Challenges and opportunities for
Canadian financial institutions at home and abroad
Government & Community Affairs
RBC Financial Group
Gowlings' 2002 Professionals'
Royal York Hotel
Friday, June 7, 2002
It is a pleasure for me to come and speak to a group of people
that are among the most important service providers to,
and partners with, the financial services industry.
focus of this session is on the principal forces shaping
our capital markets. Almost all of the challenges and opportunities
the financial industry faces have direct implications for
your law firm and the nature of your work.
Globalization / North American Integration
successive rounds of trade liberalization have not
only opened access to foreign markets for Canadian companies,
but have also made access to foreign suppliers much easier
for Canadian consumers.
removal of many of the perceived and real barriers to entry
by foreign financial institutions have led to a very open
regulatory policy changes have eased the limits on
permissible activities under taken by financial institutions
(FIs), and have enabled these FIs to offer a range of new
products and services.
information technology, such as the internet, has led
to new delivery channels which have increased access for
Canadian consumers to more suppliers of products and services
from both inside and outside the country.
relative to the past, consumers of financial services
are better informed, have more sophisticated needs,
are willing and have the means to seek out suppliers and
are more demanding.
of these developments are removing geographic and functional
limitations which have previously shaped the financial services
U.S., recent legislative changes have paved the way for
geographic diversification and the eventual emergence of
nation-wide banking. As well, they have permitted the trend
towards functionally converged financial services enterprises,
combining the activities of banking, insurance and securities.
functional convergence was permitted in Canada much earlier
than in the US. As a result, all our major financial institutions
became diversified in the early 1990s. RBC, for example,
has a significant presence in insurance, wealth management
and securities dealing in addition to its traditional base
Canadian institutions, the current trend is for growth to
occur internationally, or more aptly in the United States.
This is because of the increasing economic integration of
example, Canada's trade in goods and services, combining
both exports and imports and cross-border investment flows,
have both increased at rates almost twice those of the general
economy (or GDP) since 1988, the year we signed the FTA.
markets, large corporations always had the capacity to access
suppliers of financial services both in Canada and in foreign
markets, particularly in New York. Now, with globalization,
smaller corporations and even retail customers have access
to those U.S. and other foreign suppliers. As a result,
our domestic markets and participants are facing a huge
challenge to remain both viable and vibrant.
economic integration of the North American economy poses
both opportunities and challenges for Canadian FIs like
have emerged as U.S financial deregulation opened the way
for nation-wide branch banking and convergence between banking,
securities and insurance sectors.
of the increasing importance of the U.S. and having reached
limits to growth in Canada, we in RBC have added to our
capacity to deliver our products and services in the US.
April 2000, we have invested almost U.S.$5 billion to make
significant strategic acquisitions in the States.
our major acquisition was Centura, for US $2.2 billion,
under which we have also placed some of our other banking
related acquisitions, such as Prism, a mortgage originator.
we have added Liberty Life and Liberty Insurance, an investment
of US $580 million.
to round out our presence in wealth management and corporate
and investment banking we have added capacity by the acquisition
of two major securities firms, Dain Rauscher, for US $1.2
billion, and Tucker Anthony Sutro for US $495 million.
the opportunities, globalization, or "North Americanisation",
also poses some major challenges for Canada's financial
sector; and by implication, for your business, especially
as you are key suppliers to our industry.
for Domestic Regulatory Efficiency
me start first with the challenge for capital markets.
the size of the U.S. economy, the most liquid and deep capital
markets for North Americans are in the U.S. That was the
case 20 years ago and that is even more the case today.
markets were always a competitive challenge for Canada's
capital markets. But now the competition from them is even
more intense as a result of North American integration.
environment, while Canada's capital markets may lack size,
we could tilt the field a bit by being more efficient in
regulation, where unfortunately, Canada does not measure
13 regulatory agencies with their own overlapping and duplicative
frameworks necessary for regulating securities in a country
of 30 million, when other countries many times our size,
like the UK and even the US, seem to be able to do with
this reason, the recent renewed interest in a national regulatory
system for securities regulation, and possibly eventually
a national regulator for all market conduct is welcome.
efficiency could also be enhanced in other areas of financial
services by avoiding duplication and overlaps, speeding
approval processes, increasing reliance upon market based
self-regulation and eliminating capital taxes.
are also initiatives that can be taken for broad application
to the entire economy to encourage productive investment
in new technology and education. However, I think my co-panelists
may have more to say on that.
second challenge that globalization poses is the need for
are freed from the shackles of being confined to regional
markets, they can grow to the level that economies of scale
require. To remain competitive in this environment, global
financial institutions have had to become considerably larger
than in the less integrated world of the past.
a combination of domestic policies against mergers of large
FIs, Canada's weaker economic performance relative to the
US and more accommodative attitudes towards bank mergers
abroad, Canada's banks have been left behind in size.
