A CONSULTATION PAPER ON SETTING UP OF LIFE INSURANCE BROKERAGE SUBSIDIARIES BY ALBERTA INCORPORATED FINANCIAL INSTITUTIONS ALBERTA FINANCE October 2002
Introduction The purpose of this consultation paper is to seek the views of interested stakeholders regarding a proposal from the credit union system to authorize credit unions to establish or purchase a life insurance brokerage subsidiary. The proposal does not extend to the establishment of a general (property and casualty) insurance brokerage. A life insurance brokerage gives credit unions the capacity to distribute wealth management products. Under existing legislative provisions, a credit union can establish a life insurance company, provided that the capital and other requirements under the Insurance Act for incorporation of a life insurance company are met. Because of the capital requirements and the cost of underwriting product lines, the power is not used. Establishing a life insurance brokerage would allow credit unions to sell products of already established life insurance companies. Alberta Finance, in considering this proposal, would assess its applicability to ATB Financial and to Alberta-incorporated loan and trust corporations, as well as to the credit union system. Consideration is based on the following: Maintenance of a level playing field among financial sector competitors Business case showing growth in market share or profitability Impact on existing service providers Protection of financial consumers interests, including access to insurance services Financial institutions financial strength. Appendix 1 provides a summary of the existing regulatory structures for Alberta incorporated financial institutions regarding their insurance activities. 2
Background and Context for Change Until relatively recently, the financial sector was made up of four pillars: the deposit-taking sector, trust companies, insurance companies and investment dealers. Companies were restricted by legal and regulatory barriers from carrying on activities simultaneously in more than one of these sectors. Deregulation of the financial sector has resulted in significant convergence of products and services within the financial sector, resulting in the emergence of large financial groups that blur the distinction between the financial institutions providing products and services to Canadians. For example, in addition to providing deposit-taking services, all of the major banks have subsidiaries responsible for holding and administering trusts, underwriting and distributing insurance, and selling securities and mutual funds. The major life insurers are increasingly active in wealth management, including the sale of mutual funds through a separately owned subsidiary. They are also very active in selling segregated funds directors to investors. Insurance companies are also moving into the deposit-taking business which had traditionally been the core business of banks and other deposit taking institutions. Credit unions and ATB Financial are looking to wealth management as an important growth market. Since banks dominate the Alberta deposit-taking market, changes made to the Bank Act authorizing banks to own insurance brokerages are very relevant to this review. To enable Alberta financial institutions to respond to changes in the financial marketplace, they are proposing that Alberta incorporated financial institutions be allowed to set up life insurance brokerage subsidiaries. This initiative, if accepted, would enable Alberta incorporated financial institutions to access an important wealth management market. Wealth management looks at an individual customer in a comprehensive, holistic manner. It involves assisting customers to manage their financial affairs by helping them set goals, providing them with advice, and investing in financial products that meet their individual and family needs. Wealth management currently offers the largest market opportunity for all financial institutions. This opportunity is a result of: 3
A demographic opportunity, presented by aging baby boomers and an increasingly educated population. A significant number of Albertans are still accumulating wealth, but looking to retirement in the foreseeable future. This makes wealth management a top priority for brokerages, financial planners, investment fund companies, banks and insurers. A fundamental change in the market place. In 1990, the assets of Canadian consumers of financial products were invested 53.4% in deposits and 46.6% in securities (bonds, equities, mutual funds, segregated funds). By 2005, deposits are expected to decline to 26% and securities to jump to 74%. Regulatory Structures in Selected Canadian Jurisdictions In assessing which regulatory structure may be appropriate if Alberta incorporated financial institutions are allowed to own life insurance subsidiaries, a review of what other Canadian jurisdictions are doing was completed (see summary in Appendix 2). Most provincially incorporated financial institutions have the power to own insurance company subsidiaries. Typically, an insurance company subsidiary of the credit union would be subject to the provinces Insurance Act. There are often regulations that restrict how an insurance company may undertake its business in conjunction with the parent financial institution. For example, a credit union must ensure that its insurance company subsidiary maintains a separate and distinct premise from the credit union. As well, employees of a credit union are not permitted to act as an insurance agent. A major variation from the preceding regulatory framework exists in Quebec. That province allows the distribution of insurance within the credit union, using the employees of the credit union. 4
