Monday, September 14, 2009

The Newest Battlefield Between Independent Insurance Brokers and Banks


Battles between insurance brokers and the banks are nothing new. Current legislations states that banks can only promote insurance “outside of a branch”. Restrictions have been in place against banks for a very long time and for very good reason.

At issue this time is that the banks’ current attempts at expansion into insurance is a violation of the spirit of the legislation set up by the federal government in 1991. Obviously the government sees the need for such regulation since time and time again, the banks have tried to get them to reverse it, but it simply isn’t the right thing for the customer. A couple of the strongest reasons against banks retailing insurance in their branches are:

  • Fear of tied-selling – If you were at a bank looking for a mortgage, which has an insurance requirement built in to it, would you be comfortable saying “NO” when they offered the insurance with it (which of course has all the requirements of the mortgage built in)? Forget about the “fair competition” dilemma this brings, is it the right thing for the consumer?
  • Competition – Competition is healthy for business and results in fair treatment of the consumer. This might sound like an argument for allowing banks in to insurance, but it is quite the opposite. The big six banks already dominate Canada’s banking sector, making ours one of the least competitive banking sectors in the world. If those same institutions were allowed to offer insurance through their branches, they would also come to dominate the insurance brokerage market by virtue of their current size and power. Competition would be diminished and consumers would suffer.

There are many more reasons, but this is not a rant about why banks should not be allowed to retail insurance from their branches … that has already been looked at time-and-time again and the federal government recognizes that it is not the right thing for the consumer.

This is a discussion on what constitutes a bank branch. I can’t comment for all bank customers, but I personally can’t think of the last time I visited a teller in a branch, for my banking needs. The majority of my banking is done at bank machines, or in most situations, over the Internet. Logic would state that those bank machines and websites for banking purposes would be considered a “bank branch”. The same logic for protecting the consumer would apply to these “locations” just as much as they would standard bank branches, which is where most transactions took place when this legislation was written. It's really during the credit application process that consumers are most vulnerable and open to coercion. And as it turns out, you can also apply for credit on-line. Therefore the same threats to consumers exist whether it's in a branch or on-line. Times have changed and it appears that the banks are once again trying to skirt the rules and intent of the legislation by using the Internet, and not considering it a bank branch. What about the virtual banks that now exist? They don’t have “bricks and mortar” branches. Does that somehow make it any more acceptable for them to use unfair competitive advantages and potential tied-selling to the detriment of the consumer?

I sure hope the government decides to put an end to this skirting of the spirit and intent of the law to protect consumers. The same sound logic for not allowing banks to retail insurance products from their bricks and mortar branches applies to their virtual branches as well. Please enforce the intent of the law, or if need be, amend the law to avoid this loop-hole.