Web Branches

It is ironic that bitter political partisanship triggering Canada’s current federal election has postponed regulations promoting a common principle supported by all political parties – that is, banks should not be allowed to promote or sell unauthorized insurance on their banking Web sites.

The federal government published proposed new regulations to this effect in the Canada Gazette on Feb. 12, 2011. Interested parties had 30 days to comment on the proposed new regulations. Just before press time, it seemed everything was proceeding according to plan and a longstanding issue for Canadian brokers would finally be addressed. But then a funny thing happened on the way to Parliament. Already several years in the making, the new regulations seem to be on hold once again as Canada elects a new government for the fourth time since 2004.

For most brokers, the timing isn’t critical. Seen from a broad perspective, brokers have been urging a ban on promotion of insurance on banks’ Web pages ever since that fateful day in February 2009, when Canada’s federal solvency regulator ruled banks were allowed to sell and promote insurance on their bank Web pages.

Brokers respectfully disagreed with OSFI’s interpretation of Canada’s Bank Act. They say the fundamental premise of Canada’s legislative ban against banks selling or promoting insurance out of their physical branches is that consumers are vulnerable at the point of lending credit. They believe the same logic applies to bank Web sites, which they see as de facto bank branches in today’s technological age.

Canadian Finance Minister Jim Flaherty agreed with the brokers. Now, almost two years of consultations later, regulations are a mere election away from being enacted. So really, after spending what’s another four-week delay?

Purpose of the Prohibition

Section 416 (2) of Canada’s Bank Act says: “A bank shall not act in Canada as agent for any person in the placing of insurance and shall not lease or provide space in any branch in Canada of the bank to any person engaged in the placing of insurance.”

Brokers know by rote the public policy reason for this prohibition. It relates to the fact that banks can offer loans or credit to consumers. In theory, at least, this gives banks the power to influence customers to buy the bank’s insurance, because consumers will fear the denial of credit if they don’t. Thus, the legislation promotes consumer protection and fair competition between the banks and insurers, by removing the possibility that banks might use their unique credit-lending powers to gain an unfair advantage over consumers and competitors.

“When the consumer is buying a mortgage and he sits there and the banker says, ‘What about your insurance?’ the first thing [the consumer] thinks is, ‘I’d better buy it here. I want to make sure I get the mortgage,'” says Basil Crosbie of Crosbie Job Insurance Ltd. “I think that’s where there’s concern.”

The credit-granting situation is indeed “super-charged,” agrees Dan Danyluk, executive director of the Insurance Brokers Association of Canada (IBAC). “It’s one where the balance of power is distorted. It’s an area in which the lights are way too bright for people to have to deal with that. The banks, as we’ve always said, have every right to own an insurance company and do. They can throw all of their resources behind that. What they can’t do is take advantage of their power position as one of the few financial institutions in the country [that can offer credit to consumers]…The expectation was that there needed to be regulations to make sure that everybody played nicely in the sandbox.”

Web sites and “Branches”

First passed in 1871, the current version of the Bank Act most recently received Parliamentary Assent in 1991. A few things have changed since then, most notably the proliferation of the Internet and its use as a means of commerce. Brokers see links posted on banking Web sites, referring customers to bank-owned insurance operations. Thus the fundamental question arises: if the Bank Act makes no reference to Web pages, are they functionally equivalent to bank “branches”?

“In our view, the Web site has become a de facto branch,” says Crosbie. “More and more Canadians are doing all of their banking on the Web.”

Pamela Gilroy-Rajotte, president of the Insurance Brokers Association of Manitoba, advances the logic a step further, linking Crosbie’s observation to the spirit and intent of the regulations. “We believe that credit-granting institutions should not be selling insurance at the point of granting credit,” she says. “And essentially if someone is on a bank Web site conducting their banking business, that’s exactly what’s happening.”

For Richard Pindral, president of the Insurance Brokers Association of B.C., when banks refer consumers to their own insurance operations on their Web sites, they are blurring the line between their core banking activities and insurance activities. These activities are supposed to be “separate and distinct” under the legislation. “I think the line was a little bit blurred, or the distinction was blurred, when banks had their Web sites with links that went to the insurance operation,” Pindral said. “In my mind, it was not a separate and distinct situation.”

Brokers thus went to the federal regulator to answer their central concern: Were banks allowed to do online what they were not allowed to do in their physical branches?

OSFI Ruling, Political Fallout

OSFI made a ruling on the issue that markedly parted company with the broker’s understanding of the Bank Act. In a February 2009 ruling, OSFI said “the definition of ‘branch’ in the Bank Act, both in English and French, refers to physical premises,” citing “numerous provisions in that statute that specifically distinguish a Web site from being a branch.” And then, the bombshell conclusion: “[F]or purposes of the regulations, a bank Web site is not a bank branch,” OSFI ruled. “As a result, a bank may, on its Web site, promote in Canada any insurance policies or any insurance companies, agents or brokers, subject to the conditions that the regulations impose on such promotion outside a branch.”

