Checkmate for Brokers?

Canada’s independent brokers so far have the upper hand in what is turning out to be an epic war against the nation’s banks. The outcome of this ongoing battle to win over the hearts and minds of consumers turns on who is best positioned to retail and provide advice about insurance products – indpendent brokers or local bank branch representatives?

This chronic professional turf war is rooted in a mandated review of Canada’s Bank Act, first passed in 1871. The Bank Act is the federal legislation governing how banks operate in Canada. A review of the Bank Act is required in the legislation and usually takes place every five years. During the last two years, banks have been actively seeking to expand their presence in the retailing and marketing of insurance products. Randy Carroll, chief operating officer of the Insurance Brokers Association of Ontario (IBAO), says his organization’s records show this issue to have been tabled every five years since 1923, “so it’s a longstanding issue.”

The federal government is anticipated to close the file on the current round of the Bank Act review in April 2007, when it is scheduled to pass new fiancial services legislation.

BANKERS STATE THEIR CLAIM

In February 2005, the Department of Finance released a consultation document seeking input on how the current Bank Act might be changed and improved. Seizing the opportunity, the Canadian Bankers Association (CBA) prepared a submission calling for changes that would open up the field of insurance for banks. The Bank Act, for example, currently does not permit banks to provide information about, make referrals concerning or retail insurance products from their local branches. In its submission to the government, the CBA said it “believes that consumers would be better able to shop the market and make the best choices if certain restrictions that consumers face are lifted.”

The CBA submission contained four proposals for change:

* Consumers should be able to have ready access to specific information in bank branches about the full range of insurance products relevant to their needs and circumstances.

* Consumers should have the ability to obtain a referral from their bank branch to an insurance professional outside of the branch who could provide further advice and access to particular insurance products.

* Consumers should have the ability to give their bank permission to provide them with insurance information tailored to their individual and family circumstance.

* Consumers should have the ability to give their bank permission to pass on relevant client information to an insurance professional to make it easier to obtain information and advice on insurance matters.

All in all, the banks said, “these recommendations would ensure that consumers would continue to have the ability to control their relationship with their banks, including on insurance-related matters.”

BROKERS DRAW ‘LINE IN THE SAND’

Canada’s independent insurance brokers, on the other hand, see the CBA’s recommendations as a way for banks to control their consumers’ insurance choices. They note banks have a distinct advantage over brokers in the area of collecting consumers’ credit information, warning that banks would use such information for the purpose of retailing insurance (this practice of using credit information for the purposes of cross-selling insurance or other financial products is known as “tied selling”). Because of this competitive advantage in the area of information, brokers say, banks would be able to drive out of business small brokers who do not have similar access to consumers’ financial information.

Brokers further warn that if insurance brokers were to be driven out of business, consumers would face less choice when it comes to purchasing their insurance products. Also, consumers would have fewer independent insurance advisors with whom to consult.

In September 2005, Insurance Brokers Association of Canada (IBAC) president Robert (Bob) Kimball drew the battle lines. In a speech to IBAC members at the annual general meeting in Qubec City, he said: “This is a very real threat. If the [current Bank Act] review goes in the wrong direction, our industry as we know it will be changed forever and our livelihoods will be jeopardized. Consumers and the insurance product will suffer – definitely suffer – and Canadians will pay a steep price for having less competition. The banks will not bring competition. They will bring control.”

IBAC followed up its words with action. In 2005, it commissioned Impact Public Affairs, an Ottawa-based public relations firm, to provide strategic advice in communicating the brokers’ message to MPs. Provincial brokers’ associations rallied brokers throughout he country, urging them to talk to MPs about the matter. The public war of words suggested the metaphor of tiny, unarmed David (representing independent brokers) slinging rocks at the giant Goliath (representing the awesome lobbying power of the banks). In a recent interview, for example, summing up the challenge for brokers, IBAC’s CEO Dan Danyluk framed the situation as follows: “I think as brokers we recognize that the Canadian Bankers Association represents the largest and most powerful financial organizations in the country…The Canadian banks have had an amazing record of getting what they want. With the exception of insurance, the Big Six [banks] control 60-80% of most products. If you take a look at the OSFI [Office of the Superintendent of Financial Institutions] site, it’s a bit startling. They’ve always gotten their way, and if you’ve always gotten your way, I guess you’re always going to expect to get your way. I don’t think they will stop fighting.”

