Sunday, October 19, 2014

(No.274) Banks selling insurance & the Supreme Court of Canada

"Banks selling insurance and the decisions of the Supreme Court of Canada:
a new development?"

by Alastair Rickard

Has there been an important development affecting the involvement of Canada's big banks in the sale of individual insurance -- as some apparently believe?

Canada's banks selling individual insurance coverage inside the branches of their huge national networks (other than long permitted types of insurance, e.g., creditors' group) -- and able to use their leverage on bank clients to 'persuade' them to buy through/from the bank -- have long been a competitive concern of the insurance industry (both life and property & casualty).

I have written extensively on various aspects of banks and insurance in both the Canadian Journal of Life Insurance and in columns for RickardsReadI argued for many years in articles, editorials, speeches, life insurance industry committees and internal company memoranda that if the insurance jurisdiction of the provinces over agency matters was challenged by the federally regulated banks (as it related to their insurance activities as banks selling insurance) that the Supreme Court of Canada would ultimately side with the provinces. 

In my view that result had been presaged long before by a House of Lords decision which forced Ottawa to come up with new federal insurance legislation in 1932. This was the core of a modus vivendi involving insurance regulation going forward between Ottawa and the provinces to deal with the federal government having over-reached its powers involving the regulation of insurance.

I confess that I longed for the big banks to indulge their happy combination of arrogance and ignorance and challenge provincial insurance jurisdiction vis-a-vis bank insurance activity. They did so first in British Columbia but in a case which did not really focus on the core constitutional/jurisdictional/regulatory issue -- and won.

Then, bless the banks' high-priced 'legal experts', they made the fundamental error I had awaited for years involving a clear cut question of provincial insurance jurisdiction: the Canadian Western Bank v. Alberta. They ultimately lost. Much to the surprise of many pro-federal power and pro-bank 'experts' this 2007 decision of the Supreme Court of Canada (SCC) was a victory for the provinces.

And do not be misled, as many were when the decision in the Alberta insurance case was appealed to the Supreme Court, by media reports of what "most experts" think would happen. When it comes to financial services matters the so-called experts have been wrong or just uninformed much of the time -- indeed since long before the onset of the west's financial system crisis.

Of course I was not alone in holding a negative view of claimed bank immunity from provincial insurance jurisdiction but that 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 long standing reputation of being pro-bank, banks being their favoured 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.

This sort of federal-centric bias in the Department of Finance was once again on display when Ottawa decided not so long ago to try to impose national securities regulation on the provinces, a move the big banks liked since they dominate the Canadian securities business. The Supreme Court said no.

Why was the 2007 SCC decision in the Alberta case of great interest not just to the provinces but also to insurance companies and licensed insurance intermediaries (the latter being provincially licensed and regulated)? The answer to the question lies with the issue of who gets to measure the dimensions of the regulatory playing field on which various institutions and their people sell insurance.

In one of my columns on ["(No.33) Banks, insurance & the internet"] I explained why in its competitive implications the Supreme Court decision in the Western Bank case reduced to comparative insignificance the later federal regulatory decision by the Office of the Superintendent of Financial Institutions (OSFI) which supposedly (according to a breathless June 10, 2009 article in the Globe and Mail) heralded the "crumbling" of the barriers to an expansion of bank branch retailing of insurance. In fact it did nothing of the sort as would subsequently have been evident to business journalists -- had they bothered to follow up.

All of this had returned to my thoughts with another loss by the banks in the so-called Marcotte decison in 2009 in Quebec Superior Court. The banks 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 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.

In a June 2009 column on I offered this comment about the case and the decision: " 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. ... I hope the government of Quebec can make its recent court victory hold up."  It did -- and yet another big bank challenge of provincial jurisdiction before the SCC went down the porcelain convenience.

In a Sept. 2014 decision on the very same Marcotte case the Supreme Court ruled in favour of provincial regulation. This brings me to a comment on the website "For Advisors Only" forwarded to me recently about the SCC's Marcotte decision. The comment, posted by an Ottawa lawyer, offered a view of the Marcotte decision as being somehow decisive in the matter of banks selling insurance in branches.

"We all know (he wrote) that the chartered banks sell insurance to customers, both inside (so-called "incidental" insurance such as mortgage and credit insurance) and outside the branch.

