Legally speaking: Bank insurance, consumer rights

(September 2007) The Wild West of bank-promoted insurance has been roped by the Supreme Court of Canada. A recent decision, Canadian Western Bank et al. v. Her Majesty the Queen in Right of Alberta, is a significant improvement for consumer rights and will likely have a significant impact on the manner in which Canadian banks engage clients and promote insurance.

In short, for all insurance except mortgage insurance and export credit insurance, banks promoting the sale of insurance now must comply with provincial regulation and consumer protection legislation.

The Supreme Court of Canada released its long-awaited decision earlier this year. The case was a technical challenge by banks, which are federally regulated, to Alberta's Insurance Act amendments. In challenging these amendments the banks were attempting to avoid complying with provincial laws designed to protect consumers during the promotion and sale of insurance, saying provisions of the provincial Act should not apply to federally regulated banks. The Supreme Court of Canada was required to determine whether, and to what extent, these market conduct rules apply when banks promote and sell credit-related insurance.

After encouragement from the banks prompted a series of technical manoeuvres by federal politicians and responding manoeuvres by the provinces, the federal government revised the Bank Act in 1991, permitting banks to promote eight types of insurance in their branches. Alberta, in turn, revised its Insurance Act in 2000 so that federally chartered banks would be subject to provincial licensing requirements that govern the promotion of insurance products.

Using the Constitution Act, 1867, the banks argued that they could escape the provincial consumer protection in the Insurance Act because their sale and promotion of insurance was core to recognized banking activities. The banks argued that "the primary character of this insurance, tied as it is to the provision of loans by banks … is security collateral" and, as such, the promotion of such insurance "lies at the core of what the bank does," that is, to "lend money and take security."

The Supreme Court decided these technical and constitutional arguments were inapplicable because the promotion of the authorized, "credit-related" insurance (credit- and charge-card-related insurance, creditors' disability insurance, creditors' life insurance, and travel insurance), was not at the core of banking. It also said there was no real conflict between provincial protections and the bank's rights under federal legislation. In its decision, the Court stated that: "when promoting insurance, the banks are participating in the business of insurance and only secondarily furthering the security of their loan portfolios."

It would appear that the issue of "tied selling" of insurance by the banks was not explored, even though the banks clearly pointed out in their submission that "the primary character of this insurance" is "tied as it is to the provision of loans." They also submitted that "lending money and the promotion of security are intimately tied together and together go to the core of banking."

Perhaps this will be an issue to be pursued by provincial regulators now that the banks have gone on the record admitting to obvious truths observed by consumers and lawyers who regularly deal with complaints where insurance is "forced" on potential customers, by the banks, who then void the policies at time of claim.

In summary, this decision requires banks to comply with provincial legislation when promoting or selling most insurance. To me this is simply requiring the banks to play on an even field and kowtow to the most basic issues of consumer protections.

Of note:

1. Of all the interest groups purporting to stand up for insurance agents and public interest — Canadian Council of Insurance Regulators, the Canadian Life and Health Insurance Association, CISRO and others — only Advocis chose to stand up and be counted in this debate by making submissions to the Court.

2. The next big issue for financial advisors is the Supreme Court's review of Dominion Securities Inc. v. Merrill Lynch Canada, regarding broker and client rights and dealer fights over territory. This too has significant implications for both consumers and advisors. The question is which of the interest groups that purport to represent advisor and client interests will stand up?

Harold Geller is an expert on legal issues affecting financial intermediaries. Harold assists and represents dealers, MGAs, branch managers, compliance officers and advisors dealing with their compliance, regulatory and negligence issues. Harold also helps financial intermediaries with internal business and their clients' legal issues. Harold is a well-known industry commentator, a CE provider and administrator with foradvisorsonly.com. Harold can be reached at hgeller@miltongeller.com.

(09/11/07)