Toronto Financial Services Cluster Review (City Wide)

CITY CLERK

Clause embodied in Report No. 3 of the Economic Development and Parks Committee, which was before the Council of the City of Toronto at its regular meeting held on April 23, 24, 25, 26, 27, and its special meeting held on April 30, May 1 and 2, 2001.

(City Council at its regular meeting held on April 23, 24, 25, 26, 27, and its special meeting held on April 30, May 1 and 2, 2001, deferred consideration of this Clause to the next regular meeting of City Council scheduled to be held on May 30, 2001.)

The Economic Development and Parks Committee recommends the adoption of the following report (March 7, 2001) from the Commissioner of Economic Development, Culture and Tourism:

Purpose:

The purpose of this report is to present the findings of the Economic Development Division’s review of the Financial Services Cluster (FS). This review recognizes Toronto’s role as the Financial Services Centre of Canada, identifies the challenges facing the industry, recommends strategic directions for encouraging the further growth of the cluster and a process for implementation.

Financial Implications and Impact Statement:

There are no financial implications resulting from the adoption of this report.

Recommendations:

It is recommended that:

(1) the Federal and Provincial Ministers of Finance and Economic Development be requested to formally recognize Toronto as Canada’s Financial Services Centre given the concentration of the nation’s financial services businesses that are located in the city;

(2) Council endorse the Economic Development strategies related to the marketing and promotion, business development, advocacy, competitive intelligence and human resource development of the Financial Services sector as outlined in detail in the attached Financial Services Cluster Review (Attachment No. 1); Toronto City Council2 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

(3) the Commissioner of Economic Development, Culture and Tourism be requested to establish a Financial Services Cluster Alliance comprising industry, government, and educational leaders to review and advise on the implementation of the strategic directions in the report;

(4) the Commissioner of Economic Development, Culture and Tourism be requested to report on the mandate and composition of the Alliance and that the Alliance report back to the Economic Development and Parks Committee on an action plan outlining priority activities and partnership opportunities;

(5) Council endorse the requirement of financial institutions to undertake a Community Impact Assessment to determine the impacts of local bank branch closures when they are considering a merger; and

(6) the appropriate City officials be authorized and directed to take the necessary action to give effect thereto.

Background:

During 1998, controversial proposals by the Royal Bank to merge with the Bank of Montreal, and by the Canadian Imperial Bank of Commerce to merge with the Toronto Dominion Bank were widely discussed throughout the country. Although the Minister of Finance subsequently refused the merger proposals, they helped to create a new awareness of the importance of the Financial Services sector to the City of Toronto. This new awareness resulted in the August, 2000 approval by the Economic Development Committee of a review of the Financial Services Cluster in the City, with the following terms of reference:

What are the strengths and weaknesses of the Financial Services Cluster? What opportunities exist for the cluster? What threats exist to the health of the cluster? What global, regional and local trends are affecting the Financial Services Cluster, and how do they impact jobs and investment in the City of Toronto? What initiatives should the Economic Development Division undertake to ensure the long-term growth of the Cluster?

Council also requested that Economic Development review neighbourhood banking services and the effect of branch closures. This report summarizes the major findings of the review, and recommends strategic directions to help to ensure the continued health of the Financial Services Cluster (FS) in the City of Toronto.

Comments:

Strengths of the Financial Services Cluster:

Toronto is the undisputed Financial Services Centre of Canada. The Financial Services Cluster is of paramount importance to the long-term economic health of the City of Toronto. The cluster is anchored in part by the TSE (the best performing exchange in the world in 1999, measured by Toronto City Council3 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1 market capitalization) and the major Canadian banks. However, the cluster is more than just the Canadian banks; it includes foreign banks, insurance companies, investment companies, stock brokerages and mutual fund companies, merchant banks, and supporting institutions and services.

Employment in the financial services sector has grown steadily throughout the period between 1983 and 1999. According to the City’s annual employment survey, the FS sector grew from approximately 97,000 in 1983 to approximately 130,000 in 1999. The financial services sector has consistently employed between 9 percent and 11 percent of the City’s total employment during the last decade.

Table 1 illustrates the stability and growth of financial services relative to other sectors in Toronto’s economy since 1983. The business service sector is the only other sector to display similar growth. It is closely interconnected with the financial services sector. It is important to note that the financial services sector is a major adopter of information technology and telecommunications (IT&T) technology employing one in every four workers in computer service jobs and one in every seven telecommunications jobs in the Greater Toronto Area, thereby strongly influencing the sector’s growth (Boston Consulting Group, 1997). Additionally, the Conference Board of Canada identifies FS as the most IT intensive industry among a list of five industries, which includes communications, government, manufacturing electrical products, and health care (Greater Toronto Marketing Alliance (GTMA), Smart Toronto, 1999).

Table 1

City of Toronto Employment by Sector, 1983 and 1999

300,000

250,000

200,000

150,000

100,000 No. of Employees of No.

50,000

t t l s s a v h s e i i e r E e r i r t t e c n l n s a c e R i e e d e s t i h I ic f a io h v t f n e S t n e F v m e I r O n M r a W R e O e n H i / r la e S d c g S e P P o f . a v / / s e s M o g e s u n H G d A B E a / r h T c Sector r A 1983 1999 Toronto City Council4 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

The composition of employment within the financial services cluster has been changing. Table 2 illustrates the changing composition of the FS since 1983. While the number of people employed in bank and trust company branches in Toronto has decreased since 1983, the number employed in bank and trust company head offices, providing higher order financial services activities, has increased substantially in the same period. Employment in investment services has increased while employment in the insurance industry appears to be declining, insurance industry sources indicate that employment may be understated as a result of reclassification of employment within the industry as more and more employees work as independent agents.

Table 2

FS Employment Composition, City of Toronto, 1983 and 1999

60000 50000 40000 30000 20000 10000 No. of Employees 0 Bank & Trust Bank & Trust H. Invest Services Financing Insurance Branch O. 1983 1999

Toronto is home to approximately 80 percent of the headquarters of foreign banks in Canada. There are a total of approximately 1,700 firms providing financial services in the City of Toronto, employing approximately 25 percent of all of the financial service workers in Canada. In addition, according to an independent study conducted by Meric Gertler in 2000, the Finance, Insurance and Real Estate portion of Toronto’s economy increased its share of the City’s Gross Domestic Product by nearly 40 percent between 1988 and 1998. Compared to financial services clusters in other nations, the Canadian financial services cluster is highly competitive and has shown productivity gains.

Apart from the concentration of the industry itself, the cluster is further strengthened by a number of supporting institutions. Strong linkages between these institutions and the industry will be a key factor in maintaining the cluster’s future competitive advantage. Toronto’s FS includes the Toronto International Leadership Centre for Financial Sector Supervision (Toronto Centre) which is the only institution in the world to train supervisors in leadership skills through sharing real experiences of supervisory executives (www.torontocentre.org). The University of Toronto offers a Mathematical Finance Program producing financial engineers trained to develop new financial products and customize and trade financial products, monitor risk exposure to books of complex derivatives, devise hedging schemes and to search for arbitrage opportunities in the markets. In addition, York University offers a Graduate Diploma in Financial Engineering in conjunction with the MBA degree through the Schulich School of Business. Additionally, Toronto City Council5 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

York’s National Program in Financial Services and Public Policy has dedicated over $1 million over the next four years to fund applied research into public policy and the financial services sector. Further, the Canadian Bankers Association, the Investment Dealers Association of Canada, the Investment Funds Institute of Canada, and the Canadian Life and Health Insurance Association of Canada are just some of the important associations that comprise the FS and work to support the industries they represent.

It is important to recognize the role the City’s financial services cluster plays not only locally but also on a national level. It is recommended that The Federal and Provincial Ministers of Finance and Economic Development be requested to formally recognize Toronto as Canada’s Financial Services Centre given the concentration of the nation’s financial services businesses that are located in the city.

Threats to the Financial Services Cluster:

Despite the apparent health of the FS to date, the review indicates there are many potential dangers. There are a number of forces affecting the FS Cluster and its concentration in the City. Two of the factors are globalization and regional decentralization. The FS in Toronto and throughout the world is changing rapidly, largely as a result of factors that are national and international in scope.

In 2000, the Neptis Foundation conducted a study of Toronto’s regional economy entitled, “A Region in Transition: The Changing Structure of Toronto’s Regional Economy”. The study measured the growth rates of the FS’s North America. The study found that Toronto’s growth rate in FIRE (38 percent between 1981 and 1996) exceeded that of Boston, Chicago, and San Francisco but was outpaced by growth in Atlanta, Dallas, Seattle, Minneapolis, Philadelphia, and Seattle (Gertler, 2000). Toronto remains the third largest centre in North America in terms of employment. However, Toronto’s ranking may fall should other North American FS’s continue to grow at a faster rate.

Factors threatening the Financial Services Cluster include:

(a) the application of new technologies to the business practices of the industry, making some jobs redundant, while increasing the need for others;

(b) industry divisions within the sector are rapidly being eliminated, with banks acquiring stockbrokerages and entering into the insurance industry, insurance companies entering the banking industry, and securities firms being allowed into the payments system;

(c) mergers and acquisitions within and between the industries are occurring rapidly. Not only have the largest Canadian banks proposed mergers, but large banks everywhere are merging, creating some of the largest companies in the world. Even stock exchanges are merging, for example the stock exchanges of Amsterdam (Amsterdam Exchanges), Brussels (Brussels Exchanges) and Paris (Paris Bourse) merged in September 2000 to form EURONEXT; Toronto City Council6 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

(d) deregulation is occurring throughout the world. The previously tightly regulated industries within the FS are being freed from the rules that previously controlled them. This includes rules within Canada, where major legislation reducing the regulations affecting the Financial Services Sector is expected early next year;

(e) business units within companies are becoming more responsible for their operating costs resulting in the dispersal of many “back-office” functions to lower cost locations. This may weaken the close linkages currently found in the City’s core and ultimately affect the competitiveness of the cluster. Industry sources have noted that property tax and real estate costs in Toronto are contributing to the movement of some functions to the 905 areas of the Greater Toronto Area;

(f) issues impacting Toronto’s quality of life, such as homelessness, traffic congestion and transit availability, may make the core a less desirable place to do business. A study of London, England’s financial services cluster found that improving the quality and breadth of the transportation infrastructure is a crucial factor affecting the future growth of its cluster; and

(g) concerns have been expressed about possible labour shortages particularly related to information technology, legal and accounting services.

Strategic Directions:

Cities around the world have successfully encouraged the growth of their FS through strategic alliances and sound promotion. Toronto must follow suit in order to remain competitive in the international market place. For example, Frankfurt, Germany has branded itself as “Bankfurt” and “Mainhattan”, while Leeds in the United Kingdom has established the Leeds Financial Services Initiative to promote the cluster internationally. New York has used incentive programs aimed at cutting the costs of operating in the City. Each of these cities focussed its efforts by recognizing that its competitors are both its immediate neighbours and increasingly are more likely hundreds of kilometres away.

In the short term, Toronto’s competitors for some functions of the Financial Services Cluster may be the 905 area, but in the medium to long term, Toronto’s major competitors will be such centres as New York, Chicago and Philadelphia. It is recommended that Council endorse the Economic Development Division’s plan to establish an industry-led committee, the Financial Services Cluster Alliance, to develop an action plan in cooperation with the City to target the following areas: marketing and promotion, advocacy, competitive intelligence, human resource development, and business development of the Financial Services sector as summarized below and outlined in detail in the full Financial Services Review (Attachment No. 1).

Marketing and Promotion

Toronto must position itself as a major FS centre in North America. Collaborative marketing efforts between industry, academia and the City could focus on promoting Toronto’s FS both internally (citywide and nationwide) and externally to the world and on attracting foreign FS firms to the city. For example, this could be accomplished by developing a Canadian FS Internet Toronto City Council7 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1 portal to market the City’s FS and its capabilities in information technology and e-commerce. An FS conference could be organized to launch the web portal and to showcase the FS to political decision-makers. Additionally, a partnership with the University of Toronto’s Mathematical Finance Program and Capital Markets Institute could be developed to market the City’s role as an industry innovator by showcasing local financial engineering expertise.

Advocacy/Information/Education

Activities to advocate on behalf of Toronto’s FS could begin with a seminar to bring members of the Economic Development and Parks Committee and the rest of Council together with representatives of Toronto’s FS. In addition to providing a networking opportunity, the seminar could include presentations from representatives of each of the industries to address: global competitiveness of the Canadian FS cluster, changing employment patterns in FS, and the short-, medium-, and long-term outlook for the Toronto area. At the federal level, the City of Toronto through its role as the largest urban and economic centre of the country could, in partnership with industry, make representations to the House of Commons and Senate regarding issues affecting Toronto’s FS.

