Reforming Canada's Financial Services Sector -- A Framework for the Future: 1
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1 Introduction and Overview
Task Force on the Future of the Canadian Financial Services Sector
The legislation governing Canada's federally regulated financial institutions is subject to review every five years. At the time of the last review in 1996, Canada's financial services sector was undergoing rapid change. In recognition of this, the government announced that the Task Force on the Future of the Canadian Financial Services Sector would be established to provide advice on the future of the sector.
The Task Force's report was intended to serve as the basis for the next round of revisions to the legislation regulating the sector, scheduled for no later than 2002. Its mandate was to assess and evaluate public policies affecting the financial services sector and to make recommendations to enhance:
- the sector's contribution to job creation, economic growth and the new economy;
- competition, efficiency and innovation;
- the international competitiveness of the sector in light of the globalization of financial services, while at the same time maintaining strong, vibrant domestic financial institutions;
- the ability of the sector to take full advantage of technological advances as they occur and to meet the competitive challenges resulting from the introduction of new technologies; and
- the contribution of the sector to the best interests of Canadian consumers.
In September 1998, after nearly two years of study and consultation, the Task Force concluded that Canada is, for the most part, well positioned to meet and benefit from the changes occurring in the sector. Still, it identified a number of measures that could be implemented to help Canadians and their financial institutions better meet the challenges wrought by change. To that end, the Task Force offered 124 recommendations for enhancing competition and competitiveness, improving the regulatory framework, meeting Canadians' expectations and empowering consumers.
The Task Force's Findings
"Canada is, on balance, well positioned to benefit from a healthy, dynamic, innovative and competitive financial services sector into the next millennium. For a small country in population terms, Canada has many relatively large and successful financial institutions. We believe that they, along with new entrepreneurs in the financial services sector, are capable of positioning themselves so that they will be positive forces in the Canadian economy in the years ahead." 1
The Task Force, however, recommended that:
- Enhancing competition would make the sector more vibrant and dynamic.
- Empowered consumers would provide an important discipline to competition and make the sector more responsive to their needs.
- Strengthening the relationship between financial institutions and the communities they serve would make the sector healthier.
- Making the regulatory framework more flexible and forward-looking would more effectively balance the need for continued safety and soundness with the need to facilitate competition and innovation.
The Task Force's report was the subject of intensive public consultations. Two parliamentary committees â€“ the House of Commons Standing Committee on Finance and the Senate Standing Committee on Banking, Trade and Commerce â€“ conducted nationwide public hearings on the Task Force's report.
Between the two committees, close to 200 individuals, firms, associations and consumer groups were consulted. Both committees tabled their reports in December 1998, and both were generally supportive of the majority of the Task Force's recommendations.
Payments System Review
In June 1996, the government also initiated a review of the payments system. The Payments System Advisory Committee was to conduct its review in parallel with the work of the Task Force. The payments system was examined separately because of its highly technical nature.
The purpose of the payments system review was to determine whether access to the system should be broadened, and whether modifications to its governance framework were needed to ensure that it would continue to develop in the public interest. The review identified three public policy objectives for the system: efficiency, safety and the consideration of consumer interests. Balancing these objectives is key to ensuring that the Canadian payments system remains an efficient component of the financial sector.
The government is grateful to the members of the Task Force, the Payments System Advisory Committee and the legislators for the time and study they devoted to the important public policy questions surrounding the Canadian financial services sector.
In the months since the tabling of their reports, the Department of Finance has met with many of the individuals and groups who participated in the Task Force and parliamentary consultations.
The Evolution of the Financial Services Sector
New information technology, globalization and demographic change are driving innovation and giving rise every day to new opportunities and demands in the Canadian financial services sector. The impacts of these changes on consumers, businesses and governments will continue to drive the evolution of the sector in the future.
Technological advances have revolutionized the financial services sector
A significant catalyst of change in financial services has been the development of new technologies, particularly new information technologies. Financial services are information-intensive businesses. Advances in computing and telecommunications continue to improve the speed, security, volume and quality of financial information processing, and to greatly lower the cost of transactions. These technological developments make possible new financial products and services, from telephone and Internet banking to index-linked guaranteed investment certificates (GICs).
Canadians are among the fastest adopters of new information technologies
At the same time, the convergence of communications and computing technologies leads consumers to expect real-time access to financial services anywhere, at any time. And Canadians have shown themselves to be among the fastest adopters of such new technologies â€“ 57 per cent of Canadian shoppers indicate that they prefer to use debit or credit cards rather than cash in making purchases.
The new information technologies have also accelerated the trend toward freer trade around the world, leading to a truly global market for capital and financial services. As a result, firms now have access to more consumers who, in turn, enjoy greater choice of products and services from enhanced competition.
The trend toward freer global trade has presented tremendous growth opportunities for innovative, competitive firms, and allowed the Canadian financial services sector to make a greater contribution to Canada's export performance. It has also meant that foreign providers of financial services can make greater inroads into the Canadian market.
