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Bankers prepare to battle

Globe and Mail Update

Neil Skelding, chief executive officer of Royal Bank of Canada's insurance business, couldn't sleep Wednesday night.

Driving to work the next morning, turning down Royal Bank Drive to RBC Insurance's sprawling headquarters on Mississauga's Financial Drive, he was still fixated on two questions: How did this happen, and what does it mean?

In the hallways and elevators of the massive complex where roughly half of RBC's 4,075 insurance employees work, people were asking the same thing.

Finance Minister Jim Flaherty's surprise decision to stop banks from selling or even promoting insurance on their websites has thrown the industry for a loop. Chief executives of the big banks first learned of the decision when Mr. Flaherty's office faxed them a letter Wednesday afternoon and bankers say that, having worked closely with the Finance Minister to pull through the financial crisis, they were shocked.

The banks only hold about 5.8 per cent of the life insurance market, 8.9 per cent of the personal property market, and 11.1 per cent of the auto insurance market, according to MSA Research Inc. But, having dominated most other financial products, they have begun to pin ambitions for new growth on insurance. Property and casualty insurance alone is a $36-billion business.

While Mr. Flaherty instructed banks to quickly stop marketing insurance online, most of the banks don't intend to do so yet since they haven't been given details. (Bank of Montreal has removed references to insurance from its home page.) The Finance Department says it is trying to replicate the laws that govern banks on the ground. The Bank Act prohibits banks from marketing insurance in their branches, but allows them to own separate insurance companies and offices. That might mean that the new restrictions only apply to the part of a bank's website where customers sign in using their customer number and password, but the Finance Department isn't saying yet.

“Implementation details will be forthcoming,” said department spokesman Jack Aubry. “The government will take action at the earliest possible opportunity, and the banks are expected to initiate steps to adapt their business practices to meet the policy objective.”

He added that the government is open to receiving input on how to implement the policy.

“In the weeks and months ahead, the banking lobby will use all of its ingenuity to prevent the enactment of such legislation or do its best to water it down,” said Joel Baker, CEO of MSA Research.

“There's only so much banks can achieve with insurance offices adjacent to bank branches,” Mr. Baker said.

The Internet age is making bricks and mortar increasingly irrelevant to financial institutions. Since last year, the majority of Canadians (53 per cent) bank online, according to the Canadian Bankers Association (CBA).

The laws that restrict banks from marketing insurance in their branches do not bar insurance companies from marketing banking products. Manulife Financial Corp., for instance, promotes both products on its websites.

Bankers argue that Ottawa is arbitrarily hurting their business and, by extension, consumers. “What does competition typically do? It gives more choice and puts downward pressure on prices,” said Terry Campbell, vice-president of policy at the industry association.

Some banks are talking about launching an appeal to consumers in an effort to persuade voters that Mr. Flaherty's decision will hit their pocketbooks. A study commissioned by the CBA in 1998 suggests that, between 1970 and 1996, as the banks' mortgage businesses grew from about 10 per cent of the market to nearly 60 per cent, the cost of mortgage credit relative to government borrowing dropped 1.5 percentage points, saving consumers more than $9-billion in interest annually. Similarly, as banks grew in the securities business, the cost of trading declined, according to the study.

Having been in the insurance game for more than 15 years, the banks still hold a small fraction of the market. But it's only recently that they've put real muscle behind the business. Bank of Nova Scotia announced this summer that it had built its first insurance office next to a bank branch. RBC earned $167-million from insurance in its latest quarter, making up more than 10 per cent of its total profit.

With files from reporter Steven Chase

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