Competitive Intelligence

The City of Toronto must continue to broaden its view from one that focuses on its position relative to the 905 areas in terms of FS employment to a view that focuses on its position and relative competitive advantage to the U.S. (primarily New York City) and the rest of the world. This could be accomplished by forming a partnership with academic groups such as the University of Toronto’s Capital Markets Institute, industry, and other levels of government to create an ongoing and consistent program to regularly benchmark, monitor and anticipate the direction of the Canadian FS sector in the North American and global context, focusing on the impacts on Toronto. The City would take a proactive role in developing an accurate assessment of the sector’s international competitiveness while building a network of industry representatives with which to share industry intelligence.

Human Resources Development

The City must establish linkages within and between industry and academia and training institutions to identify and address specialized labour requirements of the FS and the industries that serve it, for example business services such as accounting, management consulting and legal services, and information technology and telecommunications. Developing a labour force readiness plan to assist education and training providers to meet and anticipate the demands of industry would ensure an adequate supply of highly skilled labour for the FS in Toronto and would enhance Toronto’s attractiveness as a location.

Business Development

The City must work to ensure that its historical comparative advantages, for example, a strong public transportation network, are strengthened and expanded to meet demand. Further building on the GO Transit and TTC would be important steps to facilitating commuting between the downtown core and other areas of the city and region. Additionally, the costs of doing business Toronto City Council8 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1 in Toronto compared to the rest of the GTA must be harmonized to ensure Toronto can compete for some back office functions of the FS. The City must actively work with local companies to maintain a strong concentration of financial services in the City’s core and capture as many of their back office and subsidiary functions as possible.

Implementation

The City needs to play a leadership role with respect to the implementation of the strategic directions noted above. It is recommended that the Economic Development Division be directed to establish a Financial Services Cluster Alliance to develop an action plan that will identify the priority activities needed to implement the strategic directions noted above. This should include the identification of partnership opportunities with the private sector and the external resources that can be leveraged to implement the action plan. It should be noted that the Economic Development Division has been successful in leveraging private sector support through its other sector initiatives, with the resources leveraged five to ten times greater than the City’s investment.

In recognition of the importance of the cluster to the City’s economic health, additional resources will be required in order to leverage the start-up of key initiatives and to work closely with the financial services cluster over the next few years. Additional funds will be required to hire on contract a financial services specialist and for associated operating expenses. This will be reported back following discussions with industry leaders.

Local Branch Closures:

To date no primary research exists on the effect of bank branch closures on Toronto’s neighbourhood-level banking services. The Toronto Association of Business Improvement Areas has tabled this issue for discussion for the next technical committee meeting. In addition, under the merger review policy outlined by the proposed legislation, the merger partners will be required to prepare a public interest impact assessment. This assessment must cover both the micro-economic impact of the merger, issues such as job losses and branch closures as well as the more macro economic issues such as international competitiveness and the overall financial sector in Canada. The partners will have to indicate in their assessment how they propose to address any negative impacts of the merger that they identify. It is recommended that Council endorse the requirement of financial institutions to undertake a Community Impact Assessment to determine the impacts of local bank branch closures when they are considering a merger.

Although there are fewer branches presently available to the public, Canadians have been among the global leaders in adopting alternative delivery channels such as debit card usage, telephone banking, Internet banking, and banking through wireless technology (for example, cell phones). In 1998, Canada was the world leader in terms of debit card usage according to the Bank for International Settlements. Canada is also a world leader in automated banking machine (ABM) use logging 53 transactions per Canadian in 1998, followed by 41.4 in the U.S. and 37.6 in Sweden. Should Council wish to further study the impacts of branch closures on the community, additional financial resources will be required to undertake primary research. Toronto City Council9 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Conclusions:

FS is undergoing massive and rapid change globally resulting in the reorganization of FS’s throughout the world. As consolidations continue, particularly among the exchanges, a new order of FSs will emerge dominated by a handful of cities. While globalization, deregulation, intra- and inter-industry consolidations and technology are minimizing the need for proximity (to other FS firms and services and to the market) combined, they are further centralizing FS activity by allowing major FS centres to serve a wider market area. The question is where will this activity centralize in the North American context. Beyond the City of Toronto’s concerns regarding the movement of processing and clerical functions to the 905 areas, the City must recognize that the local market for financial services is now broader than the GTA or Canada. The local market now includes all of North America in which competitors include dominant centres like New York City.

Toronto is at a critical stage in its development as a financial service centre. The City must actively participate in positively influencing its future as Canada’s FS centre and as an FS player on the world stage. Otherwise, the flow of investment and innovation will be outward, not to other parts of Canada, but to the United States and to the rest of the world.

Contact Name:

Ms. Brenda Librecz, Managing Director, Economic Development Division, Telephone: 416-397-4700, Fax: 416-395-0388, [email protected].

Attachment No. 1 A Driving Force in the New Economy: A Review of Toronto’s Financial Services Cluster January, 2001

Table of Contents

1.0 Executive Summary

2.0 Introduction

3.0 Background

4.0 The Financial Services Cluster 4.1 Financial Services Employment and Output Across Canada 4.2 The Financial Services Cluster in Toronto 4.3 Toronto’s Financial Services Cluster from a North American Perspective 4.4 Locational Behaviour of Financial Services Firms and Their Operations

5.0 Industry Description: Sub-Sectors and Key Issues 5.1 Deposit-taking Institutions 5.2 Securities Toronto City Council10 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

5.3 Insurance 5.4 Financial Services Reform in Canada 5.5 Financial Services and Information Technology

6.0 Global Forces for Change in Financial Services

6.1 Globalization 6.2 Deregulation 6.3 Consolidation 6.4 Technology 6.5 Cross-pillar Activities

7.0 Strengths, Weaknesses, Opportunities and Threats of Toronto as a Financial Services Centre 7.1 Strengths 7.2 Weaknesses 7.3 Opportunities 7.4 Threats

8.0 Local Initiatives to Develop Financial Services

8.1 New York 8.2 Stamford, Connecticut 8.3 London, United Kingdom 8.4 Leeds, United Kingdom 8.5 Frankfurt, Germany

9.0 Recommendations to Develop the City of Toronto’s Financial Services Cluster

10.0 Conclusions ______

1.0 Executive Summary

However, the financial services sector is experiencing a period of instability as forces of change with respect to globalization, regulatory changes, consolidations, and advances in technology change the entire context of financial services throughout the world. Recognizing the importance of the cluster and the potential threats from outside forces, the Economic Development Division commissioned a review of the cluster. The review addresses: the strengths, weaknesses, opportunities and threats to the cluster; the global, regional and local trends affecting the cluster and how they impact on jobs and investment; and the initiatives that should be undertaken to ensure the long-term growth of cluster. Toronto City Council11 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Financial services contribute significantly to the nation’s total exports, GDP and employment. Ontario is the only province with a trade surplus in financial services with inter-provincial trade expanding at an annual growth rate of 7 percent since 1992. Quebec, Alberta and British Columbia are Ontario’s biggest importers of financial services. Given that the majority of financial service sector activity takes place in Toronto, the City’s role in the national and provincial economies is critical.

Toronto has a concentration of 1,700 financial services firms. Employment in the financial services sector has grown steadily throughout the period between 1983 and 1999. According to the City’s annual employment survey, the financial services sector grew from approximately 97,000 in 1983 to approximately 130,000 in 1999. The financial services sector has consistently employed between 9 percent and 11 percent of the City’s total employment during the last decade.

The financial services sector has added stability to the City’s economy and is closely aligned with other key business clusters in the City. While the sector has shown steady growth, the composition of employment within the sector has been changing. The share of total Toronto financial services employment in bank and trust company branches decreased by from 21 percent in 1983 to 11 percent in 1999. The share employed in bank and trust company head offices doubled from 21 percent to 42 percent over the same period. The share of employment in investment services has grown steadily from 11 percent in 1983 to 17 percent in 1999. Apart from the concentration of the industry itself, the cluster is further strengthened by a number of supporting institutions. Strong linkages between these institutions and the industry will be a key factor in maintaining the cluster’s future competitive advantage.

All of the large Canadian banks are actively pursuing the U.S. and international markets through establishing subsidiaries, or through acquisitions, joint ventures and strategic alliances. This trend will continue as Canadian banks attempt to build economies of scale to compete against large international institutions. To put Canadian banks in a global perspective; the top eight banks in the world are each worth as much or more than all of the Canadian banks as a whole, the largest Canadian Bank, the Royal Bank places 55th in the world.

Canadian banks have an international reputation as leaders in e-commerce applications, tying with Swedes as the nationality most likely to bank online. The banking industry continues to invest billions of dollars in IT, product development and the employment of IT professionals. E-commerce and overall technology development was identified as a primary focus for bank investment activity in order to remain competitive globally and to reach a wider market. Toronto City Council12 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Access to financial markets has a significant impact on economic growth, making the presence of financial markets so vital to the Canadian economy. The realignment of the Canadian exchanges and demutualization of the Toronto Stock Exchange (TSE) were two of the most recent changes to the securities market. The TSE was the best performing exchange in the world in 1999 measured by market capitalization. The TSE faces challenges with respect to adopting new information technology and consolidation of global exchanges. In addition, the merging of international exchanges could lead to a system of very few dominant players, threatening the existence of the TSE and smaller exchanges around the world.

The insurance industry has been consolidating due mainly to demutualization of the industry. Many of the insurance companies have broadened their scope, increased economies of scale and decreased costs by consolidating. Between 1996 and 1999 Toronto’s employment in the insurance industry decreased by approximately 11 percent. The City’s ability to retain the insurance industry will be dependent on improving the skilled labour pool, advanced telecommunications infrastructure, and transportation infrastructure.

While Toronto’s Financial Services Cluster had more jobs than Philadelphia and Minneapolis, and employed the same number of people as Boston’s cluster, it ranked well behind New York and Chicago. The FIRE sector grew at a rate of 38 percent between 1981 and 1996, exceeding that of Boston, Chicago, and San Francisco but was outpaced by growth in Atlanta, Dallas, Seattle, Minneapolis, Philadelphia, and Seattle. Toronto’s ranking may fall should other North American Financial Services Clusters continue to grow at a faster rate.

Financial Services Clusters throughout the world are being reorganized. As consolidations continue, particularly among the exchanges, a new order of Financial Services Clusters will emerge dominated by a handful of cities. Factors relating to globalization, global regulatory changes, consolidations that include mergers of the world’s largest financial institutions, increasing cross-pillar activities, and rapid and revolutionary advances in technology will drive this reorganization.

One of the main objectives of the report is to identify the strengths and weaknesses of, opportunities for and threats to the financial services cluster in Toronto. The strengths of the industry include: the existing concentration of the financial services cluster, the linkages that exist within and between industry groups, the growth of the higher order head office and administrative functions in the banks, a large available, skilled labour pool, the availability of a public transportation system and the existing critical mass of financial services and educational institutions.

Opportunities include: the growth of alliances using holding companies, building upon Toronto’s image as the nation’s financial services centre and regulatory changes allowing for easier entry of U.S. firms into Canada. There are also opportunities for the City to work with the existing industries, institutions, and educational infrastructure to strengthen the linkages within the Financial Services Cluster and develop programming to facilitate the long-term growth and competitiveness of the cluster.

The most frequently stated weakness of the Financial Services Cluster in Toronto is the regulatory system that is now being examined by the Federal government. Proposed legislation Toronto City Council13 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1 covers four key areas: promoting efficiency and growth of the sector, fostering greater domestic competition, empowering and protecting consumers, and improving the regulatory environment. Canada is also the only major economy in the world to levy capital taxes annually on its financial sector. Alberta has recently agreed to eliminate capital taxes on financial institutions. The presence of the capital tax may affect the City’s ability to retain and attract investment from the banking industry. Issues related to homelessness, traffic congestion and transit accessibility were also cited as weaknesses along with a general lack of political support for the cluster.

Threats to the cluster include: regulatory uncertainty and the recent expansions and investments by financial services companies south of the border resulting in the flow of capital outside of the City and county. Labour and skills shortages may affect the future growth potential of the cluster. Changes to foreign ownership rules could result in a movement of corporate decision- making functions to foreign companies, resulting in a loss of high-end employment in Toronto. The demutualization of Canada’s insurance companies may lead to further industry consolidation. Further growth and movement of financial services companies to the 905 area may weaken the critical mass of businesses concentrated in the core of the City.

Toronto is at a critical stage in its development as a financial service centre. Cities around the world have successfully encouraged the growth of their Financial Services Cluster through strategic alliances and sound promotion. Each of these cities focussed its efforts by recognizing that its competitors are both its immediate neighbours and increasingly are more likely hundreds of kilometres away. Toronto must follow suit in order to remain competitive in the international market place.

One of the first steps to strengthen the cluster will be to recognize the importance of the Financial Services Cluster in terms of positioning Toronto as an international city, as a major employer, a major contributor to the local GDP, and as a driver of IT. It is recommended that the Federal and Provincial Ministers of Finance and Economic Development be requested to formally recognize Toronto as Canada’s Financial Services Centre given the concentration of the nation’s financial services businesses that are located in the city.

