The Federation of Canadian Independent Deposit Brokers Position Papers- January 4, 2005 Canadian Deposit Insurance Corporation - Protection Coverage Limit Seriously Eroded by Inflation Print Close

Minister of Finance
The Honourable Ralph Goodale
Department of Finance Canada
Room 607, Confederation Building
Ottawa, Ontario K1A 0A6

Re: Federation of Canadian Independent Deposit Brokers Submission:
“Canadian Deposit Insurance Corporation –
Protection Coverage Limit Seriously Eroded by Inflation”

Dear Minister,

The Federation of Canadian Independent Deposit Brokers (FCIDB) was incorporated as a national trade organization in 1987. Our member deposit brokers are independent retailers of financial products and services specializing in guaranteed investment products. Member deposit brokers distribute a broad range of financial products such as GICs, short-term instruments of deposit, annuities and a variety of investments that qualify for RRSPs and RRIFs for Canadian banks, Trust and Insurance companies. In addition, certain deposit broker firms are also offering mutual funds and life insurance products and income tax and financial planning services..

As independent financial intermediaries our role is to assist Canadians in all walks of life across the country in their search for the best valued product and services in the marketplace. Our latest deposit brokerage survey (2003) reports deposit broker clients represent assets in guaranteed investments in excess $28.7 billion dollars giving us the opportunity to be in a position to hear our client concerns on the limited protection coverage offered by CDIC.

Since the beginning, the primary focus of the FCIDB is to protect the best interests of all Canadian consumers. And, as such, it is that reason today we bring to your attention the inadequate protection coverage Canadian Deposit Insurance Corporation (CDIC) is offering in today’s marketplace for the consumer. The insurance protection offered Canadians by the CDIC has seriously been eroded over time due to inflation, to the point where the program has fallen way behind other deposit-insurance plans. This prompts investors to circumvent the rules through multiple registrations in order to keep all of their deposits insured. This can lead to complications in some cases and may not be in the best interest of the consumer.

Let’s make sure government policy is acted on in advance and not be placed in a position of having to retroactively increase coverage like the last time when it was raised from $20,000 to $60,000. This retroactive change caused great concern for investors and found the Government of Canada having to loan CDIC millions to be recovered after the fact. Typical insurance premiums are collected in advance. In fact, the last time around, the failed institution contributed nothing to amounts paid out under increased coverage.

CONCERNS OF THE FEDERATION & OUR CLIENTS:

1. Inflation has eroded the real amount of coverage since 1983

Under the Canadian Deposit Insurance Corporation Act, CDIC currently insures deposits up to $60,000 including both principal and interest. The maximum applies to the aggregated total of all insurable deposits an individual has with the same institution. There is separate coverage for joint deposits, deposits held in trust, and deposits held in RRSPs and RRIFs.

At the time this legislation was debated in the House of Commons, its stated purpose was to increase insurance coverage levels to keep pace with inflation in order to protect consumers more effectively. The current limit, which was established in 1983, has certainly not kept up with inflation. In fact, inflation has eaten away almost half of the coverage’s value. Based on the changes in the Consumer Price Index (CPI), the buying power of the initial protected limit of $60,000 amounts to around $34,000 today.
The average rate of inflation between 1983 and 2004 is 2.86%. One dollar in 1983 is worth approximately $1.81 today. Thus, maintaining CDIC protection coverage of $60,000 in 1983 amounts to $108,555 in today’s terms.

2. Merged Financial Institutions = Less Access for Canadians

For the majority of Canadians of modest means, their dollars have been accumulated over each generation. In the past, we were able to distribute these funds evenly with a number of financial institutions and thereby ensure the protection of CDIC. This is no longer the case. With the demise of many of our trust companies and with the amalgamations of others, the average consumer is placing more and more of his or her funds with fewer institutions. Subsequently, the consumer may find that a portion of their savings will become uninsured within a merged institution.

In the same vein, there are several small communities that simply do not have access to more than one or two financial institutions in which consumers may place their money. As such, part of our concern deals with the lack of choice given to consumers who do not have access to a sufficient number of financial institutions about which they can feel safe and still access their savings when they wish. Access to financial institutions in downtown Toronto is somewhat different than access in Lillooet, B.C.

3. Attitudes & Awareness Toward Deposit Insurance

In the final report on CDIC’s Awareness Survey released in April 2002, the measure of attitude toward deposit insurance indicates that Canadians are concerned about the security of their money. In fact, a strong majority, 87%, stated that the security of their money should an institution fail was a most important factor.

Yet when Canadians were asked whether their savings would be protected against loss, 63% of those surveyed could not name an insured financial product on their own. An even greater number of consumers are unaware that the value of protection coverage has been severely eroded by inflation. CDIC has in its past, conducted market research to gage depositors concerns and understanding of CDIC protection, but remarkably has not asked any questions regarding the amount of coverage expected. Furthermore, other deposit insurance schemes for non-federal institutions offer higher coverage. A mixed bag of protection is inequitable to all financial institutions and a huge point of confusion for the depositor.

