Task Force on the Future of the Canadian Financial Services Sector September 1998 Competition, Competitiveness and the Public Interest Background Paper #1 Cat No.: BT22-61/2-1998E-1 ISBN 0-662-27135-1 For additional copies of this document please contact: Distribution Centre Department of Finance 300 Laurier Avenue West Ottawa K1A 0G5 Telephone: (613) 995-2855 Facsimile: (613) 996-0518 Also available through the Internet at http://finservtaskforce.fin.gc.ca Cette publication est également disponible en français. Table of Contents Chapter 1 Introduction . 7 Chapter 2 The Forces of Change . 11 The Forces . 11 Globalization . 11 Technology . 13 Domestic Demographic Changes . 17 Economic Change . 19 Impact of the Forces of Change . 19 Consumers . 19 Industry . 25 1. Wholesale Financial Services . 26 2. Retail Financial Services . 27 3. Distribution Channels . 27 4. Technology . 28 5. Financial Institution Positioning . 29 6. Employment . 31 7. Shape of Industry . 32 Government . 32 Policy Implications . 33 Chapter 3 Overview of the Sector . 35 Historical Overview . 35 The Financial Services Sector Today . 37 The Deposit-Taking Sector . 42 Pooled Funds . 47 Property and Casualty Insurance . 49 Life Insurance . 52 Securities Dealers . 55 Specialized Financing Companies . 55 Crown Financial Corporations . 57 Market Structure . 58 Profitability . 63 Conclusion . 64 3 Chapter 4 Enhanced Competition for Canadians . 67 Are Canadians Well Served? . 68 Global Competitiveness Survey . 69 Efficiency of Intermediation: Loan-Deposit Spreads . 70 Financial Services and Customer Segments . 72 1. Larger Canadian Businesses . 72 2. Small and Medium-Sized Businesses . 74 3. Individual Consumers . 75 Canadian Opinion . 81 Summary of Observations . 84 Challenges to Domestic Competition in Financial Services . 84 Barriers to Entry . 85 Information Asymmetries . 86 Industry Consolidation . 87 1. Competition Law . 87 2. Local Focus of Retail Banking . 91 3. Clustering . 92 Increasing Competition in Financial Services . 94 Competition among Existing Players . 95 1. Powers . 96 2. Facilitating Alliances . 97 3. Demutualization . 97 4. Flexibility for Credit Unions . 98 5. Networks . 99 Barriers to Entry for New Players . 99 1. Less Burdensome Start-Up Requirements . 100 2. Size-Based Ownership Framework . 100 3. Role of OSFI in Competition . 101 4. Lowering the Tax Burden . 101 Barriers to Entry for Foreign Financial Institutions . 102 1. Current Restrictions . 103 2. Branching . 104 3. Relaxed Entry Rules . 104 4. Observations . 105 Strengthening Consumers’ Bargaining Power . 106 Chapter 5 International Competitiveness . 109 International Competitiveness and Domestic Markets . 110 Benefits . 110 Relationship with Domestic Competition . 110 Canadian Control . 111 4 International Competitiveness of Canada’s Financial Sector . 111 Global Competitiveness Survey . 111 Profitability . 112 Efficiency Measures . ..