The Federation of Canadian Independent Deposit Brokers Position Papers- June 26, 2002 Response of the Task Force on the Future of Canada's Financial Services Sector - Questions & Answers Print Close

The Chairman: 
The underlying public policy rationale for deposit insurance, which this committee has looked at in some considerable detail, is to protect the unsophisticated investor.  The  idea was if you had up to $60,000 it was unfair to expect a person who was a novice at investing to be able to find somewhere to put their money.  Therefore, many years ago the government decided it would protect a $60,000 investment
Your complaint early on in your presentation is that if someone gives you $300,000 you can
proceed to break it into five $60,000 parcels and place those parcels in five different institutions.  This single individual is now treated as five unsophisticated investors all rolled into one.  As the market is consolidated this particular investor has trouble because they cannot find enough CDIC-insured institutions in which to place their money.  Tell me why there should be a public policy reason why we ought to be concerned about that level of investor.  I am not arguing that what you are doing is illegal, but it runs absolutely counter to the entire intent of deposit insurance.  Your solution to that is we either create more insured places to put the money or we raise the limit.
This committee is on record on an number of occasions as being in favour of lowering the limit, not raising it.  You should know that in advance.  You point out that in both Ontario and Alberta provincial institutions have unlimited limits.  In my view, you do not have a problem because you could put $150,000 or $200,000 into one of the provincial institutions and thereby have it insured.  I do not see why you have a problem.  However, more important, tell me why we should care about that.

Mr. Rothenberg: 
Mr. Chairman, I know initially what you are saying sounds very logical to everyone around the table.

The Chairman:
This committee has been consistent on the issue.  I am not presenting you 
with an issue that we have not thought about in some detail.

Mr. Rothenberg:
Being involved with the consumer, as I have for over 30 years now.  I can tell you that there are very few sophisticated investors.  I do not care whether they have $500,000 or $2 million.  If you think the investor with $100,000 and the investor with $1 million has a difference in education you are mistaken.

The Chairman:
We do not have an obligation in government to protect everyone from their own stupidity.  That is not a public policy requirement.  Why should there be a public policy requirement to protect your millionaire?  I do not understand why that is a responsibility of government .  You can tell I feel modestly passionate about this subject.

Mr. Rothenberg:
I am passionate about the same subject.  What bothers me is that the government has set up a regulatory body to watch the banks and large corporations.  In the early 1980's our six major banks were virtually bankrupt because they were caught up in the thrill of lending money to Third World countries.  The view was to see who could lend money the fastest.  Due to the leniency of the government, which allowed this bad debt to be spread over a decade, we managed to save our banks.  On one hand the government is saying that it is looking over these financial institutions.  If you are watching them for us, then you have an obligation to those individuals who put you into power.  An individual may have worked hard and their father, who was a carpenter, may have laboured hard as well, and now they have inherited the parent=s money.  Perhaps that individual does not know about derivatives, mutual funds or investments in bonds.  All that has happened is because of high interest rates in the early1980's their quarter of a million has grown to half a million or, perhaps, a million because a spouse=s parents died and now they have $1 million, which they give to a bank because they figure they are solid and secure.  Then they wake up one morning and see that everything is gone.

I am a very capitalistic individual.  I am like you.  I am saying this is not capitalism. You are talking Russia here, you are talking socialism, protecting all the individuals.  You cannot have it both ways.  It is one thing to stand up and say that there is no regulation on the banks; the government is not watching all of these financial institutions; and you guys worry about where you put your money yourselves because we are not worrying about it any more.  If the government is legislating and it really thinks that it has control over what it can watch, I doubt it.  The guys being sent out to watch do not even understand what they are supposed to be watching.  That makes me question your strength and the emotionalism that you have in taking away the CDIC.  We need to cover all consumers.

The Chairman:
The only place where you and I disagree is that you think we need to cover all consumers.

Senator Carney:
My question partly deals with the question of why should public policy care about this issue.  I would like to ask your views on access.  If you have $120,000 in savings you would like to think, under your rationale, that there are two institutions into which you could park your money.  If you have $300,000 or $450,000, you tend to want to go to those institutions from which you could get your money out if you needed it.  In British Columbia, there are many communities that simply do not have enough financial institutions now.  Yesterday, Ian Waddell discussed that when he talked about the report of the task force.
Armstrong, British Columbia, has 4,000 people and only one bank. Hope, with a population of 6,200 people, has only two banks. Invermere, with 2,600 people, has two banks.  Gold River, which may have to close down, has 2,000 people and one bank.  Nakusp has 1, 700 people and one bank.  Hudson Hope has more than 1,000 people and no bank service.  Fort Nelson has 4,400 people and one bank.
Does part of your concern about the CDIC deal with the access of investors to a sufficient number of institutions about which they can feel safe but still access their savings when they want?