At the same time, demographic trends in Canada and throughout North America have been further shaping the financial services market, just as they have other markets. In particular, the aging of the "baby boomer" population is having a visible impact on the evolution of the financial services marketplace. Financial institutions are placing increasing emphasis on wealth management services as this generation shifts from its borrowing to its saving years.
The growing ranks of small-business owners and the self-employed also create new markets for financial services since these individuals tend not to be covered by group pension and insurance benefit plans.
A particular challenge for Canada is the shrinking population in small communities. This has implications for how financial institutions maintain national pricing policies while ensuring adequate access to financial services in smaller remote and rural communities.
The sector's responses to these forces are having an impact on consumers, competitors and regulators, simultaneously reinforcing and accelerating change.
Today, financial institutions use sophisticated information technologies to understand their customers, sell their products and, sometimes, sell the products of other firms. While financial institutions prize "brand loyalty" in their customers, many commonly used services, such as deposit accounts, mortgages and GICs, are becoming interchangeable commodities.
As economic borders fall between countries and business lines overlap, firms seek out more strategic alliances to remain competitive. As well, in the drive to achieve scale economies and reduce costs, businesses seek out opportunities for mergers and acquisitions.
These forces will not diminish. The rate of change will not slow. Indeed, it could accelerate. Therefore, it is incumbent upon the government to provide a policy framework that allows this evolution to proceed to the benefit of all Canadians, while preserving the health and strength of the sector.
An overview of the current structure of the financial services sector is provided in Annex B.
Shaping the Financial Services Sector â€“ Guiding Principles
Strong, efficient and profitable financial institutions are vital to Canada's economic success. Over and above their important direct contribution to economic activity, financial institutions are in some way involved in virtually every transaction in the economy: processing payments, pooling savings, financing investment or managing risk.
The men and women who work in Canada's financial institutions are the people Canadians turn to for financial services and advice, and the success of each institution depends on them. As such, they have much to be proud of, for they have ensured that these institutions remain among the most innovative and dynamic companies anywhere in the world. This has occurred in the face of a rapidly changing global environment.
Canada is also widely acknowledged for having one of the safest and soundest financial sectors in the world. This is a valuable asset in a rapidly changing global economy. Although it is not the responsibility of government to effect change within the sector, it is incumbent upon government to put into place a policy framework that allows the sector to evolve, while preserving its soundness and ensuring that its evolution benefits consumers.
Canada is widely acknowledged for having one of the safest and soundest financial sectors in the world
In shaping financial services sector policy, the government has been guided by four fundamental principles. They are that:
- financial institutions must have the flexibility to adapt to the changing marketplace and to compete and thrive, both at home and abroad, in order to retain their role as critical sources of economic activity and job creation;
- vibrant competition is necessary to ensure a dynamic and innovative sector and that individual and business consumers have a range of choice at the best possible price;
- consumers, regardless of their income or whether they live in an urban or rural area, and individual businesses, whether they be large or small, should receive the highest possible standard of quality and service; and
- the regulatory burden should be lightened wherever possible, consistent with prudential and public interest objectives.
Reforming the Financial Services Sector â€“ A Framework for the Future
This paper sets out a comprehensive, balanced package of four interrelated components. They are:
Promoting efficiency and growth with:
- A new definition of widely held ownership that allows strategic alliances and joint ventures with significant share exchanges.
- A new holding company regime to provide greater structural flexibility.
- A transparent bank merger review process with a formal mechanism for public input.
- An examination of capital taxation policy with the provinces.
Fostering domestic competition by:
- Encouraging new entrants with liberalized ownership rules and lower minimum capital requirements.
- Facilitating the ability of the credit unions to compete by allowing a restructuring of their system.
- Expanding access to the payments system to provide additional competition in deposit-like services.
- Allowing foreign banks to offer services to businesses and individual consumers via branches, in addition to subsidiaries.
Empowering and protecting consumers of financial services with:
- Measures to improve access to financial services regardless of income or place of residence, including a standard low-cost account and a process to govern branch closures.
- A Financial Consumer Agency to strengthen oversight of consumer protection measures and expand consumer education activities.
- An independent Canadian Financial Services Ombudsman.
- Measures to prevent coercive tied selling and improve the information consumers receive when purchasing services or making investments.
- Public Accountability Statements for financial institutions to report on their contributions to the Canadian economy and society.
- More and better statistics on and analysis of small and medium-sized business financing to provide a better understanding of their needs.
Improving the regulatory environment by:
- Improving the governance of the payments system.
- Reducing the reporting burden relating to Canada Deposit Insurance Corporation standards.
- Providing the Superintendent of Financial Institutions with new powers to deal with the potential risks arising from increased competition.
- Streamlining the Office of the Superintendent of Financial Institutions' regulatory approvals process.
- For clarity of exposition, throughout this document the legislative proposals which the government will be bringing forward for the consideration of Parliament are or may be described as if they were already adopted or in force. These are, of course, simply proposals and will have no force or effect unless and until they are passed by both Houses of Parliament and receive Royal Assent.