Related Issues Allowing credit unions and other provincially incorporated financial institutions to establish an insurance brokerage subsidiary would assist them in diversifying their income sources. The process must be managed to ensure that there are tangible benefits to consumers of financial products. It is important to be able to establish a balance between having a strong Alberta financial sector and protecting consumers. As financial institutions diversify their products, certain related issues are likely to surface. These issues may include: coercion and tied selling, and sharing of premises. Additional regulatory action may have to be taken if those issues arise. 1. Coercion & Tied Selling An example of tied selling occurs when access to a loan is dependent on whether or not the consumer purchases a specified product offered by the institution. Coercion occurs when a consumer is required to purchase a product they do not need or desire. There is an economic incentive for financial institutions to use tied selling to increase revenue. Further, a borrower who wishes to stay in good standing with the lender will often feel uncomfortable resisting the recommendations of the lender. It is often the perception of the borrower that the borrower needs the lender much more than the lender needs the borrower, which creates an imbalance of bargaining power between the consumer and the financial institution. Small business owners are particularly vulnerable to this because their business depends on the line of credit or other operating credit offered to them by the financial institution, as are mortgage consumers. 5
2. Shared Premises Shared premises facilitate forms of coercion that are difficult to control and prevent. The potential for coercion and tied selling could be reduced by prohibiting the sharing of premises. Defining what is physically separate and what is shared can be difficult. Currently, most provinces have legislation in place to prevent an insurance agency and a deposittaking institution from sharing premises. They are required to have the insurance company in distinct and separate premises from the deposit-taking institution; which usually means a separate entrance, which cannot be accessed through the institution. Questions to be Addressed a) Should credit unions, ATB Financial and Loan and Trust Corporations be permitted to own life insurance brokerage subsidiary? b) What are the advantages and disadvantages of the proposal to the Alberta financial services sector? c) Will consumers be harmed if the proposal is accepted? d) Should any condition or restriction be attached to the ownership of a life insurance brokerage? Consultation Process Timeline October 7, 2002 release of consultation paper November 8, 2002 deadline for written submissions from stakeholders. 6
How to Respond Interested parties are invited to make written submissions by November 8, 2002. Please note all submissions received are subject to the access and privacy provisions of the Freedom of Information and Protection of Privacy Act. If for any reason you feel that your comments should not be shared with other parties please indicate this in your covering letter. All submissions should indicate a contact person and contact details (return address, telephone, fax and e-mail address). Questions should be directed to: Mr. Ebenezer Frimpong Phone: (780) 415-9234 Fax: (780) 420-0752 E-Mail: Ebenezer.Frimpong@gov.ab.ca Written submissions should be made to: Financial Sector Policy Alberta Finance Room 402, 9515 107 Street Edmonton, AB T5K 2C3 The consultation paper is available on Alberta Finance website. Printed copies of the Alberta Treasury Branches Act, Loan and Trust Corporations Act, and Credit Union Act are available through the Queen s Printer: Queen s Printer Bookstore Queen s Printer Main Floor, Park Plaza Main Floor, McDougall Centre 10611 98 Avenue 455 6 Street SW Edmonton, AB T5K 2P7 Calgary, AB T2P 4E8 Phone (780) 427-4952 Phone (403) 297-6251 Fax (780) 452-0668 Fax (403) 297-8450 Website: http://www.qp.gov.ab.ca 7
Appendix 1: Existing Regulatory Structures Credit Unions A credit union, a person, officer or an employee of a credit union is not permitted to act as an insurer, insurance agent or adjuster, but they may hold a restricted insurance agents certificate. A restricted insurance agent s certificate enables the holder and the holder s employees to act or offer to act, subject to prescribed conditions and restrictions, as an insurance agent in respect to classes or types of insurance specified by the Minister. A subsidiary or affiliate of a credit union may carry on business as a corporation that is an insurer. A credit union must get prior approval from the Credit Union Deposit Guarantee Corporation (the deposit insurer) before beneficially owning more than 10% of a corporation. ATB Financial ATB Financial is not permitted to carry on business as an insurer, insurance agent, or adjuster. ATB Financial and the employees of ATB Financial are permitted to hold a restricted insurance agent s certificate of authority under the Insurance Act. The restricted insurance certificate enables the holder and the holder s employees to act or offer