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RBC Financial Group Submission in Response to Finance Canada's 2006 Review of Financial Sector Legislation:

RBC Financial Group

Submission to the Department of Finance: 2006 Review of Financial Institutions Legislation


I. Introduction

Comments on Financial Sector Reform

RBC Financial Group ("RBC") welcomes the opportunity to respond to the government's request for comments on measures to be considered in the next round of reforms to the federal financial institutions legislation.

The attached appendix provides a very brief summary of our response to the issues outlined in the 2005 Budget in relation to the review.

Beyond responding to these specific issues, however, the main purpose of this submission is to underscore the importance of one key issue – the need to remove the constraints on the ability of Canadians to obtain insurance services, products and advice from banks.

Insurance Powers

In outlining our position on insurance, this submission is divided into four main parts:

1. Background – outlines the impact of the current barriers on the options available to consumers

2. Benefits to Consumers – illustrates how removing the barriers would provide more choice and convenience for consumers

3. Evolution of Policy – notes that the removal of the constraints would be consistent with recent policy developments to promote efficiency

4. Impacts – shows that the time has come to remove barriers to competition.

Summary of Position

In summarizing the key points of this submission, we would highlight two fundamental principles that have underpinned the government's approach to financial sector policy and legislation in recent years:

  • the promotion of efficiency and competition, including the objective of providing consumers with the widest possible range of choice;
  • the priority of ensuring that consumers are fully informed about the financial services and products available to them.

Bearing these principles in mind, we submit that removing the constraints on the ability of consumers to obtain insurance services, products and advice from banks would constitute the single most important initiative that the government could undertake in this review to promote the interests of Canadians.

II. Background

Overview of Current Law

To provide context to the discussion below, it is important to note that the current legislative and regulatory framework imposes significant constraints on consumers seeking to purchase or learn about insurance services and products in the branch of a bank.

Consumers cannot, for example, purchase life and health insurance, home and auto insurance or annuities in a bank branch. Beyond that, consumers are also not allowed to get a bank's pamphlet on these products in the branch, or even to get a referral to an insurance company to learn more about these products.

The purpose of this submission is to examine whether the above restrictions continue to make sense.

Policy and Legislative Changes

A key characteristic of financial sector policy in Canada has been the ongoing evolution of the legislative and regulatory framework to reflect the changing needs of Canadians. An important element of this evolution has been the removal of barriers that limit efficiency, competition, convenience and choice. One of the more significant changes in this area has been the breakdown of the barriers between financial institutions.

By way of background, the barriers between banks, trust and loan companies, security dealers and insurance companies began to break down in earnest in 1987 with the ability of banks and other financial institutions to acquire security dealers. In 1992, further changes were made to allow banks, insurance companies and trust companies to acquire each other.

This deregulation permitted banks, insurance companies, trust companies and securities dealers to compete across pillars. The changes led to the growth of widely diversified financial groups that effectively compete against each other in all facets of the Canadian financial services marketplace.

While the 1992 changes culminated a process of significant reforms, a fundamental barrier to competition was left in place -- the inability of consumers to purchase or learn about most types of insurance services and products from a bank branch.

Application of the Policy to RBC

An overriding objective of RBC's business principles is to provide the broadest range of choice to our clients at the most competitive prices possible. As legislative constraints have been eased, we have expanded the range of offerings available to our clients to include banking, securities, trust and insurance services.

With respect to insurance, we are legally obligated to offer many of our services, products and advice through either our life insurance company or our property and casualty company. As currently drafted, however, the constraints in the legislation impose real barriers on the ability of our customers to learn about specific types of insurance products or to obtain information about a specific insurance company, including our own insurance subsidiaries. A further reduction in the policy and regulatory barriers in this area would allow us to better follow through on the imperatives of our business to provide choice, convenience and tailored advice to our customers.