The City should harness the local talent, resources, and commitment of the Financial Services Cluster to form a Toronto Financial Services Cluster Alliance that would include key industry, association, and academic representatives as well as city council. The Financial Services Cluster Alliance would focus efforts to develop an action plan in cooperation with the City to target the following areas: marketing and promotion, advocacy, competitive intelligence, human resource development, and business development. Toronto City Council14 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

2.0 Introduction

The City of Toronto is recognized around the world as Canada’s national centre for financial services. Toronto is home to the headquarters of Canada’s five largest banks and to approximately 80 percent of the headquarters of foreign banks operating in Canada. In addition, the Toronto Stock Exchange is the largest exchange in Canada, trading more than 29 billion shares in 1999. The Financial Services Cluster consistently ranks among the top employers in Toronto and was identified as such in a recent study of the top ten key clusters driving Toronto’s economy (Toronto Competes, February 2000). The top 10 clusters were chosen on the basis of export capability, competitive advantage, and employment.

According to the City of Toronto’s 1999 annual employment survey, approximately 130,000 people are employed (10 percent of total employment) in financial services in Toronto. Further, the survey indicates that the Financial Services Cluster’s share of total employment in Toronto has remained consistent at between 9 percent and 11 percent since 1983. Between 1988 and 1998 Finance, Insurance, and Real Estate’s (FIRE)1 percentage share of the Toronto CMA’s2 Gross Domestic Product (GDP) increased by nearly 40 percent (Gertler, 2000). These figures indicate that financial services contribute significantly to Toronto’s employment and economic output. However, the financial services sector is experiencing a period of instability as forces beyond local control work to change the entire context of financial services throughout the world. These forces appear to be acting on the geographic relationship between the Financial Services Cluster and the City. The forces of change are globalization, regulatory changes, inter and intra-industry consolidations, and advances in technology and together, they will have profound consequences for Toronto’s role as an important financial centre. Recognizing the potential importance of the cluster and the potential threats from these outside forces, the Economic Development Division commissioned a review of the cluster. The terms of reference of the review are:

(1) What are the strengths and weaknesses of, opportunities for and threats to the Financial Services Cluster in Toronto?

(2) What global, regional and local trends are affecting the Financial Services Cluster and how do they impact jobs and investment in the City of Toronto?

(3) What initiatives should the Economic Development Division undertake to ensure the long- term growth of Toronto’s Financial Services Cluster?

The review involved four stages of data collection and analysis. Stage I involved reviewing the literature available from industry, academic, trade association, and public sector sources available in either hard copy and electronic formats. The second stage included conducting a series of interviews with academic, government and industry representatives to gain a better understanding of the issues affecting the Financial Services Cluster in Toronto. Stage III was an analysis of the results from the literature review and interviews to identify the strengths and weaknesses of, opportunities for and threats to the cluster. Stage IV of the study examined the ways in which the Economic Development Division can positively influence the cluster and explored potential partnership opportunities with industry representatives. Toronto City Council15 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

(1Real estate brokers and developers are often combined with financial services to form a category called FIRE used in many data series. 2The Toronto CMA refers to the Census Metropolitan Area assigned by Statistics Canada and includes the City of Toronto plus parts of York Region, all of Peel Region, Halton (excluding Burlington), the western municipalities of Durham Region.)

3.0 Background

The Financial Services Cluster plays a vital role in Toronto’s economy both directly (as an employer and as a contributor to municipal tax assessment) and indirectly, by purchasing goods and services from other businesses, and by providing capital and advice for business start-up and expansion. It is appropriate for the City of Toronto to be concerned with the sector’s local development. Other cities such as New York and London have acknowledged the importance of financial services to the local and national economies and have developed programs to promote the Financial Services Cluster in their respective jurisdictions. Efforts to retain and develop the Financial Services Cluster at the local level are particularly relevant today given the changing global landscape that is shifting the roles and relative size and positions of global, secondary and local financial centres. The changing landscape coupled with the following local events, led the Economic Development Division to conduct a more thorough study of the cluster leading to the formulation of recommendations to assist in its development and growth in Toronto.

Chronology

December 1998

- Merger proposals by the Royal Bank and Bank of Montreal and CIBC and TD banks are refused by the Minister of Finance. The controversy surrounding the proposed merger galvanized the City to understand the merger issue from a business and consumer perspective and to establish a position on the issue of bank mergers.

May 1999

- The Royal Bank announces it will sell its multi-tenant office holdings across Canada including Royal Bank Plaza in Toronto’s financial core.

February 2000

- The City’s Economic Development Division releases a report on Toronto’s economic competitiveness entitled “Toronto Competes: An Assessment of Toronto’s Competitiveness” which highlights the significant role financial services play in the local and national economies and states that “the city cannot overlook its role as the leading financial services cluster in Canada”.

February 2000 - The Board of Trade reports that approximately 22 percent of all downtown office leases will expire between 2002 and 2004 and raises concerns about the role property taxes will contribute to the renegotiations. Toronto City Council16 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

March 2000

- Robert Fung’s report on Waterfront Revitalization is released and stated that Toronto’s financial services firms are defecting to 905 areas, leaving the core of the city in a state of vulnerability.

April 2000

- NASDAQ strikes a deal with the Quebec government to establish NASDAQ Canada in Montreal.

May 2000

- Council approves the Economic Development Strategy, which directs the Economic Development Division to report back in 2001 with an implementation plan to advance Toronto’s competitive advantages.

June 2000

- The Federal Government releases long-awaited legislation to reform the financial services sector. The legislation is a result of four years of community consultation.

These events, together with multiple announcements of consolidations among leading industry players around the world, necessitated a closer examination of the health and direction of the City of Toronto’s Financial Services Cluster.

4.0 The Financial Services Cluster

This section presents data on the national and local sector composition by industry and employment, compares the Financial Services Cluster to other North American centres, and presents a discussion of financial services locational behaviour within the Greater Toronto Area.

4.1 Financial Services Employment and Output across Canada

Canada’s domestic market for financial services is small compared to other markets in the U.S., the U.K. and Asia. However, financial services contribute significantly to Canada’s total exports, GDP and employment.

In 1999, the financial services sector employed 526,500 people across Canada. Approximately 50 percent of employees in financial services are employed by deposit-taking institutions, insurance companies employ 20 percent, while investment companies employ approximately 15 percent followed by other financial intermediaries. Banks employ approximately 70 percent of those employed by deposit-taking institutions. Table 2 lists the number of bank employees by province. Toronto City Council17 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Table 1 Deposit-Taking Institutions in Canada Type Number Banks: 53 Domestic 12 Foreign 39 Foreign Bank Branch 2 Trust Companies 40 Loan Companies 27 Cooperative Credit Unions 7

Table 2: Canadian Bank Employment by Jurisdiction Region Total 1999 Newfoundland 1,980 Prince Edward Island 570 Nova Scotia 6,500 New Brunswick 3,700 Quebec 39,000 Ontario 114,630 Manitoba 6,400 Saskatchewan 5,240 Alberta 17,500 British Columbia 25,900 Yukon & Territories 360 Total in Canada 222,000 Total Outside Canada 24,000 Total Worldwide 246,000

The securities industry employed approximately 39,000 across Canada in 2000 and comprised 187 firms with operating revenues totalling approximately $2.8 billion (www.ida.ca). Integrated firms generated 73 percent of the total revenues followed by retail brokerage firms at 16 percent and institutional firms at 11 percent. Integrated firms offer products and services that cover all aspects of the industry in both the institutional and retail markets. The securities dealer affiliates of the major domestic banks and one major U.S. dealer generate about 70 percent of total industry revenues.

Interestingly, in Canada the financial services sector ranked second to technology and media in gross value for all public offerings and ranked first for Initial Public Offerings (IPOs) in 1999 (Price Waterhouse Coopers, 2000). In 1998, the financial services sector ranked first for both gross value of all public offerings and IPOs. Most of this activity was related to the completion of three of the five planned demutualizations1 of insurance companies in Canada (Clarica, Manulife, and Canada Life). The other significant IPO was the sale of TD Waterhouse Corp. by TD Financial Group raising approximately $1.4 billion. Clearly, the Canadian financial services sector plays a significant role in the national economy. Toronto City Council18 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Over half of the total banking employment in Canada is generated in Ontario. Ontario is also the only province with a trade surplus in financial services, which together with wholesaling and business services drove Ontario’s inter-provincial exports. Inter-provincial trade in financial services has expanded at an annual growth rate of 7 percent since 1992. Nearly half of all inter-provincial service exports originated in Ontario in 1998, of which 60 percent were financial services (Statistics Canada, 2000). Quebec, Alberta and British Columbia are Ontario’s biggest importers of financial services. Given that the majority of financial service sector activity takes place in Toronto, the City’s role in the national and provincial economies is critical.

(1 Demutualization in the insurance industry is the process whereby regulated mutual life companies are converted to stock companies. Demutualization enhances a company’s ability to access capital, increase the size of their markets and offer a wider range of financial services and products.)

4.2 The Financial Services Cluster in Toronto

Toronto is the undisputed Financial Services Centre of Canada with a concentration of 1,700 financial services firms. The Financial Services Cluster is of paramount importance to the long- term economic health of the City of Toronto. The cluster is anchored in part by the TSE, the best performing exchange in the world in 1999 as measured by market capitalization, and the major Canadian banks.

In Toronto, banks and trust company branches and head offices employ the greatest proportion of workers in the Financial Services Cluster. Approximately 67,000 workers, 52 percent of Toronto’s financial services sector, worked in bank and trust company branches and head offices in 1999. The six largest banks in Canada are Royal Bank, CIBC, Bank of Montreal, Bank of Nova Scotia, TD Bank and the National Bank of Canada as measured by total 1999 assets. The “big six” are followed by HSBC Bank of Canada, Laurentian Bank of Canada, Bank of America Canada, Deutsche Bank (Canada), Citibank Canada, and ABN AMRO Bank Canada. Headquarters of four of the five largest foreign banks are located in Toronto. The headquarters of CIBC, TD Bank, and Scotiabank and the executive functions of the Royal Bank and Bank of Montreal are located in the City of Toronto. Although the largest banks have been prevented from merging thus far, one of the most noteworthy events of 2000 was TD Group’s acquisition of Canada Trust, the largest trust company in Canada.

Employment in the financial services sector has grown steadily throughout the period between 1983 and 1999. According to the City's annual employment survey, the financial services sector grew from approximately 97,000 in 1983 to approximately 130,000 in 1999. The financial services sector has consistently employed between 9 percent and 11 percent of the City’s total employment during the last decade. Toronto City Council19 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Table 3: City of Toronto, FS Employment by Industry, 1983-1999 140000 120000 100000 80000 60000 40000 20000 0

983 984 985 986 987 988 989 990 991 992 993 994 995 996 997 998 999 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Bank & Trust Branch Bank & Trust H. O. Invest Services Financing Insurance

Source: City of Toronto Annual Employment Survey

Table 4: Financial Services Employment as a Percentage of All Employment in Toronto 1983-1999

12% 10% 8% 6% 4% 2% 0% 1983 1985 1987 1989 1991 1993 1995 1997 1999

The financial services sector has added stability to the City’s economy and is closely aligned with other key business clusters in the City. The cluster provides the financing necessary for the creation and growth of new and existing businesses. The Financial Services Cluster is also a major consumer of business services and information technology and telecommunications services. The following chart illustrates the stability and growth of financial services relative to other sectors in Toronto’s economy since 1983. The business service sector is the only other sector to display similar growth. Toronto City Council20 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Table 5: City of Toronto Employment by Sector, 1983 and 1999 300,000

250,000

200,000

150,000

100,000

No. of Employees 50,000

l t v t i r E s e s ia h s e i e n r r t t a c e e ic d l n s s t i R c f e e e h I i f e a io h n e v t m n S e t I r F v O O n n M r a W R e e r a H i / l e c g S S d e f P P o . a v / / s e o e s M g s u H n d G A B E a / r h T c r A Sector 1983 1999

While the financial services sector has shown steady growth in the last decade, the composition of employment within the sector has been changing. The following table illustrates the changing composition of the financial services sector since 1983. While the number of people employed in bank and trust company branches in Toronto has decreased since 1983, the number employed in bank and trust company head offices, providing higher order financial services activities, has increased substantially in the same period. The share of total Toronto financial services employment in bank and trust company branches decreased from 21 percent in 1983 to 11 percent in 1999. The share employed in bank and trust company head offices doubled from 21 percent to 42 percent over the same period. The share of employment in investment services has grown steadily from 11 percent in 1983 to 17 percent in 1999. While employment in the insurance industry appears to be declining, insurance industry sources indicate that employment may be understated as a result of reclassification of employment within the industry as more and more employees work as independent agents. Toronto City Council21 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Table 6: FS Employment Composition, City of Toronto, 1983 and 1999

60000 50000 40000 30000 20000 10000 No. of Employees 0 Bank & Trust Bank & Trust H. Invest Services Financing Insurance Branch O. 1983 1999

Apart from the concentration of the industry itself, the cluster is further strengthened by a number of supporting institutions. Strong linkages between these institutions and the industry will be a key factor in maintaining the cluster’s future competitive advantage. Toronto’s Financial Services Cluster includes the Toronto International Leadership Centre for Financial Sector Supervision (Toronto Centre) which is the only institution in the world to train supervisors in leadership skills through sharing real experiences of supervisory executives (www.torontocentre.org). In terms of financial services education, the cluster comprises three universities, and four colleges as well as the Ontario Securities Course offered through the Ontario Securities Commission. Further, the Canadian Bankers Association, the Investment Dealers Association of Canada, the Investment Funds Institute of Canada, and the Canadian Life and Health Insurance Association of Canada are just some of the important associations that comprise the Financial Services Cluster and work to support the industries they represent.

