Business in the Canadian Context
ADMS1010 – Summer 2012 – Troy Young
Lecture 12 – Confederation Life and RBC – July 26 2012
Profile of the Financial Services Industry in Canada
- The Financial Services Sector is incredibly varied.
- The financial services sector is a significant contributor to Canada’s economic
growth, employing over 750,000 Canadians in 2007. The sector represented over
6% of Canada’s gross domestic product in 2007 (up from 5% in 2000) and
contributed approximately $78 billion to GDP.
- Over $60 billion in acquisitions have happened outside of Canada by our
financial services sector, which is widely considered one of the most highly
developed financial services sectors in the world.
- This is anchored by what is deemed to be the world’s strongest banking system.
- The financial services sector plays a critical role in a market economy.
o Provides capital for business growth, both established businesses and
new businesses alike.
o The Financial Services Industry helps government finance debt issues
(through the sales of bonds or other financial instruments) that allow
government to operate programs that benefit society.
o Also provides every day for financial transactions, including chequing,
savings and wealth management.
- Foreign investment in our financial services sector is high, accounting for $54
billion in 2006.
- Canadian Life and Health Insurance companies sell their policies outside of
Canada as well, accounting for an additional $77.7 billion in premiums generated
outside of the country.
Profile of the Financial Services Industry in Canada
- Made up of many different types of businesses:
o Trust and loan companies
o Credit unions and caisses populaires
o Life and health insurance companies
o Property and casualty (P&C) insurance companies
o Securities dealers and exchanges
o Mutual fund companies and distributors
o Finance and leasing companies
o Independent financial advisors
o Pension fund managers
o Independent insurance agents and brokers.
- Banks are the largest and most well-known of this sector, accounting for $1
trillion in assets, in 2000, or half of the value of the entire sector.
- Mutual fund companies are next with $419 billion in assets.
- Life Insurance comes in at $267 billion. - Credit unions account for $122 billion.
What is a Trust Company?
- When one administers the assets on behalf of another, this is called a trust.
- A trust company is an organization that specialises in being a trustee for these
assets and managing estates.
- When someone is tasked with managing your money on your behalf, this is often
- The largest trust companies are subsidiaries of the major banks.
What is a Credit Union?
- A credit union is a financial institution that is operated by a membership group.
- Everyone that has invested their money there has a say in how it is operated.
- Each member has a single vote, regardless of how much money they have
- They offer many of the same services as banks (like savings, chequing and
- They are much smaller than banks, and prevented from operating in more than
- Caisse Populaire de Levis was the first credit union ithNorth America
- Credit unions started in rural Germany in the 19 century as a way to raise
needed capital on a community level to spur on investment.
- Most exist to provide affordable credit to their members and assist with
- The Building & Loan from “It’s a Wonderful Life?” that would be a credit union.
- Canada boasts the highest level of credit union per capita usage with one-third of
Canadians belonging to a credit union.
Regulatory Oversight and Reporting of the Canadian Financial Services Sector
- Both the federal and provincial governments share jurisdiction over the financial
- Banks are regulated by the federal Bank Act (way back in Week 1).
- 90% of life and health insurance companies are regulated under the federal
Insurance Companies Act, but are also required to follow regulations of each
province they do business in.
- The federal government oversees financial institutions through the Office of the
Superintendent of Financial Institutions (OSFI).
- This is mainly on deposit taking institutions, insurance companies and private
Office of the Superintendent of Financial Institutions (OSFI)
- OSFI was established in 1987.
- It was created through the merger of two other agencies – The Inspector General
of Banks (OIGB) and the Department of Insurance (DOI).
- The OIGB was established in the mid-1920’s, and the DOI was established in the
very late 19 century.
- The government in 1984 stated its intention to review Canada’s financial system. - Rapid change in the global financial system required that Canada modernize its
- The failure of the Canadian Commercial Bank and the Northland Bank in 1985
further spurred the need for change.
- The OFSI has two real functions: regulation and supervision.
- Regulation includes helping to develop and interpret legislation with regards to
the financial services industry, issuing guidelines to financial service businesses
and reviewing and approving requests from institutions regulated by the
- Supervision is the assessing of the soundness of the institutions and pension
plans, to make sure that they retain sufficient capital to operate in an effort to
protect the rights and interests of all of those whose wealth is being managed by
The United States Financial Service Industry
- By comparison, the US financial services industry accounts for 8.4% of their
- The US banking system has $13.3 trillion in assets at the end of 2010.
- The insurance industry accounted for an additional $934 billion.
- The Banking Act of 1933 (commonly known as the Glass-Steagall Act)
introduced banking reforms aimed at curbing speculation.
- Remember, the US had smaller regional banks, many that failed. Canada had
large banks with multiple branches, making them more secure.
- The Glass-Steagall Act was aimed at fixing issues that directly helped cause the
- Glass-Steagall separated commercial banking from investment banking.
- This prevented banks and insurance firms from entering into each other’s
- This kept the individual businesses relatively small, since they could only grow in
- Glass-Steagal was partially repealed in 1999 and replaced with the Gramm-
- The GLB allowed the various companies to merge.
- The banking industry had lobbied heavily to allow these types of mergers to
- The GLB was in part brought about by the merger of Citicorp (bank) and
Travelers (insurance company) which was deemed to be in violation of Glass-
- These types of mergers were now allowed.
- Directors and other bank employees could now also hold positions at more than
one financial institution.
- Banks could still not own other non-financial service companies, nor could other
companies start banks (WalMart wanted to start up a commercial bank).
- The amount of equity that a bank was required to hold under the fractional
reserve banking was downgraded. - General oversight of the financial services sector lessened. Many point to the
GLB Act as one of the causes of the current economic crisis, by creating
companies that were “too big to fail”, although that is open t