Apart from the desire for lower taxes, there are few things on which all facets of the Canadian financial services industry can agree. And when it comes to many of the big industry issues, there’s little consensus.

This past summer, a panel was appointed to review existing competition and investment policies, with an eye to improving the economy’s productivity and competitiveness. The Competition Policy Review Panel, chaired by former BCE Inc. CEO Lynton Wilson, had sought submissions on the subject and will hold consultations throughout February. The panel is scheduled to deliver its advice to the federal government by the end of June.

Several of the big banks and insurers, as well as financial services industry lobbyists, submitted papers to the panel before its mid-January deadline, providing some insight into their policy priorities.

Those submissions are full of calls for generic commerce-friendly initiatives such as lower taxes, more aggressive efforts to gain access to foreign markets, enhanced interprovincial trade and labour mobility, as well as reforms to the legal and regulatory regimes concerning takeovers within the industry.

Many of the papers convey a perceived need for widespread reform to enable Canadian firms to compete effectively in the increasingly globalized economy. Royal Bank of Canada’s submission suggests: “The global economy is entering a phase of fundamental restructuring that will rival major changes throughout history.”

It warns that Canada is not well positioned to adapt to this evolving environment and it sees the need for “a new domestic policy agenda… to ensure that Canada can be at the forefront of the changes to come.” That agenda must include reforms dealing with taxation, regulation and the national economic union, the RBC paper says.

However, beyond sweeping policy prescriptions, many of the papers submitted to the panel also address a number of long-standing industry-specific issues, including the prospects for mergers, the desirability of banks retailing insurance and the need to improve industry regulation.

On these big issues that are much closer to home, there’s a real lack of unanimity.

On the ever-present issue of the ownership constraints on large financial institutions, the banks that made submissions (Bank of Montreal, Bank of Nova Scotia, and RBC) and industry lobby group Canadian Bankers Association agree that the current constraints are less than ideal. Proposed mergers — both between banks, and among banks and the large, demutualized life insurers — have been denied, and the requirements for widely held ownership (control is limited to 20% of the voting shares, or 30% of the non-voting shares) thwart any possible foreign takeovers.

Scotiabank recommends that the government eliminate specific ownership limits in banking and that it rely on the minister’s discretion to assess prospective ownership stakes by foreign banks. “Through this approval process, Canadian control over the Canadian banking system will be maintained,” the Scotiabank paper suggests, “although an individual transaction may be permitted that is in the national interest.”

However, prior to unlocking the gates for foreign banks, the Scotiabank paper insists, it’s necessary to allow domestic firms to partner up if they want: “Before the banking sector is open to foreign acquisition, we believe it is critical to allow Canadian banks to restructure and adjust, including the option to merge. In so doing, Canadians can rest assured that any proposed bank merger will be judged by standards that are significantly higher than those in other jurisdictions.”

The RBC paper agrees that the current ownership restrictions should be replaced by a more flexible approach that balances public policy considerations with the benefits of consolidation. It suggests that the existing merger review process “overemphasizes consumer issues” and marginalizes the benefits of enabling Canadian financial institutions to compete on the global stage.

The only issue to consider in approving a merger, the RBC paper argues, is whether it “would enhance the competitiveness of the financial institution.”

Although the banks are generally in agreement on the need to free their industry from heavy-handed government intervention in their ownership situations, the insurers take a slightly different view. For example, the submission of Manulife Financial Corp. asserts that the rule on widely held ownership should be maintained, but mergers of all sorts (bank with bank; bank with insurer; insurer with insurer) should be allowed.

Sun Life Financial Inc. ’s submission agrees with Manulife’s on the value of preserving widely held
ownership, but disagrees on the merger question. Specifically, it argues that bank/insurer deals should continue to be prevented: “Both absolutely and relative to intra-industry combinations, we think that ‘cross pillar’ mergers between large banks and large life insurance companies are inferior in business and policy terms… the current policy prohibiting such mergers has been a tremendous success.”