The University of Toronto offers a Mathematical Finance Program producing financial engineers trained to develop new financial products and customize and trade financial products, monitor risk exposure to books of complex derivatives, devise hedging schemes and to search for arbitrage opportunities in the markets (http://algolab.newcollege.utoronto.ca/).

Another University of Toronto initiative is the Capital Markets Institute (CMI) which was created in 1998 by a donation from the TSE and is a joint initiative of the Rotman School of Management and the Faculty of Law. The purpose of CMI is “to be a centre for independent and rigorous research and debate on the structure and performance of Canadian capital markets” (www.mgmt.utoronto.ca/cmi/about/index).

York University offers a Graduate Diploma in Financial Engineering in conjunction with the MBA degree through the Schulich School of Business. Additionally, York’s National Program in Financial Services and Public Policy has dedicated over $1 million over the next four years to fund applied research into public policy and the financial services sector. Toronto City Council22 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Further developing local financial engineering expertise in Toronto could position the city as a centre for innovation. The experience in New York City has shown that its success as an international financial services centre is due in part to its skills in financial engineering which have led to the development of innovative financial products. The Universities of Toronto and York will be valuable partners in the City’s efforts to strengthen the Financial Services Cluster. This is discussed in more detail within the list of recommendations in Section 9.

4.3 Toronto’s Financial Services Cluster from a North American Perspective

A number of studies were conducted in 1999 and 2000 to examine, in part, the comparative role of Toronto’s Financial Services Cluster in a North American context. Toronto Competes examined the competitiveness of 10 sectoral clusters including financial services. The study found that Toronto’s Financial Services Cluster had more jobs than Philadelphia and Minneapolis, employed the same number of people as Boston’s Financial Services Cluster but ranked well behind New York and Chicago (City of Toronto, Economic Development, 2000).

The Neptis Foundation also conducted a study of Toronto’s regional economy entitled, A Region in Transition: The Changing Structure of Toronto’s Regional Economy. The study measured the growth rates of the Financial Services Clusters of North America. The study found that Toronto’s growth rate in FIRE (38 percent between 1981 and 1996) exceeded that of Boston, Chicago, and San Francisco but was outpaced by growth in Atlanta, Dallas, Seattle, Minneapolis, Philadelphia, and Seattle (Gertler, 2000).

While Toronto remains the third largest centre in North America in terms of employment, Toronto’s ranking may fall should other North American Financial Services Clusters continue to grow at a faster rate. Toronto competes with these jurisdictions to provide financial services to domestic and foreign clients. As globalization opens up domestic markets, the leading financial service firms will compete with the Financial Services Cluster in Toronto.

4.4 Locational Behaviour of Financial Services Firms and Their Operations

Toronto’s downtown core has been synonymous with the Financial Services Cluster (both within Toronto and across Canada) for the last two decades. The FIRE category of employment (includes finance, insurance and real estate agents and developers) is the largest employer in the central Toronto office market, followed by business, professional, and technical services. Much of the business, professional and technical services activity is generated by the FIRE sector and together these categories generate the wealth that drives the rest of the service economy (Lizieri, 2000). During the 1990s however, an increasing number of financial services firms began to locate outside of the core and into other areas of Toronto such as the former cities of North York, Scarborough, and Etobicoke and even further out into the “905” suburbs. A recent study for the Neptis Foundation revealed that although FIRE employment in the core increased between 1981 and 1996, greater increases were experienced in the outer suburbs (905 area), the ex-urban areas (fringe 905) and the inner suburbs of Toronto (Gertler, 2000). However, the report added that despite growth in the 905 areas, thus far the core has retained its role as the hub for financial services (Gertler, 2000). Toronto City Council23 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

The Neptis study illustrated that FIRE exhibits a “highly centralized pattern with a strong concentration of jobs in the financial district and Yonge Street corridor and that while some decentralization has occurred, it has taken a strongly nodal form” (Gertler, 2000). The pressure for financial services to concentrate in a small number of centres arises from benefits accrued through positive external economies of scale such as access to a large skilled labour pool, proximity to supporting services, personal contacts, and the prestige of a central location (London Business School, 1992). Industry contacts further confirmed the importance of central areas to financial services firms. When conducting the survey for this report, nearly all the respondents indicated that the most important locational variable for their overall business is access to skilled labour followed by an efficient public transportation and road system.

Another interesting but distressing trend noted in the Neptis report was Toronto’s loss of head office share since 1989. According to the study, the GTA’s share of the Top 500 firms headquartered in Canada dropped 13 percent from 200 in 1989 to 177 in 1999. Within the GTA, the 905 areas experienced an increase in the number of head offices from 44 to 63 and the 416 area experienced a decrease in the number of headquarters from 156 to 114 between 1989 and is 1999. Head offices typically locate next to sources of capital and financial expertise and the movement of head offices to the 905 areas is a concern because this dispersal may reduce the incentives for financial services to congregate (London Business School, 1992). The decrease in head office employment in the City of Toronto may be attributed to a combination of losses due to the North American Free Trade Agreement, to the recession of the early 1990s, and as a result of growing worldwide corporate consolidations.

This dispersal may also be a function of local cost factors related to property taxes, land costs, and rental rates. There has also been a loss of employment lands in the City as a result of land use conversions, further reducing opportunities to develop new office facilities for financial services. Business units within companies are becoming more responsible for their operating costs resulting in the dispersal of many “back-office” functions to lower cost locations. This may weaken the close linkages currently found in the City’s core and ultimately affect the competitiveness of the cluster. Industry sources have noted that property tax and real estate costs in Toronto are contributing to the movement of some functions to the 905 areas of the Greater Toronto Area.

5.0 Industry Descriptions and Survey Responses

The Financial Services Cluster consists of three main industry groups; banking, insurance, and securities. These industry groups are often referred to as the “pillars” because traditionally, they were prohibited from entering into each other’s core business. This section describes Toronto’s Financial Services Cluster by industry group and illustrates the key issues affecting the Toronto Financial Services Cluster. These issues include globalization and consolidation, cross-pillar activity, and technology development and adoption. This section also addresses financial services regulatory reform in Canada and how the Financial Services Cluster has adopted new information technology. In addition, the findings of the interviews with industry representatives are presented. Toronto City Council24 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

5.1 Deposit-taking Institutions

Deposit-taking institutions include banks, foreign bank branches, trusts, loan companies, and cooperatives. Banks own most of the trust and loan companies, dominating the deposit-taking industry and are the focus of this section (Table 1 above shows the breakdown of deposit taking functions by type of institution).

Each of the large banks in Canada is engaged in activities far beyond traditional deposit-taking functions. In fact the modern Canadian bank is a complex entity providing services including deposit taking and lending, wealth management, corporate financing, capital markets, and merchant banking. In addition, the major banks are involved in cross pillar activities through their insurance and securities subsidiaries.

Canadian banks continue to widen their service delivery mechanisms by investing heavily in e-commerce applications and Internet technology in addition to other alternative delivery channels such as ABMs, telephone banking and retail store outlets. The following is an overview of the trends in each of the major product segments.

(a) Wealth Management

Wealth management includes any activity that helps customers plan and execute their financial strategy, grow their savings, and manage liquidity and risk. Activities include estate, retirement, and education planning. During the interview stage of the study, wealth management was identified as the highest growth area for banks due to the demographic shift taking place in most of the developed world, the aging of the baby boomers. It is interesting to note that Canada’s baby boom and baby bust cycles are more pronounced than anywhere else in the world. The “graying” of North America, Europe and Asia in particular has resulted in an increased demand for wealth management services as baby boomers pass through the wealth creation cycle of their lives and enter the cycle of wealth preservation. Wealth management is not limited to an older demographic group. Changing savings and investment patterns among all age groups indicate a growing demand for wealth management services.

(b) Capital Markets

In addition to wealth management, secondary sources of information identify that capital markets have provided strong revenue growth for banks since 1994. Capital market activities include the issuing, buying, selling or trading of securities, currencies and derivatives. Capital market revenues are derived from full service and discount broker fees, underwriting and mergers and acquisitions.

P&C services comprise accepting deposits from, and issuing loans to, persons or small and medium sized businesses. Although capital markets and wealth management continues to show the greatest revenue growth, P&C remains the primary revenue generator for Canadian banks. Toronto City Council25 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

(d) Corporate and Investment Banking

Corporate and Investment Banking is the wholesale side of the financial services business where banks provide such services as corporate finance, syndicated lending, derivatives, merchant banking, global trading, asset securitization and mergers and acquisitions advice to large companies, institutions and governments.

Globalization and Consolidation

All of the large Canadian banks are actively pursuing the U.S. and international markets through establishing subsidiaries, or through acquisitions, joint ventures and strategic alliances. For example, the Bank of Montreal acquired Harris Bank in Chicago and intends to expand its market reach to the U.S. Sunbelt. Harris Bank now contributes 25 percent to 30 percent of BMO’s total wealth management earnings. Overall, Harris contributes 22 percent of BMO’s earnings, up from about 18 percent in the mid-1990s (Merrill Lynch, 2000).

Another example was the acquisition of Oppenheimer & Co. Inc by CIBC World Markets in 1997. Headquartered in New York City, CIBC’s World Markets is the global investment banking, securities brokerage and asset management arm of the Canadian Imperial Bank of Commerce (www.cibcwm.com). Scotiabank is Canada’s most international bank with operations in the U.S., South and Central America, Asia, the Caribbean, Europe and the Middle East.

During the past year announcements of international alliances between Canadian banks and institutions all over the world have been made on an almost weekly basis. This trend will continue as Canadian banks attempt to build economies of scale to compete against such financial behemoths as Deutsche Bank, HSBC, J.P. Morgan Chase & Co., Citibank, and Bank of America. It is important to identify the competitiveness of Canadian banks given the number and scale of consolidations occurring in the rest of the world, particularly Europe, Asia and the United States. The following facts place Canadian banks in a global perspective:

- the top eight banks in the world are each worth as much or more than all of the Canadian banks as a whole (Merrill Lynch, 2000);

- Citigroup alone is worth more than three times the combined value of all Canadian banks; and

- the largest Canadian Bank, the Royal Bank places 55th in the world’s largest banks by size of assets followed by CIBC at 59th, Bank of Montreal at 61st, Scotiabank at 66th, and TD Bank at 70th (www.cba.ca);

Although current Canadian legislation prohibits mergers among the largest Canadian banks and insurance companies, Canadian institutions have responded through a number of innovative and strategic partnerships and acquisitions both domestic and international. The following table lists some of the numerous transactions made by Canadian institutions. Toronto City Council26 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Table 7: Recent Partnerships/Acquisitions in the Canadian Financial Services Sector Firm(s) Type of Deal Deal TD Bank Acquisition Acquisition of Canada Trust TD Securities Inc. Acquisition Newcrest Capital Bank of Montreal Acquisition Purchases 12 TD-CT branches in Western Canada Sale Sells 14 rural bank branches in Manitoba to a group of 9 credit unions. New venture Venture Capital Merchant Banking Investment Fund focused on media and telecom co.’s based in New York Acquisition Of U.S. brokerage Freeman Welwood Bank of Nova Scotia Acquisition Addition of BancoSudamericano (Chile) CIBC Merger In 1996 CIBC joined Mellon Financial Corporation to form CIBC Mellon Global Securities Services Company, dedicated to serving institutional investors Acquisition Of Canada Trust’s pension and custody business and a 50 percent interest in The R-M Trust Company and formed CIBC Mellon Trust Company

Royal Bank Acquisition RBC acquires Dain Rauscher, a full service securities firm based in Minneapolis, U.S. New Venture Royal Bank and Baldhead Systems are forming a new company called Sona Innovations Inc., focusing on the development of secure end-to- end encrypted wireless banking and brokerage services.

CIBC New Venture CIBC National Bank approved for license by U.S. regulators to operate through MarketPlaceBank outlets to be operated out of Winn Dixie locations. CIBC National Bank is a wholly owned subsidiary of CIBC

Maritime Life Acquisition Maritime acquires Aetna Canada CI Fund Management Acquisition BPI Financial Sun Life Divestiture Sells reinsurance business to Clarica Industrial Alliance Acquisition Acquires Seaboard Canada Life Acquisition Completed its acquisition of certain Crown Life operations Acquisition TD Canada Trust’s group savings business Sale Property and Casualty Life business to TD’s property and casualty insurance subsidiary, Meloche Monnex AIG Acquisition Of certain Hartford Canada operations Toronto City Council27 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Cross-Pillar Activity

It is interesting to note the range of the businesses involved in the consolidations which also serves to illustrate the degree to which cross-pillar activity takes place in the Financial Services Cluster. The banking industry drives cross-pillar activity in the Canadian financial services sector. In addition to traditional banking functions such as personal and commercial services banks are heavily involved in corporate and investment banking, wealth management services, trading and securities, venture capital financing, and insurance services. However, there appears to be some realigning of business lines in the Canadian banking industry as companies divest themselves of some operations in order to focus on core competencies. For example, CIBC agreed to sell its property and casualty insurance companies, (The Personal Insurance Company of Canada and CIBC General Insurance Company Limited, to Desjardins-Laurentian Financial Corporation (DLFC)), subject to regulatory approval. The sale is valued at approximately $330 million Canadian.