Beyond these constraints on availability of information, we would note that while our insurance subsidiaries are important components of our business strategy, and our clients have valued the services they provide, this is not necessarily the only way that customers want to purchase insurance. The constraints currently imposed on the ability of customers to purchase insurance from our branches limit our capacity to pass on potential efficiency gains to Canadians in this area.

Application of the Policy to Canadians

As will be discussed in more detail below, the fundamental question raised by the policy and legislative developments in this area is the impact on Canadian consumers. With the accelerating pace of change in our sector, particularly with respect to the use of the Internet, serious questions are raised as to whether the current legislative and regulatory constraints continue to reflect the needs of Canadians.

In recent years, significant new flexibility has been provided to Canadians in terms of access and choice through on-line banking. We have reached the point where Canadians can effectively obtain any of the information they want or need about insurance through a bank's Internet site. Moreover, options are increasingly being made available for customers to in fact purchase insurance over the Internet.

The availability of this flexibility on-line raises questions as to why constraints should continue to be imposed on the ability of Canadians to obtain similar insurance services, products and advice from the branch of a bank. Consider, for example, whether the following scenario makes sense:

  • a consumer may see an ad on television promoting a life insurance product offered by an insurance subsidiary of a bank. Intrigued by the ad, the consumer decides to go to the branch to get a copy of the bank's pamphlet with more information;
  • at the bank's branch, the consumer is informed that federal legislation does not allow for a bank's pamphlet on insurance to be located in the branch – he or she can obtain the information on the Internet, just not from the bank's branch. Taking this one step further, the law even goes so far as to prohibit the use of a telecommunications link, such as a computer in the branch, to go on-line to learn more about these products;
  • electing to forego the bank's pamphlet, the consumer decides to seek out information about the bank's insurance products from a bank employee. At this point the consumer is informed that federal rules prohibit the employee from providing specific information on life insurance. In addition, the employee is also prohibited from referring the consumer to our RBC Insurance subsidiary, or an insurance professional at another location for additional information;
  • going one step further, the consumer decides that they would simply like to purchase insurance from the bank. At this point the consumer would be informed that federal law prohibits insurance professionals from being present in a bank branch for the purposes of selling life insurance.

Canadian consumers have expressed frustration, confusion and amazement that the government would impose such obstacles on their access to financial services and advice.

It is not clear to these consumers why the regulatory framework should not provide the highest level of choice and information to customers irrespective of their means of access. We think they're right and that the constraints imposed on branches should be removed.

III. Benefits to Consumers

Choice, Convenience, Competition

Polls repeatedly show that a vast majority of Canadians would like the flexibility to obtain insurance services, products and advice from their bank branches. The rationale isn't difficult to understand – making it easier for Canadians to purchase or learn more about insurance services and products in bank branches would promote efficiency, enhance competition, expand access and be more convenient for all Canadians.

In fact, experience in other jurisdictions, such as Australia and the UK, has shown that competition in insurance by deposit-taking institutions has led to lower distribution costs and more competitive prices. In Canada, when banks have been allowed to enter new product areas such as mortgages, consumer loans and securities, markets and prices have become more competitive.

Beyond these immediate benefits relating to choice, convenience and competition, the fact that expanded insurance powers could enhance the viability of bank branches would also go a long way to ensuring that network access can be maintained throughout Canada, including in rural communities.

In concluding on this point, we would note that other key players share our views on the above-noted benefits to consumers. In its submission to the Senate Banking, Trade and Commerce Committee earlier this year, for example, the Consumers Association of Canada supported the elimination of the constraints imposed on the ability of consumers to purchase insurance in their bank branches. The submission specifically highlighted the beneficial competitive impacts of this change in providing more choice for consumers.