"The Marcotte decision of the Supreme Court means that these activities (including incidental insurance) are governed by the provincial regulators. The Supreme Court's clear statement (which I believe is a repetition and clarification of earlier decisions) is a resounding “Yes must comply”. This includes both Consumer Protection Legislation and the provincial Insurance Act.

"In Ontario, for example, bank branches must comply with FSCO regulations when dealing with customers. If any of the people in the branch provide insurance advice including incidental insurance, then that teller, mortgage advisor, credit consultant etc must be trained, licensed and registered within FSCO requirements.

"Unless the provincial law specifically exempts banks or the banking activity is a "core" activity (enumerated under the Bank Act), the Supreme Court of Canada has established that the law of general application in the province covers banks. That is the take away from this decision." [end of quotation]

I was not alone in my view that this perspective on the SCC's Marcotte decision endowed the decision with an importance vis-a-vis insurance selling by banks that it does not possess. Subsequent to the "For Advisors Only" posting I received the following comment from a veteran observer responding to the comment (above):

"I hate to criticize a member of such an honourable profession as the one to which the "For Advisors Only" writer belongs but I find his comments a bit too broad in scope and somewhat out of date. The “take” he suggests about insurance was well established in 2007, in the case of Canadian Western Bank et al v. Alberta, (2007, 2 SCR 3),  and the recent Marcotte case is no “clarification” on this count.

"Banks have a nagging tendency to believe that because ‘banking’ falls under exclusive federal jurisdiction, they need not bother with provincial legislation. Once again, they were reminded by the Supreme Court that we live in a federation (hopefully Harper is listening) and provincial contract law applies to their contracts.  

"In a nutshell, the Supreme Court gave another lesson in “co-operative federalism” to the banks, and in doing so, simply applied what it had said in CWB et al v. Alberta, a case that dealt with insurance (in this instance, the right of a province to require licensing of bank employees selling or advising about insurance).  

"The Marcotte judgement, which had nothing to do with insurance, is full of references to the 2007 insurance case, to rebuke the banks’ position that they did not need to comply with the Quebec Consumer Protection Act (CPA), asking for disclosure of bank charges on credit card transactions, because of the doctrines of interjurisdictional immunity and of federal paramountcy. The requirement of the Quebec CPA applies to all lending contracts, and is thus akin to the general rules of contracts stated in the Quebec Civil Code, said the Supreme Court. 

"There is no federal civil or common law other than that established by the provinces under the 1867 power respecting “property and civil rights”.

"This CPA requirement does not impair the banking power nor “significantly trammels” the manner in which Ottawa exercises its banking power, so the doctrine of interjurisdictional immunity does not apply.  Nor does the requirement make dual compliance impossible, nor frustrate the federal purpose, and we must aim at “co-operative federalism” in these matters, said the Supreme Court  referring to what was already clearly said in the Canadian Western Bank case of 2007.  

"By proclaiming its attachment to co-operative federalism the Supreme Court means that, in the absence of the legislation of one jurisdiction emasculating that of the other or clearly conflicting with the other, the Court will lean toward giving effect to both. 

"In any event the net result for the banks was clear: for a second time, off with their heads!  The provincial consumer legislation applies to bank loans, as do the Mortgage Act and the Insurance Act of each province, to such contracts that are entered into by banks. Nothing new here, just a re-affirmation of what the banks have a hard time to understand.

"(An interesting point of the Marcotte decision is that each member of a class in a class action need not have a cause of action against all the defendants, contrary to what the Quebec Appeal Court had said. In layman’s terms, in a class action case Marcotte and the other members did not need to have a credit card with each of the banks they were suing and there was no need to have separate cases -- a separate case of all the holders of bank X credit card suing bank X, etc.-- as this would greatly complicate and encumber the judicial process, said the Supreme Court.  Wise guys who preferred to simplify their work! But this is procedural.)

"I think the writer on "For Advisors Only" is a bit late in celebrating the Marcotte case of 2014 as a great victory for provincial insurance legislation.  I see the case as simply an application of the principles already clearly enunciated in the Canadian Western Bank case of 2007 to consumer legislation." [end of quotation]

I agree although I suspect Canada's big banks may well have to suffer another Supreme Court defeat or two (or three) before they begin to assimilate both the idea and the reality of provincial jurisdiction in this country.




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