Mr. Rothenberg:
That is exactly what we are saying.  Incidentally, this is how we were born.
We would open up in a little community like this and our one little office represented the Canadian 
Western Bank, the Royal Bank, the Toronto Dominion Bank and every other bank and trust company.  We found it started to get smaller and smaller.  As the years went, by and the clients= money started to grow, if they have $500,000 you had to look for quite a number of different areas in which to put their money.

Senator Carney:
Inherent in some of your replies is that you have to look at the question of access.  The access to financial institutions in downtown Toronto is somewhat different from the access in Lillooet.

The Chairman:
Senator Carney, I agree absolutely with your access point.  If you were living in a community with only one bank and had $300,000 you could give it to Mr. Rothenberg and he would put it in five different institutions, even though the branches would not actually be in the community in which you are located.

Senator Carney:
In theory, I would agree with you.  In fact, not everyone wants to do that.

The Chairman:
They would want to do it on their own.

Senator Carney:
They would want to have access to it themselves.

Mr. Rothenberg:
There may not be a deposit broker in every little town and city across the country.

Senator Oliver:
One of the things that the MacKay tack force report talks about is competition.  Part of the problem and the concern that you have can be overcome if there were more 
competition for the banks that you fear will merge, thus taking away some of the places into which you can place $60,000.  Since I have been in British Columbia, I went to look at one of the little ING
stores.  I read some of their signs.
Do you place some of that $600,000 that comes into your hands with ING Bank?  Is that not a new bank in Canada?  If there were more of those, would that not resolve your problem and would it not be unnecessary for us to even consider raising the protection limit to $150,000 from $60,000?

Mr. Rothenberg:
I know that our firm does not deal with ING.  Perhaps Mr. Minton knows.

Senator Oliver:
Can you tell me why you do not?

Mr. Rothenberg:
I was not aware of them.  Our head office is in Quebec.  Perhaps they are not allowed to operate in Quebec.  Usually, these institutions seek us out.  We are the largest deposit broker in Quebec right now.  We usually deal with everybody across the country, but there are a few that do not want to come into our organization because of political problems.     

Senator Oliver:
Have you heard of ING?
 
Mr. Rothenberg:
No, I have not.

Mr. Brad Minton, President, Federation of Canadian Independent Deposit Brokers:
If I am not mistaken, our firm is affiliated with the Wrights Financial Group out of Manitoba.  We deal with a large number of companies.  I am not sure whether ING Bank is there or not.  I have not
noticed their rates on our list.  They could be, although I am not really sure at this point.
I deal with six to eight clients a day.  I have been through some of the fiascos in the past.  We woke up one morning to find the Standard Trust had gone down.  We woke up another morning to find that Confederation Trust and Confederation Life had gone down.  Those were scary times for us and our clients.  I am glad deposit insurance was there and in place.

I am dealing with one client who has moved to Comox, British Columbia which is where I live.  He had worked all his life for Bell Canada and had put a lot of money into a group RRSP.  The wisdom of Bell Canada said Confederation Life was a good strong company.  One morning he woke up and realized that he had $110,000 invested there.  He panicked.  He did not know what to do.  I got involved and over a period of time we were able to work through the situation.

The difference between dealing with the CDIC and the CompCorp is dramatically different.  With the CDIC, within a matter of five or six weeks people had a cheque for their money.  In the case of Confederation Life, we still have not got all the money back for this particular client.  It caused a lot of concern, especially for an older gentleman of 72.

Senator Oliver:
As brokers and as people actively involved in the business community, and pursuant to some of the provisions of the MacKay task force report, can you direct us, as policy makers, to what we should be doing to encourage the establishment of more tier one banks in Canada so that there are other places in which to place deposits?

Mr. Rothenberg:
You have to make it easier for a bank to open up.

Senator Oliver:
In what manner?  Do you mean with regard to taxes or to regulations? 
 