Underserved Markets, Including Lower Income Canadians

Evidence suggests that many Canadians shopping for insurance are not being well served under current market conditions. Data from Advocis shows, for example, that independent financial advisors do not make money from portfolios valued at less than $60,000, meaning that advisors tend to focus on higher-income Canadians. Given that the average portfolio size in Canada is only $30,000, lower-income Canadians may find themselves underserved in terms of their insurance needs.[1]

Evidence also suggests that in places where deposit-taking institutions are permitted to sell insurance, such as Quebec, they can be effective in serving this market niche. The fact that provincial rules allow caisses populaires, such as Mouvement Desjardins, to accept deposits and to engage in a full range of insurance activities has clearly benefited consumers in a variety of ways.

These benefits include more flexibility for consumers in learning about insurance services and products and better access to these products through branch outlets. Evidence also suggests that this flexibility has resulted in better service to markets that have traditionally been underserved in other parts of Canada, such as lower-income consumers. A breakdown of insurance ownership by income, for example, demonstrates the following:

  • on a national basis, just 17% of Canadians in the lowest quintile of income earners own life insurance, whereas in Quebec the corresponding figure is close to 27%;
  • in the second lowest income quintile, only about 29% of Canadians own life insurance, whereas in Quebec, this figure is about 46%.[2]

These facts show that permitting deposit-taking institutions to sell insurance, as in Quebec, is beneficial in serving the lower-income market.

In our view, banks would be particularly well positioned to fill this market gap on a nation-wide basis.

Competition From Mass-market Retailers

Recent trends suggest that there is an increasing involvement by mass-market retailers, such as grocery stores and other retail outlets, in the marketplace for insurance services and products. It is not uncommon, for example, to find information on specific insurance products offered by a financial institution in a grocery store or a mall, alongside information that may also relate to that institution's bank products.

These trends underscore two concerns with the current framework. First, from a competitive equity standpoint, it is unfair to create a set of rules that permit specific information relating to a competitor's insurance and banking products to be located in a mass-market outlet such as a grocery store or a mall, while at the same time prohibiting this type of information from being available within the branch of a bank.

Second, the availability of this type of information highlights the benefits to consumers of having a broader range of access and choice in mass-market locations where they conduct their everyday affairs. While we do not object to the availability of specific banking and insurance information in outlets such as grocery stores, we believe that fairness and consumer benefit dictate that similar freedom should also be available in the mass-market outlets where Canadians conduct their financial affairs – the branches of their local banks.

Providing Services to Existing Customers

Overview

Beyond reaching out to new and underserved clients, the current restrictions in the regulatory framework also impose arcane and unreasonable constraints on our professional obligations and business imperatives to provide trusted counsel and advice to our clients. Customers seek out this advice, and we should not be limited in our ability to provide it. The examples below highlight the concerns with the current constraints.

Annuities

Many clients have banked with our institution, often with the same trusted bank branch staff, for many years. Once these clients reach the age of 69, however, they are required to convert their RRSPs. One important option in making this change is a life annuity, which banks are prohibited from selling under the Bank Act. Notwithstanding the legal obligation to acquire a product such as an annuity, federal rules do not allow our customer to go to a branch to make this change. In fact, the restrictions effectively require our client to terminate this aspect of his or her business with our bank.

To illustrate this point, the law imposes the following constraints on our relationship with our clients:

  • the law prohibits our clients from purchasing annuities in their bank branches, forcing them to seek out advice from other sources. Beyond this, it would also generally trigger the need for them to pay an unnecessary insurance industry commission (that could be as much as 3%) for this change;
  • the restrictions also limit the ability of our clients to obtain specific information from branches about the life annuity options that may be available to them, including those that may be available from an entity within the bank's group. Taking this one step further, the law also prohibits our clients from obtaining a referral to RBC Insurance, or any other insurance company, to discuss their insurance needs.

Property Insurance – An Example of Where Consumers Can Be Better Served

As part of a discussion relating to a mortgage product, RBC branch employees can inform a client about the obligation to obtain property insurance. They are prohibited, however, from providing the client with a related property insurance offer. Our employees cannot even specifically refer our client to an RBC Insurance professional, who may be located in an insurance outlet next door, to get more information about property insurance.

