Laura Paglia:
Welcome to Candid Conversations for Financial Markets podcast series. I’m your host Laura Paglia, President and CEO.

Our podcasts are designed to provide insights, transparency and provocative yet achievable proposals for matters that move financial markets in Canada.

We are joined today by the Honorable Colin Deacon. Senator Colin Deacon was appointed to represent Nova Scotia in the Senate in June 2018 with an entrepreneurial background. When appointed to the Senate, he was tasked with one request, to hold the government to account and to challenge it to be better. He is staunchly independent and believes in collaborative work amongst all parliamentarians.

He intends to continue disrupting the status quo and challenging the government to improve for the benefit of all Canadians and the Canadian economy.

As part of the Senate, he has been a strong advocate for entrepreneurs, harnessing the digital economy, updating Canada’s privacy legislation, ensuring global competitiveness of Canadian firms, and promoting Canadian leadership on climate change. Welcome, Senator Deacon.

Colin Deacon:
Thank you very much, Laura. I’m really glad to be with you today.

Laura Paglia:
Thank you, Senator Deacon. How else can we incentivize these Canadian companies to grow with domestic capital as opposed to foreign investment?

Colin Deacon:
I would say that I’m not against foreign investment. I just don’t want to have us relying on it.

It’s a crutch, you know, and all the economic benefits of our ideas, our innovation, our entrepreneurship are sucked out of Canada. I don’t want that to be the case for sure, but I’m not against foreign investment. What we’ve got to do is create the conditions that will cause Canadians to invest in Canada.

So how do we incentivize Canadian companies to grow with domestic capital better than we are today?

One of the ways, I mean, is, you know, government puts a lot of money into investing in innovation, but has it been effective? I’m not entirely certain the degree to which. We don’t do a good job of monitoring the KPIs around that, but when they do invest, I think they should be in businesses. They should be a co-investor on private sector-led investments, and they should have all their conditions clearly and simply, their requiring conditions clearly stated up front and not have a decision-making period where something goes back to Ottawa after a deal is done. That just wastes entrepreneurs’ time. So if they’re going to invest, have a co-investment structure right up front that is very clear and can behave like the private sector.

But I think the biggest thing we need to look at is to provide incentives that reward Canadian investors, like reducing or eliminating capital gains taxes every time Canadians invest in companies that demonstrate the sort of conditions that show the fastest sustained growth. I mean, those conditions include R&D and exports into global markets because it proves that you’re globally competitive, innovative and globally competitive, and those have been well shown over time by Stats Canada.

But the other thing is, is that when a private company goes public, we reduce their access to the federal scientific research and experimental development tax credit benefits. So we’re disincentivizing a Canadian leader at this point in time, a leading company, to go public in Canada because of that shred rule. So it’s something for us to consider there.

The other thing is, I think we’ve got to do a better job of catalyzing private sector leadership, due diligence and investment right across the country.

I say this as somebody who—I hate saying it out loud when I’m in Nova Scotia, but I’m going to—I’m from Ontario. I grew up in Ontario. I’m come-from-away. I’m a Nova Scotian by choice.

But I do note that a huge amount of the money that’s invested by Nova Scotians ends up—the decisions end up being made in Toronto as to where that money gets allocated and invested and the priorities that are brought forward to investors.

And I’d like to turn that around. And one of the things that I’ve noted over the years is the UK has got great performance reports on a program called the Enterprise Investment Scheme. And it’s a tax-advantage program to encourage investment across the UK. And every corner of the UK, there’s money from every corner of the UK going into every corner of the UK.

And it’s similar to what we have in Nova Scotia—and I think BC has as well—the provincial equity tax credits. But that’s a barrier to interprovincial investing. And I think that’s the problem.

What we want to do is have Canadians investing, the capacity to invest coming from Canadians right across the country and going into businesses right across the country. But the key is on any program that’s put in place, we’ve got to monitor and report outcome-based key performance indicators.

Colin Deacon:
The other big thing I would recommend for us to get more domestic capital moving is implement a broad-based incentive to encourage corporate spinoffs.

And this could help to deconsolidate or de-monopolize our economy.

And it could be simply a tax-free incentive to spin off a division or entire company, but as long as they turn into a completely independent operating company. Now, why do I like this? We could create Canadian entrepreneurs from deep in the bowels of our oligopolies, because they’re only working in those oligopolies because in many cases it’s their only career option in that sector in Canada.

So they’re there, they’ve got talent—we could unlock that talent.

We could use a version of the current employee ownership trust program that we have in Canada to help in this process and lead to getting employees more invested in these opportunities.

