B.C. Court Acts Against Banks

An important court decision in British Columbia was recently released that limits the powers of banks in the sale of insurance. The case involved the Bank of Nova Scotia and Optima Communications Canada Inc. in a petition for judicial review against the Superintendent of Financial Institutions, the Financial Institutions Commission, and the Attorney General of British Columbia.

The Supreme Court of British Columbia has held that the FSC of British Columbia has jurisdiction over the insurance activities of banks. The decision also provides helpful interpretation of the Insurance Business (Banks) Regulations made under the Bank Act (the “networking regulations”). The decision involves group creditor insurance but is relevant to all types of insurance that banks may sell.

The networking regulations have raised interesting issues regarding who has the jurisdiction to regulate the sale of insurance. Provincial departments of insurance have the jurisdiction to regulate all aspects of the sale of insurance including licensing requirements. The networking regulations appear to give the banks the power to be involved in activities that would normally be considered to be under provincial jurisdiction. The ambiguity that the networking regulations created is whether they give the banks certain powers with respect to the sale of insurance that are not subject to provincial regulation in the same area.

Licensed agents

The Bank of Nova Scotia had retained Optima, a telemarketing firm, to enroll its VISA credit card holders under a group policy that provided coverage on the cardholders’ outstanding credit card balances in the event of death, disability or involuntary unemployment. Optima was not licensed as an insurance agent and marketed insurance coverage independently from the issuing of credit cards. A telemarketer from Optima would call a VISA cardholder, explain the coverage and then attempt to obtain the application to immediately enroll the person under the group policy.

The Superintendent of Financial Institutions issued an order against the bank and Optima requiring them to stop selling group creditor insurance in this manner. The bank and Optima decided to seek a judicial review as to whether their activities in relation to credit balance insurance are subject to provincial regulation. Banks are not generally subject to provincial regulations. The actions of the Superintendent of Financial Institutions in British Columbia were considered by the bank to be an attempt to expand provincial regulation over it.

Under the networking regulations, a bank is permitted to be involved in the promotion of certain authorized types of insurance. Group creditor insurance is an authorized type of insurance, and as a result, the bank would be able to promote it. Banks are not allowed to promote property and casualty products such as automobile and homeowners insurance. The networking regulations do not provide any definition of what promotion is. The rules do, however, provide that a bank may administer an authorized type of insurance. A bank may also provide advice regarding an authorized type of insurance. It is clear that there is some overlap between these types of activities and those that are required to be done by a licensed agent or insurance broker under provincial insurance legislation. The networking regulations do not, however, give a bank the power to act as an agent or insurance broker.

The bank argued that it could market authorized insurance products as permitted by the networking regulations without the requirement for additional licenses or authorization from provincial regulatory authorities. The bank also argued that the promotion of insurance constituted part of the business of banking and that only the federal government has the power to regulate such activities. The court found that the activities of Optima constituted the sale of insurance and not simply the promotion of it.

Defining promotion

There had not been any judicial consideration of what “promotion” was in the context of the networking regulations prior to this decision. The court found that, since the networking regulations used the specific terms “advice” and “promotion”, but did not use the word “sale”, the federal government did not intend to grant banks the capacity to be directly involved in the completion of a sale of insurance between the cardholder and the insurance company.

The court also found that the use of Optima to solicit participation under the group policy exceeded the limits of anything that could reasonably be construed the promotion of insurance by the bank within the meaning of the networking regulations. The intent of the telemarketers from Optima was the immediate enrolment of VISA cardholders under the group policy while they were on the telephone. The role of Optima was to sell credit insurance and not just to provide information that it was available.

Provincial exemption

The court also considered the issue as to whether the bank and Optima are exempt from provincial licensing. An exemption is provided to a person whose only activity is selling credit insurance that is sold incidentally to the granting of credit. As a result, an exemption would exist for employees of the bank, provided that the credit insurance is sold at the same time that the credit is granted. However, Optima is not a bank. As a result, Optima and its employees were found to not be able to claim this exemption.

The court therefore determined that the sale or solicitation of credit insurance by the bank or its employees at a time other than when the line of credit is granted would require the bank and its employees to be licensed under the Province of British Columbia to sell insurance. The court found that it was the timing of the sale of credit insurance that was important in determining whether the exemption would be available.

Provincial regulation wins

The court decision is interesting since no discussion is made of the insurable interest of the bank with respect to enrolment of VISA cardholders under the group policy. The bank would have an insurable interest in obtaining the coverage since the benefits under the policy would be paid to the bank and were limited to the amount of the outstanding indebtedness. It could be argued that Optima was acting as the agent of the bank for enrolling its customers for coverage. The court emphasized the fact that a sale occurred. However, under the sale of group insurance enrolment is normally considered to be a function done by the group policyholder, that is not required to be licensed as an agent or insurance broker. There is little difference between enrolment under a group policy and a sale of insurance. The decision does not include a discussion about the special nature of group insurance and the differences from individual insurance.

This decision is important since it clearly confirms that banks will be subject to provincial insurance licensing regulations when they attempt to sell insurance products. It creates an important precedent that may have application in areas other than insurance, including the activities of banks in the selling of investments, which are also provincially regulated. It is likely that the decision will be appealed since there are a number of important issues that were considered in it. Both the Canadian Bankers Association (CBA) and the Canadian Life and Health Insurance Association (CLHIA) acted as interveners with respect to the court proceedings. The CBA provided support to the position of the bank and Optima. However, the CLHIA provided support for the position of the Superintendent of Financial Institutions of British Columbia.

This decision is part of the ongoing fight between the banks and the insurance industry over who has the power to sell insurance products. The banks have not become significant distributors of insurance products to date in Canada. It is likely that this decision will further restrict their activities.

Unless the decision is overturned on appeal, it will be an important precedent in both interpreting the powers o f banks to promote the sale of insurance under the networking regulations as well as to confirm that they will be subject to provincial insurance legislation including licensing requirements. As a result, it will be necessary for most types of insurance to continue to be sold by licensed agents or insurance brokers, even if they are acting as representatives of banks. This is an interesting decision with implications that may be far broader than the participants originally contemplated.