to act, subject to prescribed conditions and restrictions, as an insurance agent in respect to classes or types of insurance specified by the Minister. ATB Financial is also permitted, upon prior approval of the Lieutenant Governor in Council, to beneficially own shares in which they may have more than 10% of the voting rights attached to all of the issued and outstanding voting shares of a corporation that is an insurer. Loan and Trust Corporations Loan and trust corporations are not authorized to carry on business as an insurance agent, or an adjuster as defined under the Insurance Act. They are permitted to hold a restricted insurance agent s certificate, which permits a registered corporation and its employees to act as an insurance agent, subject to prescribed conditions and restriction in respect to classes or types of insurance specified by the Minister. 8
Appendix 2: Regulatory Structures in Selected Canadian Jurisdictions Ontario A credit union may undertake the business of insurance or act as an insurance agent to any person in placing insurance if the type of insurance is authorized by the Act. A credit union can administer creditor s insurance or group insurance on life but cannot undertake individual life insurance. A credit union is not permitted to underwrite insurance and shall not act as an agent for any person in the placing of insurance. There are restrictions about providing space in any credit union to a person placing insurance. At all times the premises of a credit union must be separate and distinct from the premises of an insurance company, agent or broker. Employees of a credit union may not act as an insurance agent because they are deemed to be in a position to offer inducement or use coercion in placing an insurance contract. A credit union is not permitted by the regulations to set up a life insurance brokerage subsidiary. Saskatchewan Credit unions are not permitted to underwrite insurance under any circumstances. The regulations of the Credit Union Act only allow credit unions to market or administer insurance if it is an authorized type. The authorized types of insurance include creditor s life insurance and group life insurance. Although credit unions can administer authorized types of insurance, they are not permitted to act as an agent for any person in providing them insurance. Therefore a credit union can only act as an agent of the insurer and not of the insured person. Credit unions cannot set up any insurance brokerage. Credit unions are not permitted to lease or provide space for any person engaged in the placing of insurance. British Columbia Credit unions and trust companies in B.C. are able to set up an insurance company or an insurance agency as a subsidiary. The business of insurance is deemed to be an authorized and related business and therefore financial institutions have the ability to administer this business, which enables financial institutions to have total investment either directly or indirectly. 9
A trust company or a credit union and their officers and employees are not required to be licensed as an insurance agent in respect to credit insurance that is incidental to the ordinary business of a trust company or a credit union. This includes creditor s life insurance and group life insurance. They are subject to certain restrictions particularly concerning confidentiality, and shared premises. Regulations to the act prohibit licensed insurance agents from conducting business on the premises of a savings institution. The shared premises regulation restricts credit unions and loan and trust corporations in the physical set up of the insurance business in relation to the branch or head office of the main institutions. They are required to have a wall separating their business of banking from their business of insurance, and each business must be equally identified and separately represented. These regulations do enable credit unions and loan and trust corporations in B.C. to set up life insurance brokerage subsidiaries. Quebec Credit unions and trust companies may distribute insurance products provided that they are registered as a firm with the Bureau des services financiers and that they distribute such products through registered representatives. The provincial legislation regulating the activities of financial services cooperatives and trust companies does not stipulate constraints on how the distribution of financial products and services may be carried out, i.e. directly or through a subsidiary. The Act respecting the distribution of financial products and services sets out applicable requirements relating to such things as disclosure of names, disclosure of the fact of compensation, and rights of rescission and competence. Federal Banks may own insurance companies and insurance brokerages subsidiaries. The Bank Act prohibits banks from acting as an agent in placing insurance, but agent is not defined in the Bank Act. Banks are subject to shared premises restrictions in that they are unable to provide space in a branch to any person engaged in the placing of insurance. Insurance business regulations prohibit the marketing of insurance to bank s clients and also prohibit a bank from sharing client information with an insurance company. Deposit-taking institutions are permitted to market a limited number of insurance products of an authorized type, which include various types of creditor s insurance including creditor s life insurance. 10