BUSINESS/ECONOMY

Threatening the four pillars

Michael Salter April 29 1985
BUSINESS/ECONOMY

Threatening the four pillars

Michael Salter April 29 1985

Threatening the four pillars

BUSINESS/ECONOMY

Michael Salter

For Barbara McDougall, the federal minister of state for finance, the presentation was by far the most important of her new political career. For her audience, an overflowing crowd of unusually tense top-level business executives lunching last week at Toronto’s Sheraton Centre, the minister’s remarks were even more critical. Then, McDougall unveiled the Conservative government’s sweeping proposals to change the way in which Canada’s major financial institutions do business with consumers. Declared McDougall:

“The question is not whether to change but what direction that change will take.”

Her statement left some members of the financial community outraged, some pleased and others simply confused. Business executives immediately began to assess the impact of the government’s most controversial proposal: a plan to permit trust and insurance firms to enter the banking business. Under her proposals—which have not been tabled in Parliament—those institutions would be able to create parent financial holding companies that would be legally empowered to own a new class of bank. The result of that change, said McDougall, would be the creation of financial supermarkets offering an unprecedented array of services to customers —from banking, trust and insurance services to mortgage loans.

For their part, the major banks, whose executives say that they are concerned about increased competition in the stagnant corporate lending business, condemned the plan. But trust and insurance industry spokesmen, who have been campaigning to obtain the commercial lending powers of the banks, welcomed the proposals. Said William Somerville, president of Stratford, Ont.-based National Victoria and Grey Trust Co.: “We have fought hard for the latitude to put our deposits into more than just mortgages.”

What is at stake in the showdown of financial titans is the future of their territorial boundaries. Financial analysts say that the government’s propos-

al will end the decades-old concept that Canada’s financial institutions should be viewed as “four pillars,” with the activities of banks, trusts, insurance and investment houses clearly divided.

The debate over McDougall’s discussion paper promises to become even more acrimonious as finance depart-

ment officials begin to poll financial executives for their views. But the government is already set on its course of action. Said McDougall: “The details of the paper are negotiable, the principles are not.” Currently, there are two categories of banks—Schedule A banks made up of the nation’s 13 domestic chartered banks and Schedule B banks that include the 58 foreign-owned banks in the country. Under the McDougall plan, financial holding companies could create a new category of Schedule C banks.

They would be subject to most of the same regulatory requirements as other traditional banks but with a difference —their owners would be permitted to hold majority control of the new

banks, freeing them from the demands of shareholders. The foreign-owned banks have no such restrictions on ownership, but the federal Bank Act currently stipulates that no individual can control more than 10 per cent of a Canadian chartered bank.

McDougall acknowledged that the

creation of the new financial holding company will concentrate enormous power in the hands of a few owners. But to ensure adequate consumer protection and to guard against potential abuses, McDougall proposed a series of tough new rules. For one thing, affiliates of the proposed holding company could engage in networking — selling each other’s products to consumers —but each would have to remain a distinct corporate entity with its own board of directors and financial statements. As well, the minister said, self-dealing, in which one branch of a conglomerate arranges a loan or similar deal with an affiliated company or senior officer, would be banned. At the same time, pen-

alties could include criminal charges.

To police the financial giants McDougall unveiled plans for a a new Financial Conflicts of Interest Office, modelled on the U.S. Securities and Exchange Commission, to investigate and launch court actions in response to public complaints. The minister also proposed the consolidation of the existing Office of the Inspector General of Banks, which supervises the banks, and the Department of Insurance, the agency that oversees the trust, mortgage loan and insurance companies.

But her assurances did not lessen the the bankers’ concerns. Robert Korthals, for one, president of the Toronto Dominion Bank, told Maclean ’s that by abandoning the 10-per-cent ownership rule for Schedule C banks the government was inviting conflict-of-interest abuses that would be impossible to control. Added Korthals: “It will take literally an army of regulators to monitor the transactions of these financial conglomerates.” The brokerage industry was also guarded in its reactions. Said Andrew Kniewasser, president of the Toronto-based Investment Dealers Association: “Ottawa’s proposals can only lead to more corporate concentration.”

Still, industry experts said that the federal plan was overdue because it may lead to effective regulation of the fast-growing financial conglomerates that have already emerged in Canada. For years companies such as Torontobased Trilon Financial Corp., a financial conglomerate controlled by Peter and Edward Bronfman’s Brascan Ltd., have been spreading their corporate tentacles in a regulatory vacuum. Industry experts also pointed out that Ottawa’s proposals might bring the whole country in line with the dramatic changes already under way in Quebec. That province’s Bill C-75, which was passed last June, gave provincial insurance companies the freedom to expand into most areas of the financial services industry. And already the Laurentian Group of Quebec City, the province’s largest insurer and a financial holding company with assets of $2.9 billion, has taken full advantage of the new provisions.

Laurentian Group will be the first company in Canada, its officials claim, to offer consumers true “one-stop” financial shopping. When the company opens its new $75-million office in downtown Montreal early next year, customers will find the services of a bank, a trust company, a life insurance company, a property and casualty insurer and a stockbroker. If the federal government’s radical new proposals become law—as Barbara McDougall expects they will by early next year—the Laurentian Group’s financial supermarket will be only the first of many to spring up across Canada.