The seeds of the financial upheaval were sown quietly in the United States. In the past decade major U.S. firms such as Chicago-based Sears Roebuck & Co. have begun spreading their corporate tentacles, giving birth to a new phenomenon in the business world: financial supermarkets for consumers that offer everything from banking and insurance to real estate services under one roof. And acquisition-hungry Sears, traditionally known as a dry goods retailer, has expanded to include one of the world’s largest securities firms, Dean Witter Reynolds Inc. of New York; North America’s largest independent real estate broker, Los Angeles-based Coldwell Banker; and Allstate Insurance Co. under its corporate umbrella. That transformation and similar moves by other U.S. corporate giants, including New York-based American Express Co., have set the pace for a financial revolution in North America—one that is now trying to take hold in Canada.
The U.S. ferment has sparked an angry debate in Canada’s financial community which has produced a flurry of position papers and public pronouncements by the institutions involved. Both the federal and provincial governments have entered the fray with studies on whether to change the regulations that attempt to segregate the business activities of the four financial pillars: the banks, insurance, brokerage and trust companies. Last week the Ontario Securities Commission (OSC) began a three-week public hearing into the issue. And in Ottawa government officials, besieged by industry lobbyists arguing on both sides of the issue, must decide whether federal legislation separating the components of the financial industry should be overhauled. The question is whether regulatory officials and politicians can extricate themselves from the paper avalanche and act before expansionist firms topple the restraining walls.
At the centre of the current debate is the role of the recently battered brokerage trade. Already beset by slumping business that has caused declining revenues and massive mergers, the investment dealers—their $8.6 billion in assets make them by far the smallest of the four groups of firms—increasingly find their business eyed by Canada’s
chartered banks ($410.2 billion in assets), trust companies ($52.6 billion) and insurance companies ($76.9 billion). At the same time, many large foreign investment dealers are pushing for an end to restrictions on their Canadian activity. The effect of all the pressure,
said Austin Taylor, chairman of the Toronto securities firm McLeod Young Weir Ltd., is that Canada “will witness a major restructuring of the Canadian capital market, whether or not we take deliberate action in this regard.”
The fight between the groups came to public prominence last week when the OSC began hearings into ownership and structure of the industry. The positions of the four types of firms have crystal-
lized during more than a year of confrontation. And, as their submissions to the OSC made clear, all sides equate their self-interest with the public interest. Most of the brokers, for example, are urging the commission to leave the rules essentially as they are. Increased
foreign participation and the introduction of bankers and others into their business, they argue, will increase the larger institutions’ already significant financial market power, reduce competition, create conflicts of interest and concentrate ownership of the nation’s financial system. The net result, they say, would harm both big and small investors. Contended a submission by the Joint Securities Industry Commit-
tee (JSIC) to the OSC: “Canadians concerned about the health of our capital markets should be troubled by the current developments.”
Last year a bank received permission from the OSC to direct customers to the services of discount stockbrokers who offer slashed commission rates on share purchases—a move most major brokers decried as a dangerous incursion into their territory. But that step, which other provinces are also considering, did not satisfy the banks’ expansive appetite. Stated a report to the OSC by the Canadian Bankers’ Association: “In general the JSIC report is uncompetitive, self-serving and regressive in nature.”The banks, which are governed by the federal Bank Act, want the legislation changed to permit them to own security firms.
But while the bankers are busy
preaching open competition in the brokerage field, they are fending off attempts by others who want to move into some parts of the banking trade. Trust companies and insurance companies both essentially want the investment and lending powers of the five major domestic chartered banks. Again, the stated rationale is advancement of the public interest. Said Henry Jackman, chairman of E-L Financial Corp., which controls National Victoria & Grey Trustco Ltd. and The Empire Life Insurance Co.: “No one could ever suggest that innovation and consumer service is best served if five or six institutions [the chartered banks] have a near-monopoly position.”
But in the end, it seems unlikely that the OSC will suggest a shake-up in the relationship between the groups. Peter
Dey, whose term as OSC chairman will come to an end shortly after findings derived from the hearing are released early in the new year, said last week that while the securities body may suggest that distinctions between the groups may be blurred, “it will not become a technicolor mess. The best way to effect change is through incremental changes.”
But arguments over the four groups’ relationship have not been restricted to the boardroom of the OSC’s high-rise Toronto office. Indeed, even Robert Elgie, Ontario’s minister of consumer and commercial relations—the politician overseeing the OSC—has set up another study group, above and beyond the security commission’s efforts, to examine financial services. Since its inception last spring, the three-member panelheaded by Stefan Dupré, a University of
Toronto political scientist—has held secret informal meetings with the fighting factions. About the same time that Dey releases his, the so-called Dupré commission will give Elgie a confidential interim report. But at the moment it appears that the commission will not produce its final report until it completes at least 12 months of closeddoor discussions with the industry.
Further complicating any efforts to deal with the industry are the complex overlapping jurisdictions of the provinces and Ottawa. While Ontario responded with its study group and the OSC hearings, Quebec’s finance minister, Jacques Parizeau, plunged ahead this year with startling changes affecting the four groups’ relationship. After claiming that his stand “blows the lid off the whole system,” Parizeau made
his first move in April when he allowed Quebec-based insurance companies to offer mortgages, set up retirement and stock savings plans and run pension funds. It was expected that early next year he would further his initiative by expanding the powers of trust companies and investment dealers. But he resigned last week in the midst of political turmoil in Quebec which could doom the effort.
Similarly, the dramatic change of power in Ottawa this fall clouded the future of the federal government’s plans for banking (for which it is the sole regulator) and federally chartered trust and insurance companies. Like Ontario, the former Liberal government opted to study, rather than act. Last January, RoyMacLaren, the Liberals’ minister of state for finance, appointed a panel of 14 businessmen who met occasionally to review policy papers prepared by the department of finance. But by July the committee recessed without reaching a consensus on many controversial areas. William Dimma, a Toronto real estate executive and chairman of MacLaren’s committee, said recently that, like Dey, the group favors “evolution rather than revolution.”
As the debate continues, some participants are suggesting that the time has come for Ottawa to centralize control of the nation’s financial institutions. Said Henry Knowles, the past chairman of the OSC: “With the increasing dichotomy between regulation in Ontario and Quebec [and] with the increasing idiosyncrasies among the provincial patterns of regulation it may be appropriate for the federal government to exercise its legislative primacy.” For his part, OSC chairman Dey rejects the notion of handing over the administration of capital markets to Ottawa.
Clearly, the pressure to act is growing on both governments and the industry. Jack Carr, an economist at the University of Toronto, said that Canadian brokers, who also deal in U.S. securities, are already feeling a small pinch because of business lost to lower-priced operations in the deregulated market south of the border. Carr argues that brokers’ arguments that the nation’s securities industry must remain segregated are not motivated by concern for financial markets’ customers—as their joint submission states—but by worries about their own profitability. Said Carr: “They can’t make a submission saying, ‘We want protectionism because we cannot compete.’ ” The tide of events in international markets is so strong, he said, that the status quo is no longer an option for Canada. Concluded Carr: “Changes are going to occur because they are happening in the United States. Canada is going to have to come to some sort of an accommodation.”
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