Revising the Bank Act: consumer protection above all else

The Bank Act is going to be revised in 2012. Ottawa has just begun the process, and it is an issue that always stimulates debate. Fraser Lyle, President of the Insurance Brokers Association of Canada (IBAC), says he intends to hold fast to one position: the only thing that matters is consumer protection.

Recently elected president of the association, which represents property and casualty insurance brokers, Mr. Lyle says he is not worried about competition from banks in insurance. They are already in the business, he points out. However, the current battle will be fought over the sale of insurance in branches and over the Internet.

According to the report presented to convention attendees by the associations’ public affairs and political action committee, the lobbying has already begun. In 2009, the committee was chaired by Brian Wilcox, from the Toronto Insurance Conference, and Dale Rempel, from the Manitoba Insurance Brokers Association.

Those who are in favour of bank branch insurance sales see two advantages. They say that those without coverage can obtain insurance easily, and that the banks can reach a segment of the market that is unserved.

Mr. Lyle raises the following argument against selling insurance in bank branches:  when a client wants a mortgage, he or she may feel obliged to accept insurance in order to obtain the loan. The association wants to make certain that the consumer is able to exercise free choice in the matter.

Mr. Lyle is also concerned about the combination of financial products. He does not think asset management should be mixed with risk management, and does not believe that banking and insurance products should be sold side-by-side at the branch level. He points out that this is forbidden by the Bank Act. “You have to be careful about abuses that will prevent the consumer from objectively considering the insurance options that are available,” he says.

Federal Minister of Finance Jim Flaherty recently announced that he was initiating a review of the laws dealing with financial institutions. This review will deal with the Bank Act, the Insurance Companies Act, the Trust and Loan Companies Act, and the Cooperative Credit Associations Act.

There will be a consultation period before the laws are revised, running until November 19. The last revision took place in 2007, and the sunset date for the financial institutions statutes is April 20, 2012.

Since the recent global financial crisis has brought about some significant changes in regulation, Mr. Flaherty believes that the changes this time will be minimal.  “Some fine-tuning to the system may be required, but wholesale change is not necessary,” he said.

Battle on the internet

Besides this longer-term, comprehensive review,  Mr. Flaherty will soon have to submit legislation dealing with the sale of insurance on bank web sites. While the Bank Act forbids the sale of insurance products in branches, it did not foresee the rapid expansion of e-commerce over the Internet. Today, the banks say that more than 50% of banking transactions take place on-line. In addition, they have rapidly added insurance to the range of services available on their web sites.

However, on Oct. 7, 2009, Mr. Flaherty surprised the financial industry and dealt a blow to the Canadian banking industry. In a letter addressed to IBAC, which the organization later made public, Mr. Flaherty announced that banks’ web sites will be subject to the same rules that prohibit insurance sales in their physical branches.

He also wrote to many of the large banks as well as to the Canadian Bankers Association (CBA), and the Trust Companies Association of Canada to ask them to quickly bring their business practices in line with this policy. The CBA reacted strongly to this announcement, even pointing out that Mr. Flaherty’s position goes against the decision of the Office of the Superintendent of Financial Institutions, which ruled in July 2009 that a bank Internet site was not a branch.

Insurance brokers have been waiting for Ottawa’s proposals since October 2009.  “We should have an opportunity to review the legislation and formulate comments,” said Mr. Lyle. However, he says he does not expect to see any special measures. “I hope that the change will be made public before the end of the year.”