Monday, June 22, 2009

(No.34) Can the provinces protect financial consumers?

For more than 25 years I argued and predicted that if the insurance jurisdiction of the provinces (generally agency matters) were to be challenged by the banks as it related to their insurance activity the Supreme Court of Canada would side with the provinces as had a House of Lords decision decades before, a decision which had forced on Ottawa the creation of the (then) new federal insurance legislation of 1932. This was the core of a modus vivendi between Ottawa and the provinces to deal with the federal government's having over-reached its constitutional powers involving the regulation of insurance. 

Of course I was far from being alone in holding a negative view of claimed bank immunity from provincial insurance jurisdiction but that constitutional reality was not widely appreciated outside a relatively small club of informed opinion inside the insurance business and certainly not acknowledged by the Finance Minister's mandarins who are the banks' regulators and in any case have -- in the view of some insurance people, including me --  a longstanding reputation of being pro-bank (i.e., banks being their federally regulated constituents). 

Indeed it was not uncommon for supposed expert and high-priced opinion to take a pro-bank view: i.e., banks are federally regulated financial institutions, whatever banks do they are entitled to call banking, hence the provinces have nothing to say about banks' insurance selling activity in those provinces.

I confess that for years I absolutely longed for the banks to make the mistake of challenging provincial insurance jurisdiction. If they were to follow their longstanding habits and be arrogant enough as the long-favoured, pampered and protected federally regulated financial institutions then they might believe (I speculated) that they could kneecap the provinces by taking even a weak case to the Supreme Court and do so successfully. That mistake the banks finally made with the Canadian Western Bank v. Alberta case, the decision being handed down May 31, 2007. It favoured the provinces.

Why was that decision of great interest not just to the provinces but also to insurance companies and licensed sales intermediaries (the latter being provincially licensed and regulated)? The answer: the potential leveling of the regulatory playing field on which various institutions sell insurance.

My most recent post to the blog, "(No.33) Banks, insurance & the internet", explained why in its competitive implications the Supreme Court decision in the Western Bank case reduces to comparative insignificance the recent federal regulatory decision by OSFI which supposedly (according to a breathless June 10 article in the Globe and Mail) heralds the "crumbling" of the barriers to an expansion of bank branch retailing of insurance. In fact it does nothing of the sort.

All of this returned to my thoughts with the recent loss by the banks in Quebec Superior Court. They had tried to be excluded from new provincial consumer protection laws. The court agreed with Quebec's Attorney-General that provincial laws intended to protect the consumer should apply to banks on a broadly defined basis -- as indeed I agree they should; in fact it is desirable and appropriate that they should apply to any and all financial institutions including insurance companies doing business with Quebec consumers.

In an echo of the Alberta insurance case decision the Quebec Superior Court refused to accept the banks' argument that they should not be subject to provincial consumer protection legislation because they operate under federal law.

Don't bet against the banks eventually taking the Quebec decision to the Supreme Court of Canada to try to get it reversed on appeal. In this matter I am not as confident about the outcome as I was with the case involving the banks and provincial regulation of insurance, that when it comes to provincial consumer legislation the provinces have as strong a case with which to convince our high court. 

I hope the government of Quebec can make its recent court victory hold up.

Alastair Rickard