Banks are subject to provincial regulations

For some years now, banks have been intent on providing one-stop shopping for financial services. In the last decade, they’ve moved into the brokerage industry and the insurance industry, to name just two significant examples.

But the Alberta Court of Appeal’s January 2005 decision in Canadian Western Bank v. Alberta put a wrench in the works by deciding that federally regulated banks selling credit insurance are subject to provincial insurance legislation.

Two months later, however, the Supreme Court of Canada granted leave to appeal and on May 31, 2007, upheld the Alberta judgment.
“There was a huge amount at stake in this litigation, because credit insurance is a very significant part of the consumer lending business,” says Neil Finkelstein of Blake Cassels & Graydon LLP’s Toronto office, who represented Canada’s largest banks in the case.

“Now banks will have to deal with a checkerboard system of regulation involving all the provinces and territories, which will create an administrative nightmare,” he tells Law Times.

The Court of Appeal had ruled that the constitutional principles of interjurisdictional immunity and paramountcy did not exempt the banks from the application of provincial insurance legislation. Interjurisdictional immunity doctrine holds that a law, even if generally valid, does not apply to matters outside the jurisdiction of the enacting body. And the doctrine of paramountcy makes provincial laws inoperative to the extent they conflict with federal laws.

Essential, then, to the banks’ argument in support of interjurisdictional immunity was the theory that the link between granting credit and credit insurance made insurance part of the “unassailable core of banking.” Both the trial judge and the Court of Appeal disagreed, noting that obtaining credit insurance was optional for borrowers. The mere fact that federal banking law authorized banks to sell insurance did not make it a core banking activity.

“On the one hand, the majority of the banks’ customers choose to purchase insurance; insurance proceeds, on a global basis, provide an important source of the banks’ revenue,” the Court of Appeal wrote.

“On the other hand, the insurance is mostly optional and outside the banks’ control. Borrowers’ insurance-related decisions do not affect the banks’ credit-granting decisions. These facts support the trial judge’s conclusion that the banks have not discharged their burden of showing that insurance promotion is at the core of banking.”

The banks didn’t fare any better in their paramountcy arguments.
Since the banks did not require a license under the federal regime, Finkelstein argued, the Alberta law prevented them from doing what Parliament had authorized them to do. As well, he added, provincial regulation interfered with the uniform national banking regime that Parliament had intended.

The Court of Appeal pointed out, however, that the Bank Act didn’t force banks to promote insurance, but merely allowed them to do so. Requiring banks to obtain a provincial license, then, did not create the kind of conflict that invoked the doctrine of paramountcy. All the more so, because a total of 10 banks, including the ones who were parties to the appeal, had in fact applied for licenses, all of which the province had granted.

The Alberta decision in Canadian Western Bank, however, flew in the face of the 2003 decision of the British Columbia Court of Appeal in Bank of Nova Scotia (BNS) and Optima Communications Canada v. Superintendent of Financial Institutions. In Optima, the court overturned the judgment of Justice Ian Pitfield of the British Columbia Supreme Court. Pitfield had ruled that provincial governments could regulate chartered banks when they sell credit insurance.

The case arose after the Bank of Nova Scotia (BNS) retained Optima Communications Inc., a telemarketing firm, to enroll credit cardholders in a group insurance plan called Scotia VISA Balance Insurance (SVBI). The insurance provided coverage for cardholders’ outstanding credit card balances in the event of death, disability, or involuntary unemployment.

The issue was whether the activities of BNS and Optima were subject to provincial regulation under British Columbia’s Financial Institutions Act (FIA). The statute exempted from regulation any “employee” of a “bank” who was “acting as agent in respect of credit insurance, incidental to the ordinary business [of the] bank.”

The Canadian Bankers Association, represented by Finkelstein, intervened in support of the BNS; the Canadian Life and Health Insurance Association, represented by Bryan Baynham of Vancouver’s Harper Grey LLP, intervened in support of the province.

