Banks subject to provincial insurance law

In a decision that is bound to shake the financial services industry, the Supreme Court of Canada has ruled that banks are, in fact, subject to provincial insurance law. The ruling represents a major impediment to the banks’ quest to sell insurance in their branches.

“The [Alberta] Insurance Act and its associated regulations apply to the banks’ promotion of insurance,” the court said in its ruling. “The fact that Parliament allows a bank to enter into a provincially regulated line of business such as insurance cannot, by federal statute, unilaterally broaden the scope of an exclusive federal legislative power granted by the Constitution Act, 1867.”

The case stems from an appeal launched by Canadian Western Bank, challenging Alberta’s right to amend its Insurance Act to include mortgage life insurance, which is widely available in bank branches across Canada. Canadian Western Bank was joined by the rest of the banking industry in the appeal to the Supreme Court.

The banks had argued that these products were part of their banking operations and therefore subject only to the federal Bank Act.

“When promoting insurance, the banks are participating in the business of insurance and only secondarily furthering the security of their loan portfolios,” the court said in the majority decision. “The banks’ claim to interjurisdictional immunity must therefore be rejected, and they have to comply with both federal and provincial laws because the paramountcy doctrine is not engaged in this case.”

The decision leaves the door open for other provinces to rewrite their own insurance legislation to regulate insurance sold to mortgage applicants.

The court said that while securing collateral for a loan is intrinsic to banking as an industry, promoting products to serve as that collateral is not. Furthermore, the banks’ argument that provinces could not regulate their insurance activities would create a legal vacuum, since the federal government is barred from regulating insurance sales.

“The banks did not demonstrate that credit related insurance is part of the basic, minimum and unassailable content of the banking power,” the court said. “While s. 416(1) of the Bank Act allows bank corporations to engage in some insurance activities, it recognizes insurance as a business separate from banking.

“The banks themselves do not consider the insurance to be vital to their credit granting, since apart from s. 418 mortgages, the loan agreement is not, in practice, made contingent on obtaining insurance. The bank cannot therefore be protected from operation of the Insurance Act by virtue of the doctrine of interjurisdictional immunity.”

The question of who regulates bank-based insurance sales has been central to the debate over the entry of deposit-taking institutions into the broader life insurance market. The banking industry has repeatedly declared itself to be outside of provincial regulators’ mandate, as it is a federally regulated industry.

Advocis has welcomed the ruling, calling it a victory for financial advisors and consumers alike.

“First and foremost, this unanimous result is a victory for advisors and Canadian consumers. The Supreme Court of Canada’s unanimous ruling preserves a level playing field for financial advisors and an environment that places consumers’ interests first,” said Steve Howard, president of Advocis. “It’s only fair that all who sell insurance products should abide by the same rules.

“Imagine that this had gone the other way and there was now a separate and distinct element added in, with the banks able to set their own rules under federal legislation,” Howard said. “A whole new variable would be introduced into the regulatory soup. It would have created a tremendous amount of confusion and chaos in the industry and for consumers. It would have been the thin end of the wedge.”

Advocis was the only industry association to be granted intervenor status in the case, along with the major insurance carriers and the attorneys general for Canada and several provinces.

“This decision means status quo,” Howard said. “It preserves the platform that the industry is currently operating on. For advisors it’s very important, as it preserves the platform for a level playing field.

Advocis has long argued that insurance sales should be restricted to those holding a life insurance license and who are subject to provincial regulation. Howard points out that the primary obstacle to the banks selling insurance in-branch remains the Bank Act itself, which is not up for review again for five years.

“This decision really focuses in on consumer protection and the provinces’ jurisdiction to mandate and have oversight over consumer protection,” said Sara Gelgor, Advocis’ vice president, regulatory affairs. “The legislation in question in Alberta has to do with things like training procedures, misrepresentation about the levels of premiums, sanctions for non-compliance, and ethical practices of agents. The powers that would be given to banks with respect to the kinds of business they can participate in remains with the Bank Act.”

From the other side of the argument, the Canadian Bankers Association issued a statement saying: “The Canadian Bankers Association is reviewing the Supreme Court of Canada’s decision in Canadian Western Bank et al v. Her Majesty the Queen in Right of Alberta in more detail to fully understand the implications of the ruling. We believe that consumers are well-served by the federally-authorized insurance products.”