If these restrictions were to be applied to other industries, such as communications, it would be difficult to imagine a situation where employees of an entity such as a cable provider would be forced to say that they could only talk to customers about cable and cell phones, but not about Internet access.

This anomaly becomes particularly acute when one considers that insurance companies (which are permitted to own banks and have access to the payment system) are provided with more flexibility than banks in offering insurance and banking products for their clients. Insurers can, for example, offer a discount on home insurance if car insurance is purchased at the same time and would face no constraints in including a mortgage loan as part of such a bundle of products. In an era where the lines between banking and insurance products are blurring, equity suggests that similar rules should apply to consumers shopping in both types of institutions.

Constraints Inconsistent with Government Policy

It is important to emphasize that the above scenarios are only examples of the daily constraints imposed on the ability of our customers to obtain financial services, products and advice from our branches. Insurance is an important component of a total financial services portfolio and customers seek out our advice on these products in our branches. These customers should not be restricted in their ability to access appropriate and specific advice on the full range of insurance solutions available to them and on the best ways to add these products to their portfolios.

In our view, the situations described above are fundamentally inconsistent with the government's policy objectives of ensuring that customers are fully informed and able to make choices in acquiring financial products and services.

IV. Evolution of Policy

Overview

An important characteristic of financial sector policy in Canada has been its ongoing evolution to keep pace with the needs of Canadians. While significant progress had been made in moving forward with beneficial changes to enhance competition in the area of insurance, this process stalled after the 1992 legislative amendments.

As will be documented in more detail below, there have been significant legislative and marketplace developments since the 1992 changes that highlight the need to move forward with the legislative and regulatory amendments required to remove the final barriers to competition in the insurance sector.

MacKay Task Force and Government Response

Following up on the 1992 amendments, in 1998 the MacKay Task Force re-examined the insurance restrictions that continued to be imposed on banks. After extensive study, the Task Force concluded that the restrictions should be eliminated in the interests of promoting more competition and choice for consumers. Having said that, however, the Task Force also highlighted certain transitional concerns with easing these constraints, including issues relating to the use of confidential client information, coercive tied selling, and the ability of the small mutual life companies to compete with banks.

Taking into account the Task Force's concerns, the government elected not to ease the constraints on banks in the intervening rounds of reforms, choosing instead to focus on initiatives to address the concerns raised in the Task Force's report. More specifically, the government introduced initiatives in the following key areas:

  • legislative protections for client information: the law was amended to ensure that confidential client data is protected. This means that a further expansion of bank powers into insurance would not raise concerns from a client information perspective – this information can only be used with client consent;
  • legislative prohibition against coercive tied selling:
  • the law was amended to prohibit a bank from requiring that a client purchase one type of product (e.g. insurance) as a condition for the bank selling that client another product (e.g. credit);
  • legislative initiatives to enhance the competitiveness of insurance companies:
  • the government moved forward with policy and legislative measures to facilitate the demutualization and consolidation of insurance companies and to provide them with access to the payments system.

Current Environment

With the introduction of the measures above, the policy and legislative framework has evolved to the point where all of the concerns of the MacKay Task Force have been addressed. Banks are now subject to robust legislative provisions relating to the protection of confidential client information and to the prevention of coercive tied selling practices. Beyond these specific protections, the government also created a new agency, the Financial Consumer Agency of Canada, to ensure that the rights of consumers are protected.

With respect to the size and competitiveness of insurance companies, many of the relatively small mutual life insurance companies have recently demutualized and consolidated to the point that they are essentially the same size or larger than even the largest Canadian banks. In fact, the three largest Canadian life insurance companies, Manulife, Sun Life and GWL, are among the top ten life insurance companies in North America. In terms of property and casualty companies, the Canadian market is dominated by large foreign companies.

As will be discussed in more detail below, these recent trends in the sector raise real questions as to whether the current constraints on competition in this industry continue to make sense.