@page_break@Even though the issue of bank mergers never seems to die, talk of bancassurance deals seem to have much less life — until recently, that is. The notion reared its head once again in mid-January, after it was revealed that Manulife had provided $500 million of a $2.8-billion capital injection sought by CIBC.

Analysts say the transaction is simply an equity investment and not a prelude to a proposed deal. But they also can’t help reviving the idea of such a deal, particularly as it involves the same firms that apparently tried to merge several years ago, only to be rejected by the federal government. It appears that no one is expecting a merger at this stage, but the issue is at least back on the radar.

It may come as a bit of a surprise to hear that the banking and insurance industries don’t have a common view on the proper policy for mergers and ownership restrictions in the financial services sector. However, it’s no surprise that they also don’t agree about the wisdom of banks selling insurance directly in their branches.

The RBC paper insists that the current limits on banks distributing insurance through their vast branch networks are anti-competitive and anti-consumer, maintaining that eliminating these restrictions would generate “significant benefits” for consumers and suggesting that such a move could also help pave the way for a bank/insurer combination: “While this change is not a condition for mergers between large banks and large insurance companies to proceed, eliminating the constraints would provide a wider range of strategic options and further opportunities for productivity gains for the respective companies to consider.”

Merger considerations aside, some in the insurance business take precisely the opposite position. In its submission, the Insurance Brokers Association of Canada argues that allowing the banks to sell insurance in their branches “would clearly provide a predatory and unfair advantage that small businesses simply cannot match.”

And customers would suffer, too, the IBC paper insists, as industry consolidation ultimately limits competition and consumer choice: “There exists a natural assumption that by removing restrictions and regulations in the interest of improved competitiveness, one will achieve such a goal. However, we would suggest that in some instances, intelligent legislative restrictions allow for small players to compete on a level playing field with giants. The result is, in effect, more competition, not less.”

In addition to arguing that consolidation harms competition, the IBC paper also maintains that fragmented provincial regulation benefits consumers. It claims that efforts to harmonize regulation governing things such as point-of-sale transactions would not be in consumers’ interest: “Market conduct regulatory regimes work most appropriately and efficiently when drawn up at the provincial level. Harmonizing these regulations would make one provincial market uncompetitive relative to others, and consumers in those markets would be disadvantaged.”

This position runs counter to that taken by many of the submissions from other financial services industry players — most of whom call for greater efforts to rationalize and modernize regulation. The paper from the Insurance Bureau of Canada, for example, calls for the streamlining and harmonization of the existing regimes, noting that “consumers ultimately pay for overlapping regulation.”

The demand for more efficient regulation is echoed by various commentators concerning other sectors, as well. The Canadian Life and Health Insurance Association’s paper calls for modernized, uniform insurance laws, pension supervision and securities regulation.

Indeed, it’s the securities area that commands the most attention in these papers.

“The industry recommends,” states the CLHIA’s submission, “that all governments make it a priority to work co-operatively to reduce regulatory burden and overlap in the regulation of securities and to develop an ongoing system of securities regulation that ensures efficient and effective regulation in the future.”

RBC’s paper is even more definitive, calling for both a common securities regulator and a single federal securities act. It notes that numerous studies have shown that the existing system is too costly, inefficient and not as effective as it should be: “The need to change the system is clear. Canadian businesses and taxpayers should no longer be expected to suffer from a broken system that is widely seen as out of step with international trends.”

While the RBC paper recognizes that the provinces probably aren’t going to support a common regulator, it recommends that the federal government “take all reasonable steps to move this issue forward as soon as possible.”

Financial services firms haven’t had much luck getting any governments to move many of these issues forward in the past.

Although there is still a good deal of disagreement — both among the industry pillars and among specific firms — on just which direction to take on certain hot-button topics, the feds should tackle these thorny policy problems once and for all if, indeed, it is truly intent on improving productivity and enhancing competition. IE