Financial Services Agreement

By Duff Conacher, Coordinator Democracy Watch, 19 January 1998

The World Trade Organization Financial Services Industry Agreement (FSIA) effects our banking sector the most, as our insurance, trust, and investment brokerage sectors are already wide open to foreign financial institution entry and ownership, mainly as a result of changes to legislation governing these sectors enacted in 1993-94.

The Agreement as a whole is not yet available, mainly because it is actually a series of agreements or positions of the 70 or so countries that signed the Agreement. Each country has lowered the barriers to foreign financial institutions entering its financial services industry in different ways, because every country had different barriers in place. A compilation of these agreements has not yet been completed, and it usually takes two or three months after any international agreement to complete such a compilation.

However, you can obtain a copy of Canada's final offer to the other countries involved, which is essentially the agreement that Canada signed. Canada's final offer can be obtained from Frank Swedlove, Director, Financial Sector Division, Department of Finance, L'Esplanade Laurier, 140 O'Connor St., Ottawa, Ontario, K1A 0G5, Tel: (613) 992-4679; Fax: (613) 943-8436. I do not have Frank Swedlove's email address, however the email address for Jim Peterson, Secretary of State of International Financial Institutions (the Minister most directly responsible), is <peterj@parl.gc.ca> and his fax: (613) 995-2355.

With regard to the commitments Canada made, they did not go further than the changes to financial institution legislation that were proposed in a Department of Finance discussion paper published late September 1997. Generally the commitments are as follows:

* allow foreign banks to set up branches in Canada, without having to set up a separate, incorporated subsidiary as they now have to do (e.g. Citibank Canada is the Canadian subsidiary of Citibank U.S. and currently has one branch, but in the future Citibank U.S. could close down Citibank Canada and simply open branches of Citibank U.S. here in Canada);

* foreign bank branches will only be allowed to take deposits of more than $150,000.

What do these changes mean? First of all, let me make it clear that the Canadian Community Reinvestment Coalition (CCRC) has not taken a position on the Agreement except to call for full, meaningful public consultation before the Agreement is signed and implemented, and to point out some of the potential negative impacts of the Agreement. The CCRC is a project of Democracy Watch's and is made up of 65 small business, community economic development, labour, anti-poverty and consumer groups from nine provinces and the Northwest Territories. Just for clarification, I am the Chairperson and Spokesperson for the CCRC.

According to the CCRC's analysis, not much will visibly change in terms of the financial institutions you see on street corners across the country as a result of the WTO Agreement. Why not? Because 80% of businesses (all small businesses) and 90% of individuals in Canada have less than $150,000 on deposit in a bank. Therefore, foreign banks will only be able to open branches to serve 20% of businesses and 10% of individuals, in other words only a small portion of the market. As a result, it is unlikely that many foreign banks will set up branches in Canada, and likely only in urban centres or other locations where there is a concentration of individuals or businesses with more than $150,000 on deposit in banks. Another reason discouraging foreign banks from setting up branches here is that most big businesses and wealthy individuals can already deal with foreign banks if they want to, either through subsidiaries in other countries, or by simply opening accounts in other countries.

However, the changes do have serious implications concerning the costs of banking, especially for small businesses and low and moderate-income individuals. Why? Well, foreign banks will be competing with Canada's banks for the deposits of big businesses and wealthy individuals, and the competition will likely lead to lower prices for these businesses and individuals. Therefore, Canada's banks will lose revenue from the sale of products and services to these customers, both because foreign banks will take away some of the business, and also because prices will likely be lower. How will Canada's banks replace this lost revenue. It is likely that the banks will increase their prices for all the customers who cannot deal with foreign banks because they have less than $150,000 on deposit with a bank. In other words, the 80% of businesses and 90% of individuals in Canada with less than $150,000 on deposit in a bank will face higher service charges as a result of these changes.