Mr. Rothenberg:
The very first thing concerns taxes They cannot operate when you realize the tax they have to pay on the capital.  In Saskatchewan, the province figured out a way to tax debt.  That is no way to be in banking business.  Absolutely, it has to be more competitive.
We sell life insurance.  I listened to the previous discussion about general insurance.  Here is my capitalistic view coming out.  It is wonderful to have banks sell insurance for cars, houses and offices at their branches, making those services more accessible to the average consumer.  What concerns me is the banks are so wealthy that rather than brokers placing the risks with insurance companies the banks will place it with themselves.  They can cover their own losses.  Ultimately - and, hopefully, these companies will not go under - the banks will be left as your sole provider.  I can tell you that my experiences with my bank are terrible when they are sole providers.  They raise premiums galore.  It is not where they will be competitive.  I find nothing wrong in banks selling insurance, if they behave as brokers and feed the premiums that they are receiving to the insurance companies, allowing them to earn a  commission.  Let them compete equally when they are allowed to be their own providers.

Senator Oliver:
My final question in this series of questions will deal with some of your comments on coercive tied selling.  MacKay dealt with this.  He made several very specific recommendations on coercive tied selling.  On page 135 of the main report it states:

- we recommend that section 459.1 of the Bank Act be proclaimed after amendment in two respects.

He talks not only about the status quo, but he said you must go further.  This is what he said:

     The offence of coercive ties selling, which now applies only to ties to a loan should be extended to apply to ties on all credit products and to insurance products.  Further, in view of the pace of change in the marketplace and the desire for flexibility in regulation, regulators should be given legislative authority to designate other specific products or Services to which the coercive tied selling prohibition would apply.

Is that not going far enough?  Were you familiar with this provision when you made your presentation to us?

Mr. Rothenberg:
When I read it the impression I had was that it will all be self-regulatory.  Is that not what it says?

Senator Oliver:
He talks about legislating it.

Mr. Rothenberg:
It is legislated that this and that cannot be done, but the so-called bodyguard watching it is someone hired by the bank and within the bank.  That is the impression I had.  What the federation was suggesting is that there be an outside source.

Senator Oliver:
Do you mean the ombudsman, perhaps?

Mr. Rothenberg:
Perhaps.  I have heard of the ombudsman, which was new to me when I heard about it.  I did not even know an ombudsman existed.  May I talk personally for a moment and not as someone representing the federation?

Senator Oliver:
Please do.

Mr. Rothenberg:
I run a deposit broker agency and we are also stockbrokers.  We are licensed with the Investment Dealers Association.  I have a line of credit at the bank which is quite sizable.  Being a deposit broker I also own personally investments and term deposits.  They are placed with different trust companies or banks at which I can get the best rate.  I also enjoy the privilege of getting the commission from whoever I give my own money.  The bank said to me that they wanted my term deposits as collateral. I had no problem with that and gave them $200,000 in term deposits.  As they came due they said to me that they did not accept the fact that they were with the Canadian Western Bank or the TD Bank because it would become too much of a hassle for them to collect if I were to go bankrupt and they would have to get the money from my term deposits.  They insisted I change them over to their bank.

Senator Oliver:
Were they prepared to give you the same rate?

Mr. Rothenberg:
No.  They refused to give me the best rate that I was able to get.  They also refused to give me the commission on my own term deposit.

Senator Oliver:
But you were able to turn around and walk out the door and invest your money where you could get the best terms.  That is what we can do in Canada.

Mr. Rothenberg:
I cannot do that if the bank is going to pull my line of credit.
Another very interesting thing happened last week.  A manager came in and said, you are in the stock brokerage business and stock markets are falling.  We understand because we own a stock brokerage firm and just a matter of weeks the revenues that are coming in have gone down to a trickle.  We do not like your line of credit being as high as it is.  Mr. Rothenberg, we want you to cash in those term deposits of $200,000 and lower your line of credit.  I said that I have confidence in my company.  I will take my $200,000, cash it in and pay it off against my line of credit.  I did that.
Because my line of credit is not as high as it was before the bank sent me new forms in the mail.  In an accompanying letter they asked me to pay a fee of $1,000, along with a $100 monthly fee based on the fact that they have to watch my line of credit every month.  I did not sign the forms.  My bank manager called me up and asked when I was sending back the forms.  He said he must have them as his bosses were complaining.  I said that I was not sending them.  I asked why I had to pay a $1,000 fee after I paid $200,000 to lower my line of credit.  He said, Mr. Rothenberg, we spent a lot of time with you.  We came up to your office, we talked to you about how the stock brokerage business is having trouble now and you have to lower your lines of credit and you have to cash those term deposits.
Was this big work?  I became very emotional.  I crossed out the fees and after yelling at him and using some English language words I cannot repeat here, we agreed that we would discuss the fees at some later date.

Senator Oliver:
You have not paid?