TORTUOUS PATH

Complicating the brokers’ campaign, the legislative path of the 2005 Bank Act review was anything but straight and narrow. Thus far, the current round of the Bank Act review has survived a number of postponements, a federal election, and two minority governments.

A minority Liberal government elected in 2004 repeatedly delayed the Bank Act review. Finally, in August 2005, then-minister of finance Ralph Goodale announced the postponment of the review altogether until after a 2006 federal election. Explaining his decision, Goodale said an atmosphere of “partisan politics” made it impossible to carry on a meaningful discussion of issues related to the Bank Act.

But a funny thing happened on the way to the Jan. 23, 2006 election. Brokers scored what ultimately proved to be a major victory when the Conservative Party unveiled its election campaign platform. Unlike any other party, the Conservatives promised to maintain the Bank Act’s restrictions against banks retailing insurance products. IBAC quickly and publicly endorsed the party’s position. But even though the Conservatives formed a government in January, their minority status ensured the country’s brokers could not rest in their efforts to lobby all of the political parties. In Ontario, brokers have had to work particularly hard to gain the commitment of the province’s 107 MPs.

BANKS FIRE PUBLIC SALVOS

At this point, the banks increased their lobbying efforts and publicaly aired their arguments with shareholders. Bank presidents lambasted the Bank Act as being anachronistic. “Canada is the only developed country in the world that prohibits consumers and small business owners from buying insurance products, or even getting information about insurance from their bank,” Royal Bank president and CEO Gordon Nixon said in a March 2006 address to shareholders. “The absurdity of this is highlighted by the fact that stores like Loblaws and Costco can provide this financial service, but banks that are in the business of providing financial advice cannot. This simply does not make any sense to us, nor to our customers, who would benefit from the increased competition, greater access, broader c
hoice and better pricing that bank distribution of insurance would provide.”

Nevertheless, in June 2006, the Department of Finance made good on the Conservatives’ election promise, releasing a White Paper entitled 2006 Financial Institutions Legislation Review: Proposals for an Effective and Efficient Financial Services Framework. The document, which sets the agenda for Parliamentary review of the Bank Act, contains absolutely nothing on the issue of bank branches retailing insurance products. The day the White Paper was released, a number of insurance company CEOs attending a Swiss Re insurance function couldn’t hide their happiness about the government’s position. One said insurance company CEOs were reluctant to enter the fray in part because they were worried about tipping off the insurance industry’s tactics to the banks.

Brokers, for their part, are finally seeing the light at the end of the tunnel. Some have made highly qualified proclamations of success. “The government has advised us that they are going to maintain the current regulations on bank activity with respect to insurance, which is good,” Doug Gueddes, the president of the Insurance Brokers Association of B.C., says. “We’re pleased and relieved. We’re actually out thanking the government for sticking to the commitment that they made before the election. We think it’s great news for consumers and competition in the long run.” Still, Gueddes says, echoing the views of other broker representatives across the country, it isn’t clear yet whether the light brokers see is that of an oncoming train.

“It’s a qualified success,” Harold Baker, the CEO of the Independent Insurance Brokers Association of Alberta, agrees. “Even if it’s not in the White Paper, I think we all have to remember that when the legislation finally goes to the House of Commons to be debated, they can change from the White Paper. They can, at some stage along the process, change their mind as a government and move to allow banks to retail. So we still have to be cognizant of what we’re doing and staying on top of it. Until that sunset clause is re-established, we’re still open to problems.”

Those problems might yet include another election and minority government, Steven Wagler, the incoming president of the Insurance Brokers Association of Ontario, says. “We could face two elections,” he says, referring to the past election and the possibility of an election in the future should the current minority government lose a non-confidence vote. He goes on to say the Bank Act issue “could be relevant again in a very short period of time. We’re not anticipating that, but we’re being prepared. We’re not jumping up and down and saying ‘Hurray,’ because no victory’s finished until the ink is dry, but I think we’re more prepared than ever. The realization we’ve made is that the other ones are becoming better at their organized lobby efforts, so we’re not done. This one’s not over.”