The only possible way that the changes will not have such a discriminatory effect on small businesses and low and moderate-income individuals, is if "deposit" is very broadly defined to include various investments or credit extended to customers. However, even if the definition is broad, a majority of customers will still not be able to deal with a foreign bank.

Concerning the rumour that these changes will lead to the privatization of the Bank of Canada, I have no information that would lead me to believe this, and I do not know how or where this rumour started.

How will these changes be implemented? As mentioned above, the Department of Finance released a discussion paper on changes to foreign bank entry at the end of September 1997, with consultation until the end of October 1997. Because the proposals in the discussion paper were essentially the same as those in the final WTO Agreement, when Parliament opens again on February 2, 1998, it is likely that a resolution to ratify the Agreement, and legislation to make changes to Canada's financial institution laws in accordance with the Agreement, will be introduced early in the Parliamentary session.

How should you respond to these proposed changes? First, send a letter to your Member of Parliament, Finance Minister Paul Martin (email: <pmartin@fin.gc.ca> or fax: (613) 995-5176), Secretary of State for Financial Institutions Jim Peterson (email: <peterj@parl.gc.ca> or fax: (613) 995-2355), In your letter, as the CCRC has been doing for the past seven months, call for full, meaningful public consultation on the changes, both to ensure that there are not other, hidden changes being made, and also to explore fully the implications of the changes. Tell your MP and the Ministers that a two-tier banking system in Canada is not acceptable (in which big businesses and wealthy individuals have access to foreign bank services but small businesses and low and moderate-income Canadians do not), although if you are not in favour of foreign banks being active in the Canadian market at all, your message will obviously be different.

In addition, make it clear to your MP and the Ministers that these changes do not mean that Canada's big banks will suddenly face severe competition from foreign banks, since Canada's market has only been opened up in a very limited way (ie. only allowing foreign banks to take deposits of over $150,000). It is important to let elected officials know that you don't believe that our market is now wide open. Why? Because Canada's big banks are already using the spectre of foreign competition (even though it hardly exists right now) in their arguments that they should be allowed to merge, and sell insurance and auto leases directly from their branches. When these changes are made, Canada's banks will use the argument even more, even though foreign competition will likely not increase very much at all. In other words, Canada's big banks are still protected, as they have been for 30 years, from foreign competition. And the only real reason they want to get bigger is because they want to be bigger, not because they need to be bigger to serve their customers or survive and thrive as businesses.

In addition, in your letter to elected officials, make it clear that the federal government should enact requirements for all banks, foreign or domestic, to disclose details about their lending, investment and service to customers. Such requirements have existed in the U.S. for over 20 years, and before any bank can expand (e.g. open a branch or ABM) or merge or take over another bank, regulators review the disclosed information and grade the bank's performance. If the bank receives a failing grade (ie. is discriminating against some customers or generally not serving its customers well) then the application to expand can be denied. Such disclosure and review requirements would allow Canadians to hold banks operating in Canada accountable to high standards of service across the country.

Another key accountability change is the creation of a financial consumer organization in Canada.

For more information, please view the CCRC's home page at the following address: <http://www.cancrc.org> (we are still making a few changes to the page, but it is more or less completed). The page contains the CCRC's five position papers on the issues of the banking ombudsmen, access to basic banking services, disclosure of business lending statistics, the creation of a financial consumer organization in Canada, and the enactment of an overall accountability system for banks and other financial institutions in Canada.

You can also contact me at the address below with any questions or if you would like to receive a full information package by mail concerning Democracy Watch's and the CCRC's work on banking issues and other democratic reform issues in Canada.

I hope you find this information interesting and useful, and I hope you can join the CCRC in working for bank accountability in Canada.

Sincerely,

Duff Conacher, Coordinator
Democracy Watch
P.O. Box 821, Stn. B
Ottawa, Ontario
K1P 5P9
Tel: (613) 241-5179
Fax: (613) 241-4758
email: dwatch@web.net
Internet: http://www.dwatch.ca/dwatch