Disagreeing vigorously with OSFI’s conclusion, brokers engaged in about 14-15 months of political activity to change the regulations. Their efforts quickly bore fruit. The opening salvo came when Brossard-LaPrairie MP Alexandra Mendes introduced a private members bill, Bill C-457, into the House of Commons in March 2010. In some ways, the private member’s bill went beyond the narrower issue of banks selling insurance on Web sites. The text of the bill in first reading said simply: “No bank shall, in Canada, promote an insurance company, agent or broker.” It went further to add: “No bank shall provide a telecommunications device that is primarily for the use of customers in Canada and that links a customer with an insurance company, agent or broker by any means, including the Internet.”

The government took action of its own in October 2009, when Finance Minister Jim Flaherty sent letters to the Canadian Bankers Association, IBAC and the Trust Companies’ Association of Canada. In his letter, Flaherty announced his intention to introduce new legislation that would effectively reverse OSFI’s interpretation. “As you know, the business of insurance is not permitted in a bank branch, other than for some limited activities, as laid out in the Bank Act and supporting regulations,” Flaherty said in his letter to Danyluk. “The Government of Canada intends, at the earliest opportunity, to adopt specific policy measures by adapting our policy to reflect technological advances. This means that Web sites will become subject to the same insurance business regime that currently applies to branches.”

After soliciting c
omments on the proposal, the government came back with a framework for its proposed regime in May 2010. The new regulations, which are not officially registered, were introduced in the Canada Gazette on Feb. 12, 2011. The amended regulations begin by defining a “bank Web page” as follows: “a Web page that a bank uses to carry on business in Canada, including any information provided by the bank that is accessible on a telecommunications device. It does not include a Web page that is only accessible by employees or agents of the bank.” The amended regulations go on to clarify that “a Web page is not a bank Web page by reason only that the Web page provides access to a bank Web page or promotes the business of a bank in Canada.” In other words, the Web page has to be owned or controlled by the bank.

Essentially, the amended definition takes care of a concern expressed by some brokers during the consultation period that mobile devices might be perceived in a different way than Web pages. “A telecommunication device that is going into a Web site is really still just going into a Web site,” as Danyluk puts it. “So it’s not like it’s just two different worlds or two different things. I think that they have picked that up, and rightly so, to make sure that there is clarity.”

But the real meat of the prohibition is contained in s. 7.1(1) of the amended regulations. First of all, promotion of insurance “may take place on a bank Web page if it relates to an insurance company, agent or broker that deals only in authorized types of insurance.” Examples of “authorized insurance” include insurance related to charges for lost credit or charge cards, mortgage insurance, coverage of liabilities arising from car rental contracts and/or travel insurance, to name a few.

However, the amended regulations add, “a bank shall not, on a bank Web page, provide access to a Web page – directly or through another Web page – through which there is promotion of: (a) an insurance company, agent or broker that does not deal only in authorized types of insurance; or (b) an insurance policy of an insurance company, agent or broker, or a service in respect of such a policy, that is not of only an authorized type of insurance.”

Brokers across the country appear satisfied the wording of the regulatory amendments addresses their concerns.

“Our view is that the minister’s intent is what the suggested regulations reflect,” Danyluk said. “And that is to replicate online what has been the longstanding situation in bank branches – that credit-granting institutions ought not to be selling insurance or promoting insurance or marketing insurance at the point of granting credit.”

“As far as the way the regulation is written now, we support it,” added Randy Carroll, president of the Insurance Brokers Association of Ontario (IBAO). “I think there was a lot of thought put into the direction of the change, with a keen eye on making sure that consumers were protected.”

First Banks, Next Credit Unions?

Insurance brokers know well that credit unions have the same power as banks to grant credit to consumers. But whereas the federal Bank Act applies to banks, credit unions are governed by provincial legislation, and so the federal regulations do not apply to the credit unions. For some provincial broker associations, particularly in jurisdictions where the credit union presence is strong, the next step is to make sure the provincial legislation is aligned with the regulatory amendments in the Bank Act.  

Heather Pottle, president of the Insurance Brokers Association of Saskatchewan, says her association has heard complaints from member brokers about the promotion of insurance by banks and credit unions, including on their Web sites. When asked if credit unions should follow the same (amended) regulations as banks related to Web sites, Pottle replied: “All credit granting institutions should be required to follow these same rules.” To ensure this, Pottle said the association “told MLAs who attended our annual reception in March [2011] that we would like the provincial government to implement the same rules for credit unions at the first possible opportunity.”

Gilroy-Rajotte says Manitoba brokers share the concerns of their neighbouring brokers. “Locally, we are seeing the local credit unions doing this [promoting insurance on their Web sites] as well,” she says. “So that’s a concern to us, because there is no difference [between a credit union and a bank]. Credit unions are still a credit-granting institutions and consumers are vulnerable at the point the credit is granted.”

