New financial services legislation ignores the benefits of technology and savings to consumers
Contacts:
Jason Clemens, Director of Fiscal Studies
The Fraser Institute, (604) 714-4544
Email: jasonc@fraserinstitute.ca
Release date: 16 July 2001
VANCOUVER, BC—Bill C-8, recently passed by parliament to reform the financial services sector, fails to recognize the rapidly changing nature of the financial industry, ignores technological innovation and the potential savings to consumers through consolidation and competition, says a new article, "Financial Services Reform is Politicized and Dated," published in the July issue of Fraser Forum, The Fraser Institute's monthly magazine.
Savings to consumers
The total annual savings obtained from gains in efficiency and rationalization of the branch banking system (just within the Big 5 banks) could be between $3.3 and $9.9 billion. This translates into annual savings of between $108 and $323 per Canadian, realized in the form of lower interest rates, service charges and fees. This represents potential savings over a ten year period between $1,512 to $4,537 per Canadian.
"There are significant savings available within the financial services industry that the federal legislation prevents through onerous regulation and excessive political oversight," says Jason Clemens, the Institute's director of fiscal studies.
Savings would be even greater if smaller banks, credit unions, and other financial institutions were included in the legislation. For example, annual savings could increase by an additional $617 million to $1.85 billion when de-mutualized life insurance companies are included.
Less bricks and mortar, more technology
The article concludes that the new legislation failed to account for dramatic changes in the way financial services are provided due to technological innovations.
For instance, in 1990 the Big 5 banks offered services through 6,310 branches and 8,083 automated teller machines (ATMs). By 2000, the number of Big 5 branches had shrunk by 18.3 percent to 5,155, while the number of ATMs increased 100.3 percent to 16,192.
Furthermore, the Big 5 banks serviced 9.7 million customers through phone banking and another 5.8 million customers through Internet banking in 2000.
The number of telephone and Internet customers that the Big 5 served increased 65.8 percent and 262.0 percent, respectively, between 1997 and 2000. None of the major financial institutions offered either phone or Internet-based banking in 1990.
"The use of electronic-based delivery methods such as ATMs, telephone banking, and Internet-banking has exploded in the past few years," says Clemens, "unfortunately much of this technological revolution has been ignored or misunderstood in the drafting of the new legislation."
Problems with the legislation
The legislation consistently relies on political mechanisms to ensure oversight of the financial services industry. For instance, the Minister of Finance retains the exclusive power to approve transactions such as mergers, increased ownership, and investments that are already pre-approved by the legislation.
Bill C-8 continues to treat banks differently from other financial institutions. For instance, the legislation requires that banks provide low-cost accounts, reduce the level of due diligence for account openings and transactions, and prohibits tied selling of financial products. However, these regulations are not applied to other financial institutions providing similar products.
Removing barriers to entry is key
The best way to ensure that consumers realize the savings is to encourage greater competition by removing legislative barriers to entry for both domestic and foreign competitors. The current legislation takes some small steps in that direction, but more is clearly needed. Any barriers that prevent the full participation of foreign financial institutions should be removed.
"This legislation makes some progress in re-shaping Canada's regulatory regime and should be seen as a starting point for further reform. New initiatives should begin immediately with a view towards promoting the sector rather than limiting its potential," concludes Clemens.
The Institute's recommendations for reform of the financial services sector were first outlined in the 1998 analysis "Bank Mergers: The Rational Consolidation of Banking in Canada."
Established in 1974, The Fraser Institute is an independent public policy organization based in Vancouver, with offices in Calgary and Toronto.