We could create new companies right across the country that could attract investment back into Canada. And I speak to an awful lot of people that the only way they can get the diversity in their portfolio is to invest in public companies outside of Canada. We just don’t have enough diversity in our markets anymore. Well, this could help to address that.

At some point, I do think it is important to talk about the $2 trillion in the Maple 8 pension funds. That’s, I think, something you’re probably going to do in a whole new podcast at some point in time in the future. So I don’t think we’ll talk about that here, but I do think it’s important to understand that Canadians must contribute to these plans by law, but these funds are not required to invest in Canada. So I think at some point we have to at least have a good Canadian discussion about that issue.

The biggest area where I think we really need to rethink in order to encourage investment in Canada is the globally leading level of rules and regulations that are anti-competitive. We’ve got to turn them pro-competitive. And it’s at every level of government and every department.

It’s not just municipal, it’s not just provincial, it’s not just federal—it’s at every level and it’s across departments and sectors.

And the Competition Bureau has been long asking for government to implement a pro-competitive review, a process for making sure that we start to make sure our regulatory burden enables innovative new entrants to break into markets that are dominated by incumbents. And I think that’s absolutely critical. Specifically, I think it would be important to do this in the investment industry itself.

And the reason is we can’t ignore the fact that our public markets are increasingly irrelevant.

And when you consider that almost every Canadian would have shares in one or more of the six banks directly or indirectly through a mutual fund or ETF or pension fund.

So there’s no question they’ve got—and the banks have—an outsized share of our financial markets. And they also exercise an enormous influence on how those funds are actually allocated and in making up the rules on how our markets function. And I just offer—we’ve got way too many eggs in six big baskets at this point in time.

So to enable and encourage new businesses to emerge from under the control of the banks, I think there’s a spinoff strategy and incentivizing spinoffs that would do what I think every investor is told to do—which is to diversify. It would be diversifying our economy as we suggest investors diversify their portfolios.

And then you consider divisions within the banks or bank-owned companies like Interac or Simcor, they could become standalone independent public companies competing in Canada—not just in Canada but globally—for business. And that will help to drive innovation in our economy, and innovation drives productivity growth.

So that’s where I think we’ve got to start—to focus at the foundation of our economy if we’re going to get the sort of innovation we need right across the economy, because the foundation of our economy—the payments, banking, and investment sectors—are critical to how our economy functions.

Laura Paglia:
Deakin, thank you very much. The financial sector has been a focus of several of your comments, particularly regarding spinoffs. Why?

Colin Deacon:
We’re never going to rebuild our economy into a diverse and robust domestic investment sector when 93% of the country’s assets are controlled by six men behind six doors.

Our biggest banks right now make a 30% return on equity year in, year out, without taking big risks or making big bets.

That is an ROE that’s three times the global average for banks.

So it’s not going to change without political will, but I think there’s reason for that political will.

The conditions that deliver that 30% year in, year out ROE—I tell you—they’re going to be tenaciously protected. And I’ve seen that over the last number of years just with the conversation about open banking, or consumer-driven banking as it’s called in Canada.

The Senate studied this. We produced a report back in 2019 and really encouraged swift action on giving Canadians control over their financial data—which is really, that’s all this is. It’s giving Canadian financial consumers secure control over their financial data. That’s what open banking is. It’s very simple.

The Competition Bureau has been promoting it since 2017. Both leading political parties promoted it and committed to it in 2021.

But we are still facing lots of resistance on moving forward.

My concern is that proponents of the status quo, I should say, they’re really good at creating arguments as to why everything needs to slow down and not have changes to how the country’s run. And one of the biggest arguments against open banking involves a conflation of prudential regulation with the need for the banks to control payments, banking, and investment sectors. And that’s hogwash.

You know, a change in how Canadians—the simple change of giving Canadians control over their financial data—does not affect the prudential stability of our banks.

And the other thing is OSFI oversees 400 FIs. I mean, if there were more or a few more organizations to oversee, I don’t think that that is going to be an issue. So it’s not a prudential risk.

But the key is right now is that we have seen already six to nine months of reduced business investment—that just today—because of the uncertainty around Donald Trump, that’s going to be continuing for the next 12 to 18 months, at least if not for the next three or three and a half years.

So we have got to act with decisiveness, with courage, and with urgency if we’re going to start to cause our economy to reverse the productivity decline that it has been experiencing for a generation.

Laura Paglia:

With respect to your comments on innovation, several of your comments have focused on the importance of it. For the benefit of our audience, when we’re referring to innovation, what does that encompass?

