Banking on insurance

(April 2006) My bank has been phoning me a lot lately. And every time they call, panic automatically sets in: Have I been the victim of identity theft? But as it turns out, they’re always just thrilled to offer me “an extraordinary new service only available to select accounts.” You can imagine how privileged I feel to have my dinner or TV show interrupted for this.

So as the federal government reviews the Bank Act and considers granting banks the power to sell insurance in their branches, I’m already aware of the possible implications: even more sales pitches offering me stuff I simply don’t require!

Seriously, who can blame the banks for wanting insurance information in their branches? They see it as a new growth area — not surprising, as there’s a renewed focus on retirement income planning strategies.

The issue is especially an aggravation for RBC chief executive officer Gordon Nixon. At a speech in Toronto last month, Nixon noted the banks could provide “broader choice and better pricing,” creating a win-win for the insurance industry. He highlighted the absurdity of grocery stores Loblaws and Costco offering insurance while “the banks that are in the business of providing financial advice cannot.”

He has a point. Opening insurance up to the bank branches means exposing the product to more consumers — notably those with modest incomes who are not even targeted by financial advisors. That should be seen as a good thing.

So what’s the problem? For starters, the lack of consumer protection. One fear is the banks will hold their credit granting authority over the average consumer’s head. In other words, a bank rep may suggest (ever politely, of course) that if Jim wants that competitive mortgage rate, he’d better open an RRSP account, or in the future, buy some insurance.

Is mild coercion in itself reason to restrict the banks from providing insurance in their branches? It very well may be. Tied-selling may be illegal but that doesn’t necessarily stop the practice from occurring. Many advisors hear client complaints about the current practice of bank coercion. In a lot of these situations, the clients are buckling under the pressure because they feel they have no other choice.

While the banks have lovely, colourful brochures that speak out against tied-selling, this in itself does nothing to actually enforce the rules. The onus shouldn’t be on the consumer to point out to the bank rep that “coercion is against the law.” The consumer already has enough on his mind, worrying about someone rejecting that all-too important loan if the bank doesn’t get any more of his investment business.

Advisors themselves can do more to get the word out. Make sure clients are aware of these possible scenarios and are equipped to deal with them.

There are other issues with insurance in bank branches. While increased distribution definitely has its advantages, it can’t be taken lightly. Buying insurance shouldn’t be equated to buying a shirt. And how accredited will those selling insurance in the bank branches be? Will reps be doing a complete insurance needs analysis with prospects or just simply trying for the biggest sale possible? Let’s hope these details are hammered out well before the feds revise the Bank Act.

Filed by Deanne Gage, Advisor’s Edge deanne.gage@advisor.rogers.com