Control over the distribution of insurance products is once again back on the property and casualty insurance industry’s radar screen as the federal government’s proposed white paper on financial services competition is set to go forward before parliament for legislative approval this March/April. Although the final version of the financial services paper is expected to contain the all- important block against banks retailing insurance through branches, hitches over other proposals contained in the package could result in significant delays in the passing of legislation. And, the concern shared by several insurance bodies is that a delay could well result in the financial service proposals being put on the back burner if a strongly rumored federal election announcement is made in the second half of the year. With the political waters stirring, interest groups, from insurance through to the banks, are shifting into higher lobbying gear to curry government favor.
In the event that the proposed white paper on financial services competition is not passed into legislation in the coming parliamentary sitting, the feeling among independent insurance broker organizations is that a new and intense lobbying battle will once again break out between the banks and their rivals, says Jim Ball, current president of the Insurance Brokers Association of Canada (IBAC). In essence, if the legislation is not passed this year for whatever reason, the entire package of proposals will have to go back to the drawing board for review.
As a result, IBAC sent a high-level team to Ottawa in January to reaffirm the content and expected passage of the white paper proposals. The concern rising from these discussions was that the proposals, which are being put together as a single package for legislative approval, could be delayed in passing due to technical hitches regarding wording applying to the creation of bank holding companies. The “holding company” concept was a concession finance minister Paul Martin included in the white paper allowing the major banks to restructure their corporate operations to better compete against foreign entrants to the Canadian market.
The underlying risk of the white paper being delayed to the second parliamentary sitting in the fall is that rumors are building in bureaucratic and political hallways of a federal election announcement when parliament closes for its summer holiday. If that happens, Ball comments, there is a very good chance that the financial services white paper will be set aside as party politics moves into full swing for an election race. In addition to which, Martin, who has been the main stalwart force in protecting grass-root community financial services enterprise against bank dominance, is favored as a strong contender for the Liberal Party leadership. In the event an election is called, and Martin runs for the premiership, all bets could be off in terms of existing business/political alliances.
The recent passing of the U.S. Financial Services Modernization Act, which allows for cross-selling and ownership between financial institutions (see article in this issue of CU for further details), is another factor which Ball believes could have significant bearing in the event of a federal election being called. Should the federal political structure change, pressure could be brought to bear by the major banks to align Canada’s own financial services regulation with that in the U.S. “I don’t see it [passing of the U.S. legislation] influencing the white paper proposals in the short-term, although it will have some impact at the next financial services regulatory review five years from now. However, if there is indeed an [federal] election, we could see the issue being brought to the table.”
Ball confirms early signals from the bureaucrats in Ottawa that the financial services white paper could well be delayed in being put forward until the fall. In response, IBAC has met with several bodies with common goals, namely the independent life agent associations, to prepare a contingency battle plan. IBAC also recently met with the chair of the Senate Banking Committee, which will play a key role in the redesign of financial services regulation if the white paper is subjected to further hearings as the political landscape changes.
THE LOBBYING “COLD WAR”
The banks are most definitely actively lobbying the politicians for their cause, Ball says. Having recently completed a round of meetings with politicians and bureaucrats in Ottawa, the IBAC team crossed paths with their banking counterparts on several occasions, Ball notes. On such an occasion, a dinner party, Ball found himself face-to-face with senior bank lobbyists, both sides seemingly surprised at the other’s attendance and invite to the event. The short of it is that both sides are still very much active in pressing their positions, Ball comments, although the lobbying activity has been low profile with the white paper still scheduled for reading in the first parliamentary sitting of this year.
George Cooke, who chairs the Insurance Bureau of Canada’s (IBC) committee formed in 1998 to present insurer views to government when the financial services white paper was in development stage, believes the proposals presented by the finance minister last June will go ahead. Cooke says he is unaware of any delays affecting its reading in the upcoming parliamentary sitting. He is also skeptical of a federal election announcement this year, and does not believe that a delay in putting forward the white paper will necessarily see a shift in government policy. “I’m not aware of any shift in government policy and don’t anticipate any problems [with passing of the white paper into legislation], however, that doesn’t mean we won’t be keeping up the pressure. The lobbying effort is ongoing, but at the moment it is not intense, it’s what I’d call low-key vigilance.”
And, while the U.S.’s integrated financial services legislation may bring pressure to bear in the Canadian market three years ahead, Cooke does not believe the U.S. actions will have any significant bearing on the current financial services legislative round.