Colin Deacon:
It’s simply finding a new way to create and deliver new value. It can be new technology, old technology used in a new way or a new process.

It could be a new business model. Basically, it’s anything where you are creating new value because you’re doing something differently.

Laura Paglia:
You have mentioned the federal government investing billions of dollars annually to promote business innovations through various programs. There was a very welcomed analysis on that. Despite those investments, the results have been underwhelming in Canada.

Canada has received a C-grade most recently from the Conference Board of Canada’s 2024 Innovation Report Card, ranking 15 out of 20 countries.

Why are government programs needed at all to fund innovation?

You’ve referenced the role of the private sector. Are we being realistic in asking them to get involved?

Colin Deacon:
Well, it’s certainly been a tradition in Canada for government to be investing. How often that is a catalytic investment versus a crutch to a business is, I think, a question that needs to be considered. And sometimes it’s worth handing out crutches. In 2008, the North American auto industry was saved from the brink and the majority of that support was paid back, as I understand it.

So it’s really—there are times where there is that role of government to provide support. But its most important role, I don’t think, is as the funder of innovation. Its most important role is how it shapes markets and competition as a regulator and how it procures—as a buyer. Those two things can do far more in causing innovation and creating opportunity than any investment the government can make, as far as I’m concerned.

The government decides how markets function. That’s the simple reality. And they can either create conditions that encourage or discourage investment in Canada. I think we’re seeing right now that Canada has got conditions that are discouraging investment in Canada.

It’s discouraging it on the part of our pension funds. There are only 14% of our biggest pension funds invested in Canada.

It’s discouraging in terms of venture capital investment. We’re hearing that the same sort of number comes from Canada in investing in our highest growth opportunities, according to the Canadian Venture Capital Association. We’re seeing it in terms of a lack of investments and opportunity through the Toronto Stock Exchange. So right now, the structures we have in how our markets function are discouraging investment in Canada. That can change. The conditions to encourage investment in Canada can be created.

Laura Paglia:
Thank you for your comments on a catalyst versus a crutch. And sometimes crutches are needed. We’ve had some government programs facing others less successful with respect to its investments in innovation.

Which have succeeded and which haven’t, and what is the deciding factor?

Colin Deacon:
Last summer—and I’m glad you’re asking about this because it really is important for us to understand what’s working—we studied about 140 different programs across the federal departments. And again, I’ll give you a link to our report in the show notes. They can put it in the show notes.

But what we found is very few of them had KPIs—key performance indicators—around the results. What did they cause to occur in terms of creating a competitive business that would be self-funding and growing and building global revenue streams?

The things that I found toughest in this is the amount of money in the government’s Strategic Innovation Fund, which is designed to develop and exploit IP in Canada. And the amount of money that was invested in Canada, I think, was for me disconcerting and concerning. And I think we’ve got to start to get our head around how important it is to develop IP, protect IP, build IP in Canada that is then exploited in Canada, creating opportunities, jobs, and wealth.

The ones that were successful predominantly—it’s where government was a co-investor that prioritized private investment, private due diligence, and private commitment, arm’s length, to helping a business grow. I think that’s the key. When the decision-making is in Ottawa, it’s not being made by people who have experience in building businesses on the front line, on the coalface, who’ve woken up at three in the morning with a panic as to whether or not they can make payroll and they can keep building the team.

And so I think government as a co-investor is a very important model to be considering following.

It doesn’t mean there won’t be failures. Of course, there’ll be failures. But keep it away from the politicians and just have the politicians designing the model that is based on some critical key performance indicators.

The other we found was a procurement example called Innovative Solutions Canada. That’s a program that linked innovative public servants with innovators where they were searching for a solution to a pervasive problem that there wasn’t a current solution to.

The government’s own data showed that for every dollar invested, it created $1.30 in taxes and $3 in GDP growth.

Now the sad thing is this program’s budget was cut by $70 million—or cut in half—about a year ago because it wasn’t a priority across the departments of government. Well, in my mind, that needs to be a political priority. We need to get our departments investing in, as a buyer, Canadian innovation. There’s just no question in my mind that that’s got to become a priority.

The other is funding private sector programs that help entrepreneurs and innovators to scale technologies and ideas and create equity value. There are some great examples. Rotman’s Creative Destruction Lab is a really world-leading example. Another is Bio-industrial Innovation Canada.

They are really focused on creating equity value that the private sector invests in. To me, this is all about how do you get the market investing in innovation—getting Canadians investing in innovation—not government investing in innovation.