Technology

Canadian banks have an international reputation as leaders in e-commerce applications. All of the major banks offer electronic, wireless and telephone banking and trading services to their customers. Bank of Montreal, for example was the first bank in North America to develop a continent-wide virtual bank (Mbanx) launched in 1996, and was the first bank to introduce and invest in wireless banking using digital cellular phones and PalmPilots in May 1999. Following are a few examples of Canadian financial services technology initiatives.

Table 8: Examples of Technology Initiatives Financial Services Firms Technology Initiatives

Bank of Montreal (Emfisys Cebra Inc. (EPOST, MERX, MERXbidline, TotalTrade, BrokerNet is the IT subsidiary based in Toronto) CIBC Amicus offers wireless carrier and mobile banking through partnerships with Bell, Clearnet, Rogers, RIM, AT&T and Telus Royal Bank Baldhead Systems- wireless systems TD Waterhouse Eservices: online access to brokerage statements and trade confirmations Scotiabank Piloting voice recognition telebanking project, “Telescotia” in the 416 area National Bank Discount Partnered with Bell Mobility to provide clients with access to Brokerage Internet brokerage services using digital PCS phones.

Recent Technology and financial services articles suggest that Canadian financial services firms are leaders in financial services technology development and applications. For example,

- Canadian Banker magazine indicated that the Canadian financial services sector has been the leader in applying wireless technology [to investing in product development] (Canadian Banker, 3rd Quarter 2000); and - Canadians tied with Swedes as the nationalities most likely to bank online (electronicbanker.com, October 2000). Toronto City Council28 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

The banking industry continues to invest billions of dollars in IT, product development and the employment of IT professionals. It is important to realize that the banking industry is a driving force of the new economy.

In addition to the individual efforts of Canadian financial institutions to adopt technology, a collective effort among a number of Canadian banks resulted in the creation of Symcor Services Inc. Symcor started as a three-way alliance between the Bank of Montreal, Royal Bank and TD Bank in 1996 under the Bank Act to provide economies of scale in item processing and information delivery. In 1999, Symcor processed 1.9 billion cheques, 1.2 billion pages of reports, 277 million customer statements, 44 million customer payments, and 34 million credit card slips making it one of North America’s largest generators of bank, investment dealer and mutual fund customer statements, as well as one of the continent’s biggest cheque processors. Symcor’s head offices are located in Toronto.

Survey Responses

The general themes emerging through discussions with banking representatives included an expansion of the wealth management line of business including brokerage and asset management, an increased investment in information technology and Internet business, and a growing presence in markets outside of Canada, particularly the United States. Every firm interviewed identified e-commerce and overall technology development as a primary focus of their investment activities in order to remain competitive globally, to reach a wider market, and to reduce costs through alternative delivery channels. Beyond e-commerce, alternative delivery channels include ABMs, telephone banking, and in-store branches in retail stores, such as the grocery chain Loblaws.

5.2 Securities

Both bank-owned and independent securities dealers in Canada experienced the greatest return on equity (ROE) among all the industries in financial services between 1992 and 1998. The years of greatest growth were 1992 to 1997 with a decrease in ROE experienced in 1998 for both bank-owned and independent dealers. The top securities and investment companies in Canada are all located in Toronto and include: Toronto City Council29 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Top Securities Companies by Employment, City of Toronto Top Investment Bankers TD Securities Inc. TD Waterhouse Investor Services Inc. RT Capital Management Inc. Morgan Stanley Canada Top Investment Firms/General Brokers BMO Nesbitt Burns RBC Dominion Securities Inc. Merrill Lynch Canada Inc. Scotia McLeod Inc Dundee Bancorp Inc Equion Group Ltd. CI Fund Management Inc Stock Brokers and Dealers CIBC World Markets Gordon Capital Corporation Canaccord Capital Corporation Yorkton Securities Research Capital Corporation Goepel McDermid Price Warner Securities Bond Dealers and Brokers HSBC James Capel Canada Inc. CT Securities Inc. Freedom GGB Managers/Agents of Mutual Funds AGF Management Ltd. Spectrum United Mutual Funds Dynamic Funds of Canada Bonham and Co. Strategic Value Corp.

Source: City of Toronto Business Directory, 2000

Access to financial markets has a significant impact on economic growth, and this is what makes the presence of financial markets so vital to the Canadian economy. In Canada, the realignment of the exchanges and demutualization of the Toronto Stock Exchange (TSE) were the two most noteworthy events in the exchange market. In 1999, an agreement was reached among the exchanges in Canada to restructure along lines of market specialization and take advantage of individual strengths. The TSE became the sole senior equities exchange, the Montreal Exchange became focused on derivatives and small capitalization stocks, and the Canadian Venture Exchange (CDNX) was created through a merger of the Vancouver and Alberta exchanges to handle the national junior market for smaller companies seeking equity capital and has representation in Toronto. In addition, NASDAQ Canada opened in Montreal this year with six investment dealers each equipped with two terminals and a small office. It is expected that NASDAQ will continue to expand to Toronto, Vancouver and Calgary. Toronto City Council30 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

The TSE was the best performing exchange in the world in 1999 measured by market capitalization. Daily trading volumes have increased substantially from 88.5 million shares valued at $1.2 billion in 1996 to 169.2 million shares a day valued at $3.8 billion in 1999. The TSE recently released a study examining the experience of Canadian companies that have solely listed their shares on a US market compared to those of Canadian TSE-listed companies. The study found that Canadian companies listed on the TSE received better analyst coverage and liquidity and less share price volatility than Canadian based US-listed companies. However, the TSE faces challenges with respect to adopting new information technology and consolidation of global exchanges. These challenges are further discussed below.

Globalization and Consolidation To a large extent consolidation among the exchanges has been facilitated by demutualization (the change from a not-for-profit entity owned by its members, to a “for-profit" entity owned by its shareholders by conversion to a publicly traded company). Demutualization of stock exchanges has occurred in London, Sydney, Stockholm, Chicago and Toronto, to name a few, and has been driven to a large extent by alternative trading systems that have replaced trading on exchange floors and allowed customers to bypass traders. Additionally, the adoption of new technologies in the exchanges requires substantial capital investment and demutualization provides a vehicle through which exchanges can raise capital to modernize.

Stock exchanges around the world have converted the trading floor into computerized trading systems. Stock exchanges are also being consolidated globally to adapt to 24-hour stock trading and to increase liquidity. Recently the TSE announced its intention to interconnect with Euronext, the New York Stock Exchange, Australian Stock Exchange and the Exchanges of Tokyo, Mexico and Sao Paulo to create a worldwide market. The goal is to interconnect the trading systems of the exchanges to form a transparent market with one single order book covering three time zones allowing investors to trade around the clock. Canadian investors will have access to the “Global Equity Market” (GEM) through the TSE. The TSE and NYSE announced they would explore a bilateral alliance between the two exchanges.

Cross Pillar Activity Proposed reforms to financial services legislation will open the door for securities dealers and money markets and mutual funds to enter the payments system. The large bank owned dealers would most likely be the first to enter the payments system through their parent companies.

Technology In 1977, the TSE installed the world’s first computer assisted trading system (CATS) for processing equity trades. By the early 1990s the TSE had further computerized its trading floor as trading volumes increased annually. In 1991, the TSE decided to close its trading floor and become a fully electronic stock exchange. Although it pioneered stock exchange technology in the 1970s, today the TSE faces technological challenges as it phases out the dated CATS system, deals with alternative trading systems (ATS) and 24-hour stock trading, forms alliances amid global consolidating exchanges, and implements T+1. T+1 is the shortening of time it takes to clear and settle a securities trade from three days (T+3) to one day (T+1). T+1 is a major technological advancement in the securities industry and will enable automated matching and increase trade volumes, thereby placing additional pressure on the TSE’s computer systems. Toronto City Council31 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

The merging of international exchanges could lead to a system of very few dominant players, threatening the existence of the TSE and smaller exchanges around the world. Given that the stock exchange is a major anchor of any financial centre, the possible decline of the TSE is of great concern for the entire Financial Services Cluster in Toronto. The TSE is working to retain its competitiveness by forming strategic alliances with other exchanges, investing in and implementing state of the art technology, and providing unique and attractive services to listed companies. Additionally, the TSE must maintain and grow its share of domestic and foreign investment in order to meet the challenges of technology adoption and provide liquidity to its clients. The TSE has identified natural resources (for example, mining, oil and gas) and knowledge-based industries such as telecommunications as potential niche markets. Exploring niche markets to offer specialized services to clients would enhance the competitiveness of the exchange.

Survey Responses

The area of asset backed securities, and mergers and acquisition services were identified as revenue growth opportunities for the investment community. Wealth management has been the greatest source of revenue growth while fixed income, money market and bond funds/products have seen the greatest decline in revenues. When asked if a Toronto location was advantageous given advances in technology and the availability of physical space in lower cost centres, respondents replied that Toronto maintains its position as the place to be for investment and securities firms for two reasons: personal contact is still very important, and the marketing and portfolio management expertise is located in Toronto.

5.3 Insurance There are 355 federally regulated insurance companies in Canada of which roughly one third are life insurance companies, 208 are property and casualty insurance companies and 28 are foreign bank representative offices. The top insurance companies in Toronto by employment are:

Top Insurance firms in Toronto by Employment, 1999 Manufacturers Life Insurance Company Sun Life Assurance Company Zurich Indemnity Company of Canada Canada Life Assurance Company Merrill Lynch Canada Inc. Royal and Sun Alliance Insurance Co. of Canada State Farm Mutual Automobile Association Aetna Life Insurance Company of Canada (since bought by Maritime Life) ING Canada Inc. City of Toronto Business Directory, 2000

Globalization and Consolidation Consolidation in the insurance industry has already taken place and continues to be a trend due mainly to demutualization of the industry. Many of the insurance companies seek to broaden their scope, increase economies of scale and decrease costs by consolidating with other insurance companies. This is expected to accelerate in 2002 when the consolidation of demutualized insurers is permitted. Toronto City Council32 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Between 1996 and 1999 Toronto’s employment in the insurance industry decreased by approximately 11 percent. Consolidations could further reduce insurance employment in Toronto. To sum up, industry consolidation combined with demutualization will result in companies seeking efficient use of labour and may result in a further loss of employment. This may pose a deeper threat to Toronto since it appears that a central location for insurance companies is less critical than for banks, venture capital companies, or some securities companies.

Cross-Pillar Activity

A number of insurance companies have engaged in deposit-taking functions. For example, in 1993 Manulife Financial Corporation was the first life insurance company in Canada to enter the banking industry.

Technology

Technology in the insurance industry has enabled the development of such innovative products as universal life policies whereby consumers are able to make premium payments whenever they wish. Without the processing capabilities of high-speed computers, this would not have been possible. Insurance companies are also establishing a presence on the Internet. For example Manulife Financial recently launched ManulifeDirect.com, an on-line insurance service that provides customers with information and the ability to apply for term life insurance on-line.

Survey Responses

Respondents indicated that demutualization will lead to further industry consolidation and will also lead to opportunities for banks to enter into the insurance industry. The segregated fund business was identified as an area of growth in insurance. The proposed legislation would allow insurance and securities companies to enter the payments system but there are technological barriers for many of the companies in these industries since a substantial investment in computer systems would be necessary and would be cost prohibitive. The survey respondents indicated that the proposed legislation would most likely favour Toronto in terms of the insurance industry by breaking down the industry barriers in financial services and creating more competition. The increased competition enhances the need for insurance companies to be knowledgeable in all areas of financial services and heightens the need to centralize in order to maintain close linkages with key decision-makers across the cluster. Respondents indicated that among the important locational factors, a skilled labour pool was identified as most important followed by an advanced telecommunications infrastructure, and transportation infrastructure.

5.4 Financial Services Reform in Canada Beyond the important role of protecting the consumer and ensuring fair and equitable access to capital, a country’s financial services regulatory system exerts tremendous influence over the ability of financial services firms to compete both domestically and internationally. The proposed legislation comprises four key areas: promote efficiency and growth of the sector, foster greater domestic competition, empower and protect consumers, and improve the regulatory environment. The following is a summary of the draft legislation’s major components. Toronto City Council33 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Measures to Grow the Sector

(i) Widely Held Rule

The proposed legislation would permit an investor to own up to 20 percent of any class of voting shares and 30 percent of non-voting shares for institutions with over $5 billion in assets, including the existing Schedule I (i.e. large) banks.

