Response to Finance Canada's Large Bank Mergers in Canada:
Delivered by Courier
December 18, 2003
Mr. G. Salembier
Financial Sector Policy Branch
Ministry of Finance
15th Floor, East Tower
L'Esplanade Laurier
140 O'Connor Street
Ottawa, ON, K1A 0G5
Dear Mr. Salembier,
Re: Large Bank Mergers
We are writing in response to the Ministry of Finance's invitation for input into the public discussion of Larger Bank Mergers. We are grateful to be afforded the opportunity to offer HSBC's views on this critically important issue to Canadians.
We will present our views on the following:
B) Cross pillar mergers and sale of insurance products through bank networks;
C) International ownership;
D) Remedies to cure probable challenges presented by Large Bank Mergers:
(ii) ATM full functionality.
We would be very pleased to discuss any aspect of this submission.
Yours truly,
A) Large Bank Mergers - HSBC's overall position
General
- HSBC believes mergers and acquisitions are legitimate strategies for companies to pursue to enhance their operations. Financial services are an extremely competitive business. Competition in the sector is increasingly global and larger size gives financial institutions the reach and breadth to best serve domestic and global markets. Most G-8 countries, including the US, UK, France, Italy and Spain, have recognized this relentless global competition and experienced substantial bank mergers since the Canadian "Big 5" attempts to merge were disallowed in 1999. That being said, financial services are unique due to their critical importance to Canadians' financial well-being. Concentration and other issues must be carefully addressed to ensure Canadians continue to be well served by their financial institutions.
Process Clarity
- Mergers and acquisitions are extremely complex transactions. Impacts on shareholders, customers, staff and operations must be carefully examined and detailed plans drawn up to ensure strategic objectives are accomplished. Canadians have legitimate interests in such transactions, such as safety, access, and fair pricing, which must be satisfied by the parties concerned. Introducing unnecessary uncertainty into this process, however, increases complexity, risk and wastes resources and time. Much good work has been done by the Ministry of Finance, Senate and Parliamentary committees to provide clear, well-defined processes to ensure societal considerations are well-known and addressed. However, we would agree with the view that the political approval process remains too vague and subjective and requires clarification.B) Cross Pillar Mergers and sale of insurance products through bank networks
Cross Pillar Mergers -
Canada's large life insurance companies have successfully demutualized their ownership structure and gone through intra-sector consolidation, both domestically and, with ManuLife's announced bid for John Hancock, internationally. Canada's life insurance companies are big, successful and rival the Large Banks. We, therefore, believe that cross pillar mergers should be allowed. Indeed, provided safety & soundness and concentration issues are addressed, we believe cross pillar mergers could resolve some of the issues presented by Large Bank Mergers.Distribution of Insurance Products - HSBC's global experience is that Canada is unique in the developed world in prohibiting the sale of insurance products through bank branch networks. This prohibition may have made some sense when Canada's life companies were smaller and structured as mutual companies, with Canada's Large Banks having absorbed two of the four financial pillars, trust and brokerage. This is not the case today. This prohibition, therefore, appears unnecessary and not in the interest of Canadian consumers.
We believe customers are best served when open and competitive markets provide them with the widest array of choices. Life insurance is an integral part of an individual's financial and retirement plans. So, prohibiting banks from delivering these products through their primary distribution channel, branches, does not provide consumers with full choice. In the case of Property & Casualty insurance, the result appears somewhat perverse as the sector has a high concentration of international players. As well, credit unions have, in some provinces, been allowed to distribute both life and P&C insurance products through their branches. This does not result in a level playing field nor, again, best serve consumers.
C) International ownership
Ensuring substantial domestic ownership of financial institutions is a legitimate objective shared by most countries. However, given the strength, size and dominance of Canada's Large Banks, we believe a larger degree of international ownership appears viable and indeed would better serve Canadians. Allowing for increased international ownership could potentially remedy many concentration and competition issues. A similar debate of foreign ownership and access to non-domestic sources of capital is taking place in the telecom sector with the recognition that a wider range of service providers, both foreign and domestic, results in best service to Canadian consumers.
