Financial Reform Redux

After a period of relative quietude, Canada’s financial service legislation is again an active topic for the property and casualty insurance industry. Insurers and brokers who hoped this round of legislative reviews surrounding bank retailing of insurance products would end with a swift KO are surely disappointed. However, they are not likely surprised by the banking community’s push for greater powers.

The last round of reforms and legislative change in 2001 contained a sunset deadline of October 26, 2006, at which time new financial services legislation must be enacted. The review process has already begun. In February, the Department of Finance released a consultation paper that focused on several essential parts of the Bank Act and relevant financial service legislation. The paper did not suggest changing the rules regarding how banks should retail insurance products, but rather pointed to a number of consumer protection, disclosure and regulatory harmonization proposals. The department asked interested parties to respond by June 1 and subsequently received several submissions.

In a clear strategy to redress what some consider a shortcoming within the last round of reforms, in late June the Canadian Bankers Association (CBA) released the results of a consumer poll on access to insurance information. Conducted by the Strategic Counsel in May, the survey of 1,358 Canadians reported that 85% support changing the current regulation to allow banks to provide insurance information in bank branches. The poll also found that 83% of respondents favor changing the current regulation so that branch staff could refer customers to a qualified insurance professional.

“Consumers should be able to get the insurance information or referral when and where they want it,” Raymond Protti, CBA president and chief executive officer, reports in a recent speech to the Economic Club of Toronto. “It’s time to make it happen.”

REFERENCE TO CHANGE

Specifically, the CBA has made four recommendations to amend the Bank Act and its regulations, which would allow consumers to have ready access to specific information in bank branches about insurance products and allow them to obtain a referral from their bank branch to an insurance professional outside of the branch. The CBA also wants to have the ability to tailor insurance information to individual circumstances and pass along relevant client information to an insurance professional.

Protti says the current restrictions that forbid banks from providing in-branch brochures, information and referrals for insurance were enacted in 2001 because of concerns about privacy, coercive tied selling and consumer protection. The CBA says such concerns have been addressed through the establishment of federal privacy legislation, prohibitions against tied selling and the creation of consumer regulator (the Financial Consumer Agency of Canada).

“The banking industry’s longstanding position has been that the remaining restrictions are anti-consumer and anti-competitive,” Protti says. These absurd restrictions exist on (consumers) being able to access information through their bank branch (they) can get information about insurance products at grocery stores, department stores and discount warehouses like Costco. For consumers, it just doesn’t make sense.”

Not surprisingly, brokers and insurers disagree with this position. “Every time there is a review of the Bank Act, the major chartered banks think it is Christmas,” Dan Danyluk, chief executive officer of the Insurance Brokers Association of Canada (IBAC), says. “And we are concerned that consumers will pay the price for any particular gifts that regulators may give them.”

Mark Yakabuski, vice president, federal affairs and Ontario region for the Insurance Bureau of Canada (IBC), says the IBC submission to the Department of Finance “concentrated on those items where a strong consensus was expressed. The overwhelming opinion of our members is that there is no need at this time for major structural reforms in the financial service framework. This certainly includes maintaining the current restrictions on banks retailing of insurance products.”

PROTECTING THE P&C PIE

One of the major thrusts of IBC’s submission is sharpening the distinction between p&c insurers and other wealth management sectors. “The p&c insurance industry is unique in that the core function of p&c insurers is not financial intermediation like other financial institutions,” the bureau states in its report. “In other words, they are in the business of risk protection rather than the intermediation of financial assets. . . The distinct nature of our industry should be taken into consideration in the 2006 review.”

The IBC also contends that yet another major overhaul may be premature. Yakabuski notes that the financial services industry as a whole is still digesting changes from the last round of reforms. “Many of the 2001 reforms are still being absorbed by the marketplace,” he says. “Some of our members have noted that, as recently as this spring, comments have been solicited on new regulations to implement the 2001 reforms.”

Danyluk says he finds it interesting that banks were not remotely heard from during the recent hard market cycle, when capacity issues loomed large and rate pressures led to consumer unrest. “We didn’t see in the last hard market the banks do a tremendous amount of activity to get into the business, when it wasn’t profitable,” he notes. “And that is one of our big concerns. The fact of the matter is that brokers personalize the insurance experience. We are in every small community, and you don’t see brokers withdraw from communities the way bank branches withdraw.”

On the issue of consumer access to insurance products, Danyluk says there is little proof that Canadians are demanding more information. “I certainly question the CBA-sponsored survey, mainly because I think that there are lots of ways to ask questions,” he says. “I am not convinced that consumers across the board want banks to provide more insurance information or are hard pressed for information.”

