Bill C-8: a Time to Rejoice?

Originally introduced in June 2000 as Bill C-38, the legislation died on the order paper that fell when the federal election dissolved parliament. Reintroduced in February 2001, the legislation was passed particularly swiftly considering the protracted review process that led up to it, and the magnitude of the changes it will usher in for the financial services sector at large.

While they are provincially regulated, brokers have a large stake in federal reforms to the financial services sector. Not only do they work with and provide the services of federally-chartered insurance companies to consumers, but they also compete directly with other such insurers. Brokers offer a unique, and threefold perspective on financial services sector reforms in Canada. As members of the small and medium-sized enterprise (SME) community and taxpayers, brokers are concerned about Canada’s financial services sector and its contribution to the country’s economic growth and productivity. As consumers of many products and services offered by financial institutions, they are concerned about price, accessibility and consumer protection rights, particularly as they relate to tied-selling.

As members of the SME community and the principal distribution channel for p&c insurers, brokers seek competition on a level playing-field with other players in the financial services industry.

In the making

Bill C-8 was the culmination of an extensive consultative process that began in 1996.For approximately two years, several parliamentary, advisory and other committees/task forces solicited the views of stakeholders on measures needed to modernize Canada’s financial services framework. The multitude of stakeholders included insurance, banking and other industry groups, consumer groups and government agencies, just to name a few. Represented by the Insurance Brokers Association of Canada, brokers were actively involved in the review process that led to the legislation. Representations were made on issues critical to the livelihood of the sector, in particular proposals to eliminate the prohibition on retail bank sales of insurance, and others such as tied-selling.

In June 1999, the federal government responded to the recommendations of the various consultative bodies by proposing a framework for the future of the country’s financial services sector. In a policy document known as a “white paper”, it recommended 57 measures for reform. In a great victory for brokers, the federal government announced that there would be no changes to bank powers in the area of insurance, while providing improved measures to deal with tied-selling.

The purpose of Bill C-8 was to implement the reforms contained in the white paper. While most of the legislation proposed amendments to 21 existing laws relating directly or indirectly to financial institutions, only two statutes were the subject of particularly far-reaching amendments. The first was the Bank Act which provides the legislative framework governing banks, and which ironically continues to be of greatest interest to brokers. The other was the Insurance Companies Act, which provides the legislative framework governing federally-chartered life and p&c insurers.

Tremendous victory

Expectedly, insurers and banks will be those most directly affected by Bill C-8. In contrast, the vast majority of the legislation’s provisions will only affect brokers indirectly through an overall increase in the viability and competitiveness of the insurance industry and the financial services sector as a whole.

In a rare display of unity, virtually all financial services sector stakeholders supported Bill C-8, and advocated its speedy passage. By most accounts, the legislation achieved the difficult task of effectively balancing many different and sometimes competing interests. The p&c insurance sector as a whole was particularly pleased that the legislation proposed to correct the growing competitive imbalance and market domination of the financial services sector by the banking industry. For brokers specifically, Bill C-8 was an important victory as it effectively addressed and brought closure to two longstanding concerns.

Bank sales

Brokers were highly pleased with what Bill C-8 did not do, which was to change the rules governing retail bank sales of insurance. Canada’s banking sector has long-been highly concentrated with a handful of institutions dominating the marketplace. In contrast, the p&c insurance sector has hundreds of players of various sizes operating in a very competitive and non-concentrated marketplace.

Given this market reality, the federal government has historically prohibited banks from selling insurance through their branches. In 1992, however, it allowed restricted bank entry into the p&c insurance marketplace. The industry supported this measure which has benefited consumers and ensured a reasonably level playing-field for all players in the financial services industry.

In the mid-1990s, however, the banking industry attempted to reopen the debate about the retailing of insurance. Accordingly, brokers and the entire p&c insurance sector mounted an active advocacy campaign to respond to the proposal that banks be allowed unrestricted entry into their business. The summary message to decision-makers was of the effectiveness of the 1992 rules, and that allowing banks to sell insurance through their branches would not result in a level playing-field. It was also argued that the restrictions benefit consumers by providing them with greater choice, and the p&c insurance sector as a whole by maximizing competition. In a tremendous victory for brokers, Bill C-8 changed neither the current prohibition on retail bank sales of insurance, nor any of the other rules governing the activities of banks in the insurance business.

Tied-selling

Brokers have had longstanding concerns about the ability of banks to tie the provision of certain services, insurance in particular, to extensions of credit or other products and services. Tied-selling, whether resulting from coercion by a seller or from a customer’s realization that they stand a better chance of securing a particular product or service by volunteering to accept another product or service from the same seller, is a practice that adversely affects competition as consumers no longer base their purchasing decision on factors of price or product attributes.

In 1998, as a result of the advocacy efforts of the insurance industry, among others, the federal government prohibited tied-selling in relation to loans. Accordingly, it became illegal for banks to coerce or impose undue pressure on a customer to purchase another financial product from them as a condition for obtaining a loan. While a good first step, concerns continued over the unequal relationship between banks and their customers – a relationship rendering consumers particularly vulnerable to coercion. Accordingly, through Bill C-8 the federal government extended the prohibition on tied-selling from loans to all other bank products and services. Moreover, banks will be required to disclose the prohibition on tied-selling to consumers. These strengthened provisions will help ensure that future competition between the various players in Canada’s financial services sector is indeed on a level playing-field.

Sun-setting

In keeping with past practice, Bill C-8 provides a five-year sunset provision from the time of its entry into force, likely sometime this fall. This sunset is as favorable to brokers and the insurance industry at large as can reasonably be expected. It will provide a welcome moratorium on the debate over the issues to which this legislation brought closure – bank sales of insurance in particular. It will also benefit the financial services sector at large by providing investors with market certainty and a stable policy framework within which to make business decisions.

Unfortunately, there are signs that the hiatus may be short-lived. Early in 2001, the federal government indicated that it was “prepared to revisit this legislation prior to the five-year review if it proves necessary in order to ensure that the framework keeps pace with the rapidly changing marketplace”. More recently in June, senator Cline Hervieux-Payette, a supporter of the insurance industry, indicated that, “there is every reason to believe that the speed of the changes in the global environment of the financial services sector will lead us to review these [framework] issues [in which financial institutions operate] much sooner, well before the deadline prescribed by the act”. Nevertheless, brokers should be pleased that Bill C-8 allows them to compete on a level-playing with other financial institutions, and ensures the viability of a sector that makes a significant contribution to Canada’s employment and economic growth.

For the property and casualty insurance sector and its brokers in particular, there is little doubt that the passage of federal Bill C-8 is reason to rejoice. On June 14, 2001, the federal government gave royal assent to Bill C-8, an act to establish the Financial Consumer Agency of Canada and to amend certain legislation in relation to financial institutions.