(ii) Holding Companies

The proposed legislation would allow for the creation of regulated non-operating holding companies, providing institutions with structural flexibility to compete with highly specialized firms and allowing institutions to enter into strategic alliances and joint ventures.

(iii) Permitted investments

Financial institutions would be permitted a broader range of investments.

(iv) Merger Review

All large banks with over $5 billion in equity would be required to go through a “transparent review process” when they submit a merger proposal. In addition to reviews by the Competition Bureau and the Office of the Superintendent of Financial Institutions (OSFI), the merger proponents would have to prepare a Public Interest Impact Assessment to be reviewed by the House of Commons Standing Committee on Finance. Additionally, the Standing Committee would conduct public hearings into the broad public interest issues raised by the merger proposal. The Competition Bureau and the OSFI would submit a letter to the Minister outlining their views and the Minister of Finance would have ultimate decision-making authority.

Measures to Foster Greater Domestic Competition

(i) Ownership Rules

Federally regulated financial institutions would be classed into three categories based on size of equity. Large institutions would remain widely held, medium institutions would be allowed individual shareholdings of up to 65 percent with at least 35 percent of publicly held voting shares and small institutions would have no ownership restrictions.

(ii) Reduced Minimum Capital Requirements

The proposed Bill would reduce the amount of capital required to start a financial institution from $10 million to $5 million. Both this proposal and the less restrictive ownership requirements are intended to attract new entrants in the sector. Toronto City Council34 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

(iii) Expanding Access to the Payments System

The payments system refers to the services that facilitate transactions involving the exchange of payment in return for goods, services, real assets, and financial assets (for example, credit cards). Under the proposed legislation, life insurance companies, securities dealers, and money market mutual funds would be permitted to enter the payments system.

(iv) Foreign Bank Entry The proposed legislation would raise the foreign ownership limit (of a domestic institution by a foreign bank) from 10 to 20 percent for large domestic institutions. Additionally, the legislation would ease foreign entry by allowing banks to operate through branches as well as through subsidiaries.

Measures to Empower and Protect Consumers These include establishing a Financial Consumer Agency of Canada to protect consumer interests, ensure financial institutions comply with the consumer-oriented components of the legislation and respond to consumer inquires. Additionally, a Canadian Financial Services Ombudsman will be established to handle small business and consumer complaints. The legislation would also require four to six month notice of branch closures and collect information on lending to small and medium-sized enterprises as part of the legislation.

Measures to Improve the Regulatory Environment

The two major components of this section are a provision to convert some applications for regulatory consents from requiring Ministerial approval to requiring approval of the Office of the Superintendent of Financial Institutions and second, to establish a new notice-based approval process for some applications requiring the approval of the superintendent. Applications would be automatically approved within 30 days of their receipt if the Superintendent raises no concerns. The legislation will be reviewed once again in five years but the government has indicated that it would be willing to review the legislation prior to the end of five years if it proves necessary.

Comments on the Proposed Legislation

The merger review process is the most controversial aspect of the proposed legislation. The merger proposals of 1998 raised important issues for banks as well as consumers with respect to the level of concentration of the industry and the ability of Canadian banks to gain sufficient scale to compete globally, especially in the context of increasing mergers and acquisitions among the world’s largest financial services firms.

To address the issue of consolidations, the government has included a provision for a holding company structure to provide firms with flexibility and a vehicle through which to compete with larger companies globally. A similar holding company structure has previously been introduced in the United States and in the U.K. However, many Canadian industry representatives and academics indicate that more detail regarding how the different components of the holding company would be regulated is needed. Toronto City Council35 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Another comment on the proposed legislation is that it continues to give the Minister of Finance a wide range of discretionary powers including ultimate authority over merger approvals. The concern is that maintaining a highly political element in the process creates regulatory uncertainty, thus leading to the inability of Canadian and foreign financial institutions to anticipate the costs of regulation and to plan effectively for such costs. This could force Canadian financial services firms to plan future expansions in locations with a clearer financial services regulatory regime such as the United States. In addition, a cumbersome domestic regulatory system could deter foreign entry and thereby limit the very competition that the legislation is attempting to encourage.

With respect to foreign competition, the legislation has been criticized for widening foreign ownership rules to the point where large financial institutions could become vulnerable to effective foreign control.

Finally, the banking industry has made its views known regarding its disappointment with the government’s refusal to allow banks to provide auto leasing and insurance services through their branches. Preventing the banks from providing auto leasing and insurance services was criticized on the basis that it limits competition to the detriment of the consumer.

5.5 Financial Services and Information Technology

The adoption of technology is a key theme in the literature and in the survey results and deserves some additional focus. The Task Force on the Future of the Canadian Financial Services Sector, in its background paper entitled, Canadian Financial Institutions and Their Adoption of New Technologies found that compared with the United States, Australia, France, United Kingdom, and Germany, Canada has maintained a comparable rate of technology adoption with respect to P/C Internet banking, data mining/warehousing (collecting data on consumer behavioural patterns to develop new products, build preference profiles, and improve customer service) and electronic cash cards (Ernst & Young, 1998). These areas should be a major focus for further technology development. As noted earlier, Canadians are leaders in debit card and automated bank machine usage.

The Boston Consulting Group’s 1997 study of Toronto’s financial services sector entitled, “Financial Services at the Crossroads” revealed that one in every four computer services jobs and one in every seven telecommunications jobs in the GTA can be attributed to the financial services sector (Boston Consulting Group, 1997). The Bank of Montreal and TD Bank each spent approximately $1 Billion on IT development and each employed approximately 2,000 people in the City of Toronto in 1999.

The Conference Board of Canada identifies financial services as the most IT intensive industry among a list of five industries, which includes communications, government, manufacturing electrical products, and health care (Greater Toronto Marketing Alliance (GTMA), Smart Toronto, 1999). Additionally, the study found that IT Managers in financial services have the highest average compensation range when compared to such industries as “high tech”, transportation, communications, storage, and utilities, public service, wholesale/retail, manufacturing, services, and not for profit care (GTMA, Smart Toronto, 1999). Toronto City Council36 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

6.0 Global Forces of Change in Financial Services

Financial services are undergoing massive and rapid change globally resulting in the reorganization of Financial Services Clusters throughout the world. As consolidations continue, particularly among the exchanges, a new order of Financial Services Clusters will emerge dominated by a handful of cities. Factors relating to globalization, global regulatory changes, consolidations that include mergers of the world’s largest financial institutions, increasing cross- pillar activities, and rapid and revolutionary advances in technology will drive this reorganization. This section examines how these factors are affecting financial services clusters throughout the world.

6.1 Globalization

Economic integration around the world continues to change the nature of financial services. The flow of capital is increasingly global and therefore changes in one market can have profound impacts on markets around the world. The Asian economic crisis is a recent example of a domestic financial market crisis affecting the rest of the world by way of global trade links and international capital flows. Globalization has led to a highly interdependent international market vulnerable to serious global financial ripple effects. Technological advancements that enable markets to be active 24 hours per day across time zones have further accelerated this threat by greatly enhancing the speed and quality of information flows thereby decreasing reaction time to international events and enhancing the potential for panic among international markets. Additionally, deregulation of the financial services sector across the globe has further “opened” domestic markets and enhanced the interdependence of the global financial services landscape. Canada is particularly affected by global economic interdependence because of its close trading relationship with the United States, the world’s largest economy.

6.2 Deregulation

The Financial Services Cluster is heavily regulated in Canada and in most other countries. Due to the important role financial services play in the monetary supply and in effectively distributing resources from savers/investors to producers, regulation of the sector to ensure access, fairness, and transparency is an important function of government. Presently however, governments are struggling with the level of control they exert (and should exert) over financial services due to the erosion of trade barriers as a result of globalization and advances in technology. The erosion of trade barriers resulting from globalization and technological innovation has required governments to consider the level of control they should exert over financial services. Governments must balance the legitimate concerns of their citizens with respect to access, equity and domestic competition while allowing their domestic Financial Services Cluster sufficient freedom to compete internationally. In recent years, financial services reform has been a major policy item for countries such as the United Kingdom, United States, Australia, Japan, and Canada. Canada’s financial services reform process is finally coming to an end after five years of study and consultation (details of the proposed legislation are included in Section 5.4). Regulatory reform in all countries has dealt with (in varying ways) the following policy issues: “cross-pillar” (inter-industry) activity, mergers and acquisitions of key players, consumer protection, and foreign entry. Toronto City Council37 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

The United Kingdom’s recent regulatory reform process has resulted in what is considered by many to be a seamless and “friendly” financial services regulatory regime. This is in most part due to the decision to merge banking supervision and investment services regulation into the Financial Services Authority (financial services A) (until October 1997 known as the Securities and Investments Board (SIB)). The reform process has enhanced the efficiency and clarity of financial services regulation in the UK by centralizing and simplifying the regulatory regime.

In the U.S. the Reigle-Neal Act permitted interstate banking and was followed by the Financial Services Modernization Act (or the Gramm-Leach-Bliley Act of 1999) which further opens the financial services sector by allowing companies to compete to sell securities, insurance and real estate through a financial holding company structure. The changes in regulation have resulted in a number of significant mergers across industrial and geographic boundaries.

6.3 Consolidation

Mergers and acquisitions are taking place at an astounding rate both within and between each of the industries that comprise the financial services sector. The purpose of such consolidations generally is to capture a wider customer base, offer a broader range of products and services, and gain economies of scale. Globally, mergers and acquisitions in financial services increased from US $85 Billion in 1991 to $534 Billion in 1998 (BIS, 1999). In the United States, mergers and acquisitions rose from $25 Billion in the mid-1980s to $250 Billion in 1998 and the number of banks in U.S. has dropped 40 percent since 1980. The merger between Travelers Group and Citicorp (a $70 Billion transaction) in 1998 was the largest merger of all time in any industry and paved the way for similar transactions including the mergers of BankAmerica Corp. with Nations Bank, Bank One Corp. with first Chicago, Deutsche Bank’s takeover of Banker’s Trust, BBV (Spain) and Bancomber (creating Mexico’s largest bank) and the HSBC’s takeover of CCF (France). These examples are just a few from the long list of consolidations that continue to take place in the financial services sector.

Consolidations have also started to emerge among the stock exchanges. Even the London Stock Exchange, one of the most important in the world, was planning to merge with the Frankfurt Stock Exchange until a hostile threat from OM Gruppen forced them to place those plans on hold. Another example is EURONEXT, the merger of the stock exchanges of Amsterdam, Brussels and Paris (Paris Bourse) which was made official in September 2000. EURONEXT is the first fully integrated cross-border single currency stock, derivatives and commodities market.

To a large extent the consolidation of the exchanges in London, Sydney, Stockholm, Chicago and Toronto has been facilitated by demutualization1. Consolidation is clearly impacting the stock exchange industry throughout the world. Increased competition between the international exchanges means that they compete for narrowing sources of income and their ability to raise membership fees will be limited. If the exchanges do not find a way to offer unique services to their members, membership will decline and businesses will list on other exchanges. Many believe that the merger of exchanges could lead to a system of a very few dominant players, leading to the marginalization of smaller markets (International Federation of Stock Exchanges, 2000).

(1 Demutualization of the TSE means that this has changed from a not-for profit entity owned by its members, to a “for profit” entity owned by its shareholders.) Toronto City Council38 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

6.4 Technology Among the technologies currently applied by financial services firms the Internet will continue to have the most profound impact on product development and delivery. Other key technological applications in financial services include debit cards which Canadians use more than any other nation, ABMs (automated banking machines), telephone banking, electronic cash cards, and more recently wireless technology. Canada is the world leader in automated banking machine (ABM) use logging 53 transactions per Canadian in 1998, followed by 41.4 in the U.S. and 37.6 in Sweden. In addition, in 1998, Canada was the world leader in terms of debit card usage according to the Bank for International Settlements. Morgan Stanley Dean Witter predicts that in the U.S. there will be a compound annual growth of at least 34 percent for consumer financial services on the Internet between 1999 and 2003. The projection includes consumer banking, brokerage services, auto insurance, term life insurance, and credit card interchange fees. The highest growth is predicted for term life insurance, credit cards, auto insurance, brokerage services, and consumer banking. Technological applications will allow financial services clients to increasingly bypass retail functions and may lead to the automation of some financial services functions including credit card and cheque processing and customer statement processing and issuing. This implies that the Financial Services Cluster will increase its usage of customer service and data processing centres. There is already a movement with respect to relocation of these functions from urban centres. In order to prevent a loss of jobs and assessment, municipalities will need to develop proactive strategies to maintain these functions.

