BUSINESS

BREAKING BARRIERS

THE GOVERNMENT IS REMOVING THE LAST REGULATORY OBSTACLES FROM THE BANKS AND TRUST COMPANIES

PATRICIA CHISHOLM February 13 1989
BUSINESS

BREAKING BARRIERS

THE GOVERNMENT IS REMOVING THE LAST REGULATORY OBSTACLES FROM THE BANKS AND TRUST COMPANIES

PATRICIA CHISHOLM February 13 1989

BREAKING BARRIERS

BUSINESS

THE GOVERNMENT IS REMOVING THE LAST REGULATORY OBSTACLES FROM THE BANKS AND TRUST COMPANIES

The replacement of Thomas Hockin, 50, as minister of state for finance last week was a clear signal of Ottawa’s intent to ease restrictions on banks and the ownership of trust companies— restrictions that Hockin had wanted to extend. Now, trust companies will likely retain the right to be wholly owned by individuals and corporations. Banks, in turn, will be allowed to sell everything from insurance to car leases through their vast network of branches.

Hockin had failed to ride the wave of deregulation that has washed through Ottawa since the Conservative victory in 1984. And during his tenure, the federal government was frequently left behind by more aggressive provincial counterparts who were quickly lifting financial restrictions. Opposition from Quebec was particularly strong, fuelled by such powerful figures as Paul Desmarais, head of Montreal-based conglomerate Power Corp. of Canada. Now, Hockin’s replacement by Quebecer Gilles Loiselle, 59, is widely interpreted as a stamp of approval for a less rigidly controlled financial sector.

Despite the protracted struggle over reform, Ottawa insiders said that Hockin’s proposals, released in December, 1986, never had a real chance of implementation. The federal government has been struggling to modernize the financial services sector for more than five years, and pressure for a new set of laws had become intense. But the process of change was stalled by opposition to Hockin’s proposals from almost every sector. By last summer, Quebec junior Finance Minister Pierre Fortier had succeeded in publicly embarrassing Hockin

on several occasions by pressing ahead with deregulation in Quebec and finally forced him to begin the retreat from some of his controversial proposals on ownership restrictions. Then, last week, Finance Minister Michael Wilson confirmed that American Express Inc. will be permitted to establish a bank in Canada,

a move that critics said violated Hockin’s proposed policies.

To placate angry bankers and push deregulation ahead still further, Wilson and the banks reached an agreement delaying American Express’s bank charter until banking reforms have been passed into law—perhaps up to a year. The new legislation will expand the services that banks can provide to their customers, including some now offered by American Express, such as insurance. But Canadian Bankers’ Association president Robert Macintosh also added that the compromise does not go far enough and that the question of bank ownership is still unsettled. Currently, no group or individual may own more than 10 per cent of a Canadian bank. With that, the deregulation debate will be thrown wide open. In the

end, an Ottawa-based securities industry lobbyist said that Hockin was well intentioned but naïve. Said the lobbyist, who requested anonymity: “He really believed in those principles, even though they were unrealistic.”

It was the aggressive pursuit of financial reform in Quebec that created the biggest obstacles for Hockin. As part of the Quebec government’s long-stated commitment to a distinct society,

Fortier led a powerful group of businessmen and politicians intent on procuring greater powers for such Quebec-based conglomerates as Power Corp., which controls Montreal Trustco Inc.; tobacco giant Imasco Ltd., which owns Canada Trustco Mortgage Co.; and Laurentian Group Corp., a diversified insurance firm.

But Hockin was determined to proceed with his plans and he said that he

would try to force such firms to sell off some of their trust holdings. Affected conglomerates would have included Imasco, which would have had to reduce its 99-per-cent holding in Canada Trust to 65 per cent. The rule was intended to protect the safety of deposits by reducing concentration and increasing the level of public scrutiny. But critics said that the rule would be ineffective and an obstruction to expansion. Fortier said that Quebec wanted to loosen restrictions to foster the growth of “homegrown mammoth corporations.”

Fortier had determined supporters, including Quebec Premier Robert Bourassa and Treasury Board president Robert de Cotret. Desmarais has close ties to the Mulroney government, and Laurentian president Claude Castonguay was a consistent critic of the Hockin policy. And Fortier also enlisted the support of the other provinces. Last March, he sent an angry letter to Hockin protesting the proposed ownership restrictions. Four other provinces joined the outcry and, by June, Hockin acknowledged that implementation of his proposals would be delayed until the dispute could be resolved. The legislation died when last fall’s federal election was called.

Since then, financial deregulation has continued, although unevenly because of the lack of an all-embracing federal policy. Said bank analyst Terry Shaunessy of Merrill Lynch Canada Inc.: “The institutions are flying by the seat of their pants.” Quebec trust companies gained some banking powers last year, including the right to make loans to businesses, and insurers will soon be permitted to sell stocks. In response to guidelines from the Ontario Securities Commission released last month, several Ontario dealers have applied for bank or trust

licences to augment their existing businesses.

One broker, Marathon Brown & Co., opened an office in a Toronto Guaranty Trust Co. of Canada branch an hour after the guidelines were released. And at the federal level, the battle over ownership restrictions has been resolved. Tory finance committee chairman Donald Blenkarn said that financial companies will be regulated in several new ways, including increased requirements for accountability among corporate directors. Said Blenkarn: “The general policy of the government is now opposed to Hockin’s proposals.”

But the uncertainty caused by two years of delay and shifting policies has left a bitter aftertaste. Last month, an acrimonious dispute arose between Canadian banks and the finance department over Wilson’s approval of the application by American Express to establish a

Canadian bank. American Express had vigorously supported free trade and it received preliminary approval on election day last November. The banks charged that American Express had received favorable treatment and that the new bank would be permitted to offer products and services that were specifically denied to other banks under Hockin’s proposed reforms. Said Steven Kressler, bank analyst at Toronto-based Prudential-Bache Securities Canada Ltd.: “The stated policy was against the intensified mixing of financial and commercial interests. To abandon that by going through the back door is something regulators should look at very carefully.”

But despite the continued dispute, last week’s events indicated that a resolution is near. Wilson said last week that by midyear he

expects to present “Fin-11,” a series of bills redefining the roles of financial institutions. And from the perspective of Toronto-Dominion Bank president Robert Korthals, times have already changed. He added: “The degree of separation promoted by Hockin has failed. American Express is the new thinking. Loiselle will make peace with Quebec and the Quebec style of deregulation will prevail. Basically, the business will be wide open.” For Canada’s longseparated financial sectors—the so-called four pillars of banking, insurance, trusts and securities—it is a brave new world, with freedom to engage in selling almost any type of financial product. But for Thomas Hockin, it is a disappointing downturn in his political career.

PATRICIA CHISHOLM

MARC CLARK

JOHN DeMONT