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Toronto Financial Services Alliance Submission in Response to Finance Canada's 2006 Review of Financial Sector Legislation:

May 31, 2005

Mr. Gerry Salembier
Director, Financial Institutions Division
Financial Sector Policy Branch
Department of Finance
Government of Canada
L'Esplanade Laurier
20th floor, East Tower
140 O'Connor Street
Ottawa, ON K1A 0G5

Dear Mr. Salembier:

I am writing in response to the government's financial services sector legislative review, on behalf of the Toronto Financial Services Alliance (TFSA). While different segments of the sector will highlight specific legislative and policy issues, our focus in this document will be on the broader issues of the sector's crucial importance to the success of the Canadian economy and how supportive regulatory policies can help the sector stimulate economic growth and enhance the standard of living of Canadians. The TFSA will continue to be involved in the consultation process over the course of the review, as issues evolve.

The three themes outlined in the February budget, enhancing interests of consumers, increasing legislative and regulatory efficiency and adapting the framework to new developments are entirely appropriate ways to consider this specific review and the TFSA endorses those themes. However I believe it is important to consider the industry in an even broader perspective, of which the governing legislative and regulatory environment is one part. In particular, the industry should be viewed as one of the key drivers in support of the economy as a whole.

While the role of the TFSA is to promote Toronto as a financial sector hub in North America, the ultimate beneficiary of a strong financial industry in the Toronto area will be all Canadians.

This letter demonstrates why the financial sector is important to Canadians and provides the views of some prominent commentators, who, like the TFSA, believe the industry to be an engine of growth for the Canadian economy.

Toronto Financial Services Alliance

The TFSA is a public/private initiative representing over 30 organizations involved in the financial sector. Its mandate is to enhance and promote the competitiveness of Toronto as a premier North American financial services centre.

Our supporters include all of the major financial services institutions headquartered in Toronto, their related trade associations, all levels of government, academic institutions and major providers of legal, accounting consulting and human resources services to the financial sector.

The organization was created in 2001 by the City of Toronto in partnership with the financial services industry, and with the support of the federal and provincial governments. Its goals are to build awareness of the industry and its contribution to the city's economy; to help the sector become even more efficient and competitive; and to encourage regulatory, legislative and fiscal policies that will support Toronto's international position as a financial services hub.

Importance of the Financial Sector to Canada

Promoting a strong, healthy and efficient financial sector should be a key element of government policy because the sector is necessary to sustain economic growth and prosperity. It provides efficient intermediation, facilitating the transformation of Canadians' savings into productive investments, which offer businesses the financial capital they need to grow, to invest in physical capital and R&D. It enables the efficient management of a wide range of risks, financial and non-financial. Moreover, innovation and the development of new products have reduced the cost of capital and reduced the cost of risk mitigation.

The financial sector provides the infrastructure by which payments and transactions are made quickly, efficiently and with confidence. Canada has been a leader in the development, and widespread use, of electronic payments, providing consumers with greater convenience while reducing transaction costs, to the ultimate benefit of consumers. The financial sector also enables households to save for the future, protect against a variety of risks associated with unexpected events (death, disability, need for medical attention, and various types of property losses), and to acquire durable goods such as cars and houses. All of these services are provided within a financial sector that exhibits a high degree of competition. I believe it is no exaggeration to say that Canada has one of the world's best financial services sectors.

The financial services sector is also important to the economy because of its sheer size. It employs over 750,000 Canadians, representing over 4% of total employment, at wages and salaries well above the national average. The sector also contributes directly to economic output in a substantial way, accounting for over 6% of national GDP. Moreover, the industry relies upon, and supports, a number of ancillary, high value-added services that are important contributors to the economy in their own right. And it pays a disproportionate share of taxes. Making sure that this sector operates to its fullest potential would have a very direct, beneficial impact on the Canadian economy.

The financial sector is important to the financial health of Canadians. Seven of the top ten companies in Canada, (eight of the top fifteen) are financial institutions. Forty-five per cent of the market capitalization of the top 25 companies is attributable to financial institutions. The performance of public and private sector pension plans, as well as the mutual funds that individual Canadians hold is directly related to the performance of this sector.

