Canadian Western Bank v. Alberta 2007 SCC 22 (Supreme Court of Canada)

MAY 31, 2007 - The Supreme Court of Canada today unanimously upheld the Alberta Court of Appeal ruling in Canadian Western Bank v. Alberta, under which Canada's federally chartered banks - eight of which were jointly the appellants in the case - are subject to provincial regulatory regimes with respect to the distribution of the kinds of insurance banks have been permitted, under the Bank Act, since 1991, to distribute in their branches. These include creditors' disability, life and loss of employment insurance, credit-card insurance plans relating to damage to goods purchased on credit, mortgage insurance and travel insurance.

Much of the ruling - which will be the subject of more detailed analysis in a forthcoming Financial Services Update - focused on fine points of Canadian constitutional law. The Court (with Mr. Justice Bastarache taking issue with some of the constitutional analysis of the majority, but not with its conclusion) strongly approved the view that modern Canadian constitutional law is moving away from rigid demarcation of federal and provincial realms toward a more "co-operative federalism". In the context of the case, this approach made it very difficult for the banks' counsel to maintain that, as federally chartered institutions, the banks should enjoy "interjurisdictional immunity". Such immunity - in the case of an "undertaking" under federal jurisdiction - exists only with respect to what is "vital or essential" to the federal undertaking, an expression that is now taken to mean "absolutely indispensable".

In light of its constitutional analysis, the Court was strongly of the view that the kinds of insurance in question were purely ancillary to the undertaking of banking. For example, it stated with respect to the various forms of credit-card balance protection that "The promotion of 'peace of mind' insurance can hardly be considered 'absolutely indispensable or necessary' to banking activities unless such words are emptied of their ordinary meaning." In its reasons, the Court repeatedly rejected the banks' contention that these lines of insurance were essential elements in the securing of loans, a core banking activity, finding that the products were optional, generally sold only after credit had been extended, only "loosely connected" to the eventual repayment of the debt and not (in short) part of the collateral so much as an after-acquired asset that the banks were then using as collateral. Moreover, these forms of insurance were treated by the banks as a "separate profit centre". The Court noted that in its 1997 Air Canada v. Ontario (Liquor Control Board) decision, it had held that provincial liquor laws were applicable to airlines because the sale of liquor was a benefit but not essential to the airline business, and that in this case, the same could be said of the relationship between the promotion of insurance and the banking business.

It should be noted that the Court explicitly stated that its ruling did not apply to the mandatory mortgage insurance that is required under the Bank Act for certain mortgage loans.

The banks had taken heart from the Court's earlier denial of leave to appeal with respect to the 2003 British Columbia "Optima" ruling (Bank of Nova Scotia v. British Columbia (Superintendent of Financial Institutions)), which held that a similar provincial regime that could have affected the banks' ability to take security in a certain way was an unconstitutional intrusion on federal jurisdiction. However, the Court, having noted that denying leave to appeal is not the same as agreeing with the decision in question, repeated that there is simply no reason that the promotion of insurance products, even if they had some value as collateral, should be considered "vital or essential to the banking activity". Thus it appears that the Optima ruling - insofar as it might have been distinguished from the current case - has effectively been overruled as well.

Having concluded that regulation of bank insurance activities was within the power of the province, the majority added that it was not in conflict with federal legislation - which did not expressly forbid regulation of this sort - and therefore did not engage the constitutional paramountcy doctrine.

The decision may be surprising to many. First, it is difficult to see why the concept of "co-operative federalism" requires yet another area of overlapping jurisdiction and regulation. In addition to its impact on the insurance activities of banks, the decision could lead to overlapping jurisdiction and regulation in other areas, such as securities, which arguably do not involve core banking activities. Second, the decision commits us to the largely unfruitful activity of attempting to distinguish core banking activities from ancillary or non-core banking activities. The majority judgment of the Supreme Court in Canadian Pioneer, which based constitutional jurisdiction upon the nature of the institution, rather than the function, arguably offered a more rational and workable approach, but was largely ignored by this Court.