We invest more capital in our governments in Canada than most other G7 countries, but we don’t get the return. This is why I really feel it’s important for us to be catalyzers, not the crutch.

The last thing is, I just—in my heart—believe that when you’ve got a big, hairy, pervasive public sector problem, the people who can help you solve it are Canadian entrepreneurs and innovators.

If we are to have an XPRIZE kind of model and government-funded competitions around big, hairy problems, we will come up with really exciting Canadian-made solutions—not government-created solutions.

If we start to fund Canadian innovators that way, I think we’ll be amazed at the businesses that we create to solve public sector problems that could be scaled around the world if we do so. That’s because I believe in our ability to compete, but we’ve not been harnessing our ability to compete.

Laura Paglia:
Senator Deacon, your belief in our ability to compete and the importance of competition law and policy in Canada is very welcomed and refreshing to hear. Several critics have suggested that Canada still has a level of tolerance for competition.

Where is competition lacking or needed the most in our economy?

Colin Deacon:
The changes that have been made to the Competition Act were really, really important—and they’ve been done over the last couple of years—so really important. They stopped a steady 40-year march towards the complete monopolization of the Canadian economy. From that standpoint, great work has been done, but it’s not nearly enough because competition does remain a problem in Canada. We’ve got to get rid of the anti-competitive policies, regulations, legislation that exists right across the whole of government in every sector.

So where is it needed the most is really what you asked.

I think we’ve got to look at our financial sector. Our biggest banks are by far the most profitable in the world when you just look at the Canadian operations, but over the last 20 years, the return on equity from their Canadian banking operations—the five biggest banks—have averaged more than 32% ROE year in, year out. The worst year was 2020, when it was in the low 20s.

The average ROE globally in the banking sector is about 10%. So I think it’s really important to look at that comparator because when you roll in the rest of their operations—U.S. and international—that element is about 7% and that takes it…

So if I was to say it another way—let me say it another way entirely:

The ROE of our five biggest banks is at least four times greater in their Canadian operations than when they face and compete in the global marketplace. That’s a concern. That means we are not as globally competitive as I believe our banks can be. And I believe in our banks, but I don’t believe that it’s right to have them continue to dominate to the degree that they are.

And it’s something—competition again is what every bank CEO, every economist repeats as being critical to driving productivity growth.

So at this point in time, I think that we’ve got to make sure that we create the conditions that have our banks investing far more money in globally competitive innovations in how they do business than they do in lawyers and lobbyists. Because I think lawyers and lobbyists is how they’ve been able to compete so well in the Canadian market.

So I’ll give you just a couple of examples. One of them is we have systemically important banks in Canada—or SIBs. This status gives them capital adequacy advantages, deposit support from the Government of Canada, and additional benefits that are not available to other banks.

This SIB status, in my opinion, removes competitive tension that the banks’ CEOs and economists say are so important.

It reduces the competitive pressure, the need to innovate, the need to improve service, the need to enforce pricing discipline—all at globally competitive levels. And what amazed me when I started to learn more about this is that the SIB status—the systemically important bank status—is granted purely due to size.

So ironically, this gives a competitive moat—provides a competitive moat—around our biggest banks that ensures that they stay big regardless of whether they successfully invest in becoming more globally competitive.

Because size is the only factor.

What this means, ironically, is that a smaller bank could be more innovative, more modern, more technologically advanced, more customer-centric, but it will still be systemically disadvantaged because the SIB status is only granted on size. That doesn’t make any sense.

And I think it was well stated once by former President Biden. I really enjoyed his quote where he said, “Capitalism without competition is exploitation.”

And I think we have to listen to those words carefully in this country because we have had a lot of capitalism without competition across our country and how we run our governments.

Laura Paglia:
Senator Deacon, are you able to provide us with some key examples?

Colin Deacon:
There’s three key areas of the banking sector that are owned by our big banks. There’s payments, there’s banking, and there’s investments. So I’ll give you examples from each one.

Last October in the House of Commons, a group of MPs—Michelle Rempel Garner and Adam Chambers—they were asking questions of Interac about their e-transfer fees to a board member.

And they focused in on volume-based pricing. That’s the way that it was decided that the big banks would be charged six cents for each e-transfer, and smaller financial institutions were going to be charged 43 cents—more than seven times more for each e-transfer.

Now, all they wanted to do was get some understanding as to why—from a pricing standpoint—that logic was in place. But what I thought was really interesting is just the sunlight being shone on that anti-competitive pricing model. Just the sunlight being shone on it caused Interac to change their policy within a week.