Gilroy-Rajotte notes provincial legislation governing credit unions varies from province to province. She says IBAM intends to raise the issue with Manitoba’s Credit Union Central in the hopes of working out a cooperative solution. In the meantime, the association is studying the various provincial legislative regimes across the country. The intention is to hammer out a regulatory solution for Manitoba that would be acceptable to all stakeholders, including the province’s credit unions.

Marc Leger, president of the Insurance Brokers Association of New Brunswick, says similar discussions are happening in his province. “Here in New Brunswick, our Credit Union Act is provincially regulated, but when it was created, it was done so to mirror the national Bank Act,” he said. “So it would definitely be our wish or our hope that any rules that apply to the banks would also extend to the provincial credit unions as well. I think that was the intent. That’s how we would like to see things work out.”

But it’s not automatic, he observed. The Credit Union Act in the province does not immediately reflect any changes made to the Bank Act.

But whereas some provincial broker associations are discussing the need to ensure the amended Bank Act regulations apply also to credit unions, other provincial broker associations seem less affected by the issue of credit unions selling insurance on their Web sites. This might be due either to stricter provincial regulations on the activities of credit unions, as in Newfoundland, or the comparatively more benign activities of credit unions in provinces such as Ontario.

“Right now, it’s not an issue for us, because in Newfoundland, the credit unions are not allowed to sell property and casualty insurance at all,” said Crosbie. “They’re allowed to sell their life products and credit protection insurance, but they’re not allowed to sell P&C….The fact that they aren’t allowed to sell P&C at all means they’re not allowed to promote it on their Web site.”

In Ontario, credit unions do not appear to have shown the same aggressive approach to promoting their products on Web sites as banks.

“We haven’t seen the credit unions in Ontario using the Internet in the same way as banks,” Carroll said. “I think they [credit unions] have been more respective of the spirit and the intent of the law. In this province, the last time we went out and surveyed the credit unions, over 60% of the credit unions offer some type of group, home and auto program to their members and they do that through brokers, so there is a huge relationship there. Consumers that belong to credit unions are very well served in relation to property and casualty insurance. Maybe that’s one of the reasons why they haven’t taken it upon themselves to go to the same extreme as the banks have.”

Enforcement

As of press time, the amended Bank Act regulations are not enacted and remain in limbo. As these words are put to page, no regulations are in place that would restrict banks from promoting or selling insurance on banking Web sites.

At the same time, the proposed new regulations were not erased when Canada’s government fell on a non-confidence motion on Mar. 25, 2011. Unlike proposed legislation, which
would need to be re-introduced by a new government, regulations remain on the books waiting for the government of the day to pass them. Given the near-universal support for the amendments expressed to the brokers by MPs representing all political parties, brokers hope the amended regulations will be rubber-stamped by the newly elected government.

“From our lobby efforts, when you go back and take a look at all parties, we didn’t have a single party that was opposed to our position,” says Carroll, literally hours before the government fell. “Ms. Mendez put a bill through from the Liberal side. Mr. Flaherty on the finance side supported us, and consumers, by putting through regulatory changes that would amend the Bank Act. Our conversations with the NDP were very supportive. The conversations with the Bloc were supportive. So if an election is called [the election will be held on May 2, 2011], at the very worst it puts us into a holding pattern until a government is re-elected.”   

Once the amended regulations are passed, brokers will be watching carefully to see how OSFI regulates them. “You have to see that there is enforcement, and I think that OSFI has done a good job on other issues, and I do believe they will do a good job on this issue,” said Danyluk. “This is fundamental. This is part of the license to operate.”

Pottle says monitoring Web sites is a very different proposition than monitoring local, physical bank branches. “Web sites are very public, so it should be easy to monitor and enforce these regulations,” she says. “Web sites are not localized to an area. I checked online and could not find evidence of banks marketing unauthorized insurance products.”

Brokers remain concerned about how existing regulations related to banks’ physical branches are enforced. “I know brokers across the country would say they are concerned about the enforcement of the regulations that are currently in the Bank Act,” said Leger. “There doesn’t seem to be a policing body out there that’s willing to monitor and enforce this as strongly and as thoroughly as we would like to see. We’re not seeing any reports of large fines levied.”

Pindral, in fact, would like enforcement to be incorporated into the Bank Act legislation. “Maybe put some penalties in there,” he said. “I would think without that, you will always have this grey area in which the banks are doing something that in our minds could be challenged.”

And such a “grey area” is what started the whole Web site issue to begin with, Pindral points out. “When we dealt with OSFI in trying to get the Web site issue clarified [in 2009], OSFI’s interpretation of those [existing] rules and regulations wasn’t the same as our interpretation,” Pindral notes. “I think we are always going to have that. That’s the reason why the banks will keep on attempting to see if there is room for manouevring, to have their insurance operations and their bank operations somehow under a joint umbrella.”