B.C. Court Backs Bank Insurance

In an important decision with implications for Canada’s financial services industries, the B.C. Court of Appeal recently imposed significant limitations on provincial insurance regulatory authority over federally chartered banks.

The issue of this court decision, which involved the Bank of Nova Scotia and Optima Communications Canada Inc. vs. the B.C. Superintendent of Financial Institutions (BCSFI), Financial Institutions Commission (FIC), and Attorney General (AG) of British Columbia, was Scotiabank’s “Visa Balance Insurance Plan” – a group insurance policy underwritten by ACE INA Insurance and CIGNA Life Insurance Co. of Canada. The policy paid the cardholder’s minimum monthly Visa payment in the event of the cardholder’s death, disability or involuntary unemployment. Scotiabank outsourced the telemarketing of the plan to Optima Communications Canada Inc.

The BCSFI took the position that this activity was unlawful because none of Scotiabank, Optima or their respective employees were licensed to solicit insurance applications under the B.C. Financial Institutions Act (FIA). Overturning the decision reached at trial, the Court of Appeal held that (I) the FIA did not apply to Scotiabank, Optima, or their relevant employees in the circumstances, and (II) even if it did, constitutional considerations would have rendered the FIA ineffective as an encroachment on federal authority.

THE FIA

The applicable provisions of the FIA apply only to “insurance agents” as defined in the legislation. Accordingly, Scotiabank and Optima’s first argument was that they were not insurance agents, but rather merely solicited enrollment in an existing group policy and did not create new insurance contracts. The court disagreed, and held that the FIA is intended to be interpreted broadly to cast a wide net with respect to the solicitation of insurance. The sole purpose of the carefully prepared scripts used by the Optima telemarketers, who were reviewed and approved by Scotiabank, was to invite and encourage Scotiabank cardholders to apply for the credit card balance insurance. The activity was therefore held to be the soliciting of insurance.

Scotiabank’s second argument was that the FIA in s. 171(3)(i) specifically exempts banks and their officers and employees from the licensing requirement “while acting as agent in respect of credit insurance, incidental to the ordinary business of the…bank”. While the applicability of this provision might seem obvious, the trial judge had found that balance insurance sold after the credit card had been issued was an independent business activity, not “incidental” to the granting of credit. The Court of Appeal disagreed, holding that all that is required to be “incidental” to ordinary business is connection “in a meaningful way” with that business – a standard easily met in the circumstances of the case.

Scotiabank was therefore exempt from the FIA with respect to the telemarketing. However, the telemarketing had actually been conducted under the outsourcing agreement with Optima. The Court of Appeal agreed with the BCSFI that, as Optima was not a bank, it could not directly claim an exemption under s. 171(3)(i). It then went on to hold that because Optima’s telemarketers were trained and employed according to strict standards established and monitored by Scotiabank, they were effectively employees of the bank (in addition to being employees of Optima) and, as such, were covered under the s. 171(3)(i) exemption.

In considering the employment status of the telemarketers, the court made a number of important points that should be of particular interest to those involved in outsourcing. First, it held that a person could be an employee of more than “one person” with respect to the same activities. It also stated that the meaning of “employee” is very context specific and that the purpose of the statute determines whether a particular relationship falls within the scope of the term. The court’s view was that the intention of the FIA was to exempt not only the bank itself, but also those persons who facilitate the bank’s solicitation of credit insurance applications, over whom the bank exercises control and who may otherwise be caught by the definition of “insurance agent”. To fall within the exemption, a person must be acting on behalf of a bank and under the direction of a bank in respect of all aspects of the telemarketing program.

Based on the same reasoning, the court found that Scotiabank and Optima were also exempt under s. 2(c) of the “insurance licensing exemption regulations” under the FIA, which provide that the licensing requirement does not apply to a person whose only activity as an insurance agent is “in connection with credit insurance sold incidentally to the granting of credit or arranged by, that person or that person’s employer”.

