On May 31, 2007, the Supreme Court of Canada delivered a disappointing blow to the banking industry with the release of its decision in Canadian Western Bank v. Alberta, a judgment that will likely have a significant impact on the manner in which Canadian banks engage in the promotion of credit-related insurance products to their customers.
The question addressed by the Supreme Court in the Canadian Western decision is the extent to which banks, as federally regulated financial institutions, must comply with provincial consumer protection legislation that regulates the promotion of insurance products to the public.
In 1991, the federal government enacted revisions to the Bank Act, S.C. 1991, c. 46, such that banks are now permitted to promote eight kinds of insurance products at their branches, including credit card insurance and mortgage insurance. In 2000, the province of Alberta enacted changes to its Insurance Act , R.S.A. 2000, c. I-3, purporting to make federally chartered banks subject to the provincial licensing scheme governing the promotion of insurance products. Under section 454 of that Act, a bank wanting to promote insurance must obtain a "restricted insurance agent's certificate of authority". Banks thereby became subject to other regulatory provisions under Alberta's Insurance Act and its regulations, such as the requirement for training procedures to be in place and the imposition of sanctions for non-compliance.
In response to Alberta's new legislation, numerous banks (the "Banks") collectively sought a declaration from the court that the promotion of the eight kinds of insurance products as authorized by the federal Bank Act is "banking" within the meaning of section 91(15) of the Constitution Act, 1867, which grants the federal government exclusive jurisdiction over "banking, the incorporation of banks and the issue of paper money". In particular, the Banks argued that Alberta's Insurance Act and its associated regulations are not applicable to their promotion of insurance by virtue of two constitutional doctrines, one of which protects the areas of respective federal and provincial legislative jurisdiction (as set out in sections 91 and 92 of the Constitution Act, 1867), and the other of which deems federal legislation to prevail in the event of incompatible conflict with provincial legislation.
The primary argument put forward by the Banks was that the promotion of insurance increases the security of their overall loan portfolios. The promotion of the eight lines of insurance products is integral to their lending practices and thus to banking itself, argued the Banks, which is a federally regulated activity. Accordingly, the provincial insurance regulations strike at the "core" of what banking is all about, namely enhancing the security of loan portfolios, which falls within federal and not provincial legislative jurisdiction. The Banks relied on the British Columbia Court of Appeal's decision in Bank of Nova Scotia v. British Columbia (Superintendent of Financial Institutions) (2003), 11 B.C.L.R. (4th) 206, where the court found that the taking of security in general is a core aspect of the banking power. In that case, the court found that certain provincial legislation requiring telemarketers to be licensed, which could operate to prevent banks from obtaining security in a certain way, was not within the province's legislative jurisdiction.
Unfortunately for the Banks, the trial judge, the Alberta Court of Appeal, and the Supreme Court of Canada disagreed with their position. All levels of court found that the challenged provisions in Alberta's Insurance Act are valid legislation, falling within the provincial "property and civil rights" power under section 92(14) of the Constitution Act, 1867, such that banks must comply with the provincial regulatory scheme in promoting insurance products.
In coming to this decision, the Supreme Court concluded that the promotion of insurance is not vital or essential to the banking activity. The mere fact that banks participate in the promotion of insurance does not change the essential nature of the insurance activity, noted the Court, which remains a matter generally falling within the provincial jurisdiction. In the Court's view, when promoting insurance, banks are participating in the business of insurance and only secondarily furthering the security of their loan portfolios. As such, banks must comply with both federal and provincial laws relating to the promotion and regulation of insurance.
The Supreme Court was persuaded by several factual findings made by the lower court. The trial judge found, and the Supreme Court agreed, that of the eight types of insurance products, only mortgage insurance and export credit insurance actually insure against the risk of default in the payment of a loan. In contrast, credit-card related insurance and travel insurance have no significant connection to the amount of a loan owed to a bank and are payable irrespective of any default. While the Supreme Court agreed that the business of banking includes, as the Banks argued, the securing of loans by appropriate collateral, it drew a distinction between requiring collateral (a banking activity) and promoting the acquisition of a certain type of product (e.g. insurance) that could be used as collateral. In promoting optional insurance, concluded the Court, banks are not engaged in an activity that is vital or essential to banking.
The Supreme Court was further persuaded by the lower court's finding that the insurance promoted by the Banks is not mandatory, can be cancelled at any time by the customer, and is often not promoted until after the loan agreement has been finalized. Accordingly, the Court noted that the Banks themselves do not consider insurance to be vital to their credit granting since, apart from high-ratio mortgages, the loan agreement is not made contingent on obtaining insurance. Finally, the Court observed that there is clearly no operational incompatibility between the Bank Act and Alberta's Insurance Act, as evidenced by the fact that the Banks had been promoting insurance since 2000, while complying with both federal and provincial laws.
Following the Canadian Western decision, banks that engage in the promotion of insurance products must ensure that these activities are carried out in accordance with the applicable provincial regulatory scheme. Failing to do so will invite the imposition of sanctions mandated under provincial legislation, as monitored by insurance regulators in each province and territory.