Why banks shouldn’t sell insurance in their local branches

Standing Up for Small Business
By: Robert J. Kimball, Past President, Insurance Brokers Association of Canada (IBAC)

The election of Prime Minister Stephen Harper’s Conservative government has several implications for our industry. One obvious change is the shift to new and different contacts and ministers responsible for broker and insurer issues. While we have worked very hard at developing relationships with all members of Parliament, brokers need to reintroduce themselves to the returning MPs as well as meet new MPs and refresh the new cabinet members about our issues.

We applaud the Conservative Party announcement during the election campaign that they would maintain the current provisions of the federal Bank Act regarding banks and insurance distribution and marketing. We believe this position is a realization that changing the regulations would definitely not be in the interest of consumers and Canadians.

Today in Canada, banks are already in the insurance industry. They may own an insurer, they may sell insurance, they may directly promote and advertise insurance, they also may provide advice regarding insurance questions to their customers. In reality, they are in the insurance business already. They compete head to head with insurers, agents, and brokers. They are, however, not allowed to use their banking customers’ financial information in the promotion and selling of insurance. The banks are effectively asking for an advantage: they want to be able to tap into the information they have on millions of their existing customers and target them for an insurance sale. Giving them this edge would be a serious threat to consumers.

Canada’s banks claim that Canada is the only country in the developed world that has in place the restriction of not being able to sell insurance from their branches. What the banks fail to mention is that this restriction is in place because Canada is the only country in the developed world that offers protection to their chartered banks, so that only five banks dominate the entire financial services industry with such concentration.

Bank Oligopoly

If we compare the financial landscape of the state of California, which has roughly the same population as Canada, to the financial landscape in Canada we would see that California has over 2,000 banks. Canada has five. We would also see that depending on the particular line of business, those five banks manage or control anywhere between 55% and 100% of these lines of business. This concentration is something we as Canadians don’t thinktwice about; and yet, over the past eight years, these same five banks have been lobbying the government to allow them to consolidate even more, potentially leaving just three remaining banks. This sector is already an oligopoly in the true sense of the word.

The rationale for having this restriction in place is to protect consumers; the primary need for such protection is because there is so little choice and competition already in the financial sector. Practically speaking, it is next to impossible to police coercive tied-selling that is a serious threat to consumers’ abilities to make informed decisions. It is in place because credit-granting institutions should not be in a position to tie-in an insurance sale with an application for credit. This is simply unfair to the consumer, who is already in a vulnerable and weaker position. Serious issues arise regarding possible conflicts of interest when the creditor for a home or a car is also the main beneficiary of the insurance policy.

Consumer Protection

The only reason this prohibition exists is to protect consumers, and we applaud the Conservative Party for standing up for consumers and small businesses. We are now asking the federal government to stand by this solid election commitment and follow through by keeping the current prohibitions in the new Bank Act.

Canada currently enjoys an extremely competitive insurance industry. There are more than 200 insurers, whose products are distributed by over 35,000 insurance brokers. Canadians benefit immensely from choice and competition in the property and casualty insurance industry, as it currently exists. The banks’ track record shows very well what the result is for consumers if banks gain a small foothold in an industry and then begin controlling the market. We believe the Conservative government should stand up for consumers and small businesses, choice and competition. In doing so, they would be standing up for Canada.