IDENTIFYING WITH CONSUMERS

How did brokers convince MPs to maintain the status quo? Brokers nationwide credit the clarity of their message, which identified a victory for brokers as a victory for consumers. “A lot of times when you take a look at issues that are not truly good for consumers, there’s usually a connection that they’re not good for the distribution channel or for brokers either, because brokers do act in the best interests of their consumers,” Carrol says. “The difference between the bank employee and the broker is that the broker is not an employee of the insurance company.”

“I just think we presented an argument that said consumers are being well-served [by the status quo],” Baker adds. “There are 23,000 brokers across the country. They serve consumers a number of products. They provide the same, if not better, service levels [than banks]. If you disrupt that, at what cost will the disruption come? I think when the MPs sit back and see, they certainly don’t want to disrupt a marketplace that’s works well…

“Do we [brokers] do a better job of politicking? Were we at the MPs better? Do we do all of those things? I’m not going to suggest for a minute we do that. Our arguments were sound.”

Part of the argument involves emphasizing the direct link between the independent insurance broker and the consumer. Some suggest this message is particularly resonant in smaller communities, where the broker is seen as the public face of insurance. “I think our best lobby effort is making sure that the politicians understand the value that the insurance broker and the insurance brokerage have in their community,” George Wright, the incoming president of the Insurance Brokers’ Association of Saskatchewan, says. “We are valuable in our small communities and our large communities. We are a player. In Saskatchewan, particularly in rural Saskatchewan, a lot of banks pulled away from small communities [in the mid-’80s] and people tend to be a little bit leery because of that, whereas the insurance brokers are still in the small communities and are part of the small communities. [Brokers] pay their taxes, and they support their charities and facilities in the small communities.”

POLITICAL PULL

Like most other brokers, Danyluk dismisses the notion that brokers have more local pull with their MPs. “I wish I could tell you that I am a heck of a lobbyist, or that somehow we have superior skills,” he says. “I think it was the right message and it was the right thing to do. We brokers communicated with MPs and senators. We did talk to legislators and the thing that resonated with all of them was: ‘What’s the right thing for the consumer?’ I think it was pretty apparent that once you had a discussion with the legislators, [they realized] the existing restriction is the right thing for consumers.”

RESISTING CONCENTRATION

Ironically, because Qubec consumers are already affected by high rates of bank concentration within the province’s insurance industry, the Bank Act review issue did not receive top priority in Qubec this past summer, according to Hubert Brunet, the executive director of the Regroupement des cabinets de courtage d’assurance du Qubec. To listen to Brunet, the Qubec brokers’ argument in the Bank Act issue sounds akin to closing the barn doors after all of the horses had escaped.

Direct writers already control 52% of personal lines insurance business in Qubec, according to Brunet. He further notes the Caisses Desjardins alone has a market share of 14% in the province’s insurance industry. As a result, Brunet says, the impact of increasing bank concentration in insurance would not be as severe in Qubec as elsewhere in the country. Of course, the Bank Act remains a concern, Brunet added, because preventing such market concentration is what the brokers’ lobby is all about.

“I don’t want to minimize (the Bank Act) because we know what can happen, because we live it with Desjardins,” Brunet says. “We know what can happen with only one financial institution [dominates the insurance industry]. So if all the banks get into that business, you can imagine what can happen.”

The question arising is how to better communicate these messages during the current and future Bank Act reviews. Most brokers are pessimistic about whether they can change the Bank Act legislation in such a way that they can avoid having to protect their livelihoods every five years. The Bank Act, like Canada’s financial services industry, must always be revised and updated. And so the emphasis now seems to be on preparation for the inevitable Bank Act reviews of the future.

“We are constantly going to go through examinations by regulators, by legislators, of what we’re doing both federally and provincially,” Danyluk says. “So I guess what we realize is that we have an obligation as professionals to be a little bit more outgoing.

“[Brokers have to] have people who are able to go visit regulators and legislators to discuss issues with them. I don’t think you see it as much as an army as it’s our Internet of professionals who can s
peak simply and with passion about our profession so that the decisions that are made make sense. It’s a logical thing.

“You hope that when you do something, you get better at it over time. And we hope that we’ll become better communicators. A lot of what our provincial associations are doing has nothing to do with lobbying, as much as working with regulators to come up with how to handle new occurrences in the marketplace, making sure the Canadian consumer is not only safe but believes that they’re safe.”