We have all heard the age-old argument of resting more responsibility or onus upon the consumer who is depositing their funds with a financial institution. But the reality of this is nonsense. There are too many variables. The consumer does not know if the CIBC will be bankrupt next month. Their quarterly reports are not meant for the typical layperson to understand. Their financial statements only represent a snapshot of the health of the financial institution at that given point in time. Another scenario could crop up such as the fiasco in England. All it took was arbitrage trader Nick Leason investing billions of dollars in derivatives with nobody knowing about it to cause the ruination of Barings Bank. Human comprehension is another matter. It is not the same at age 35 as it is at age 85 nor are we all savvy investors. Illness or deterioration of mental capacity is a plausible situation as well.

It seems evident that the depositor is paying for the insurance coverage as a component of the financial institutions' product offering. It’s also evident that the investor assumes the risk beyond the $60,000 coverage at their expense, whilst the institution, not having to pay CDIC premiums on the excess, adds to its bottom line.

4. Some Financial Institutions are at a Competitive Disadvantage

The basic premise of a GIC is that the investor is actually a lender. He or she lends money to a financial institution providing limited insurance protection of the principal plus an agreed amount of interest. Often you will find the consumer will rely on the larger financial institutions or credit unions (who enjoy a significantly higher level of deposit insurance coverage) to make them feel more secure about their investment. This makes for an uneven playing field as smaller-sized banks and trust companies insured by the CDIC do not have the same clout, leaving them at a competitive disadvantage. Even large financial institutions are using subsidiary companies to distribute products in order to meet their clients' protected coverage demand. Raising the limit of coverage would certainly broaden and strengthen our financial institutions in addition to building a more competitive environment to the benefit of Canadian consumers.

5. Protect and Preserve the Value of Consumer Savings

One objective of the federal government is to continue to support and provide tax assistance for retirement savings (TARS) with the primary purpose of encouraging Canadians to save for their retirement and enable them to avoid serious disruption in their standard of living at that time. Another objective is to ease financial pressure on public pension and social security programs. For many consumers the fear of outliving their assets and no longer being able to take care of themselves is a major concern. Keeping this in mind, not only is inflation affecting the consumer who is trying to build a retirement or savings fund to supplement their income in later years (with either registered or non-registered dollars), these savings could easily be taken away from him or her as well.

We have seen a lot of fiascos in the past - even with good strong companies. We woke up one morning to find Standard Trust had gone down. We woke up another morning to find that Confederation Trust and Confederation Life had gone down. Consider what happened to Royal Trust. Those were scary times for all depositors. And, we were glad deposit insurance was there and in place. But consider for a moment the reality of the client who woke up one morning and realized that he had $110,000 of savings invested at one of those institutions. He panicked. He was 72 years old.

Since those troubled times CDIC has brought back confidence and apparent stability with its risk management controls, also recouping the expenses caused by the debacles. No one knows better than your finance department how market conditions change. Ultimately, and hopefully, financial institutions will not go under, however, new tricks and dubious opportunities may present themselves – all unbeknownst to the depositor.

BASED ON THE FOREGOING:

On behalf of our client requests, the Federation of Canadian Independent Deposit Broker members seriously propose to the Minister that the limit of CDIC protection coverage, which is presently time-dated, be amended upward in accordance with inflation as formally stipulated below to:

~a minimum of $100,000 with the provision for automatic adjustment every three (3) years in accordance to inflation to the nearest $10,000 amount plus interest for both registered accounts and non-registered accounts.

We ask this request to begin immediately. Further, upon review of this matter,
consideration should also be given to:

~protection coverage to be on a per account basis

~increase the term for coverage to seven or ten years from the current five-year limit

It is understood by the FCIDB that deposit insurance provided through CDIC is intended to protect small depositors and Canadians of moderate means. However, it should be realized that fixed term deposits do not make millionaires out of ordinary Canadians. The products and services available for the already wealthy individuals are normally not suitable for the average Canadian. Nor are tax advantages available for those who rely solely on interest income. Because of this, the average Canadian needs to take full advantage of protection coverage for their deposits for peace of mind. They need to take full advantage of protection coverage for their savings, whether it is within a retirement savings plan or on investment earnings outside a registered plan. They need to take full advantage of protection coverage to offset the eroded value offered by CDIC. In this day and age, $60,000 is only a token amount of protection.

In summary, we believe that an increase in the level of CDIC deposit insurance coverage, as per our recommendation, is an important measure for Canadian investors. Plus, it would also allow for improved market competition by allowing smaller financial institutions to accommodate more deposits.

The Executive of the Federation of Canadian Independent Deposit Brokers look forward to your immediate response and review of this situation on behalf of all Canadian depositors. I can be reached at my office at (519) 825-8000.

With Regards,

Brenda Molnar, Vice – President
Federation of Canadian Independent Deposit Brokers
177 Lakeshore Drive, RR2
Wheatley, Ontario N0P 2P0

cc: Ronald N. Robertson, Q.C. Chairman of the Board, Canada Deposit Insurance Corporation
Jean Pierre Sabourin, President and Chief Executive Officer