Drop insurance restrictions for banks: report

There’s a new voice joining the simmering debate over whether banks should be permitted greater latitude in selling insurance. The C.D. Howe Institute has released a paper on the topic, calling for the federal government to drop the current restrictions when the Bank Act comes up for review in the spring.

“It is time to move beyond a prohibitionist stance toward the sale of insurance by banks, and to work toward a regime that offers the right balance of consumer protection, promotion of competition and regulatory certainty,” writes Mark Daniels, the former head of the Canadian Life and Health Insurance Association who penned the report. “The issue will have to be addressed eventually, and it is in the interests of the financial services industry and, especially, their customers, that this be done before problems emerge.”

Of course, it’s not like the banks have been locked out of the insurance industry. Deposit-takers have the freedom to operate their own insurance subsidiaries, but are forbidden from selling certain products — notably life and living benefits — in their branches.

The five largest bank-based insurance companies raked in $753 million in life and health insurance premiums in 2004. Sounds impressive — until it is compared to the $58 billion total for the life and health insurance industry.

“Everything in the Daniels paper has been thoroughly debated and we’re pleased that both Minister Flaherty and Prime Minister Harper have publicly stated their support for our position,” says Roger McMillan, chair of Advocis. “The nature of life and health insurance is too personal and the nature of the lender/borrower relationship is too imbalanced for the two to be combined under one roof. The leverage of credit granting is simply too powerful and too difficult to monitor or police.”

When the restrictions on banks were imposed, there were concerns that no set of institutions should enjoy a regulatory advantage over others in the distribution of insurance products. At the time, the banks were seen as being too powerful to allow them unfettered access to the insurance market.

One of the historical advantages the banks held was the support of the federal government provided through the Canada Deposit Insurance Corporation. Insurance companies enjoyed no such federal support when they built a similar structure, CompCorp, which has since been renamed Assuris.

“For the insurance industry, it was difficult to see how customer losses in the case of a life insurer bankruptcy differed from those of a bank customer in a bank insolvency, at least with respect to the case for a publicly funded consumer protection program,” Daniels writes. “So, the industry argued, this lack of a level playing field in a comparable financial services marketplace needed to be fixed before any further changes in business powers ought to be contemplated.”

Recently, the Conservative government has floated the idea of privatizing CDIC, which could be seen as a further levelling of the playing field between the banking and insurance sectors.

But with the growth of the insurance industry, that argument is harder to make. Daniels says the banks are now at a regulatory disadvantage to the current insurance distribution channel.

“Any advantage that CDIC backing might confer on the banks has become less valuable in the sense that improved economic conditions, regulatory oversight and prudential requirements have made the likelihood of bankruptcies of either banks or insurers more remote,” Daniels writes.

One of the main arguments voiced against the lifting of restrictions is that banks may use their considerable data-collection abilities to target individuals for coercive sales practices, such as tied selling.

“We don’t think that banks should be privy to private medical information,” says Roger McMillan, chair of Advocis. “We don’t think the walls are thick enough. They say they are, but they’re not.”

Daniels suggests that current privacy legislation should suffice to prevent such practices — or at least provide grounds for redress.

The Personal Information Protection and Electronic Documents Act restricts financial firms from using client information to target sales of products, unless the client has explicitly given the firm permission to do so.

“PIPEDA’s legislative and the regulatory framework should be able to guard against potential commercial abuses of private information in both the general and the life and health insurance markets,” Daniels writes.

He also points to the Financial Consumer Agency Act, which established the Financial Consumer Agency of Canada to ensure consumer protection.

“For the first time, there was to be at the federal level a comprehensive marketplace and market conduct regulator present for consumers of financial services,” Daniels writes. “This, of course, was of particular relevance to banks, whose regulation is entirely in the hands of the federal government in these matters.”

Muddying the waters is the fact that not all deposit takers are treated equally. Provincially regulated caisses populaires in Quebec and credit unions in British Columbia have been permitted to engage in limited in-branch promotion and distribution of insurance products. Ontario may soon join them, as the province is seeking public input on the issue.

“I don’t think in Canada you’ll ever have 10 provinces thinking alike. They have to do what’s best for their province,” says McMillan. “I don’t think that B.C. has really done the right thing in their liberalization of those rules.”

There are still some areas of concern, however, especially around the licensing of any sales force the banks may field. The banks argue that because they are governed by the federal Bank Act, they are not subject to the provincial insurance regulations which dictate the level of training and accreditation required by the insurance industry.

“What the banks are trying to do is say, ‘we can operate federally, we don’t have to play by provincial rules,’” says McMillan. “Provincial rules talk about licensing and protecting the consumer, so if the banks don’t want to play by rules that deal with licensing their individuals and protecting the consumer, one has to question their motives.”

“Extending insurance sales to banks without providing a common regulatory regime invites creating a situation where insurance companies and banks are selling the same product in the same market under two different regulatory systems,” Daniels writes. “Whatever the logic of full insurance powers for banks may be, failure to address this regulatory issue upfront may throw a huge monkey wrench into the proceedings by creating a confusing and litigious marketplace.”

He points out that at present, bank-owned insurance subsidiaries have voluntarily complied with provincial regulations. It is therefore possible that the banks would continue to do so, as a condition of relaxed restrictions. The alternative would be a messy turf war between the provinces and Ottawa, should the federal government attempt to take over the business of regulating insurance.

“Broader access to a range of insurance products — designed to mitigate personal and financial risk — supplied by an existing network of reliable, well-capitalized financial services providers is surely in the interest of consumers,” Daniels writes.

“If you let the banks retail insurance in their branches with people that aren’t licensed and aren’t accredited, and the consumer has no redress to, you’ve got a situation that is very similar to the investments industry,” McMillan warns. “If you take a look at the complaints made on the insurance side and the investments side, the investments side dwarfs the insurance side.”

McMillan also doubts that a bank branch can be conducive to building a well-considered financial plan, which is the logical first step leading to an insurance decision.

“The individual consumer has to fit their box. Your plan gets subjugated to their plan,” he says. “The issue here is tied and coercive selling and I’m not convinced that enough electronic walls can be placed that this information doesn’t transcend one area to the other,” McMillan says.

The Canadian Bankers Association declined comment on the report, simply calling it “interesting.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(11/08/06)