Electronic Branches

The latest ruling by the Office of the Superintendent of Financial Institutions (OSFI) — which holds that a bank’s Web site is not the same as a bank “branch” for the purpose of selling or promoting insurance products — may have unintentionally sideswiped consumer protections contained in the Bank Act.

Strictly in terms of semantics, Canada’s solvency regulator is correct: a Web site is not a physical “office” structure as implied by the definitions of a “branch” in both the Bank Act and the Bank Act Regulations.

In the Bank Act, the definition of a branch is: “an agency, the head office or any other office of the bank.”

Alas, a definition of an “office” in the contemporary context — featuring the meaninglessness of location characterized by the Internet — does not appear in the document.

We then go to Section 5 (cc) of the Bank Act Regulations for further clarification. It defines a “branch” or “branch office” as a place “…at which deposits are received, cheques cashed or moneys lent, and for the purposes of s. 35 includes any place of business where any other form of business referred to in subsection 1 of Section 6 is transacted.” [Section 6 includes a long list of transactions involving credit, notes, traveler’s cheques, etc., none of which has anything to do with insurance.]

Presumably, OSFI reads the above and concludes that even though we can shift our funds around electronically on a bank’s Web site, we are not physically in a place “at which deposits are received, cheques cashed or moneys lent.”

Furthermore, in a footnote, OSFI observes that various sections of the Bank Act related to public disclosure explicitly differentiate between “branches” and “Web sites.” For example, s. 413.1(2)(a) says banks will, before opening an account, “post notices at all of its branches, and at prescribed points of service, in Canada where deposits are accepted, and on all of its Web sites at which deposits are accepted in Canada.”

And thus OSFI is certainly within the letter of the law to say, as it does in its ruling, that “the definition of [a] ‘branch’ in the Bank Act, both in English and in French, refers to physical premises, and not to the location-less, electronic world of cyberspace.

But does OSFI’s conclusion support the spirit of the Bank Act?

Based on the fact that a Web site can be distinguished from a bank branch, OSFI concludes that, “as a result, a bank may, on its Web site, promote in Canada any insurance policies or any insurance companies, agents or brokers, subject to the conditions that the regulations impose on such promotion outside a bank.”

Wait a second, here. Is this conclusion warranted based on the legislative intent of the Bank Act?

One of the three principal purposes of the Bank Act is to promote the efficiency of the financial system through competition. This implies fair competition between banks and insurance companies, which, to put it crassly, means neither one is allowed to eat each other’s lunch (i. e. sell each other’s products).

The ban against banks selling insurance through their local branches is to ensure that banks can’t leverage their status as money-lenders to coerce a person to buy insurance or other financial products.

And so the question must be asked: Are banks now allowed to do through Web sites what they cannot do through their local branches?

If the answer to this is yes, then what happened to the public protection afforded to consumers by banning the banks from promoting or selling insurance through the physical branches? Did cyberspace just render such protection irrelevant?

When Parliament last assented to the Bank Act in 1991, an Internet browser was still three years away from becoming commonly known to the public. And thus the language contained in the Bank Act has very little, if anything, to say about the impact of the Internet on banking activities and transactions — including the sale of insurance.

It is time for regulators and politicians to consider whether the Internet has indeed perverted the spirit of the Bank Act, which is to protect the public by prohibiting banks from selling insurance in their physical office spaces.

Banks should not be allowed to do electronically what they cannot do in their physical branches.