V. Impacts of this Change

Abuse of Information/Tied Selling/Predatory Pricing

As noted above, concerns have been raised that banks involved in insurance would misuse confidential client information or coerce clients to purchase insurance products that they do not want as a condition for the provision of a banking product or service.

In responding to these points, it is important to be abundantly clear – these practices are against the law. Confidential client information is protected in the legislation and coercive tied selling is not permitted. The Privacy Commission of Canada and the Financial Consumer Agency of Canada are mandated to monitor banks' obligations in these areas and to investigate complaints from customers where concerns may be raised.

We take these issues seriously and have put in place internal codes and training to ensure that the interests of our clients are protected. It is also worth noting that the representatives of the insurance industry who most frequently raise these concerns are not in fact subject to the same comprehensive federal rules against coercive tied selling as banks.[3]

In addition to the concerns noted above, certain commentators have also implied that if regulatory barriers were eased in this area, banks would engage in predatory pricing tactics designed to drive out competition in the marketplace. Again, we need to be clear on this point – predatory pricing practices are prohibited under federal competition law and the Competition Bureau has the mandate and tools available to guard against any such behaviour.

Beyond legal constraints, experience in areas where restrictions have been eased, such as mortgages, mutual funds and securities, have shown that consumers have benefited from bank entry into these markets through sustained improvements in pricing. The fact that there has been no predatory pricing in forty years of experience in the mortgage market and close to twenty in the securities and mutual funds markets speaks volumes about the competitive benefits that can be realized by easing regulatory barriers on banks in the marketplace.

Impact on Industry

As noted earlier, suggestions have also been made that the insurance industry should continue to be protected from competitive forces. One rationale for this argument is that easing the constraints on banks could lead to job losses in the life insurance industry.

Evidence suggests, however, that when banks enter into a new market (e.g. securities and mutual funds in Canada), they have expanded that market. In the case of the securities market for example, employment data from the Investment Dealers Association of Canada[4] reveals the following:

  • the number of employees in the securities industry has grown from about 23,000 in 1986, the year before banks were first permitted to enter this market, to close to 38,000 in 2004, an increase of 65%;
  • the number of firms in the industry has increased from 94 in 1986 to 205 in 2004, an increase of 118%.

Given that one of the goals of broader bank powers in insurance would be to target underserved markets, including lower-income earners, the net impact could be to expand the overall insurance market, leading to more jobs.

Moreover, in jurisdictions where bank insurance distribution is permitted, banks often engage in activities that complement insurance companies, rather than replace them.

In the US, for example, where banks are permitted to offer insurance to their clients, many banks do not manufacture insurance products, but simply use their branch networks to distribute insurance to customers. All three major Canadian life insurance companies in fact make heavy use of bank branch networks to sell their products in the US, highlighting the benefits of this model. There is no reason that similar business options and customer convenience should not be made available in Canada.

Based on the above, we would submit that the impacts of any change in policy would be manageable for the sector. Irrespective of any potential impacts, however, the more important question is whether it continues to be appropriate to impose constraints on competition within the insurance industry. At the end of the day, the policy choice narrows to whether the goal should be to protect the interests of the insurance industry, or to promote the interests of consumers. In our view, the time has come to promote the interests of consumers.

VI. Conclusion

A fundamental principle of financial sector policy has been to ensure that consumers are fully informed and that the widest possible choices are available to them. Over the years, various regulatory barriers have been removed in an effort to fulfill this goal.

Key among these changes were the amendments in 1992 to permit insurance companies and banks to own each other. Since that time, equally important initiatives have been introduced to pave the way for banks to fully enter the insurance market through their branches, including measures to protect privacy, prohibit coercive tied selling, and provisions to enhance the competitiveness of insurance companies.

It has now been thirteen years since the barriers between banks and insurance companies were first eased. It has been seven years since the MacKay Task Force recommended further changes in this area and close to four years since the remaining consumer protection measures were put in place to ready the regulatory framework for the insurance powers of banks to be expanded. The insurance companies operating in Canada are now among the largest in North America and indeed the world.

