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A solvent, efficient and competitive financial services sector is vital to Canada's economic well-being. Canadians can justifiably be proud of our financial services sector, which is internationally held in high regard. In recent years, Canadian financial institutions have established a substantial presence in non-Canadian markets.

In keeping with all developed countries, the provision of financial services in Canada is highly regulated.

At issue for the Panel is the regulation of ownership and the state of competition in the financial services sector. Ownership regulations in the financial services sector differ from regulations in place governing the other sectors under consideration. Canada has progressively reduced foreign ownership controls in the financial sector. Today, there are no foreign ownership restrictions. As such, entry of foreign-controlled institutions is subject only to prudential approvals by the Office of the Superintendent of Financial Institutions and the Minister of Finance.

A "widely held" requirement exists for banks with equity of over $8 billion. This rule also applies to demutualized insurance companies with equity over $5 billion at the time of demutualization. No person can hold more than 20 percent of the voting shares or 30 percent of the non-voting shares.

The Canadian "widely held" rule is in place to reduce the risk of "self-dealing" and ensure sound governance practices. Self-dealing involves lending transactions between a financial institution and persons who are in positions of influence (e.g., a dominant shareholder) over the institution. Ultimately, self-dealing increases the risk of insolvency and the failure of a lending institution. While other jurisdictions do not impose explicit limits on shareholdings (e.g., Australia, France, Germany, the United Kingdom and US), the world's largest institutions tend to be widely held.44

The most commonly cited reason underlying calls for liberalizing ownership restrictions governing large financial institutions is that it would enhance competition. The Panel has heard a wide variety of views on the state of competition in the financial services sector. Larger businesses, particularly multinational enterprises often borrow abroad and generally have a larger choice of credit providers than smaller Canadian companies. Canadian financial institutions participate in international markets, where they face fierce competition from rivals, many of which are much larger. Scale is important for Canadian financial institutions and their Canadian customers doing business abroad.

Canada's largest financial institutions are often criticized for their small business lending practices. Other than late-stage venture capital, a market that needs to become more robust in Canada, the evidence before the Panel has not convinced us that competition is lacking in the supply of credit for small and medium-sized businesses. Beyond the six largest banks in Canada, there are many smaller Canadian and foreign banks, credit unions and other non-banks as well as several government-sponsored lending institutions in Canada. Competition has lowered the cost of banking services in Canada to the point where it is among the lowest-cost markets in the world.45

Canada has the potential for comparative advantage in financial services, which could be further exploited internationally. At the same time, allowing greater international competition as well as more competition between bank and non-bank lending institutions would benefit both the financial services sector and the public interest in competitive and efficient markets.46 These should be considerations in the 2012 review of the Bank Act by the Minister of Finance.

Limits to both scale and competition can be problematic. Concerning scale, bigger institutions could position Canada and Canadian-based firms and financial institutions to compete more effectively in international markets. As noted in the submission of the Canadian Bankers Association, the average assets of Canada's five largest banks in 1985 totalled 38 percent of the average assets of the top 10 global banks. Today, the ratio is about 19.5 percent.47 Canada's major banks are relatively small by global standards: the Royal Bank of Canada, Canada's largest bank, ranks as the 30th largest bank in the world according to the Fortune 500.48

Because Canada represents 3 percent of world capital markets, reaching the scale of the world's largest institutions will depend on how well Canadian banks fare in the contest to acquire foreign banks. At the same time, there may be benefits in terms of realizing efficiencies resulting from domestic mergers. In their submission to the Panel, the Canadian Bankers Association quotes former Bank of Canada Governor David Dodge:

…a flexible framework governing Canada's financial institutions that provides incentives for innovation and efficiency is needed. Bank [of Canada] research suggests that Canadian financial institutions may find efficiency gains through economies of scale — gains that could flow across the economy through lower-cost business and retail lending.49

Much has changed since 1998 when a de facto prohibition on mergers between large financial institutions was announced by the Minister of Finance. Canadian financial institutions have become more international, have pursued divergent strategies and have succeeded or fallen back according to their respective strategies. Several of Canada's insurance companies have demutualized and grown to become some of the largest and most internationally competitive in the world. More foreign competitors and non-bank institutions compete with the big banks. Internet banking has grown and expanded the choices available for consumers. Financial institutions the world over have merged, creating larger, more powerful competitors. Yet the de facto ban on mergers between large Canadian financial institutions has been in place for a decade.

