September 20, 2000

Bank reform tops fall legislative agenda
Liberals should pass Financial Institutions Bill before calling election

Amidst speculation about whether Jean Chrétien's Liberals will call a snap fall election, the House Finance Committee is gearing up to for intensive work on Bill C-38, the Financial Institutions Bill, a key piece of legislation affecting small business.

The bill is designed to increase competition in Canada's financial industry by opening it up to new players. This could lead to lower service charges and better access to financing for small businesses.

Small businesses, which generate the vast majority of new jobs created in Canada are poorly served by the nation's banks. Thirty-five per cent of small-to-medium sized businesses expressed concern about the ability to obtain financing according to a 1999 study conducted by the Canadian Federation of Independent Business. This trend has been continuing upwards since 1994, in spite of the recovery in the Canadian economy.

Big businesses seem to fare much better than their smaller counterparts in their dealings with banks. The value of authorized loans by Canadian banks in excess of $200,000 has been on the increase in recent years, but the value of loans under $200,000, the kind that would interest most small businesses, has remained flat.

The reason for this is that Canada's banking industry is for all intents and purposes an oligarchy. The six major players act in concert in a variety of interest rate, credit acceptance and fee setting policies. Only rarely does one of the institutions break with the group. In fact in many smaller Canadian communities which have only one branch a veritable monopoly situation exists.

Because there is so little competition for business in many lucrative financial services sectors, the banks have long been able to generate record profits by taking little or no risk. Businesses that supply innovative or bold business plans are often rejected not because the plans are bad, but because the lack of competition means the banks have been often able to pick and choose their customers. The result is that small businesses are increasingly being left on the table.

A CFIB survey released last week showed that the six major bank's share of the small business market fell to 75.4 per cent in 1999, down from 80.6 per cent in 1989, with most of the lost business going to credit unions.

"These market-share findings are very significant," said CFIB president Catherine Swift in a prepared statement. "Even a one percentage point loss or gain for a major bank represents thousands of small businesses." One in two respondents reported switching financial institutions because of poor service or lack of credit availability and 40.0 per cent said they left because they were not satisfied with the level of service charges said Swift.

The result of decades of the big banks, protected from competition, milking lucrative Canadian financial services markets and ignoring riskier and more entrepreneurial ventures, is that they are chronically overstaffed, inefficient and bureaucratic in their procedures and outlook. Small businesses have been the main victims of this anachronistic regime.

That is why the Financial Institutions Bill is so crucial. Small business owners and pressure groups need to keep an eye on the legislation, as it moves through committee hearings to make sure that its main elements do not get watered down by big business and the Canadian banking industry lobbyists.

But even that vigilance may not be enough. Another threat to banking reform legislation lies in the timing of the looming federal election. If the Liberals decide to call the election this fall, the bill would have to be reintroduced when Parliament reconvenes. That means the whole legislative process would have to be restarted from scratch which could delay the bill indefinitely.

While that might not be so bad for many bills, the finance bill is a huge piece of legislation that is long overdue. The government should make it a top priority before going to the polls, and the Liberals are showing every sign of doing just that.

In a press briefing to reporters last week to announce the government's fall legislative agenda, Government House Leader Don Boudria listed banking reform as one of the key pieces of legislation that must be passed before an election call. Boudria estimated that to get the bill through the legislative process including committee hearings, ratification by both the House and Senate, and assent by the Governor General would take at least until February.

That's not to say that the Liberals would not drop the bill in about a second if they saw a good opportunity to call and win a fall election, however that scenario looks increasingly unlikely. The Liberals have bad memories about the backlash that greeted former Ontario Premier David Peterson's election call just three years into his mandate, and they don't want to see a repeat performance.

So don't expect a federal election before spring 2000. You heard it here first.


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