Bill C-8, the financial services reform legislation which passed unamended on June 6, will have a relatively neutral impact on the industry unless the opening it offers for mergers between the large banks comes to fruition says Standard & Poor’s.

This legislation incorporates proposals to increase the level of competition and consumer protection measures within the financial services sector. As well, it sets the rules for a bank merger review process, wider ownership rules, and a new holding company structure that could provide Canadian banks with greater structural flexibility and less regulatory oversight. Standard & Poor’s says the slight increase in the level of competition that would result from this legislation is not likely to impede the Canadian banks’ domestic business position.

Standard & Poor’s does not believe that allowing foreign entrants will change the competitive nature of the Canadian banking industry by much. It observes that the domestic banks enjoy dominant positions in the personal and commercial market, and offer very competitive pricing.

As for the possibility of bank mergers, Standard & Poor’s says it not convinced that mergers will necessarily benefit the banks from a global perspective. It says the benefits, if any, could not be accurately assessed without knowing how the banks’ domestic and global competitiveness would be affected, which would take some time to determine.

Revisions to the ownership rules, where a single shareholder may own up to 20% of voting shares (up from the current 10%) and 30% of nonvoting shares of a Canadian bank, will have no material effect on competition in the industry.

Foreign institutions are not likely to pursue a strategy with no ownership control and only a 20% equity stake in a Canadian institution. Standard & Poor’s says that ownership stakes are more likely to be used to cement strategic alliances in specific business lines, spurring some innovative structures, though the effectiveness of such structures is yet to be proven.

Although the new holding company structure may have subsidiaries facing lighter regulatory requirements, according to Standard &Poor’s the benefits pertaining to capital and tax relief remain unclear. The credit ratings firm says the holding companies themselves are likely to be rated lower than the operating companies.

Standard & Poor’s notes that the moratorium on mergers and acquisitions in the life insurance sector will be lifted Jan. 1, 2002. It says that mergers of banks and insurance companies seem unlikely as cost and product synergies are not readily apparent.