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The task force on the future of the Canadian financial services sector was established by the Canadian government in December 1996 to undertake a careful, independent and objective analysis of the broad trends affecting the Canadian financial services industry, and to provide advice on public policy issues to help the government develop a framework for the industry in the 21st century. The task force was comprised of an independent and diverse group of individuals under the chairmanship of lawyer Harold MacKay.

The government delayed dealing with a number of important financial industry issues in the hope that the report of the task force would lead to a justifiable and consistent public policy approach to the industry. The delay, while frustrating to many industry participants, appears to have been worthwhile. The task force issued its report in mid-September to almost universal industry approval. The report was immediately referred to committees of the House of Commons and Senate for prompt study and report. The extent to which the government is prepared to adopt the report should become apparent in the new year.

The task force approached its mandate by articulating an integrated vision of a desirable financial services sector against which it might develop and measure its recommendations. It decided that a desirable industry is competitive, offering a wide range of choice, products, levels of service and price. Other items of consumer appeal, desirable institutional structures and supportive regulatory frameworks are also part of the vision.

Measures are therefore recommended to enhance domestic competition and encourage new entrants. These include increased access on the part of non-deposit-taking institutions to the Canadian payments system and other electronic networks; support for rapid demutualization of insurers; government backing for insurance compensation funds as well as deposit guarantee funds; allowing banks to offer insurance and automobile leasing through their branches (the subject of intense debate and lobbying for years and the recommendation producing the most vocal protests); and discretion to lower capital requirements for new special purpose financial institutions (FIs).

Of perhaps greater interest internationally, the task force envisages consistent ownership and structural rules being adopted for all Canadian FIs, with differences in permitted ownership based on size rather than function and history. Regulated holding companies would be permitted, with a holding company subject to ownership restrictions consistent with those for regulated FIs, restricted to holding only those entities which could be held by an operating regulated FI, and subject to prudential capital requirements and related party restrictions. The inability of Canadian banks to benefit from a holding company structure has been a key factor in their reluctance to support easier access for the non-banking arms of foreign banks.

Canadian FIs with shareholders equity in excess of C$5 billion (US$3.25 billion) would be subject to wide ownership requirements, with single shareholders limited to 10%, although some flexibility would be built in to ease strategic transactions that could benefit Canada. FIs with less than C$1 billion shareholders' equity could be owned by anyone deemed fit and proper by the minister of finance. FIs between these two limits would be required to have a minimum of 35% of their voting participating shares widely held but the minister could exempt the subsidiary of a foreign FI. For those existing institutions which will not comply, a degree of grandfathering is suggested with a sale of the non-conforming interest to a widely held foreign regulated FI being permitted to achieve compliance. In exceptional cases the federal cabinet could approve the acquisition of a widely held Canadian FI by a widely held foreign FI, subject to undertakings but otherwise free from the above rules.

The task force advocates removal of protectionist barriers to the operation of foreign banks in Canada. While it believes retail deposit activity should still be confined to Canadian subsidiaries of foreign banks, foreign banks which do not accept retail deposits in Canada (including well-capitalized smaller institutions) should be able to operate by branch of the parent with the lightest possible regulation. If the foreign institution does not wish to operate as a bank in Canada, the task force sees no need for any prudential regulation at all, although the entity would be subject to market conduct regulation. The task force says it is not appropriate to impose prudential regulation on foreign competitors simply to level the playing field. In any event the recommended holding company regime can potentially overcome any perceived structural disadvantage to Canadian domestic banks.

Foreign FIs will also be interested in proposals to eliminate withholding tax on all arm's-length cross-border loans made to Canadian companies regardless of term. On the other hand, foreign providers of financial services to Canadians without a physical presence in Canada would have to obtain regulatory permission to do so and agree to abide by market conduct rules. Deposits and premiums could be taken only by subsidiaries or branches regulated in Canada.

A merger review process is advocated which would examine public interest concerns not adequately addressed by the safety and soundness review conducted by federal FI regulators and the review of competition issues under the Competition Act. Merger proponents would be required to submit a detailed public interest impact assessment addressing certain public interest criteria which would be available for public review and comment, after which the minister would decide on the proposal.

Other features of the report include a stronger and broader ban on coercive tied selling, a financial sector ombudsman, a comprehensive privacy regime and streamlined regulatory processes.

The task force sees its report as an attempt to "stay ahead of the whirlwind". It urges prompt government action to implement its recommendations. Both Canadian and foreign FIs await the government's response.

John Myers

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