So to me, it just shows that right now we have a lot of things going on in our system that are not defensible when the public starts to learn about them.

Look at credit card interchange fees. In Europe, the interchange fee is 0.3% on all credit cards. And Canada is now down to 0.95%, which just reduced last November from 1.4%.

On Canada’s $12 trillion in payments a year, that means that Canadians—consumers and small businesses—are only paying $78 billion a year more than we would be paying in the EU.

And just in case somebody says the premium is needed because of Canada’s geographic size, I’d offer that Australia has 0.5%. So we’ve been out of whack for a long time. We’re still out of whack. And it’s costing Canadians a lot.

And payment systems are like telecommunications. It’s an essential infrastructure that only the incumbents can access.

And what’s ironic is the new entrants—the competitors who come in—have to buy access from incumbents in order to compete with the incumbents.

So it’s a system where there isn’t—we’ve got to somehow look at the market dynamic there and say, what is the best way to start to encourage innovation and competition in the most important parts of our economy, like payments and obviously like telecom.

There was a great article in The Economist about a little over a week ago about modern payment systems in the UK and Brazil and how they’re far more inclusive and affordable, offer banks, credit unions, securities dealers, fintechs—everybody—with a level playing field and the ability to better meet the needs of consumers.

So in the payments area, I don’t know what we are now—eight years into getting a real-time payments rail for immediate clearing? We’re so far behind in Canada, and it is such an expensive system. If it was more expensive because it was better, that’d be one thing. But we do not have world-leading status at all.

In banking, you’ve got to consider the sad reality of TD’s AML failure in the United States and the $3 billion fine that occurred and how their business in the U.S.—the growth of it—is going to be curtailed by the U.S. regulator. It was truly humiliating for Canada. It was front-page of every financial newspaper in the world. We’re seen to have a well-regulated, trustworthy banking system, and this was a real hit.

But yet we had—and we have in St. John’s, Newfoundland—the world-leading AML software service provider. We’re just not causing our banks to implement the very best systems in the world. And right now, the competitive pressure isn’t there.

Massive AML failures are preventable, but we haven’t done what is needed yet.

Then you’ve got to look at the issue of fraud.

Fraud is modern-day bank robbery. It’s money being stolen from consumers rather than the bank—and without a mask and a gun. And it’s preventable. Yet for some reason, we’re not making progress there as a country.

And I have spoken to many different regulators across the country, and most believe that where we’re standing with AML and fraud is that they are similar in scale in Canada now as those operating risks are similar in scale to the prudential risk management needed in our banks.

So these are serious issues where we’re just not making headway. That’s the banking side.

In terms of the investment industry side, I’d look at the Client Focused Reform that was introduced in September 2021 called the Know Your Product rule.

And the first reaction of our biggest banks was to announce that they’re going to halt sales on third-party mutual funds.

Now, Ontario Finance Minister Bethlenfalvy scoffed at that and said it wasn’t reasonable—that their excuse was it wasn’t reasonable for them to fulfill the Know Your Product obligation on funds they didn’t control.

So it was reversed—the decision was reversed—but we’ve got to recognize that the self-interest-serving reflex is there and it will, whenever possible, reduce competition. And even for a quote-unquote client-focused reform.

So the banks are doing what they need to be doing. They’re protecting their shareholders. But our governments, our regulators, are not doing their job in creating the structures that are empowering Canadians.

So I’m of the view that we’ve got to start—we’ve got to do something significant to turn this around. I am convinced that our banks include an incredible number of frustrated entrepreneurs in different divisions that—if spinouts were to happen—we could see some phenomenal opportunities being created in this country.

Consumers, shareholders, the economy overall would benefit.

I think there’s just a great opportunity for us to create new entrepreneurs, create new investment.

But my biggest worry is that our banks very much just want to protect the status quo. Fair enough—they’re serving their shareholders best, I guess, as they’re doing that. But the other is there’s not enough senior leaders in government that have realized that the systemic problems we’re facing cannot be solved through regulation alone. We have got to increase market competition structurally. We’ve got to do that through changes in ownerships. And we’ll never regulate our banks into being customer centric or globally competitive.

That’s where I’m hoping that we can focus. I think Canada is a strong nation of innovation. I think we absolutely can start to invest in ourselves. And I think we can absolutely reverse the decades-long decline in productivity in this country that’s eroding the prosperity of ourselves and our grandchildren.

Laura Paglia:
Senator Deacon, this has been a very welcomed, very important discussion.

Colin Deacon:
Thanks so much, Laura. I’m really honored to be invited and included.