The Panel is of the view that appropriate prudential, competition and public interest standards and processes are in place in Canada to allow for an objective analysis of merger proposals involving financial institutions.

The Panel recommends that:

11. The "widely held" rule applicable to large financial institutions should be retained.

12. The Minister of Finance should remove the de facto prohibition on bank, insurance and cross-pillar mergers of large financial institutions subject to regulatory safeguards, enforced and administered by the Office of the Superintendent of Financial Institutions and the Competition Bureau.

The Competition Act

Effective competition laws and policies are key elements in ensuring the competitiveness and efficiency of the Canadian economy. In its core mandate, the Panel was asked to review policies affecting competition law, focusing on the Competition Act to ensure that it fosters competition in Canada.

Canadian competition policies and institutions are largely in keeping with those of other major countries. The Competition Act is recognized internationally as both modern and flexible and, in the Panel's view, it does not constitute an impediment to Canada's overall competitiveness. However, the Panel concludes that long-term improvements to Canada's productivity could be achieved by amending certain outmoded or ineffective provisions of Canada's competition laws. The adjustments required, though, are more in the nature of fine-tuning than a major overhaul.

In assessing the effectiveness of Canadian competition law and policy, the Panel believes that it is desirable to conform Canadian legal requirements with those of the US, where practicably feasible, with a view to minimizing unnecessary procedural or substantive differences, given the high level of integration of business operations in the two countries.

The 1985 MacDonald Commission Report set out the importance of international competition to Canada's overall competitiveness and productivity:

Commissioners maintain that competition policy should not be particularly concerned about mergers and amalgamations in those sectors of the economy where foreign competition exists. Such policy should focus instead only on those sectors of the economy that are not exposed to competition from abroad. The importance of liberalized trade as a guarantee of competition cannot be stressed too often. Given the discipline of international market prices, Canada can obtain the benefits of scale and of rationalization without suffering increases in domestic monopoly power.50

The Panel believes that this reasoning is even more relevant today with higher levels of global trade and investment.

Issues in Canadian Competition Law

Despite substantial reforms effected in the mid-1970s and 1980s as well as more recent amendments, the oral and written submissions received by the Panel have persuaded us that a number of provisions of the Competition Act are either ineffective or obsolete. These deficiencies are particularly evident in respect of the conspiracy and pricing provisions. As a consequence, the legislation deviates in some respects from internationally accepted best practices.51

A recurring theme in Canadian competition policy is the need to balance the necessity for Canadian firms to achieve scale and specialization in order to compete in global markets against concerns about reduced competitive intensity in the Canadian market stemming from industry consolidation and concentration. As a small open economy, higher levels of industry concentration in Canada than in other modern economies such as the US are inevitable. As the MacDonald Commission concluded, concentration and vigorous competition are not necessarily incompatible where barriers to entry into the marketplace are not insurmountable by potential entrants.

The Panel is of the view that the primary focus of Canadian competition law and its administration and enforcement should be on anti-competitive conduct and outcomes more than on concerns about industry concentration.52

A number of the issues the Panel has considered were dealt with in legislative proposals introduced in Parliament in 2004 in Bill C-19. Essentially, the Bill proposed to decriminalize the pricing provisions of the Competition Act while strengthening the remedies available to the Competition Tribunal53 for abuse of dominant position and deceptive marketing practices violations. Bill C-19 was not passed into law due to the 2005 federal election. The Panel commissioned research on recent proposals to amend the Competition Act and heard a great deal on this subject from competition policy experts and interested stakeholders.54 Several of the proposals in Bill C-19 have merit and are relatively uncontroversial. However, the Bill did not address a number of the most important issues in Canadian competition policy that have economic importance.