The bankers maintained that their telemarketing activities were part of the business of banking over which Parliament has exclusive legislative authority. Insuring unpaid credit card balances, Finkelstein argued, was simply one way for banks to secure the repayment of their loan – and as such, was an “incidental” function of banking exempted by the FIA.

The province responded that the activities were part of the business of insurance, a matter within the “property and civil rights” provincial jurisdiction; and that the banks’ activity was not incidental to the bank’s business.
As Justice Pitfield saw it at trial, all that banks do is not necessarily banking. And while Parliament had empowered the banks to do certain things in relation to insurance, that did not make the telemarketing of insurance part of the business of banking.

Here, the substance of the arrangement between BNS, Optima and the insurer was that coverage began with completion of the application by the telemarketer in the telephone conversation, and no cardholder was required to commit to the purchase of SVBI in order to enjoy the continuing use of the credit card. In other words, the insurance transaction was independent of the granting of credit.

“Were BNS and its employees to sell credit insurance or solicit or enroll purchasers at the time of approving the credit card contract, licensing would be unnecessary even if the ownership of insurance were not a requirement of the contract,” Pitfield concluded.

“In the context of the FIA, it is the timing of the credit insurance transaction as much as the requirement of security, that is important when seeking the protection of the exemption.”
But the B.C. Court of Appeal ruled that Pitfield had erred in concluding that the word “incidental” implied a temporal connection between activities.

“In its simplest formulation, the plain meaning of ‘incidental’ is ‘connected with in a meaningful way’ and includes an activity that is subordinate to a principal activity,” the court wrote.
Here, credit-card insurance supported the credit transaction “in a meaningful way”: it was therefore incidental to the bank’s business, meaning that the FIA exemption applied to BNS.

As for Optima, whether an employee hired by Optima to staff the telemarketing program could be considered a BNS “employee” within the meaning of the statute depended on the degree of control exercised by the bank over the employee.

To categorize the telemarketers as BNS employees, the bank had to show that it exercised fundamental control over their work. This the bank had done by demonstrating that the employees hired by Optima were acting on behalf of the bank and under its direction in respect of all aspects of the telemarketing program.

The result was that neither the bank and its employees, nor Optima, attracted the FIA’s licensing requirements.
In November 2003, the Supreme Court of Canada refused leave to appeal in Optima, a refusal that did not augur well, as it turned out, when the Supreme Court of Canada later gave leave in the Alberta case.

As well, the effect of the Alberta decision is to narrowly define the business of banking, an approach that seemed contrary to the Supreme Court’s 1980 decision in Canadian Pioneer Management Ltd. v. Labour Relations Board of Saskatchewan.

Ultimately, the Supreme Court adopted the “co-operative federalism” approach to modern Canadian constitutional law. The high court ruled that the impugned provisions of Alberta’s Insurance Act fell within the provincial “property and civil rights” power, meaning the banks had to comply with the provincial legislation.

As the court saw it, selling credit insurance was not a vital or essential part of the bank’s activity. That made it very difficult for the banks to succeed on the “interjurisdictional immunity” argument, which can succeed only where the activity in question is “vital or “essential” to the federal undertaking.

Indeed, Canada Western Bank seems to contain the argument to cases where the activity is “absolutely indispensable” to the federal undertaking.
“What the Supreme Court has done is made it very difficult to imagine a case beyond the already decided cases to which interjurisdictional immunity would apply,” Finkelstein says.

David Stratas of Heenan Blaikie LLP’s Toronto office, who acted for Financial Advisors Association of Canada, an intervenor who supported the insurers, is of the same mind.

“This case has put interjurisdictional immunity in the furthest darkest corner of the basement,” he told Law Times. “The judgment is going to be Tab 1 in all the new casebooks on the division of powers, because it sets out a recipe for analyzing such cases.”

Stratas notes that the decision had been on reserve for longer than any other judgment in the last decade.
“The reason is that the court was doing a very fundamental think-through of constitutional principles,” he says.

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