result, they have missed out on some of the benefits of
scale enjoyed by their international competitors and so
have been forced to narrow their range of products and markets.
have vacated all but a few major global syndications; some
have outsourced their entire technology departments; others
have sold off chunks of their businesses where their size
was too small to be competitive with huge scale driven competitors.
for example, only RBC of the major banks retains an exclusive
presence in the custody business, while CIBC has a presence
through a JV, and all banks have vacated the payroll business.
of Financial Reforms (C-8)
recent financial reforms, as reflected in bill C-8 and its
accompanying administrative policy have tried to address
some of these issues. There is no question that there are
a number of potentially positive elements in these reforms.
include, expanded business powers, the ability of insured
depositories such as banks to also set up uninsured deposit-taking
affiliates for wholesale banking services, and the ability
of a Canadian bank to establish another de novo Canadian
bank as a subsidiary.
and other changes will lead to improved efficiency and the
ability to offer a wider range of products and services
clear seem to be initiatives aimed at increasing competition.
While at RBC we welcome competition, we doubt whether these
reforms will have much impact on increasing the number of
players in the market.
reason why there are only a few large FIs in Canada is very
competitive banking markets with limited potential for profitable
growth. These are signs of a mature and overbanked market,
rather than one with barriers to entry. One also wonders
whether the policy makers have been consistent, in that,
the two areas where studies show greater competition would
be beneficial - insurance networking and auto leasing -
they have chosen to retain existing restrictions.
while the new federal market conduct framework including
the creation of the Financial Consumer Agency of Canada
is welcome, it will mainly cover the banking sector. Non-bank
financial institutions will continue to face the multiple
and duplicative market conduct regulation through the provinces.
however, in the merger area that the reforms are the most
ambiguous. While accepting that mergers between banks may
be a legitimate business option, the process articulated
for achieving a merger is extremely onerous, highly politicized
and uncertain in terms of outcome.
there is a prohibition on mergers between the two large
demutualized insurance companies, Sun and Manulife, and
policies on mergers seem disconnected from the economic
reality that scale matters.
global world, scale is increasingly important for long-term
growth and survival in almost every industry. Some of the
global non domestic FIs have enormous size, the cost advantages
of which they may well be able to use to challenge Canadian
FIs in the Canadian market place.
FIs may find it difficult to match their prices. This has
already occurred in some financial services which Canadian
banks had to vacate.
disjointed policy with respect to mergers and scale has
the potential for some unintended consequences. If Canadian
FIs can't achieve scale through domestic mergers, they have
only two options. Grow abroad and / or exit activities where
they do not have scale advantages - and they have done both.
Erosion of Canadian Based FIs
abroad is positive from the business perspective up to a
limit. Indeed, developing our U.S. presence is a requirement
with the growing integration of North America.
to get competitive scale advantages, foreign operations
may require very large commitments.
same time, if scale remains an elusive goal in Canada, Canada's
banks may have to exit more of scale dependent businesses,
continuing the recent trends mentioned earlier.
presence increasing in foreign markets and shrinking in
domestic markets, would it remain possible to be Canadian
based in a real sense, even though technically one might
well continue to be so classified due to a figurative head
office in Canada?
only has to note the relocation of business functions which
occurred in our Canadian context during the threat of Quebec
succession for an example of the trends that can surface.
advantages of having strong, Canadian-based but globally
relevant, financial institutions may be underestimated.
These advantages are not entirely measured in business terms.
example, Canadian based FIs, can more readily accommodate
international aspirations of Canadian firms than foreign
create high value jobs, such as in head-office functions
and technology, contributing to the creation of core knowledge
provide an important source of government revenues through
taxation and contribute also culturally and socially.
they ensure "mind of management" in Canada, which
may enable a better focus on issues unique and relevant
to Canadians than possible with management based abroad.
Implications for your business
me now conclude with two observations for your business,
since it is so closely tied to ours.
as North American economic integration continues, the market
will become increasingly a North American one for your business,
as it has for ours. As our RBC platform becomes increasingly
focuses on North America, over time it is inevitable that
we will prefer suppliers who can work with us in both Canada
and the US. As key suppliers to RBC, Gowlings should pay
serious attention to this as it is happening fast.
as we are finding, to the extent that your business has
scale dependence, you also face two challenges. Firstly,
many of our products which have a legal component are becoming
commodities. An example of this is our new "bricks
and mortar" project where, for our commercial mortgage
product, we are conducting an RFP for legal services seeking
one supplier across Canada. The second challenge is for
you to recognize that in this sector, your competitors will
likely include non traditional suppliers such as Title Insurers,
who likely are much larger and better scaled competitors
and have cross border delivery capability. This project
illustrates well both the changing nature of an important
part of your business and the competitive landscape you
RBC and Gowlings, if trends continue as they are, both of
our business strategic thinkers may have to start paying
much more attention not only to what is going on in Washington
than they have done in the past, but also to the demands
that scale necessitates. Thank you.