Ken Orr, current president of the Insurance Brokers Association of Ontario (IBAO), which would be mostly affected by bank competition in retailing insurance due to the high volume of brokers and premium in Ontario, confirms that the association is keeping up its political lobbying efforts in conjunction with the IBAC initiative. “It’s definitely been our stance that the independent broker movement needs to maintain an ongoing and consistent message out there [to political leaders].” However, the main political issue for the IBAO is Ontario’s own legislative reforms currently in the pipeline, Orr observes. The deregulation issues being dealt with mainly concern intermediary training, licensing and ownership, and are unlikely to be impacted by future federal regulation of financial services, he adds. Orr is hopeful of conclusion to content of the provincial legislation by September this year. In the meantime, lobbying momentum will have to be kept up on all fronts, he states.
SIZING UP FOR THE SECOND ROUND
Should the financial services white paper proceed through to legislation this year as expected, this will be far from a won battle with the banks, says Cooke. He expects the banks will continue efforts to win political favor for advancing into insurance retailing. This, however, will only likely reach intensity three to five years from now when banking legislation will be revisited.
Of greater concern to Cooke is the appearance of auto dealers in the insurance business. Recently, Cooke observes, some auto dealers have been advertising floor financing and auto insurance on the spot. Whether the auto dealers and manufacturers are actually underwriting these insurance products or merely forwarding the business to a direct writer is unknown. Cooke points out that General Motors has for some time held a specialty insurance company in Canada, which has underwritten commercial vehicle coverages. Whether the auto manufactu rer may be expanding its scope into general auto insurance is another unknown factor. However, the real concern Cooke has with auto dealers becoming involved with insurance is that in many respects they have access to the same customer information as the banks, thereby enabling them to compete at an unfair advantage to the independent broker system (plus the possibility of tied-selling). “Our friends the banks haven’t given up, and the auto dealers are becoming a concern…which raises the same concerns surrounding the banks on tied-selling.”
Laird Laundy, formerly the head of mergers and acquisitions at Equisure Financial Network and now working as an independent insurance consultant, does not believe that retailers, such as auto dealers, pose much of a threat to the independent broker system — at least in Canada. With financial services legislation having changed in the U.S., he expects to see one or two major retailers/product manufacturers attempt to move into the insurance fray. The structure of the Canadian financial services market is very different to that of the U.S., he notes, with most retailers content to market products under group plans underwritten by traditional insurers.
Laundy’s prime concern remains the banks, pointing out that they are no doubt aware that any political maneuvering at this stage with gain little favor. They will, however, be focussing their efforts on the next round of legislative reform with the lobbying gambit already in play. “The banks know that at the moment they won’t get much success [with the politicians]. The bloody nose has been delivered [in the last debate leading to the white paper draft], but they [the banks] will go through the pro forma moves to wear down the independent broker movement. This is a big stake business for the banks, so there’s no doubt that the battle lines will be drawn five years from now.”
Ted Belton, author of the Belton Report, also expects the bank lobbying pressure will continue after the legislative passing of Martin’s white paper proposals. He notes that some of the banks having advanced into the insurance field have decided to pull back until gaining complete clearance to retail insurance through their branches. This may provide the independent broker movement with a temporary respite, however, several of the major players are advancing their presence across the country through direct writing initiatives. These players are likely taking a long-term view to their insurance investments and will not let go the possibility of grabbing the “golden ring” too easily. “Overall, I expect there will be continued [bank] interest in lobbying Ottawa.”
This thought is confirmed by Bryan Davies, the senior vice president of regulatory affairs at Royal Bank of Canada. Davies is also one of the lead lobbyists for the bank movement. He expects the passing of the U.S. legislation will open the door on the integrated financial services debate in Canada. However, this is an expectation of the future, as Davies is fairly confident that Martin’s white paper proposals will go through the legislative system this year — assuming that the package is presented to parliament before the summer close. Davies points out that, from the House of Commons, the proposed legislation would then have to go before the Senate in the fall before finalization. A delay, say sparked by an election announcement, in its presentation to the House of Commons from the first session to the fall sitting could possibly see the package being pulled back. This would allow the bank movement to go back to government with a stronger message based on the U.S. developments in the reviewing of the white paper proposals. “But this is a “big if’,” Davies comments. More likely, he adds, the bank movement will be focussing its efforts on the second review round in coming years. “We certainly hope that, in time, the government will keep an eye open to [legislative] modernization [of financial services].”cu
