BUSINESS/ECONOMY

Security and competition

PATRICIA CHISHOLM July 11 1988
BUSINESS/ECONOMY

Security and competition

PATRICIA CHISHOLM July 11 1988

Security and competition

BUSINESS

ECONOMY

Thomas Hockin, minister of state for finance, former professor, businessman and consultant, enjoys the limelight. Amiable and articulate, Hockin, 50, seems to relish the publicity generated by the project that has consumed most of his two years as the junior finance minister—the deregulation of Canada’s financial sector. Last week, he even appeared pleased when Liberal opposition critic Raymond Garneau highlighted the issue in the House of Commons by demanding to know when Hockin’s long-awaited legislation would appear. Although Hockin said that his bill would soon clear the Commons, it could be stalled by a crowded legislative agenda that includes both free trade and tax reform. And that could lead to an indefinite delay, leaving the financial sector in disarray. Said John Evans, director of the Trust Companies Association of Canada Inc.: “If an election is called this summer, it’s a dead duck.”

If that happens, criticism of Hockin will almost certainly be harsh and widespread. He has already missed his self-imposed spring, 1988, deadline for passage of his reforms. There will be separate bills for the trust, banking, insurance and credit-union sectors, but because the principles are similar, Hockin says that he plans to introduce the bills as a package. So far, only a draft of the loan and trust companies act has been released. But Hockin is expressing optimism that the House may consider the first stage of the reforms this summer. And he added that he is confident that even if the legislation fails to pass before the summer recess, it will be in place no later than Jan. 1,1989.

Hockin’s task is made particularly difficult by two competing demands. On the one hand, he must create a more open and competitive market in the financial-services sector. That means dismantling the barriers between different types of financial activities so that banks, for one, are permitted to take deposits and also to sell securities. These activities have traditionally been separated to prevent deposited money from being used in such speculative business activities as trading securities.

To prevent abuses, Hockin’s plan must also contain powerful regulatory measures. The safety of Canadians’ savings may depend on it.

Part of the new regulatory plan was to include a restriction on so-called com-

mercial links. They refer to situations in which a company with commercial activities, including manufacturing, owns part or all of a financial institution, such as a trust company. The rule would help slow down corporate concentration and reduce the possibility that the public’s funds would be misused in speculative business ventures. Hockin has steadfastly opposed the growth of such links since the policy was introduced in December, 1986. But in a startling shift last month, Hockin said that he will reconsider the commercial links issue. Hockin added that he realized a significant compromise on the matter could help to smooth the way for quick passage of his bill by removing the opposition of the private sector as well as that of other parliamentarians.

The reforms are intended to create larger, more diversified financial institutions with larger capital bases. And with more financial influence, Canadian financial institutions should become more competitive in international money centres in New York City, London and Tokyo. Although consumers may

benefit from the new, more competitive climate among institutions, the real winners will be the institutions themselves—and their owners.

But some members of the financial community say that they are angered

by the ever-increasing delays, and confused about their corporate powers in the absence of firmly established rules. There are also growing complaints that the federal plan clashes with provincial regulations governing provin-

dally incorporated trust companies.

The potential conflict between federal and provincial regulations leads to irksome problems for such corporate groups as The Laurentian Group Corp. of Montreal, which include both federally and provincially chartered companies. A different set of rules applies to each, making corporate planning more difficult.

The pending changes in Canada are also intended to increase public confidence in the banking system. After the Ontario trust companies scandal of 1982, the spectacular demise of two Alberta banks in 1985 and the collapse of Ed-

monton-based Principal Group Ltd. last summer, federal officials say that they are determined to stop banking failures.

But many members of the financial community have expressed concern about some of the proposed safety mea-

sures. The commercial link rule has been the most contentious. The proposed rules would place restraints on such diversified conglomerates as Torontobased Brascan Ltd. and Power Corp. of Montreal, which have interests in both financial and commercial subsidiaries. Under the proposals, financial and commercial companies that are linked to one another by ownership would be prohibited from growing by acquiring another financial-services company. However, spokesmen for the companies affected say that those rules would merely restrict their growth without increasing regulatory safeguards. And,

they point out, the rule would prevent a cash-rich commercial affiliate from injecting capital into an ailing financial institution.

Some company executives add that, instead of crimping growth, regulators

should expand supervisory or so-called prudential rules. Such rules would prescribe certain ethical codes of conduct rather than placing restraints on ownership, which they say do nothing to assist solvency and merely render Canadian institutions less competitive internationally. Said Melvin Hawkrigg, president of Toronto-based financial-services giant Trilon Financial Corp.: “We’re still confused about whether the federal government really wants to encourage world-class corporations.”

Protests from the financial-services industry intensified during the spring after the release of the draft trust and loan companies act last December. And Claude Castonguay, chairman of Laurentian Group, led a powerful Quebec insurance lobby against the commercial link rule. He was later joined by Pierre Fortier, then Quebec minister responsible for finance and privatization. After the four western provinces joined Quebec, Hockin agreed to reconsider the rule.

But Hockin defended his record, adding that he has done “an intensive process of listening.” The billion-dollar Principal Group collapse would not have occurred, he contends, if rules similar to his proposals had been in place. He said that the new rules on corporate selfgoverning, self-dealing and conflicts of interest are the most important aspects of the policy. And he added that the expanded regulatory powers of the Office of Superintendent of Financial Institutions has been more successful than expected.

So far, Hockin has said only that he will likely “relax the commercial link prohibition, opening up opportunities for more acquisitions, as long as it’s not big by big.” And others, including influential finance committee chairman Donald Blenkarn, say that the muchmaligned proposal will be dropped. Said Blenkarn, who recently engineered a proposal to change bank service charges: “Hockin now realizes that he has to have something in line with the views of the provinces and the financial industry.”

For now, Hockin must concentrate on guiding his complex reform package through the Commons. Acknowledging that he hopes to stay in the cabinet— and perhaps change portfolios—Hockin is at a pivotal point in his career. And reaching a politician’s compromise with the powerful financial-services industry may be the test that determines whether or not he will succeed.

-PATRICIA CHISHOLM