Financial services firms are using the Internet as a powerful distribution tool for delivering real time information to clients, for delivering their product and/or services and as a marketing tool. For example, in the U.S., several of the world’s largest investment banks (Goldman Sachs, Merrill Lynch, Morgan Stanley Dean Witter, Salomon Smith Barney, Credit Suisse First Boston, Deutsche Banc, and UBS Warburg) have teamed up to deliver their services through “TheMarkets.com”, an information portal for institutional investors. The purpose of the portal is to provide easy access to customized and personalized key research and market information, facilitating clients’ investment decision processes. Another example is the recent announcement of an Internet portal in Australia (AusMarkets) to be launched by the nation’s four largest banks, ANZ Banking Group, Commonwealth Bank of Australia, National Australia Bank, and Westpac Banking Corp. The portal will carry the banks’ online bond, fixed income, foreign exchange and derivatives products and services and will be available to institutional investors. (www.afr.com.au/premium/financialservices/2000/11/06/FFX29N7K5FC).

6.5 Cross Pillar Activities Cross pillar activity or “convergence” as some refer to it, is increasing globally and is to a great extent a function of deregulation. Banks, securities and insurance companies are entering each other’s markets by acquiring established companies in the desired industry and market, and/or entering into strategic alliances, joint ventures and co-branding agreements. Cross pillar strategies allow a company to gain economies of scale, access a wider market, cross-sell and deliver a wider range of products and even enhance product innovation capabilities. The most written about example was the merger between Citibank and Traveler’s Group, combining the banking and insurance activities of two of the largest firms in their respective markets. Canadian firms have been involved in cross pillar activities for a number of years. In 1984, TD was the first bank to form a discount brokerage and in 1992, Royal Bank became the first bank to own an insurance company (Voyageur Insurance Co.). Toronto City Council39 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

7.0 Strengths, Weaknesses, Opportunities and Threats of Toronto as a Financial Services Centre

One of the main objectives of the report was to identify the strengths and weaknesses of, opportunities for and threats to the financial services cluster in Toronto. The following section presents the strengths, weaknesses, opportunities and threats of the Toronto Financial Services Cluster in the context of these questions and is based on the literature review and the series of interviews with sector representatives and academics.

7.1 Strengths

The City of Toronto’s strengths with respect to its locational attractiveness to the financial services cluster include:

- the existing concentration of the financial services cluster in the City’s centre and the linkages that exist within and between industry groups;

- the growth in employment by banks in their higher order head office and administrative functions;

- large available, skilled labour pool (one respondent pointed to Toronto’s role as a major destination point for new Canadians, creating a source of new and skilled labour);

- availability of a public transportation system;

- educational infrastructure;

- central location of the financial services sector makes it the most accessible area within the GTA;

- existing critical mass of financial services institutions, including the TSE; and

- Toronto’s image as the place to be for financial services is very positive implying the “prestige” factor is still very strong for Toronto.

Canadian financial services firms are recognized globally as innovators with respect to developing and adopting new uses for e-commerce in financial services and with respect to developing automated financial services processing and clearing systems. The City’s amenities related to entertainment, culture and recreation combined with its accessibility make it a desirable location for IT workers.

7.2 Weaknesses

The most frequently stated weakness of the Financial Services Cluster in Toronto is the regulatory system. The current regulatory situation is creating uncertainty through the delay of the legislation’s passage and by the legislation’s delegation of decision-making authority to the Minister of Finance. Additionally, industry experts consider the overlapping and duplicative Toronto City Council40 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1 regulatory regimes of the provinces and territories and the federal government with respect to financial services cumbersome. Industry representatives suggested Canada should move to one national level of financial services regulation similar to that in the United Kingdom, and that the lack of such a national scheme may be facilitating the movement of new investment south of the border.

Canada is the only major economy in the world to levy capital taxes annually on its financial sector. Capital taxes are a competitive burden since they tax the very capital base on which the soundness of financial institutions is determined. The amount of capital taxes paid in Ontario actually increases every time a financial institution invests in the Province, thus creating a disincentive relative to other jurisdictions. In 1999, Canada’s banks paid $284.4 million in capital taxes in Ontario. Alberta has recently agreed to eliminate capital taxes on financial institutions. The presence of the capital tax may affect the City’s ability to retain and attract investment from the banking industry.

A frequently cited weakness of Toronto as a location for financial services firms was Toronto’s increasing homelessness and poverty levels (nearly all of the respondents indicated these as key weaknesses). Additionally, respondents indicated that the public transportation system needed improvement on three levels: that the GO system requires expansion, connectivity between the TTC and GO requires improvement, and the TTC itself needs to be strengthened. Congestion levels in the core were also identified as a weakness.

Business units within companies are becoming more responsible for their operating costs resulting in the dispersal of many “back-office” functions to lower cost locations. This may weaken the close linkages currently found in the City’s core and ultimately affect the competitiveness of the cluster. Industry sources have noted that property tax and real estate costs in Toronto are contributing to the movement of some functions to the 905 areas of the Greater Toronto Area.

In addition, lack of political support for the Financial Services Cluster at all levels of government was identified as a weakness. Respondents felt that given the sector’s contribution to local and national GDP, employment, taxes, and exports, more support for the sector at all levels of government is needed. Interestingly, respondents admitted that their public relations efforts and outreach activities to the public and to local, provincial and federal politicians were lacking.

Finally, the absence of an association or group to market the Canadian financial services cluster globally was revealed as a weakness in both the literature review and the interviews.

7.3 Opportunities

The proposed holding company structure may result in the ability of financial services firms to increase economies of scale through creative partnerships and alliances. Demutualization of the smaller insurance companies such as Clarica will present opportunities for further industry and cross pillar consolidation. In addition, the new merger review process, while cumbersome, will make bank mergers a possibility. Toronto City Council41 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

The perception of the City of Toronto as the hub of financial services remains strong among local and international industry representatives. However, a number of industry contacts indicated that many international players in financial services view the TSE as a resource exchange and are not aware of the new economy companies currently listed. An opportunity exists to further strengthen and improve upon Toronto’s image as a financial services centre both in Canada and internationally.

U.S. financial services regulatory reform has opened opportunities for Canadian banks and securities industries by allowing interstate banking and cross pillar activity and easing foreign entry.

If the trend toward one financial services centre per continent continues, there could be a role for Toronto as a centre for raising capital for companies that do not qualify or would get lost in an international financial centre such as New York.

There is an opportunity for the City to work with the existing industries, institutions, and educational infrastructure to strengthen the linkages within the Financial Services Cluster and develop programming to facilitate the long-term growth and competitiveness of the cluster.

7.4 Threats

Respondents indicate that there is a threat of continuing regulatory uncertainty should the federal government fail to move forward on the proposed financial services reform legislation. This may jeopardize Toronto’s ability to compete internationally by deterring merger activity and indirectly deterring investment from Toronto, making investment south of the border comparatively attractive. This is clear, given that all major investments by the banks in the last couple of years have been made outside Canada and largely in the U.S.

Recent expansion and investments by Canadian banks and securities companies south of the border, particularly their higher value added functions like global corporate and investment banking and securities trading, threaten to further increase the flow of investment outside of Toronto and therefore Canada. As some automated functions like cheque and credit card processing move to suburban areas, Toronto could be squeezed out of some financial services employment opportunities and Canada out of a domestic pool of liquidity to finance its business and investment opportunities throughout the country.

The movement away from a global system of national exchanges to a network of regional and continental exchanges could threaten to reduce the TSE’s liquidity. Further, the TSE’s move to electronic trading systems allows trading to be conducted from any location and could result in loss of employment in Toronto.

Labour and skills shortages in business services and information technology and telecommunications (IT&T) are issues for financial services firms in Canada. Financial services firms are significant purchasers of good and services provided by the business services and IT&T sectors. Representatives of Toronto’s Financial Services Cluster indicate that firms in the U.S recruit Toronto’s highly talented people in business services. For example, U.S. firms recruit top Toronto lawyers specializing in mergers and acquisitions, thereby reducing Toronto’s pool of Toronto City Council42 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1 expertise. In addition, because financial services firms invest heavily in IT, they too feel the impacts of the IT labour shortage. It is important to note that every contact interviewed for the study placed labour force quality in the top two most important factors in their location decisions. If companies must leave the region to find high value-added business and IT services, then they may begin to consider moving their executive functions closer to that new source of labour, typically found in the United States.

The City of Toronto has lost a number of domestic and foreign head offices. Head offices and financial services concentrations have a positive relationship and the decrease in the number of head offices may minimize the need for financial services firms to centralize.

Change in foreign ownership rules may result in increasing foreign ownership of financial services firms. This would most likely affect small financial services firms in the short term because of the federal government’s stance on mergers among the large domestic financial services firms. However, the widened ownership rules may result in increased decision-making and management by foreign companies. The widened foreign ownership rules could result in a movement of corporate decision-making functions to foreign countries, resulting in a loss of high-end employment in Toronto.

The demutualization of Canada’s insurance companies will lead to further industry consolidation, likely resulting in job losses and movement of clerical and processing functions to lower cost areas. However, industry decision-makers and higher value-added jobs will remain in the City as cross pillar activity heightens competition and insurance executives place more emphasis on information sharing and face to face contact to monitor their competitors in the banking and securities industries.

8.0 Local Initiatives to Develop Financial Services

The challenge in developing a locally based financial services initiative lies in the fact that most factors that influence and shape the financial services sector are beyond the control of the local area. For example, regulation occurs at national and international levels, while technological advancements and merger and acquisition decisions occur within the industries themselves. The critical question is what can be done at the local level to assist in strengthening and expanding the financial services sector. Areas that can be influenced at the municipal level are quality of the educational and training infrastructure, property taxes, quality of life factors (safety, transportation, housing, amenities, quality of after-work entertainment opportunities, and quality of the school system), and the quality of local roads and public transportation systems. Beyond improving these areas, local initiatives for Financial Services Cluster development must include a strong advocacy role. To assist in determining what the City of Toronto might do to assist its Financial Services Cluster, the financial services efforts of New York, Stamford, London, Leeds and Frankfurt are examined.

8.1 New York

In the early 1990s, the Mayor’s office developed a number of incentive programs to address the vacancies experienced in downtown Manhattan. The programs provided a combination of tax rebates, rent reductions, and utility savings to commercial and industrial property owners and tenants in exchange for the location of employment uses within specified areas of Manhattan. In Toronto City Council43 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1 addition to programs aimed at drawing employers to the downtown core, New York’s policy initiatives to improve the quality of life, particularly crime and safety, played a key role in enhancing the City’s attractiveness as a location for business. Today, New York’s efforts to attract and retain financial services firms are undertaken primarily through the Economic Development Corporation’s marketing and promotional activities. New York’s critical mass including the New York Stock Exchange and its highly skilled and trained labour force are integral to the success of the City as one of the international Financial Services Clusters in the world.

However, New York City has experienced some loss of financial services from the efforts of neighbouring cities to lure firms to their jurisdictions. Those communities include Stamford Connecticut and Jersey City, New Jersey.

8.2 Stamford, Connecticut

Stamford is attempting to entice financial services firms from New York City through tax and economic incentives and by marketing its comparatively low rental rates. Qualified financial or service firms, manufacturers, research and development operations and warehousing/distribution facilities are offered significant economic incentives to expand or relocate their businesses in Stamford. Stamford also offers significant property tax abatements and corporate tax credits under the Enterprise Zone Program and under the Urban Jobs Program. These programs may include abatements for existing and new construction projects.

8.3 London, United Kingdom

The Corporation of London is one of the many members of British Invisibles (BI), a private sector organization that has for thirty years promoted the UK-based financial services sector internationally. BI’s membership also includes trade and professional associations, exchanges, the Bank of England, and leading financial service companies. BI promotes the international activities of U.K. based financial services institutions and helps them to develop commercial opportunities by arranging missions and conferences worldwide and meetings with senior representatives of foreign governments. Some of BI’s activities include:

- through the Liberalization of Trade in Services (LOTIS) BI works to ease regulatory barriers and facilitate trade in the global market for financial services;

- works with governments and other organizations on trade barriers in individual countries.;

- raises awareness of the U.K’s role in international financial markets and of the major contribution of financial services to the UK economy; and

- produces The City Business Series, a series of research and statistical publications.

It is important to note that at the national level the United Kingdom has moved to one regulator, The Financial Services Authority to simplify the regulatory regime and to regularly update and monitor regulations for its financial services sector. The simplified regulatory approach has in itself advanced the competitiveness of the sector in the UK. Toronto City Council44 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Through its Economic Development Unit, the City of London promotes its Financial Services Cluster as the “Powerhouse of World Finance”. The City of London’s Financial Services Cluster is also promoted by the Lord Mayor of London who acts as an ambassador for the Financial Services Cluster by visiting cities all over the world annually to market London as an international financial centre.

The United Kingdom as a nation is very involved in conducting research on and monitoring the status of London’s international competitiveness as a financial services centre. The nation’s role and support is key particularly with respect to its progressive regulatory structure. The research and regulatory capabilities and support at the national level, together with the marketing and promotional efforts at the local level, form a powerful partnership in developing and maintaining London as a leader in financial services.

