Why the Banks Failed

Another round of periodic Bank Act reviews is well advanced; so far, there has not been much fanfare. The federal government issued a White Paper on June 14, 2006 and called on all interested parties to respond by July 21. Under the current timetable, legislation will probably be introduced in the fall, with royal assent coming in the spring session of Parliament.

Certain things about Bank Act reviews are predictable. For example, insurers and bankers will certainly argue about extending bank powers in the insurance sector. It is also certain that the chattering classes – including lobbyists, pundits and scribes – will proclaim at the outset of the debate that the banks are sure to get what they want this time. In these reviews, however, the actual events have a way of confounding the experts. As the White Paper makes clear, there is not going to be any significant change to the insurance regime for at least another five years. By that time, banks will have been at this sterile quest for almost a quarter of a century.

Of course, the banks did try to get the debate going their way. Their tactic this time was subtle, compared to previous efforts. In what amounted to a kind of policy ‘soft shoe,’ the bankers suggested that all they really wanted was to provide more information about insurance to their customers in their branches. This consumer focus seems reasonable enough on the surface. But as the famous architect Mies van der Rohe once said: “the devil is in the details.”

DEVIL IN THE DETAILS

The “devil” in this case was a lack of clarity around how the banks proposed to go about providing this information without violating a prohibition against using their extensive databases to target potential insurance customers. The use of bank databases for this purpose is one of the key prohibitions against banks selling insurance. Disallowing banks from using their databases in this fashion is supposed to maintain some form of competitive level playing field, since insurers do not have the same ability as banks to collect a wide range of customer information. If banks are permitted to chip away at this provision, it is not too difficult to imagine that in time the prohibition would become meaningless. Bankers have thus far been unable to convince critics that their proposal is something more than just a means to exploit their vast and powerful databases. In the end, the proposal appears to have foundered. Not that it would have mattered anyway. There were plenty of other problems with the bank lobby this time around.

As was the case with the bank merger proposal several years ago, when the Bank of Nova Scotia stood against the other big players, this time it was the Royal Bank’s turn to play the contrary role. RBC has chosen to present a much more aggressive stance on the insurance issue. In doing so, it probably undermined to some degree the softer approach other bankers were trying to present. Sometimes this notion of a dissenting voice is useful in helping to showcase the main proposal as the more reasonable alternative. Not so this time. The lack of unity and the doubt it created about the true intentions of the banks probably did nothing to advance their cause.

Then, too, there is an important political dimension that cannot be ignored. Put simply, minority governments are not inclined to waste precious political capital on moves that befriend banks; and certainly not at a time when the banking industry’s profit levels are as healthy as they are now. Former prime minister Paul Martin knew this.

The same political maxim clearly resonates with the Conservatives, who went so far as to take a position on the insurance issue in their election platform. The platform said a Conservative government would maintain the current regulations governing insurance marketing by the chartered banks. It is hard to see how there could be much wiggle room for the bankers lobby in that statement. A national party with strong roots in the Prairie provinces would find it difficult to convince dyed-in-the-wool rural constituents that bankers, who treated them to some pretty rough justice during the Depression, deserve their support. Memories are long out West. All of this means the banks’ lobby was dead politically before it even got off the ground.

Another powerful force in this debate is the insurance broker community. While it may be said that the Insurance Bureau of Canada seemed remote at times during the debate’s latter stages, the same could not be said for brokers, who continued to have a well-organized, effective and united position for maintaining the current regulations. Brokers are a credible and compelling voice on this issue because they are community-based; they are socially and political active at the town level all across Canada. Brokers are, after all, part of the small business group to which all political parties pay attention. The banks have no similar base from which to operate: they have closed many of their small town locations in recent years, which created an additional, significant weakness in their overall lobby effort.

FUTURE OBSTACLES

In retrospect, it is not too hard to see why the bankers failed this time. Naturally, there are those who, having already conceded this round, say things will change in the next round. But there will be other roadblocks in pursuit of the bank agenda next time; such obstacles were not addressed during this shortened round of debate.

For example, the bank lobby is constantly shifting ground. In other words, the lobby never seems to be sufficiently focused on a firm proposal over the long haul. In the last few Bank Act reviews, for example, the key issue for the bankers has variously been presented as:

* the right to merge among the Big Five,

* the unfettered right to sell insurance of all kinds in the branches, or

* a qualified move to widen the provision of insurance information to customers in bank branches.

Juxtaposed against this moving target is the fixed and firm position of the property and casualty brokers. After so many years of debate, this position is clearly articulated and well known to the political parties. Consistency has its virtues.

The bank lobby was never very persuasive in arguing for domestic concessions – such as the right to merge among the Big Five – to bolster their international competitiveness. Canadians are simply not preoccupied with the international ‘critical mass’ of bank size, even if economists think they should be.

For years, bankers pointed to international trends in banking and insurance to bolster their arguments. Chief among these was the European trend to the ‘all finance’ or ‘bancassurance’ model, which proposed that financial products were essentially the same and could be offered in the most cost-effective manner through combined multinational banking and insurance conglomerates. The argument against this model was that financial products were emphatically not the same; the skills required to make a good banker were not at all the same as those required for making a good insurance underwriter or claims handler. Recent evidence from Europe suggests the two businesses are indeed sufficiently different to defeat the hoped-for synergies. One hears less and less about the ‘bancassurance’ experiment as time goes by. This will not help the Canadian bank lobby, which has in the past relied heavily on European precedent.

HURDLES FOR BANKS

A host of other factors figure in the debate. These are:

* the ability of the insurance industry – so far, at least – to keep internal dissention from public view;

* the insurance industry’s lack of demand for changes of its own, which would establish the possibility of some trade-offs for more bank powers in insurance; and

* the bankers’ perplexing failure to increase their life insurance powers , where synergies are more appa rent, while leaving the property and casualty business alone, where they are not as apparent.

Last, but not least, there is public opinion. For most of the last 15 years, the insurance industry has entered the bank powers debate with a decided edge in public opinion. Not so in this round. As insurance prices rose in recent years, so, too, did public anger at insurers. The ‘tipping point’ of public opinion in this round decidedly favored the banks. But the advantage was fleeting: insurance prices are falling and/or stabilizing, and the industry is hard at work with public outreach programs. Insurers are bound to have an improved public relations profile for the next round of review of the Bank Act. As for the bankers, if they could not pull together more support than they did at a time of unprecedented public antipathy towards insurers, one wonders if they will ever succeed.