D) Remedies to cure potential challenges presented by Large Bank Mergers
(i) Branch and other distribution channels
Given the size of Canada's banks and their respective market shares, concentration issues are inevitable upon Large Bank Mergers. These concentration issues will arise in delivery channels (Branch, ATMs etc), products (Cards, deposits, mortgages) and geographies (particularly in specific communities, which may be banked by only a limited number of FIs). Mandated divestitures are an apparent, well recognized and legitimate means of remedying such concentration issues and been well used in other G-8 countries. That being said, we would raise two points:
a) Government should provide general guidelines only, specifying prohibited concentration levels, leaving it to the market to generate create innovative solutions to comply;b) That being said, HSBC's experience is that merging parties divesting positions in excess of concentration limits tend to sell their poorer quality assets. For example, if two merging banks are obliged to sell branches in near proximity, their obvious inclination will be to sell the lower quality location. Frankly, we do not have a solution for this challenge. However, we believe it needs to be pointed out and considered.
(ii) ATM Full Functionality
Canada's large banks have publicly stated that their ATM networks are unique and integral parts of their service propositions to their customers. We understand and respect their position in this regard. The challenge, however, both currently and worsened upon Large Bank Mergers, is that the Large Bank's dominant positions limit competition and make it very challenging for smaller financial institutions to enter the market or compete. Further, Canada has a very high number of ATMs and is well served by the existing network. We believe the situation is analogous to Canada's telecommunication market. When this sector was de-regulated, foreign and domestic players were permitted to compete with the established, dominant telecoms using existing lines and network. Rather than obliging these new entrants to invest material capital to build new telecom networks, which would have duplicated the existing network, new entrants and competitors were permitted access and use of existing lines at a reasonable price.
As the Ministry of Finance is aware, ATM Full Functionality already exists and operates quite successfully with The Exchange Network; in 1983 a number of B.C. credit unions agreed to provide inter-institutional, full function ATM transactions processing. The Exchange now includes 4 banks, including HSBC, Canadian Western Bank and National Bank, and 66 credit unions and other financial institutions with 1,300 ATMs connected.
A number of issues have been raised with respect to ATM Full Functionality:-
Unique Service Proposition
- Canada's "Big 5" banks have stated that their ATM delivery is a unique part of their service proposition to their customers. Again, we understand and respect this position. However, we believe for Full Functionality to work only basic banking functions need be provided - cash withdrawals and cheque deposits (fund transfers, balance enquiry and bill payment would not be necessary as these services are available over the Internet and by telephone). Banks can continue to distinguish their ATM networks by offering many other products and services, such as foreign exchange, ticket sales, passbook updating, funds transfer, which need not be accessible to competitor customers.
Cost
- Though there will obviously be cost in expanding service, the programming, capabilities and processes for Full Functionality already exists within the network. We believe that the competitive advantages gained outweigh the costs.
Stifling Innovation
- Again, we are only suggesting that basic banking functions be considered. Banks could continue to deliver unique services through their networks, distinguishing themselves from the competition. The Exchange network demonstrates this point, with member banks and credit unions, including HSBC, investing substantially in their ATM networks, in spite of Full Functionality shared services.
Fraud & Money Laundering
- This is obviously a very legitimate concern. However, we believe existing measures could be expanded to control ATM crime. There is no evidence of increased fraud amongst Exchange members.
In summary, we believe mergers are legitimate strategies for companies to pursue, subject to ensuring that healthy competition is not compromised. HSBC believes that opening up the ATM network to accepting deposits of other banks should be considered to promote competition whether Large Bank Mergers proceed or not, and that the rules limiting ownership of large financial institutions should be amended to allow increased levels, up to 100%, of international ownership.
