Thursday, December 17, 2009

(No.69) Banks & insurance: shooting off another toe?

As I have written previously in this column I argued for many years in articles, editorials and speeches that if the insurance jurisdiction of the provinces over agency matters was challenged by the feds or the federally regulated Canadian banks as it related to their insurance activity as banks the Supreme Court of Canada would side with the provinces as had been the case with the House of Lords decision which had forced Ottawa to come up with the federal insurance legislation of 1932. This was the core of a modus vivendi at the time between Ottawa and the provinces to address the federal government having over-reached itself constitutionally involving the regulation of insurance.

In more recent years it must be admitted that the provinces were hesitant to assert their right to regulate bank insurance activity within their area of competence. I longed for the big banks to exercise their happy combination of arrogance and ignorance and challenge provincial insurance jurisdiction vis-a-vis bank insurance activity. They did so in BC but in a case which did not really focus on the core jurisdictional/regulatory issue -- and won. Then, bless their high-priced legal advice, the big banks made the fundamental error (in Alberta) I had long waited for involving the clear cut issue of provincial insurance jurisdiction. The Western Bank v. Alberta case went all the way to the Supreme Court which, in a May 2007 decision, favoured the provinces.

[ For some of my previous comments on banks and insurance see column Nos. 33,34,47 & 48 on]

Now in what one must regard as an unintended consequence the Royal Bank has, by initiating a piddling civil suit in the Ontario Superior Court, caused to be generated a judgment (dated Nov 18,2009) which not only cites the Alberta bank case precedent but confronts the province of Ontario (as well as by implication the other common law provinces except Alberta and BC) with the need to take action themselves in terms of bank insurance activity.

Why? Because the nub of the matter in the case of Royal Bank v. Mujagic is this:
the bank was held to be taking and transmitting insurance applications and receiving benefits in return, i.e., acts like those of an insurance agent and therefore requiring an insurance license in Ontario -- which the bank does not have.

Several points that need to be noted about this significant case and judgment by Justice D.S. Crane:
  • This may well be the first time since the the unanimous decision of the Supreme Court of Canada in the Western Bank case that the decision has been cited with authority regarding banks' authorized types of insurance. Well done Royal Bank for causing this citation of a key precedent; another toe on the banks' legal foot is shot off since the banks' longtime core belief (almost religious in its intensity) is that they -- the almighty, deity- sanctified, federally incorporated and regulated big banks of Canada -- should not have to lower themselves to a point at which they need to pay attention to lowly provincial insurance regulators.
  • An Ontario judgment involving a regulatory framework for banks and insurance is significant not only for Ontario but other provinces. Since the definition of "insurance agent" is the same in all of the common law provinces the implications of the Royal Bank case judgment extend beyond Ontario. The other common law provinces (except for BC and Alberta which have already legislated on the matter of banks and licensing) cannot stand idly by and do nothing.
  • Given this decision by an Ontario court it seems clear that the status quo is no longer an option for Ontario. Therefore the Financial Services Commission of Ontario (FSCO), the insurance regulator, needs to: (1) apply the law, i.e., the existing insurance licensing requirement, OR (2) ask the legislature to pass amendments to specifically exempt banks from licensing (as in BC), OR (3) implement a restrictive licensing regime applicable to banks (as in Alberta). The insurance industry trade associations like CLHIA, CAILBA, Advocis and IFBC should work to ensure that FSCO does not try to successfully pretend that nothing has happened and that it does not need to take effective regulatory action.
  • The judgment in the Nov. 18 Royal Bank case clearly shows on the basis of evidence what has certainly been no secret: banks do more vis-a-vis insurance than simply enrolling consumers. They take and transmit insurance applications and receive something of value in return. These are core functions that define an insurance agent for regulatory purposes in Ontario. Hence this case reinforces, for those who may have preferred to turn a blind eye, that banks are functioning as insurance agents and need to be licensed accordingly.
  • Leaving banks unlicensed when they are acting as insurance agents creates an unlevel playing field, one that gives the banks a competitive advantage since they have a lesser regulatory burden. It also leaves insurance consumers at risk with no proper and appropriate regulator with whom to lodge insurance-related complaints and from whom to seek redress.
  • The Supreme Court decided in the Western Bank case that the distribution of insurance and its regulatory framework are NOT of federal competency. Only the provinces can regulate those acting as insurance agents. It is clear that if FSCO were to fail to enforce Ontario's insurance regulation on the banks then it would demonstrate, in light of the Royal bank decision, a lack of due diligence in protecting the insurance buying public.
  • Clearly the status quo in Ontario is not an option. There is nothing in the Ontario Insurance Act that empowers FSCO to replace the existing licensing regime with some sort of self-regulatory regime applicable to banks acting as insurance agents. The Ontario judgment in the Royal Bank case makes clear: a license is required in Ontario to do what the Royal Bank was found on the evidence to be doing. Therefore this now requires action by FSCO.
  • What ought to be done by Ontario is what agents and others (including me) have favoured for a long time concerning banks and insurance: apply a full insurance licensing regime at the provincial level to bankers rather than to banks per se vis-a-vis the banks' current authorized types of insurance. Certainly such compulsory individual licensing (and its associated preparation and knowledge) would at least begin to address the problem posed for consumers by the gross inadequacies arising from the so-called incidental sale of insurance (ISI), the biggest share of this ISI product category being the highly profitable creditors' group insurance coverage peddled by unlicensed bank staff in connection with the lives of those seeking the banks' mortgages and loans.
  • Finally, if FSCO (or any other provincial insurance regulator) decides that a possible bank court challenge in response is a deterrent to their taking real action involving bank licensing and levelling the regulatory playing field in terms of who is and is not required to be examined and licensed, they need to remember -- even if the banks and the same legal advisors who took them to the Supreme Court have retiform memories -- that provincial jurisdiction in this matter has already been decided by Canada's highest court.
Meanwhile, as the banks limp from legal defeat to legal setback, it is becoming ever more difficult for them to pretend that the provinces are unable to call the agency tune to which they must dance -- with implications that extend beyond bank branch staff licensing to the consequential issue of the potential provincial role and influence in their attempting to bring off any future expansion of bank branch retailing of insurance.

For the time being at least the federal Tory govt. has kept that door firmly closed. But stay tuned. Although the door is likely to remain closed for some time there are still likely to be further interesting developments in the area of banks and insurance in Canada. And there are bank toes yet to be severed.

Alastair Rickard