In addition, the industry is increasingly taking on an export orientation. Changes in technology and the opening up of foreign markets mean that services, once thought to be limited to the domestic market, can now be traded across the world. As exporters, revenues and profits are earned outside Canada while a disproportionate share of employment and taxes remain in Canada. Several of Canada's leading financial institutions are now world leaders in their industries while others are becoming internationally recognized brands. This export orientation opens up the door to an even greater contribution to the Canadian economy, one that is not bound by the size of the domestic market. Canada's life insurance companies are perfect examples of this export orientation. In some instances the bulk of activities take place outside Canada, yet thousands of jobs have been created in Canada to serve those export activities. These jobs would not otherwise exist in Canada. As other institutions such as banks increase their foreign presence, similar benefits can be expected.

Importance of the Financial Sector to Toronto

Finally, I would like to point out the importance of the industry from Toronto's point of view. Toronto is the financial hub of Canada. While there are financial companies based in other parts of the country and financial sector employment is spread out in all regions and cities, the industry is clearly identified with Toronto and concentrated within the city and the greater Toronto area. Approximately 10.5% of the jobs in Toronto are in the financial services sector, which is more than twice the national average. These are head office, high quality and high paying jobs.

The infrastructure for Canada's financial industry is in Toronto. It is the home of Canada's capital market – the Toronto Stock Exchange (TSX) is the third largest stock exchange in North America and the eighth largest in the world, and is the world leader in listings of mining and oil and gas firms. Over one-half of Canada's 208 securities firms and almost three-quarters of Canada's pension managers are headquartered in Toronto.

It is also the centre of the banking industry – the headquarters of the five largest domestic banks, 17 out of 25 foreign bank subsidiaries and three-quarters of the foreign bank branches operating in Canada are located in Toronto.

Two of the three largest life insurance financial companies are headquartered in Toronto. Fifteen of the top twenty mutual fund companies are located in Toronto.

Collectively, these institutions have developed the critical mass to make Toronto a major financial centre in North America.

  • Toronto is now clearly the number three financial services hub in North America as measured by sector employment, behind New York and Chicago.
  • In 2000, Toronto's financial sector employment was only slightly greater than that of Los Angeles. Today it is 13% higher, despite the fact that Los Angeles is a much larger city. The concentration of financial sector employment in Toronto (at 10.5% of employment) is almost twice that of Los Angeles.
  • Toronto has clearly surpassed other traditional financial centres in the U.S.A., such as Boston and San Francisco.
  • This concentration of employment is of direct benefit to the city because the financial sector tends to offer high value added employment. In banking, for example, the average salary in 2001 was about 70% higher than the national average and the head office jobs in Toronto are even higher paying.

While the story is clearly positive, Toronto is vulnerable in several ways.

  • Financial sector jobs are footloose. A TFSA study conducted in 2003 showed that 70 percent of the companies surveyed had entertained the possibility of relocating, expanding or downsizing. American developments in the financial sector might be only partially relevant to Canada, but they make clear that no metropolitan area can take its financial sector for granted. New financial centres develop and older ones sometimes shrink. Internationally, the strength of domestic institutions and the regulatory environment can have an impact on the success of financial hubs.
  • Globalization, modern technology, and enhanced North American integration all combine to make the sector even more mobile. If properly nurtured, these developments can be a source of strength. But the challenges are also real. Within this context of globalization, David Dodge, the Governor of the Bank of Canada has stated that "Perhaps the biggest challenge for Ontario's service sector will be from the continued consolidation within financial services industries around the world. This poses a real competitive challenge to the financial services industry that is so important to the Greater Toronto Area."
  • There are a small number of financial sector hubs in North America, and Toronto's financial sector is actually very large for the size of the domestic economy. Toronto needs to develop in such a way that it is successful in an international context, not just in a Canadian context.

Toronto's Financial Services as a Stratetic Sector

These statistics point to the fact that Toronto's financial services activities present a unique economic advantage to Ontario and to Canada. The Governor of the Bank of Canada has recently described the financial sector as "an important contributor to economic growth in Ontario," going on to say that "[a] n efficient financial sector will continue to be a competitive advantage for this province, both in maintaining efficiency in our own market, and in providing an opportunity to export expertise around the world. So policy-makers have an interest in providing a framework that will allow our financial institutions and markets to compete in an increasingly globalized world." And he clearly sees broadly based benefits from financial sector efficiency. As Mr. Dodge put it, "an efficient financial system is key for the future—not just of the institutions, but of the Canadian economy as a whole."

The TFSA believes that providing this framework should be a key focus of government policy, whether it be sector-specific policy or broader fiscal policy. The financial services sector should be regarded as a strategic focus for the government's economic agenda.

As I said, Toronto has developed into a major financial services cluster. Some of the most notable examples of clusters that come to mind are Silicon Valley in California for high technology and Wall Street in New York for finance and capital markets. Both are engines of local economic growth but they are also sources of innovation for their respective industries.