8.4 Leeds, United Kingdom Leeds is the regional capital of both Yorkshire and the Humber region in the U.K. The City’s economy has grown rapidly throughout the 1990s and with this growth Leeds has attracted a notable mass of financial services institutions. Between 1991 and 1996 employment in the financial services sector grew by 21 percent from 57,000 to 69,000. The City wishes to expand on this growth and has established the Leeds Initiative, a partnership among the key players in the City led by City Council, the Leeds Development Agency, and the Chamber of Commerce to develop and promote the city as a major European centre. Part of the Leads Initiative focused on the development of the financial services sector through the Leeds Financial Services Initiative.

The Leeds Financial Services Initiative (LFSI) was established to promote the city’s financial services cluster internationally as the premier financial services centre in the U.K., outside of London and Edinburgh. There are 100 members including the major banks, building societies (similar to trust companies), insurance companies, stockbrokers, accountants, merchant banks, law firms, finance houses and the universities. In addition to promotion activities, LFSI was established to improve the range of skills of people in the sector through the Leeds Training and Enterprise Council. The LFSI’s mandate is as follows:

- to create greater awareness of Leeds in the U.K. and Europe as a major centre for financial and professional services; - to improve the cohesion of the financial services sector in the region;

- to develop a relevant human resources strategy, including appropriate training programs;

- to offer a series of business seminars and conferences for members; and

- to carry out research to identify areas of opportunity and address any weaknesses in the region’s financial services sector (www.leeds.gov.uk)

8.5 Frankfurt, Germany Frankfurt’s recent efforts to grow its Financial Services Cluster have focused on marketing and promotion using branding names like “Mainhattan” and “Bankfurt”. In 1996, Finanplatz, a promotional organization, was established to promote the development of the Financial Services Toronto City Council45 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Cluster. Finanplatz uses industry leaders to promote Germany as the place to do business in financial services. Additionally, Frankfurt developed a web presence using the branding name “Bankfurt” to further promote existing financial services and attract new investment by providing information on the City’s Financial Services Cluster and quality of life and amenities (www.bankfurt.de).

9.0 Recommendations to Develop the City of Toronto’s Financial Services Cluster

“…while the international network of financial services is indeed expanding, a leaner system dominated by a handful of strategic cities is evolving”. (Sassen, 1999)

The success of the financial services cluster in Toronto will depend largely on the ability of its financial services firms to adapt to the external forces shaping the sector, namely globalization, deregulation and consolidation, increasing cross pillar activities, and technological adoption and advancements. The City of Toronto can play an important role in assisting to create an environment that enables rather than inhibits the sector’s ability to compete locally and internationally. One of the key objectives of the Economic Development Strategy approved by Council in 2000 was to “Advance/grow major industry clusters by strengthening the competitive position of Toronto businesses through synergies with related businesses, labour, education, training and research institutions and government”. The Sector and Strategic Partnerships group within Economic Development works with key sector associations and industry experts to gather information, influence policy, and facilitate employment growth through export development, investment and strategic alliance building.

Strategic Directions The City should harness the local talent, resources, and commitment of the Financial Services Cluster to form a Toronto Financial Services Cluster Alliance that would include key industry, association, and academic representatives as well as city council. The Financial Services Cluster Alliance would focus efforts to develop an action plan in cooperation with the City to target the following areas: marketing and promotion, advocacy, competitive intelligence, human resource development, and business development. The key areas are discussed in more detail below: Toronto City Council46 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

Marketing and Promotion Toronto must position itself as a major financial services centre in North America. Collaborative marketing efforts between industry, academia and the City could focus on promoting Toronto’s Financial Services Cluster both internally (citywide and nationwide) and externally to the world and on attracting foreign financial services firms to the City. For example, this could be accomplished by developing a Canadian financial services internet portal to market the City’s Financial Services Cluster and its capabilities in information technology and e-commerce. A financial services conference could be organized to launch the web portal and to showcase the Financial Services Cluster to political decision-makers. Additionally, a partnership with the University of Toronto’s Mathematical Finance Program and Capital Markets Institute could be developed to market the City’s role as an industry innovator by showcasing local financial engineering expertise. The Economic Development Division has successfully leveraged resources, such as the Program for Export Market Development (PEMD) for cooperative marketing purposes. This and other available programs should be explored with respect to developing specific initiatives.

Advocacy/Information/Education Activities to advocate on behalf of Toronto’s Financial Services Cluster could begin with a seminar to bring members of the Economic Development and Parks Committee and the rest of council together with representatives of Toronto’s Financial Services Cluster. In addition to providing a networking opportunity, the seminar could include presentations from representatives of each of the industries to address: global competitiveness of the Canadian Financial Services Cluster, changing employment patterns in financial services, and the short-, medium-, and long-term outlook for the Toronto area. At the federal level, the City of Toronto through its role as the largest urban and economic centre of the country could in partnership with industry, make representations to the House of Commons and Senate regarding issues affecting Toronto’s Financial Services Cluster.

Competitive Intelligence The City of Toronto must continue to broaden its view, from one that focuses on its position relative to the 905 areas, to a view that focuses on its position and relative competitive advantage to the U.S. (primarily New York City and Chicago) and the rest of the world. This could be accomplished by forming a partnership with academic groups such as the University of Toronto’s Capital Markets Institute, industry, and other levels of government to create an ongoing and consistent program to regularly benchmark, monitor and anticipate the direction of the Canadian financial services sector in the North American and global context, focusing on the impacts on Toronto. The City would take a proactive role in developing an accurate assessment of the sector’s international competitiveness while building a network of industry representatives with which to share industry intelligence.

Human Resources Development

The City must establish linkages within and between industry and academia and training institutions to identify and address specialized labour requirements of the Financial Services Cluster and associated business services such as accounting, management consulting and legal services, information technology and telecommunications. Developing a labour force readiness Toronto City Council47 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1 plan to assist education and training providers to meet and anticipate the demands of industry would ensure an adequate supply of highly skilled labour for the Financial Services Cluster in Toronto and would enhance Toronto’s attractiveness as a location.

Business Development

The City must work to ensure that its historical comparative advantages, for example, a strong public transportation network are strengthened and expanded to meet demand. Further building on the GO Transit and TTC would be important steps to facilitating commuting between the downtown core and other areas of the city and region. Additionally, the costs of doing business in Toronto compared to the rest of the GTA must be harmonized to ensure Toronto can compete for back-office functions of the Financial Services Cluster. The City must actively work with local companies to maintain a strong concentration of financial services in the City’s core and the linkages within and between industry groups. The City should develop a strategy to capture as many back-office and subsidiary functions as possible.

Financial Services Cluster Alliance

The City needs to play a leadership role with respect to the implementation of the strategic directions noted above. It is recommended that the Economic Development Division establish a Financial Services Cluster Alliance comprising industry, government, and educational leaders to review and advise on the refinement and implementation of the strategic directions in this review. The mandate of the Alliance would be to develop an action plan identifying the priority issues and activities that need to be undertaken. This should also include the identification of partnership opportunities with the private sector and the external resources that can be leveraged to implement the action plan. It should be noted that the Economic Development Division has been successful in leveraging private sector support through its other sector initiatives, with the resources leveraged 5 to 10 times greater than the City’s investment.

10.0 Conclusions The City of Toronto is recognized around the world as Canada’s national centre for financial services. Toronto is home to the headquarters of Canada’s five largest banks and to approximately 80 percent of the headquarters of foreign banks operating in Canada. In addition, the Toronto Stock Exchange is the largest exchange in Canada, trading more than 29 billion shares in 1999. The City and industry need to promote and market Toronto as Canada’s Financial Services Centre given the concentration of the nation’s financial services businesses that are located in the city.

Other important Canadian industries like oil in Alberta and fishing in Newfoundland enjoy supportive political representation in their respective jurisdictions. However, there is little recognition by Toronto area MPs, MPPs and City Council of financial services as a major employer, a significant exporter to other provinces and to the rest of the world, and as early adopters of technology. Despite the apparent health of the Financial Services Cluster to date, the review indicates there are many potential dangers. There are a number of forces affecting the Financial Services Cluster and its concentration in the City. Two of the factors are globalization and regional Toronto City Council48 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1 decentralization. Financial services is undergoing massive and rapid change globally resulting in the reorganization of Financial Services Clusters throughout the world. As consolidations continue, particularly among the exchanges, a new order of Financial Services Clusters will emerge dominated by a handful of cities.

Canada’s financial services firms are losing relative economies of scale due to increased consolidations among firms outside of Canada. The reaction of Canadian firms to the federal decision to prohibit mergers among the largest Canadian banks and insurance companies has been to look to the U.S. and Europe for investment partnerships and opportunities. To retain and strengthen local investment in the Financial Services Cluster:

- the Canadian regulatory system must be clear and efficient. Proposed legislation needs to be passed as quickly as possible so that the Financial Services Cluster can take advantage of opportunities in the fast-changing, globally competitive marketplace;

- the local pool of highly skilled labour in business services and IT services must be increased;

- the TSE must continue to introduce innovative technology to deal with increasingly high volumes and high-speed transactions, and

- the TSE must differentiate itself by pursuing niches in for example, oil and gas and mining in addition to new economy industries, and by encouraging superior analyst coverage and exposure.

An increase in cross pillar activity will lead to further consolidations as larger institutions explore new markets and partnering opportunities. The demutualization of the insurance industry for example, will lead to new consolidations as banks and other insurance companies purchase the newly publicly traded companies. Depending on the partnerships that arise, this may mean a decrease in employment and space requirements in the City of Toronto.

The Financial Services Cluster is decentralizing a number of its functions and relocating some of its back office activities. Local issues related to the cost of doing business, lack of available land/space for expansion, accessible transit, traffic congestion, and quality of life issues such as homelessness affect the City’s ability to retain these back office functions.

Toronto’s Financial Services Cluster is a global leader in innovation. Technology is rapidly changing the development, processing and delivery of financial services information, products and services. Financial services firms are increasingly able to offer products and services internationally through the Internet, heightening competition between financial services firms all over the world and increasing pressure to deliver customized services and products. The Financial Services Cluster is a significant investor in technology both in terms of capital investment and as an employer of IT professionals. The cluster has an opportunity to create a positive and strong image as a new economy, knowledge-based cluster.

Globalization, deregulation, consolidations, and technology advancements are providing an opportunity for certain financial services centres to serve a wider market area. The question is where will this activity centralize in the North American context? The City must recognize that Toronto City Council49 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1 the local market for financial services is now broader than the GTA or Canada. The local market now includes all of North America in which competitors include dominant centres like New York City. The City of Toronto and industry need to work together in developing and implementing the strategic directions related to marketing and promotion, advocacy, competitive intelligence, human resource development, and business development. This will allow the City to build upon the strengths of the existing industry and support the future growth of the Financial Services Cluster. ______

List of References

Boss, Sandra, Devin McGranahan and Asheet Mehta. “Will the Banks Control On-Line Banking?” McKinsey Quarterly, Number 3 (2000): 70-77.

Canadian Bankers Association (2000). Financial Services Reform 2000: The Canadian Bankers Association’s Response to Bill C-38.

City of Toronto (2000). Toronto Competes: An Assessment of Toronto’s Global Competitiveness, Toronto.

Devine, Ted et al. (2000). Where the Money Went: Growth and Profits in the Personal Financial Services Industry McKinsey & Company. Internet July 2000. Available http://www.pfsmckinsey.com

GHK International (2000). The Future of Downtown Toronto: Overview Report, Toronto.

GHK International (2000). The Future of Downtown Toronto: Background Studies, Toronto.

Immergluck, Daniel (1999). Cities and Finance Jobs: The Effects of Financial Services Restructuring on the Location of Employment, The Brookings Institution, Center on Urban and Metropolitan Policy.

Majury, Niall C. (1999). Local Knowledge, Global Markets and the Geography of Investment Banking, University of Toronto.

Merrill Lynch & Co. (2000). Canadian Banks.

Morgan Stanley Dean Witter (1999). The Internet and Financial Services.

Morgan Stanley Dean Witter (1999). Canada Investment Research: Canadian Banking Industry Initiation of Coverage.

Sassen, Saskia (1999). “Global Financial Centres”, Foreign Affairs, V. 78, No.1: January/February, 1999.

Shutt, Theresa and Hugh Williams (1999) The Canadian Financial Services Industry: The Year in Review, 1999 Edition, Conference Board of Canada: Ottawa. Toronto City Council50 Economic Development and Parks Committee April 23, 24, 25, 26, 27, 30, and May 1 and 2, 2001 Report No. 3, Clause No. 1

The Boston Consulting Group (1997). Financial Services at a Crossroads: The Current and Potential Role of Financial Services in the Greater Toronto Area. ______

The Economic Development and Parks Committee also had before it during consideration of the foregoing matter a communication (March 26, 2001) from Mr. Raymond J. Protti, President and Chief Executive Officer, Canadian Bankers Association, acknowledging the important work of the Economic Development and Parks Committee and the Economic Development Division of the City of Toronto, which led to the release in July 2000 of the City of Toronto’s Economic Development Strategy.

______

The following persons appeared before the Economic Development and Parks Committee in connection with the foregoing matter:

- Mr. Jon Cockerline, Director of Research, Toronto Stock Exchange, and filed a copy of his submission; and

- Ms. Mary Webb, Senior Economist, Bank of Nova Scotia.