Merger review is a key activity conducted by the Competition Bureau that has a substantial impact on the competitiveness and scale of Canadian industry. Most transactions are reviewed on a timely basis as posing no competition concerns and very few transactions require merger remedies. From 2002 to December 2007, data indicate that there were 7937 mergers in Canada.55 Of these, 1431 transactions were reviewed by the Competition Bureau and only 15 resulted in merger remedies, such as divestitures of assets or businesses.

Figure 10 — Mergers in Canada Reviewed by the Competition Bureau, 2002–2007

Figure 10 — Mergers in Canada Reviewed by the Competition Bureau, 2002–2007

Source: Quarterly summaries of Canadian M&A activity from Financial Post Crosbie: Mergers & Acquisitions in Canada, and Competition Bureau statistics.

click here if you would like the text equivalent of image

Merger review is a feature of every modern economy. Increasingly, the most significant mergers are international in scope. It is important for Canada to have a voice along with the competition agencies of other countries that are engaged in the review of mergers affecting Canada's economic interests. Consequently, using an analytical approach and regulatory process that is convergent with our major trading partners should not only help the Competition Bureau conduct its work but also reassure international investors that Canadian competition laws in respect of mergers are modern and transparent.

Overall, the Panel is satisfied that substantive merger provisions are generally modern, compatible with the laws of our major trading partners and appropriate for the Canadian economy. The Panel has heard much debate about the merger "efficiencies defence" but concludes that there is no compelling need to change it. Indeed, the Panel is of the view that the achievements of efficiencies through mergers is sufficiently important for the Canadian economy that the Competition Bureau should review mergers with this in mind from the outset, rather than limiting its assessment of efficiency considerations to cases where it has determined that the merger is likely to prevent or lessen competition substantially.56

During the course of the Panel's consultations, concerns were expressed about the time taken to review complex merger transactions and the use of formal investigative processes by the Competition Bureau, both of which can be time consuming and costly for the merging parties and other market participants.57 Merger analysis needs to be conducted on a timely basis in the fast-paced world of modern business. At the same time, the Competition Bureau needs relevant information and a reasonable period of time to analyse transactions that raise complex issues. Seeking court orders to obtain more information or obtain an extension of the review period is unsatisfactory, for both the private and public sectors, because it diverts time and attention away from consideration of the substantive issues arising in connection with proposed merger transactions.

Given the identification of these issues and the importance of our merger review process being better harmonized with that of the US, the Panel is of the view that it would be beneficial to adjust our merger review process into a two-stage regime that would more closely align our procedures with those in the US. This change would separate merger cases into two categories: those cases that are concluded (and effectively cleared) within 30 days of the initial filing, and "second stage" cases that raise complex competition issues. So-called "second stage" cases would be subjected to an additional review period that would terminate 30 days following full compliance with a "second request" for information.

To ensure that the merger notification provisions of the Competition Act are up-to-date and do not impose regulatory obligations on parties to proposed mergers that are disproportional to their potential to raise substantive competition issues, there should be a narrowing of the scope of these provisions by increasing the financial thresholds that trigger the notification obligation. In particular, the "size of parties" threshold in section 109 of the Competition Act has remained at $400 million in Canadian assets or revenues since 1986. While the "size of transaction" threshold in section 110 was increased from $35 million to $50 million in 2002, a further increase is likely justified in light of the general appreciation of transaction values over the past five years. In addition to or in lieu of increasing financial thresholds, consideration should be given to creating more exemptions from merger notification for classes of merger transactions that do not raise competition concerns. Such changes can be effected relatively expeditiously by prescribing regulations under section 124 of the Competition Act.

One feature of the Canadian merger review that should be retained is the advance ruling certificate procedure that effectively provides a shortcut from the notification requirements in the Competition Act for merger transactions that do not raise significant competition issues. Indeed, the Panel believes that the interests of both the Competition Bureau and the business community would be served if the Bureau issued more guidance on the criteria the Commissioner of Competition applies in issuing advance ruling certificates.