The clustering of specific industry participants in concentrated geographic regions is an important component to promoting innovation, enhancing productivity within the industry, increasing standards of living and fostering broad economic growth. Proximity to like institutions enables them to learn about new ideas and techniques through interaction with their peers. Secondly, clusters promote a concentration of skilled personnel and service providers who can be easily accessed. Good examples include the concentration of legal and accounting services that have been attracted to the financial services industry in Toronto and the high concentration of information and technology workers in Toronto.

The Ontario Task Force on Competitiveness, Productivity & Economic Prospects has identified these industrial clusters as key factors that affect economic performance. Properly exploiting and nurturing them can make the difference between a well functioning economy and a poorly functioning one. And the stakes are high. While Ontario is recognized as the economic heart of the Canadian economy, and Ontario is one of the most prosperous of Canadian provinces, its performance lags that of peer North American jurisdictions. On the basis of per capita GDP, Ontario is almost 8% below the median of peer states and provinces, ranking 13 out of 16. The peer leaders (Massachusetts, New York and New Jersey) have per capita GDPs that are more than a third above Ontario's. The implications of this for Canada are significant – a poorly performing Ontario economy means a poorly performing Canadian economy.

There is clearly room for improvement and the financial services sector can play its part. Indeed, the Task Force has determined that "Ontario's strength in business services, financial services, education and knowledge creation, and automotive, for instance has created an attractive mix of traded clusters" that is better than that of peer jurisdictions. Looked at this way, the financial services sector is one of the solutions to the prosperity gap and should be exploited as such.

The financial sector in Ontario is one of the highest paying industries, suggesting that labour productivity is higher than in many other industries. On the other hand, those industries in Ontario with the highest wages tend to lag their American counterparts by the greatest amount. This suggests that there is a great potential for increased productivity and higher standards of living by targeting measures that nurture those sectors.

What Should be the Focus of Government Policy

With all of this as a background, the TFSA would like to recommend the following key elements to enable the financial services sector to deliver better economic performance for the economy as a whole.

1. The International Monetary Fund (IMF) in its 2005 Executive Board consultations with Canada generally concluded that the financial sector was sound and well managed but that greater regulatory efficiency could provide prospects for lower regulatory costs and greater efficiency gains. In particular it concluded that the system would be "better able to respond to the rapidly changing global environment, with its challenges and opportunities, if further regulatory reforms are undertaken." In this regard, the IMF Directors "agreed that adopting a single national securities regulator would help reduce compliance and administrative costs." The Directors also agreed that "clarifying the regulatory framework governing bank mergers would reduce uncertainty and possibly allow institutions to reap efficiency gains."

The TFSA agrees with the IMF Directors' assessment that the financial services sector is strong and generally well regulated. Nevertheless, they do indicate that regulatory burden is a valid concern and governments should undertake efforts to eliminate unnecessary regulatory costs. Furthermore, given the rapidly changing global environment, including significant consolidation amongst financial institutions, the financial sector requires clarity with respect to government policy (in particular bank mergers), efficient regulatory content and structure, and flexibility to meet future challenges. These principles should guide the government in general as it undertakes the review of financial legislation.

2. The legislative and regulatory environment under which the financial sector operates should be leading edge and a source of competitive advantage, i.e. it should be "smart" regulation. The environment should allow Canadian institutions to respond to market opportunities in the most efficient manner possible. The Governor of the Bank of Canada noted that, with the Porter Commission, Canada was a regulatory leader, which enabled our financial institutions to be world leaders as well. Other nations have subsequently caught up to Canada as they aligned their regulatory systems to be more in line with the competitive philosophy of the Porter Commission. As he put it, "To stay competitive in this environment, Canada's financial system must also constantly increase its efficiency. If we don't make this effort, the Canadian economy will suffer. The status quo won't cut it." Some approaches to smart regulation that could enhance the competitiveness of Canadian financial institutions could include greater use of risk-based regulation whereby those institutions with a good compliance track record are rewarded with a lighter regulatory touch while regulatory efforts are focussed where there is a greater risk of non compliance.