Mr. Rothenberg:
I have not paid yet.  My business is cyclical and our best months are October, November and December because we handle Registered Retirement Income Funds, RRIF's and their conversion.  People procrastinate.  Those who have to do it do it only at the last minute, which is December 31.  October, November and December are our biggest months.  We can be losing money by June, July, August.  Our bank manager gets to know us and he lives with us.  He understands we are in the red a little bit, but at the end of the year everything is fine.
Bank managers change about every eight months, and a 25-year-old kid, who is wet behind the ears, determines whether or not I stay in business.  I cannot tell you how frustrating it is.  I have been running my business which is a multi-million dollar concern handling in excess of $600 million.  This kid comes in and tells me I should let go six of my people because it is a slow period, not knowing what it takes to train capable people to take care of the consumers.  Really and truly, it is very frustrating.

Senator St. Germain:
What is really scary is that it is true.

Mr. Rothenberg:
It is true.  When I go to my accountants who are one of the largest firms in the country, and ask them if I should go to another bank the accountant will tell me not to bother.  This bank has known me for 28 years.  If I go to another bank I will be faced with the same dilemma.

Senator Kelleher:
Like you, Mr. Chairman, I want to declare myself.  I identify strongly with the views of the Chairman.  This is something our committee has looked at for quite a few years.  We even recommended that there should be some self-insurance or deductible with respect to the CDIC coverage.  Do you not think that there is some responsibility or onus on the person who is depositing their funds with an institution that has a good track record for investment?

Mr. Rothenberg:
Quite frankly, senator, I think it is absolute nonsense.  With all due respect, I do not mean to insult you.

Senator Kelleher:
My skin is pretty thick.

Mr. Rothenberg:
The consumer does not know.  You do not know, senator, if the Royal Bank will be bankrupt next month.  If you receive their quarterly reports, I challenge you to tell me what they mean.  Are you telling me the consumer should show some kind of responsibility?  It is nonsense.  How?  My father passed away and left my 85-year-old mother $550,000.  Does she know whether or not the Royal bank is in good shape?

Senator Kelleher:
Some of these 85-year-old mothers know a heck of a lot more than you and I.

Mr. Rothenberg:
They have wonderful experience, that is true.  But when it comes to financial planning or knowing, how do you know?  That huge behemoth in England recently went under because some young kid was investing billions of dollars in derivatives and nobody knew about it.  They woke up one day and found that they owed $6 billion.  If they do not know, how are we supposed to know?

Senator Kelleher:
If every deposit made is guaranteed - and you are even suggesting that guarantee be to an unlimited amount - are we not encouraging recklessness with the institutions where these deposits are made because they can say they will offer a higher rate?  That way they will get the business and it really does not matter if the risks are too great because it is all insured by the government any way and they will pay it.

Mr. Rothenberg:
They do not run their business based on what is being protected.  They do not care if you protect everything or nothing.  They run their business on what kind of profit they will have at the end of the day.  What is the bottom line?  If they offer 11 per cent just to get the money, yet they cannot lend it out at 13 per cent, they will take a loss. Whether this money is insured or not, they have to watch their bottom line or they will be out of business.  Whether they are out of business and the deposits are insured or whether they are out of business and the deposits are not insured, they do not care.  They are not responsible to the consumers.  I do not think that deposit insurance determines how the institution behaves with its investments.

Senator Kelleher:
You do not have much experience with what happened in Ontario about 10 years ago if you say that.  With that, I will end my statement.

Senator Kroft:
I qualify myself as being a kid from Winnipeg who recently walked into this committee.  I do not know, in parliamentary terms, to what degree I am bound by decisions this committee has made.  I sit here, at least for this moment, feeling myself to be a free agent.  Do you exclusively place your funds in insured products?

Mr. Rothenberg:
Not at all.  We are also stockbrokers.  We invest in mutual funds and stocks and bonds, none of which are guaranteed.

Senator Kelleher:
In placing your funds as an individual, and looking at it in that perspective or on behalf of your client with whose wealth management or asset management you are concerned you can look at a range of investment opportunities in the placement of those funds, can you not?

Mr. Rothenberg:
Yes.

Senator Kroft:
The fact that a certain fund is insured or not is a factor you would bring to bear, along with rates and other matters.  There may be individual clients for whom you undertake to place their money only in insured funds.

Mr. Rothenberg:
Yes

Senator Kroft:
I come as a capitalist to the marketplace.  Let me express this view.  As I say, I am riding the risk of not knowing my status here.  Would it not be reasonable to suggest whether or not an  account is insured is just another market factor which an investor takes into account in deciding where to place their money?  As a kid from Winnipeg, not Toronto where the financial institutions are established and powerful and beyond risk, as they are, I identify more with Mr. Pollick who sat here yesterday and asked us to raise the CDIC limit.  He is terribly disadvantaged against large financial institutions because they are a principal source for raising the capital needed to allow him to build his business.