Danyluk points to a study done in Saskatchewan by Insurance Brokers Association of Saskatchewan executive director Ernie Gaschler, which looked at the ratio of insurance companies and intermediaries to consumers. It found that there was one insurance intermediary for every 80 residents between ages 20 and 75, which Danyluk describes as a “great ratio.”

TOO MUCH INFORMATION

The biggest threat brokers anticipate bankers touting more information may pose is the potential for coercive selling techniques and the abuse of influence in buying decisions. “The CBA is saying that they should be able to take client information and prepare specially tailored insurance packages – in other words, to use the information that they have gathered for another purpose,” Danyluk says. “I don’t think that is appropriate. I think we have just gone through the establishment of a whole privacy regime, which indicates that we don’t indeed want to do that.”

In its submission, the IBAC pointed to an example of how abuse could take place if banks were granted greater insurance retailing abilities. “Insurance brokers must routinely provide banks with ‘proof of insurance coverage’ on their customers to whom the bank has lent money,” the association states. “In so doing, banks are provided with the ‘insurance coverage data’ of the brokerage’s customers; personal information which could in turn be used to sell that individual insurance. Banks may also obtain client personal information in the course of providing the brokerage with a loan, whereby customer files are used as collateral in the transaction. The situation would be a particular concern in rural areas where one bank is the only local source of credit not only for individuals, but also insurance brokerages.”

Danyluk says brokers have never been concerned about competing with banks – as long as the play ing field is level. He notes that the “economic might of the banks has prevailed in every market sector” they have entered, often in the name of encouraging a “strong domestic banking industry.”

“Currently, banks have an opportunity to do business in virtually every aspect of insurance,” Danyluk says. “The only thing they are not allowed to do is use the information they gather on wealth management to interfere with the risk management side. That is all. It is like putting a picket fence in front of a 90-foot giant.”

Protti acknowledges that banks have made strong forays into the insurance world. “The fact is, banks are already in the insurance business and have been for some time,” he says. ” But there is a disparity in what kind of insurance information you can access and where you can access it. . .You can’t even ask or consent to your bank sending you any insurance information that could be of benefit to you. It’s bewildering to consumers.”

In fact, some banks are setting up nearby or attached facilities for insurance sales, playing with the idea of the picket fence or, perhaps more accurately, “Chinese walls.” Earlier this year, the Royal Bank announced plans to set up p&c insurance outlets right next to bank branches. Many in the insurance industry see this as a move to pressure Ottawa to open the rules on information sharing and selling insurance from bank branches.

PAIRING UP FOR PRODUCTIVITY

Aside from the issue of banks retailing insurance from their branches, some groups like the IBC are turning their focus on this round of financial reforms to streamlining regulatory processes and improving coordination between federal solvency and provincial market conduct oversight. While IBAC is mainly concentrating on banking insurance powers, Yakabuski says there are other issues that require attention.

The IBC stresses the need for improved coordination of federal-provincial regulatory bodies. As an example, Yakabuski cites the recent challenging market conditions, when provincial regulators in Ontario were encouraging insurance companies to write more business, while the federal Office of the Superintendent of Financial Institutions was closely monitoring capital and solvency levels. “Our members believe much more effort is needed to achieve greater synchronicity between market conduct and solvency regulatory objectives,” he says.

In its original consultation paper, the Department of Finance proposed new disclosure provisions at the federal level to protect consumers. The IBC pointed out that substantial disclosure provisions already exist at the provincial level, in addition to insurer-sponsored provisions, such as the Code of Consumer Rights and Responsibilities in Ontario.

The IBC’s submission also covers a number of other legislative points, including lowering the barrier to entry for new business and streamlining transactions. Another concern of Yakabuski is that the growing trend towards risk-based supervisory approaches will involve more “rigorous self-assessments” by insurance companies and financial institutions. “The industry needs assurance that self-assessment will not become a tool for plaintiffs,” he says. “We believe that self-assessment should be privileged and not admissible as evidence in civil or administrative proceedings at both the provincial and federal court levels.”

FULL CIRCLE

The Department of Finance is expected to introduce a white paper this fall after reviewing all the submissions from interested parties. Legislation could be introduced as early as spring 2006. While there are no guarantees that the Finance Department will take into account either insurance or banking recommendations, one thing is for sure – the lobbying by both sides will continue well into next year.

“I think it would be unwise for insurance professionals to sit back and relax,” Danyluk notes. “If insurance professionals across the country believe that they aren’t going full steam after insurance, they would be sadly mistaken. We need to make sure that there is a great deal of clarity and understanding amongst our politicians and regulators about what we do and the implications of any major changes. If as an industry we don’t do that, we won’t like the results.”

When it comes to banking and insurance the more things change, the more they stay the same.