Madame Chair, honorable members, thank you for inviting me to offer some views on the Public Interest Impact Assessment Process of bank merger approvals on which Minister Manley has sought your advice.

You have all had an opportunity to review my submission of November 25, 2002 to the Senate Finance Committee so I will not take up your time by repeating it in detail.

In his referral to you Minister Manley specifically suggested you consider the public interest implications of large bank mergers related to access, choice, adjustment or transition issues, and the creation of more effective Canadian-based internationally competitive institutions.

As the Senate Report states, the industry consensus was that you should avoid duplicative regulation and limit the Public Interest Assessment process to areas not covered by other agencies and existing legislation.

The issues of access, choice, and the adjustments and transitions resulting from a large bank merger are already regulated either by a number of agencies such as the Competition Bureau, OSFI, and the Financial Consumer Agency of Canada or through existing legislation such as labour laws and Human Rights legislation. In addition, all of the banks have signed Memoranda of Understanding as to how they will provide low cost accounts.

As it was made clear to the Senate Committee, these issues are not solely the concern of government and its regulatory agencies. As members of a service industry in a market that is highly competitive for both customers and top-rate employees, all of the banks are conscious that sensitivity toward issues of public interest is only good business. TD's acquisition of Canada Trust is an example of this principle in action. I will return to this in a moment.

In addition the Senate report recommends that you ensure appropriate sequencing of the review stages. Place the Public Interest Assessment as a final check after Competition Bureau and OSFI reviews. But here I would point out, and I will come back to this, that to make this a productive process we have to have certainty that the government is genuinely prepared to consider mergers. We need this before the process can begin.

A third recommendation in the report is to make the public review process short - be clear about the timeframe for hearings so that the inevitable uncertainty experienced by employees, customers and shareholders is limited as much as possible.

As you deliberate on the Minister's referral, I recognize that you need to balance national interests with your concern for the service your constituents can expect if mergers are approved. Can we have mergers and at the same time increase customer benefits? I believe we can. While the banks are far from perfect, we are all trying to build strong franchises and it is good business to be sensitive to the needs of our customers and our employees. As an example, let me come back to the TD Canada Trust experience for I believe that it shows that mergers can be customer centric and at the same time protect the interests of employees and the communities where we operate.

The TD Canada Trust experience

In merging Canada Trust with TD's retail arm we knew that the merger would have little value if we did not keep our customers. Customer loyalty is the product of a number of different elements:
- how customers are treated,
- how employees are treated
- and how the bank behaves in the community.

Thus our planning for the merger was about more than cost savings; it was about building a better bank measured by customer satisfaction and employee satisfaction as well as improved financial results.

It was from that perspective, rather than any government or regulatory guidelines, that we made commitments to our customers, our employees and to the London community - our largest employment centre outside Toronto.

Our over-riding principle was that we would put customers first in all our decision-making. We pledged that we would treat them with respect and communicate with them about changes in a timely fashion.

To employees we committed to the same principles of respect and timely communication. And we addressed their big concern about jobs by providing an 18-month compensation guarantee for all employees affected by the merger. Unfortunately it is impossible to merge two large companies without experiencing job loss. We extended the branch consolidation period over three years to make this transition as smooth and manageable as possible for both our employees and our customers.

In London, where our presence has a significant impact on the local economy, we committed to maintain existing employment levels - which we have done. We worked with local MPs and benefited particularly from the advice of Sue Barnes, Chair of this committee. This ensured that we set appropriate expectations and kept politicians informed about issues that would affect their constituents.

In addition we regularly sought customers' and employees' opinions throughout the integration period to ensure that we understood their issues and could make adjustments as we moved through our merger schedule, region by region.

I will not claim that the merger went perfectly, but our focus on our customers, our employees and the communities we serve ensured that we maintained our customer base and ended integration with basically the same net market share. Our Customer Satisfaction Index is higher now than the average of the two institutions before the merger. I believe that is a remarkable achievement.

Small business a focus

An area of particular concern to this committee is the banks' service to small businesses. There is certainly room for improvement. Small business banking is an area to which all of the banks are firmly committed. Competition among the banks for this segment is fierce. Small business is the backbone of Canada's economy. For TD it is an important area of business growth and we are investing to build our share of this market. In fact, we have continued to build our small and medium sized business franchise despite the merger.

We opened 143 new small business service wickets in our branches, provided new small business training for our financial advisors, and improved our electronic and web banking services so that small business customers now have 24/7 transaction convenience. Our electronic services were ranked top in an industry survey¹.

But the market is the ultimate determinant of who is best in this business and it is no accident that we have gained more than100 basis points of market share in small business credit each year since the merger. We also rank first in overall customer satisfaction of the big five banks⊃2;.

We are the leader in third party agricultural lending, providing service through community farm supply outlets in rural areas where we don't have a branch. Our cash management service to mid-sized companies is also ranked first in another industry study³.