Part of me is with you in the case you are making.  In response to the MacKay report you would strengthen the economic argument, your credibility and, perhaps, defuse some of the emotion of our chairman if you were also making the case that what you are doing is helping, in a knowledgeable way, on a risk assessment to direct funds toward growing institutions that need some playing-field levelling done, if the aspirations of the MacKay committee and, indeed, if the aspirations
of this committee were served in helping to broaden, strengthen and increase the numbers of our financial institutions.

Mr. Rothenberg:
I thank the senator from Winnipeg.  I am delighted you are here.
If you intend to allow more competition and if Mr. Minton and I decide to create a little bank, there is no way that we could compete if there was no CDIC or if there was some resemblance of co-insurance.

Senator Callbeck:
I want to go back to the issue of tied selling.  You are not the first witness to express concern about that matter.  We asked the financial institutions about it.  They indicated
it is not a concern.  They quote statistics to show that people really have not complained.  The Royal 
Bank indicated that in 1996 they had one complaint; in 1997, they had zero complaints; and in 1998, they have had one complaint.  Why do you feel people do not complain?

Mr. Rothenberg:
I only heard the word ombudsman when I was in Saskatoon speaking in front of a hearing similar to this one today.  You do not know to whom to complain.  You complain to your wife, your accountant and your lawyer.  To whom do you complain?  It is crazy when they say there have only been a few complaints.  You do not know where to go.  You are at a loss.  You have to realize that there are those who do not have the experience.  At least I have the strength to yell back.  Many of my friends who run little retail organizations and who have been placing their RRSP's with me for years will come to me and say that they do not want to offend me, but they are moving their RRSP's out from under my blanket.  When I ask why, they tell me that the bank  manager has indicated that if they want to raise their line of credit he wants all their business.  They tell me that they promised him their RRSP, but do not take it personally, they have to do it.  He is not complaining to anyone.  He is compliant and just does it.  He is not strong enough to object.  This is why you are not hearing it.

Senator Callbeck:
Yesterday, the Canadian Banking Ombudsman indicated that his polling shows that 40 per cent of Canadians know about the ombudsman.

Mr. Rothenberg:
When did you find out about it, senator?

Senator Callbeck:
I knew there was one.  Do you think this should be voluntary or do you think that every financial institution should have to belong to it?

Mr. Rothenberg:
I do not know if having an ombudsman is the answer.  Perhaps they really work.  I do not know anything about the history of the ombudsman.  In fact, I feel uncomfortable with the word Aombudsman.  I would like to feel that there is some strong regulatory body that really watches what goes on.  Maybe it is economically unfeasible, but I know the IDA.  I do not know if you have heard anything about stockbrokers coming under the umbrella of the IDA, but it is a vicious organization.  I cannot tell you how closely they watch us.  They really and truly monitor us.  Perhaps there should be such an organization to monitor branch managers at the various banks.  The individual branch manager has tremendous pressure on him to raise the deposits in the bank.  
This kid who was hired by the bank has an objective of raising the funds within that branch from $50
million to $60 million next year.  His job performance will be reviewed at the end of six or twelve months.  That will determine how he is doing.  He feels under such pressure so that he has to ask clients to bring him their RRSP's.  Nobody will stop him from doing it unless there is a real watchdog who can.

Senator Callbeck:
Would you make the ombudsman's recommendations binding?

Mr. Rothenberg:
Of course they should be binding, if the ombudsman is not an employee of the bank, if he is truly an ombudsman, and if he can really take himself away and be the judge.  There are very good judges.  The legal system, by and large, works beautifully. If there is an independent person who is really independent, it has to be binding.  How else could it work?

Senator St. Germain:
Mr. Rothenberg, this is a replay of when I left business 15 years ago and went into politics.  What you have explained here has not been in the glossy terms of the bankers associations when they made their presentations, but you are dead on.  They are using blackmail.  I can recall trying to access loans and being told to start paying administration fees, balloon payments and what have you, something that they used to tell us was so unethical before.  All of a sudden they became part of our chartered banks.
There is concern because of the number of banks.  I am not certain whether this whole process will improve competition.  They are protected.  I remember Mulholland saying he was only putting his money in Brazil and offshore and that you guys could just go down to the credit union, sign your life away and try to get $50,000 or $100,000 to do a subdivision.

The Chairman:
Gentlemen, thank  you for coming this morning.  Mr. Rothenberg, this is the second time we have debated this subject, and I am sure it will not be the last.