Also in keeping with international norms, the Panel questions whether it is necessary for the Commissioner of Competition to have a three-year window to challenge a merger transaction after it is substantially completed.58 A shorter period in which to challenge a transaction would provide more certainty for the Canadian business community and international investors. Moreover, the implications of a shorter time frame would engender very little change in practice, given that the Competition Bureau typically provides merging parties its views on whether the transaction raises substantive concerns in advance of the completion of the merger.59

Modernizing the Criminal Provisions of the Act

The Competition Act contains criminal provisions addressing conspiracies, bid rigging, certain pricing practices as well as false or misleading advertising and marketing practices.60 A number of these provisions have been the subject of ongoing debate concerning their effectiveness, as well as various legislative reform efforts.

The Panel is of the view that the criminal law, with its attendant sanctions including fines and imprisonment, should be reserved for conduct that is unambiguously harmful to competition and where clear standards can be applied that are understandable to the business community. This is not the case with the price discrimination, promotional allowances and predatory pricing provisions. The Panel concludes that these practices should be addressed as civil matters reviewable by the Competition Tribunal.61 This was proposed in Bill C-19, and there is a consensus that the abuse of dominant position provisions provides an appropriate civil mechanism to address these practices. Moreover, taking this action would, again, harmonize our laws in this regard with those in the US.

The resale price maintenance provisions of the Competition Act, broadly speaking, address pricing issues that can arise between suppliers and resellers of a product, but do so as a criminal offence under the legislation. This is an area of Canadian competition law that is more restrictive than comparable US law.62 Other provisions of the Competition Act, such as those relating to refusal to deal and exclusive dealing, address competition issues between suppliers and resellers as civil matters. The Panel believes that resale price maintenance should also be treated as a civil matter.

There are strong arguments in favour of reforming the conspiracy provisions of the Competition Act that are out-of-step with similar laws of other developed countries and that have been the subject of international criticism. The conspiracy provisions are often described as the "cornerstone" of the Competition Act because they address cartel behaviour such as agreements between competitors to fix prices, allocate markets or customers, or limit production. These forms of illegal collaboration between competitors are particularly damaging to the competitive process because they reduce the normal economic incentives created by competitive markets to reduce costs and innovate, key factors that influence productivity.63 This is particularly of concern, given that many cartels are international in scope, and substantive differences in the laws of the various countries that are affected by the same cartel can give rise to enforcement complications, particularly between Canada and the US.64

At the same time, criminal law is too blunt an instrument to deal with agreements between competitors that do not fall into the "hardcore" cartel category, such as restrictions on advertising or strategic alliances, but that may harm competition nonetheless. A more sophisticated economic approach to address the latter has been advocated by the Bureau and other experts to deal with this category of agreements between competitors.


There are a number of different ways of strengthening the civil provisions of the Act by empowering the Competition Tribunal to impose sanctions or penalties for breaches of the Act besides its existing order-making powers. These include providing administrative monetary penalties (AMPs) and awards of damages. A related measure to strengthen the civil provisions might be to allow greater access to the Competition Tribunal for private parties to initiate proceedings.

With further decriminalization of the pricing provisions of the Act and a consequent greater reliance on civil remedies, adequate penalties should be put in place to address violations of the law and prevent the repetition of anti-competitive conduct. The Panel can see the utility, as a deterrent, in providing for the imposition by the Competition Tribunal of AMPs of a modest amount under the Competition Act's abuse of dominant position provisions.

Amendments introduced in 2000 and 2002 provided for AMPs of up to $15 million and other interim order powers to address the emergence of Air Canada as a dominant domestic air carrier. It is clearly inappropriate to have a monetary penalty for a violation of a civil provision that exceeds the maximum fine available for a criminal offence under the key conspiracy provision. Finally, most experts agree that, to the extent possible, having the Competition Act contain rules of general application is preferable to having industry-specific rules and exemptions that reduce the transparency and predictability of the legislation.