Interestingly, when you review the steps we took throughout the merger, we considered every one of the applicable issues that Minister Manley has asked you to define in the Public Interest Impact Assessment.

While you are right to be concerned about the impact of mergers, the answer is not more rules. In fact, the fewer the better. I would urge you to be wary of adding more specific regulation when each merger situation will have its own unique set of characteristics. In TD's merger with Canada Trust for example, I doubt that the particular sensitivities of London would have been captured by any prescribed PIIA.

You may also find in your deliberations that some issues are far more complex than they first appear. For example, a merger proposal that does not involve many divestitures of branches may appear to have a strong selling point in minimizing disruption. However, without divestitures, there is no opportunity for another player to step up and offer new competition.

PIIA not the entire solution

At this point, let me step back for a moment and recap where I think we are in the process of clearing up the ambiguity surrounding large bank mergers. We already know what the Competition Bureau, OSFI and current legislation require us to do.

The Senate hearings laid out some ground rules for the Public Assessment process, and this committee will presumably identify the areas that the Competition Bureau, OSFI, FCAC and existing legislation do not already cover, so that we have a clear statement of what should be addressed in a short Public Interest Impact Assessment at the end of the merger approval process. If you articulate that clearly it will be very helpful.

But having done all of this, does it mean that a merger proposal offered today that meets these tests would be approved? I suspect not. We have to recognize that despite the safeguards of OSFI, the Competition Bureau and the PIIA, our politicians, and many of the public, are still fundamentally hesitant about large bank mergers.

Why should that be the case? Let's go back to why banks want mergers. The issue is no longer about merging to protect our retail franchises. Canada has among the best in the world. Nor are there many advocates for trying to achieve scale to stay large international wholesale players. The issue is that we see the financial services industry consolidating globally. We are afraid that if we can't achieve the bulk we need to make larger acquisitions in the United States, we will not be able to compete in any significant way outside our borders. And there is a genuine unease that if American banks all consolidate, our strong competitive position will be eroded.

But the fundamental issue is, are we as a country prepared to accept more consolidation so that our banks can compete effectively in the United States and become national champions? Are there any other ways to allow Canadian institutions to create North American champions based in Canada which could require less restructuring? These are the public policy issues the Government needs to settle.

If you are convinced that the benefits of restructuring outweigh the costs, then make it fair and transparent. Don't let it be a first-past-the-post process. It would not be acceptable to let just one proposal through. We cannot politicize the restructuring of such a major industry. But we should be clear as to the consequences of a fair and open system. As soon as the door is open for merger applications there won't just be one proposal, there will be two to three at a minimum -- and that will mean significant restructuring. Because we have jammed up the process everyone will feel obliged to move at the same time.

If the Government is willing to accept significant restructuring, then we need it to:
- tell us that it is genuinely open for business,
- define the broad parameters for approval,
- and give us notice that the game will be opened up so we have time to develop the combinations that interest our shareholders and also meet the government's parameters.

This will also allow the Competition Bureau and OSFI to make decisions based on having all the cards on the table at the same time.

As you deliberate on this issue, let me suggest that you do so in the context of the whole financial services industry. I understand that you may not see the issue of large bank and large life insurance company mergers as a focus of these hearings. However, the issue is not going to go away.

It would be timely and helpful if instead of focusing only on the five major banks you were to broaden your scope to encompass the five major banks and the two widely held life insurance companies. If we make the set larger in this way there is a greater possibility of creating a solution that is acceptable to the Government and to your constituents.

If you do widen the set I would urge you to settle the issue of selling insurance in bank branches and set out an appropriate timeframe. From a business point of view we need to know if a merger with a life insurance company can be undertaken to create synergies or if its only potential is to create the bulk required to make international acquisitions.

However, don't widen the set to include those not now subject to review. Companies who currently can sell or buy without a review should continue to be exempt.

While we are discussing unresolved issues we should also acknowledge that we have not yet dealt with the issue of foreign ownership of banks. We have a completely open policy on foreign competitors in our market but are we prepared to have domestic players bought by foreign companies? We need clarity on the role the Government sees for foreign players in the future.

However I believe it would be unfair to open up the market now. Why would we let players from jurisdictions where they are permitted to bulk up come in and buy Canadian institutions that have been stopped from growing to comparable size?

In my view, the logical order would be to:
- resolve the domestic merger issue first,
- allow our own financial institutions to gain a size where we can compete against larger foreign institutions that already have the bulk to compete internationally,
- and then open the doors to foreign entrants.

Madam Chair, it is evident that, with or without greater clarity on the Public Interest Impact process, there are still underlying issues that the Government needs to address. I can understand that you may not be ready to address these issues tomorrow.

But to avoid a situation where we are constantly running to the Minister to ask how he likes this or that idea, I would ask you to pressure the Government to give us a date by which it will be ready. If for political or policy reasons it can't do it now, give us a firm timeline when it can.

That, I believe, would be in the best interests of all stakeholders - our customers, our employees, our shareholders and your constituents.

Thank you.