3. The Ontario Task Force on Competitiveness, Productivity & Economic Prospects has determined that a key element of economic performance is the educational attainment of the workforce. Canada does not perform as well as the United States in terms of level of educational achievement and funding for post-secondary education. As well, we do not appear to take advantage of the 'brain gain' associated with immigration. Foreign credential recognition and integrating professional immigrants into the workplace are both issues of importance to the financial sector. Two-thirds of financial sector employees in Toronto have post-secondary education, compared to only 55% in total. We need, want and hire well educated workers. In addition, the financial sector is a model for the employment of visible minorities, the underutilized brain gain that the Task Force identified. The TFSA supports measures that better integrate immigrants into the Canadian society and measures that encourage and fund higher education in Canada. The recently released report on post secondary education by the former Ontario Premier, Bob Rae, entitled "Ontario: A Leader in Learning," makes several useful recommendations in this regard:

  • To establish a new framework that provides sustainable for institutions, in which the key funding partners - the provincial and federal governments, institutions, and students - each contribute in a responsible and predictable manner;
  • To obtain a commitment from the federal government to become a full-funding partner in supporting base operations and priorities for labour market training and immigration, apprenticeship, research and graduate education in a predictable and sustained way.

4. The Task Force also identified capital investment as a key contributor to prosperity growth. Unfortunately Ontario firms under invest compared to their American counterparts and the government does the same. A large part of this is due to the tax disadvantage (both federal and provincial) that firms face in Ontario compared to American peers. The financial sector is burdened not only by high corporate tax levels, but also by a capital tax that creates a disincentive to capital investment. The TFSA has been an advocate for removal of this tax at both the federal and provincial levels and while moves in the right direction have been taken, more needs to be done.

5. In addition to the suggestions of these outside experts, I would like to leave you with some of the findings of the 2003 TFSA Competitiveness Survey, which asked financial sector participants what were the strengths and weaknesses of Toronto as a financial centre and what was needed to make it stronger. The strengths were identified as:

  • the availability of good managerial and professional talent;
  • a strong information technology and telecommunications infrastructure;
  • an attractive cost structure for high-end economic activities.

Toronto's biggest weakness was excessive taxation at both the corporate and personal levels.

In terms of what should be done, the survey respondents identified a variety of what could be thought of as 'smart' initiatives, including the following:

  • Smart regulatory environment: competitive regulation adds strength but regulatory burden can drive away financial players;
  • Smart taxation: with a focus on financial firms, the capital tax and excessive corporate taxation drive away activity. Other sector specific taxes such as insurance premium taxes artificially raise the price of insurance and discourage capital formation;
  • Smart use of a skilled labour force: the labour force in Toronto is one of its major attractions to the financial sector. There are a number of elements to making sure that Toronto has an adequate and attractive supply of talent, including:
  • Understanding what the sector needs;
  • Making sure that the urban community is an attractive place to live in terms of safety and infrastructure;
  • Making sure that the economic incentives are such that Toronto can attract and keep the workforce that the financial sector requires.


The TFSA recognizes and appreciates the fact that the federal government is moving forward on some of these fronts. The reductions in corporate and capital taxes and the March 2005 Smart Regulation Report are some examples. The federal Wise Persons' Initiative on securities regulation is another. But more needs to be done. The continued success of Toronto's financial services sector benefits not just Torontonians, but all Canadians as well. That is why it is so important for the federal government, as it reviews financial sector legislation, to consider how this and other policies can take advantage of the sector's strengths and ensure it continues to drive the Canadian economy.

I thank you for the opportunity to make known the views of the Toronto Financial Services Alliance and hope that the suggestions included in this submission are helpful as you shape government policy. We look forward to working closely with you in the future.


finance - image  
Janet L. Ecker
Executive Director

cc: The Honourable Ralph Goodale
Minister of Finance
Department of Finance Canada
Government of Canada

TFSA Members and Supporters

  • ABN AMRO Bank N.V., Canada Branch
  • Association of Canadian Pension Management (ACPM)
  • AIM Trimark Investments
  • BMO Financial Group
  • Barclays Global Investors Canada Ltd.
  • Borden Ladner Gervais LLP
  • Canada Life Financial Corporation
  • Canadian Bankers Association (CBA)
  • Canadian Life and Health Insurance Association (CLHIA)
  • City of Toronto
  • CIBC
  • Gardiner Roberts LLP
  • Hill and Knowlton Canada
  • Insurance Bureau of Canada (IBC)
  • Investment Dealers Association of Canada (IDA)
  • Investment Funds Institute of Canada (IFIC)
  • Manulife Financial
  • RBC Financial Group
  • RPM Technologies
  • Russell Reynolds Associates
  • Scotiabank
  • Seneca College of Applied Arts and Technology
  • Sheridan College
  • Sigma Analysis and Management Ltd.
  • State Street Trust Company Canada
  • Sun Life Financial
  • TD Bank Financial Group
  • The Toronto Centre