The existing regime of private access to the Competition Tribunal, which allows for the adjudication of competition issues involving suppliers and customers, has not been extensively used. However, there is a concern that extending private access to the abuse of dominance or merger provisions would serve to promote unmeritorious litigation between competitors that would not enhance the competitiveness of Canadian industry or markets. The Panel is of the view that empowering the Competition Tribunal to award damages should not be pursued for similar reasons.

Competition Advocacy

Competition advocacy refers to assessing the impact of laws and regulation on competition and market efficiency as well as promoting greater reliance on the role of competitive market forces in the economy. It can also include examining private sector behaviour outside traditional competition law enforcement. The Competition Bureau takes on some of these activities, including participation in regulatory proceedings, which is part of its legislative mandate, as well as market studies, which are conducted on an informal basis without recourse to judicially authorized investigative powers.

The Panel has heard a great deal about competition advocacy and agrees with the many stakeholders who stated that the absence of a formal ongoing process to undertake this function beyond the limited role that Parliament has given to the Competition Bureau constitutes a significant gap in Canadian competition policy.65 At the same time, there are concerns about expanding the role of the Competition Bureau to include additional formal competition advocacy responsibilities in terms of possibly overwhelming its limited resources or causing the Competition Bureau to lose its focus on, or creating a conflict with, its core enforcement responsibilities. In this connection, the Panel is of the view that it is preferable to vest the responsibility for undertaking market studies as well as similar competition advocacy activities in another specialized and independent institution.

The Panel is of the view that the core mandate of the Competition Bureau is, and ought to continue to be, to enforce and promote compliance with the Competition Act.

The Panel recommends that:

14. The Minister of Industry should introduce amendments to the Competition Act as follows:

    1. align the merger notification process under the Competition Act more closely with the merger review process in the United States; the initial review period should be set at 30 days, and the Commissioner of Competition should be empowered, in its discretion, to initiate a "second stage" review that would extend the review period for an additional period ending 30 days following full compliance with a "second request" for information;
    2. reduce to one year the three-year period within which the Commissioner of Competition currently may challenge a completed merger;
    3. repeal the price discrimination, promotional allowances and predatory pricing provisions;
    4. repeal the existing conspiracy provisions and replace them with a per se66 criminal offence to address hardcore cartels and a civil provision to deal with other types of agreements between competitors that have anti-competitive effects;
    5. repeal the existing resale price maintenance provisions and replace them with a new civil provision to address this practice when it has an anti-competitive effect. This new provision should be subject to the private access rights before the Competition Tribunal;
    6. grant the Competition Tribunal the power to order an administrative monetary penalty of up to $5 million for violations of the abuse of dominant position provisions; and
    7. repeal the "Air Canada" amendments that created special abuse of dominant position rules and penalties for a dominant air passenger service.

15. The Minister of Industry should examine whether to increase the financial thresholds that trigger an obligation to notify a merger transaction as well as whether to create additional classes of transactions that are exempt from the merger notification provisions of the Competition Act.

16. The responsibility for competition advocacy should be vested in the proposed Canadian Competitiveness Council. The power to undertake interventions before regulatory boards and tribunals under sections 125 and 126 of the Competition Act should remain with the Commissioner of Competition, unless and until such powers are granted to the proposed Council.

17. The Competition Bureau should reinforce its commitment to giving timely decisions, strengthen its economic analysis capabilities, give appropriate weight to the realities of the global marketplace and, where possible, provide "advance rulings" and other less formal advice to parties concerning prospective transactions and other arrangements on a timely basis to ensure compliance with the Competition Act.

*Recusal Statement: The Panel Secretariat has received legal advice to the effect that since this report constitutes advice to government in the form of recommendations in a public report, Panel members need not recuse themselves from any of the Panel's deliberations. Notwithstanding this, Panel members reviewed their personal circumstances and decided to recuse themselves from discussion and finalization of recommendations concerning sectoral investment regimes where they have business relationships of a material nature, as follows:

  • N. Murray Edwards - Air Transport; Telecommunications and Broadcasting
  • Brian Levitt - Telecommunications and Broadcasting