The time has come for a further evolution in financial sector policy to provide more information and choice to consumers. We strongly believe that the financial institutions legislation should be amended to eliminate the constraints on customers obtaining a full range of insurance services, products and advice from their banks.

Appendix -- RBC Response to Issues Raised in the Budget

Issue RBC Response

General Review of Disclosure
  • we strongly support the robust disclosure regime imposed in the current framework
  • we note that this regime was introduced in the 2001 round of reforms as part of the creation of a comprehensive consumer protection framework
  • given the scope of these recent changes, no further amendments (other than technical changes we would be pleased to discuss with government in detail) are required at this time
Electronic Transactions
  • a series of rules and codes are in place that adequately deal with issues such as assignment of liability in the context of electronic transactions
  • no significant changes are required to this framework, beyond those needed to respond to technical and technological developments
75% Residential
Mortgage Limit
  • we strongly support the government's efforts to eliminate outmoded regulatory constraints, including the 75% mortgage limit, which is no longer required
  • in our view this change should not have implications for mortgage insurance, which we believe should continue to be made available
Cheque Hold Periods
  • if the government is to consider a maximum limit in the law, it must take into account the time required for a cheque to clear. For cheques in Canada, this will mean consideration of the clearing rules in the CPA. For cheques drawn on institutions outside Canada, a limit will not be possible given the inability to control the time required for a cheque to clear
  • we support continuing to work with the CPA on this issue as efforts to reduce clearing times are undertaken in conjunction with the movement to electronic cheque processing
Foreign Banks
  • we support changes that will simplify the foreign bank entry regime
Improvements to
Approval Regime
  • we support changes to eliminate approvals for transactions, including those that are routine, do not increase risk for the financial institution, or that are immaterial on a size basis
Consolidation of the Trust and Loan Act with the Bank Act
  • we generally support changes to simplify the legislative framework
  • we are concerned, however, about the potential complexities involved in making this change and would like the opportunity to discuss this with government in further detail
Credit Unions
  • we support initiatives to improve the structural framework for the cooperative system, bearing in mind the imperative of ensuring that prudential concerns are not compromised
Marine Insurance
  • we have no position on the government's proposed changes
Canadian Payments Systems/Cheque Imaging
  • we strongly support the need to make changes to allow for the introduction of an electronic cheque imaging regime and for amendments to the governance rules of the CPA to improve the efficiency of its operations
  • we note that changes to permit electronic cheque imaging will go a long way to responding to any of the government's concerns on cheque hold periods
Commercial Investment Power
  • we support initiatives to ease the constraints on the business/investment powers of banks
  • we are concerned, however, about the potential complexities this may cause and would therefore suggest options such as a size-based 10% basket clause as one way to ease restrictions/approvals in this area
Special Security
  • we strongly support the need to maintain a national special security regime in the Bank Act
National Securities Regulator
  • we applaud the government's ongoing interest in the need to create a national securities regulator to improve the efficiency of the regulatory framework
  • we are concerned, however, with the current impasse in discussions and suggest that direct federal action may be needed if progress is not seen by the end of the year
OSFI/CDIC Overlap
  • we support the government's initiatives to clarify the responsibilities of the two agencies (OSFI as the main supervisory regulator; CDIC as the deposit insurer), while reducing substantially duplication and inefficiencies between them

1. "Financial advisers choking on cost of oversight", Kingston Whig Standard, March 31, 2004. [Return]

2. Source: Based on 2003 data in Statistics Canada Survey of Household Expenditures. [Return]

3. While there are provincial rules against tied selling practices, they are not as comprehensive as those imposed under the federal Bank Act. [Return]

4. Source: Investment Dealers Association website (http://www.ida.ca/StatisticsAnalysis/SecIndStatis_en.asp). [Return]