RBC’s proposed takeover of HSBC Canada underscores the limits of competition law in Canada, the need for a broad review.Andrew Vaughan/The Canadian Press
When the CEO of the biggest bank in Canada announced a deal to get even bigger, he faced obvious questions about competition. He said he didn’t see reason for worries.
“We are not aware of any areas where the [Competition] Bureau is likely to have concerns,” Dave McKay, Royal Bank of Canada CEO, said in late November, as RBC laid out plans to buy HSBC Bank Canada for $13.5-billion in cash.
Mr. McKay is most likely correct – based on the current Competition Act. The act favours such deals, as a matter of (outdated) policy.
The act was written in the mid-1980s, when the idea of bigger is better reigned. One key principle is “efficiencies” – cutting costs as two companies become one. Such gains can trump a lessening of competition, under the act. Unique to Canada, the efficiencies principle aimed to build stronger companies that could compete abroad and buoy the domestic economy.
A groundswell for change has coalesced in recent years as other countries moved to reconsider their competition laws in an age of massive multinational technology companies. The head of bureau, Matthew Boswell, in October argued the Competition Act enables “high levels of economic concentration – even monopolies.”
In November, the federal government launched a potential overhaul of competition rules. Questions range from whether the bureau needs stronger investigative powers – which would be of use in its current market study of the grocery industry – to a total redrafting of the law’s priorities.
RBC wants to cut more than half of business costs at HSBC Canada. That will include job losses. This would likely fit well within the bounds of the current Competition Act, even as the deal would see the No. 1 bank swallow the No. 7 lender. Mr. McKay described the banking industry as “hugely competitive” and says the disappearance of HSBC Canada, with a total market share of about 2 per cent, would not change industry’s structure “whatsoever.”
At a minimum, the merger would mean less choice for Canadians. The country’s six biggest banks already control about 80 per cent of all lending. RBC’s market share alone is more than 20 per cent. The consultancy McKinsey, in its annual global banking review this month, showed that Canadian banks’ return on equity – a key industry gauge – is higher than banks in most countries, including the United States and the United Kingdom.
Just one example: HSBC Canada makes more money than HSBC’s business in the U.S., which is double the size.
HSBC Canada was established in 1981 – an arm of a global bank headquartered in London. While considered small by RBC, it has $134-billion of assets, serves almost 800,000 retail customers and 12,000 businesses, and is a prominent lender to industries such as real estate, manufacturing and wholesale-retail. In 2016, it made a push in residential mortgages, offering lower rates than the bigger banks. That made a splash: its mortgage business, according to RBC, grew by a third in the past four years.
Small doesn’t mean a company can’t make a sizeable competitive dent. In mortgages, HSBC Canada surely did. And small can go a long way in concentrated industries. The Competition Bureau, looking at telecom in 2019, detailed how a small wireless player can have an outsized impact. Upstarts with market share as low as 5.5 per cent could help drive prices lower by more than a third, the bureau found.
RBC’s proposed takeover underscores the limits of competition law in Canada, the need for a broad review, and the growing necessity of a modern set of rules. Ottawa has said everything’s on the table and Mr. Boswell has a lot of ideas. Among them is ending the primacy of efficiency, which the bureau calls “harmful to Canadians.”
RBC wants to complete its deal by late 2023. There’s ample time to determine if it is good or bad for Canadians – or somewhere in between. While the bureau is limited under the Competition Act, Finance Minister Chrystia Freeland has a wide ambit under the Bank Act. She can assess “all matters she considers relevant,” from the “rights and interests” of customers to the impact on competition. She could approve the deal as is, order a partial divestment, or say no altogether.
For this deal, Ms. Freeland should give careful consideration to the needs of consumers. Longer term, a revised law should provide bolstered powers to the Competition Bureau.