Few would argue that one of the most significant developments currently affecting Canada's property/casualty insurance market, and specifically independent brokers, is the legislative reforms to the financial services sector recently proposed by the federal government.
Introduced on 13 June, 2000 as one of Canada's largest ever pieces of legislation, Bill C-38, An Act to establish the Financial Consumer Agency of Canada and to amend certain Acts in relation to financial institutions, provides a new policy framework for a sector vital to Canada's economic prosperity. Financial institutions in Canada employ over half a million individuals, represent approximately 5% of Canada's gross domestic product and are a major source of exports.
Canada's financial services sector includes domestic and foreign banks, trust companies, insurance companies, credit unions and other financial institutions. While insurance brokers are provincially-regulated, they nevertheless have a large stake in financial services sector reforms at the federal level. Not only do they work with and provide the services of federally-chartered companies to consumers, but they also compete directly with other federally-regulated insurers and financial institutions that provide insurance.
Independent insurance 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 property/casualty insurers, brokers seek competition on a level playing field with other players in the financial services industry.
Bill C-38 in the making
Bill C-38 is the culmination of an extensive consultative process that began in 1996. For approximately two years, several parliamentary, advisory and other committees and 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.
Many players in the property/casualty insurance sector, including independent insurance brokers, were actively involved in the lengthy review process leading up to the Bill. Representations were made on issues critical to the livelihood of the sector, in particular proposals to eliminate the long-standing prohibition on retail bank sales of insurance and others relating to tied selling.
In June 1999, the federal government responded to the recommendations of the various consultative bodies by issuing a policy document proposing a framework for the future of Canada's financial services sector. This document identified 57 measures for reform based on four guiding principles:
The purpose of Bill C-38 is to implement the reforms contained in the policy document. Despite the Bill's 900-page length, only the small part establishing an organization to be known as the Financial Consumer Agency is entirely new. This agency, which will bring together oversight activities currently dispersed among various entities, will be responsible for the administration of the consumer provisions governing financial institutions.
The remainder of Bill C-38 introduces amendments to 21 existing statutes that relate directly or indirectly to financial institutions. Only two of those statutes, however, are the subject of particularly far-reaching amendments. The first is the Bank Act which provides the legislative framework governing banks. Perhaps ironically, it is this particular statute that is of most interest to independent insurance brokers. The second is the Insurance Companies Act which provides the legislative framework governing federally-chartered life and property/casualty insurers.
Key amendments proposed in Bill C-38 include a new definition of widely held ownership that allows strategic alliances and joint ventures with significant share exchanges; a new holding company regime to provide greater structural flexibility; and a bank merger review process with a formal mechanism for public input. Other noteworthy measures include liberalized ownership rules and lower minimum capital requirements which are expected to encourage new entrants to the industry and increase competition.
A tremendous victory
Most stakeholders in the financial services sector are pleased with this new framework as it achieves the difficult task of effectively balancing their varied, and sometimes competing, interests. The property/casualty insurance sector, and specifically brokers, wholeheartedly support this legislation as it includes measures to correct the growing competitive imbalance and market domination of the financial services sector by the banking industry.
Expectedly, federally-regulated insurers and banks will be most directly affected by the measures proposed in Bill C-38. In contrast, the vast majority of the provisions contained in this Bill will not affect independent insurance brokers directly, but rather indirectly through an overall increase in the viability and competitiveness of the insurance industry and Canada's financial services sector as a whole. Nonetheless, this legislation represents an important victory for independent insurance brokers as it effectively addresses and brings closure to - at least for a few years - two of its longstanding concerns, namely bank sales of insurance and tied selling.
Bank sales of insurance
Independent insurance brokers are most pleased with Bill C-38 for what it does not do, which is to change the rules governing bank sales of insurance at the retail level. Canada's banking sector has long been highly concentrated with a handful of institutions dominating the marketplace. In contrast, the property/casualty 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 proceeded to allow restricted bank entry into the property/casualty marketplace. The property/casualty insurance industry has been supportive of this measure which has benefited consumers and ensured a reasonably level playing field for all financial services industry players.
Since the mid-1990s, the banking industry has sought to reopen the debate about the retailing of insurance. Accordingly, the property/casualty insurance industry mounted an active advocacy campaign to respond to the proposal that banks be allowed unrestricted entry into the insurance business. The summary message to decision-makers was that the existing restrictions on retail bank sales of insurance are working and should be preserved, and that allowing banks to provide services that have traditionally been closed to them would not result in a level playing field. It was also argued that the existing restrictions benefit consumers by providing them with greater choice, and the property/casualty sector as a whole by maximizing competition.
In a tremendous victory for the property/casualty insurance sector, Bill C-38 proposes to change neither the current prohibition on bank sales of insurance through branches, nor any of the other rules that govern the activities of banks in the insurance business. Good news also came with the proposal that the bank holding companies that will be created by this legislation will not be allowed any greater access to the general insurance business than currently provided to their parent entities.
The property/casualty insurance sector, and specifically its brokers, has had longstanding concerns with 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, consumer groups and others, the federal government proceeded to prohibit coercive 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 to be raised with respect to the unequal relationship between banks and their customers - a relationship that renders consumers particularly vulnerable to coercion. As part of Bill C-38, therefore the federal government is extending the prohibition on coercive tied selling from loans to all other bank products and services. Banks will also be required to disclose the prohibition on tied selling to consumers prior to entering into a combination of financial transactions. The strengthened tied selling provisions of Bill C-38 will be instrumental in ensuring that future competition between the various players in Canada's financial services sector is on a level playing field, and constitute yet another victory for the property/casualty insurance sector.
Sunsetting and looking ahead
In keeping with past practice, Bill C-38 provides for a five-year sunset provision from the time of the passage of the legislation, probably early in 2001. In terms of process, the five-year sunset provision and the preceding review are as favourable to insurance brokers and the insurance industry at large as can reasonably be expected.
Barring any unforeseen circumstances that would trigger an early review, the five-year sunset provision will provide a welcome moratorium on the debate over the issues to which this legislation is attempting to bring closure - bank sales of insurance in particular. A lengthy moratorium on the questions of policy addressed by this Bill will also be beneficial to the financial services sector at large by providing investors with market certainty and a stable policy framework within which they can make sound business decisions.
From the perspective of independent insurance brokers, Bill C-38 will continue to ensure competition on a level playing field with other financial institutions, and the viability of a sector that makes a significant contribution to Canada's employment and economic growth. Indeed, the property/casualty insurance industry with its multitude of players is an excellent example of how well abundant and fair competition, more choice, innovation and excellent service can benefit Canadian consumers and the economy at large.
Francesca Iacurto is director of public affairs at the Insurance Brokers Association of Canada (IBAC).
The IBAC is the national trade organization that brings together the regional member associations of independent property/casualty insurance brokers in Canada. These associations represent approximately 28,400 independent brokers throughout the country.