CONSTITUTIONAL ISSUES

Although Scotiabank and Optima had been found to be exempt (or effectively exempt) from the FIA, the Appeal Court nonetheless pronounced on the constitutional arguments raised in the appeal. Those arguments related to two doctrines of constitutional law known as “inter-jurisdictional immunity” and “paramountcy”.

Inter-jurisdictional immunity is the constitutional doctrine that provincial laws of general application apply to persons and activities under federal jurisdiction, as long as such provincial laws do not impinge on the exercise of a core aspect of the federally-regulated power. As the banking power is expressly part of the federal jurisdiction, the key question was whether the marketing of credit card balance insurance constituted part of the “core” of the banking power. If so, any restriction that a province purported to place upon it would be ineffective.

The court set out three principles concerning the banking power:

It is broad in scope;

It will change to reflect changing conditions; and

The taking of security is an integral part of it.

The court found that credit card balance insurance, naming the bank as the loss payee, provides security to the bank for credit extended to the customer. The taking of security, it further held, is one of the core activities of a bank. As a result, the FIA licensing regime could not apply to Scotiabank. Policy considerations also favored this conclusion: to subject banks to many distinct provincial regimes could only produce uncertainty and never ending disputes. These concerns are best addressed by uniform control. Interestingly, the Court of Appeal extended this immunity to Optima and held that where an activity falls within exclusive federal jurisdiction, it does not matter whether it is carried on by the federally-regulated entity or by a service provider. With the exception of the finding that Optima could claim immunity, the Court of Appeal’s ruling on this point was not particularly radical.

As lending is undoubtedly a core activity of a bank, it is reasonable to conclude that taking security for a loan is also a core activity. On the other hand, by tying the immunity principle to a broad interpretation of the scope of the banking power – and by affirming that this power evolves in response to changes in the industry – the court has arguably invited the application of the immunity principle to other financial services that banks provide, from mortgage brokering to securities dealing.

Paramountcy is a second constitutional doctrine that applies to conflicts which may arise even where provincial and federal governments legislate within their proper jurisdictions. In such cases, paramountcy holds the provincial legislation ineffective to the extent of the conflict. Scotiabank and Optima argued that the FIA licensing requirements conflicted with the federal “Insurance Business (Banks) Regulations” (IBBR), which permit a bank to “promote” (and also to “administer” and “provide advice” concerning) authorized types of insurance. Credit card balance insurance is one of the authorized types of insurance. The trial judge had rejected Scotiabank’s contention that its telemarketing activity fell into the category of “promotion” under the IBB R. The BCSFI reiterated this argument on appeal, but the Court of Appeal held that “promotion” includes all “activities in furtherance of the sale of a product or service”. The BCSFI also noted that s. 416(2) of the Bank Act prohibits a bank from acting “as agent for any person in the placing of insurance”. According to the court, being an “agent” must be taken in this context as entailing “a formal act of agency”. While distributing and collecting application forms might, in an informal sense, be an act of agency, it is not enough to trigger the s. 416(2) prohibition.

FORMAL AGENTS

To be a “formal” agent, the court appears to have held, a bank must have the power to bind the insurer under a policy. That was not so in the circumstances of the case, as the insurers were responsible for approving applications and issuing insurance certificates.

It is worth noting that while the insurers were indeed responsible for the ultimate approval of the applications, the evidence indicated that they had never denied an application under the program. This aspect of the decision – which may yet be appealed to the Supreme Court of Canada – makes it clear that banks can actively market and sell policies for the types of insurance permitted under the IBBR, as long as the ultimate right to approve individual applications rests with the insurer.

The key points of the decision are therefore as follows:

The B.C. FIA specifically does not apply to banks or their employees with respect to the requirement for licensing as insurance agents with respect to credit insurance.

As a point of constitutional law, banks marketing balance protection insurance and their employees cannot be required to register as insurance agents under provincial law.

Each of the above findings is to be extended to service providers and their employees (although, in the first case, only where sufficient control by the bank over the employees is established).

As a general principle of constitutional law, banks enjoy a considerable degree of immunity from provincial regulation with respect to “core activities”, which is to be broadly interpreted to reflect changes in the banking industry.

Stuart Carruthers partner at Stikeman Elliott, LLP