Ottawa is wading into a high-stakes battle between banks and life insurers, ordering the banks to stop selling products that resemble annuities.
The decision is a win for the country’s life insurers and a blow to Bank of Montreal , which kicked off this battle in January when it began selling a product called BMO Lifetime Cash Flow, which provided buyers 55 and older with guaranteed payments for life.
Banks are prohibited by law from selling most types of insurance in their branches, and a number of life insurers complained to regulators that the new BMO product was essentially an annuity. Life annuities are a type of insurance product in which the buyer receives a series of payments over a number of years, similar to a pension plan.
Finance Minister Jim Flaherty said Friday that the Conservative government will introduce legislation to prevent banks from offering financial products that function like life annuities.
“Since taking office, this government has taken steps to clarify the separation of banking and insurance activities,” Mr. Flaherty said in a news release. “This will ensure the business of insurance continues to be subject to the appropriate rules and regulations.”
A spokesman for BMO said the bank will now stop selling the product. He declined to say how many customers had already bought it.
Mr. Flaherty said his legal changes will allow existing products to be grandfathered. But the government will “continue to monitor to ensure the enforcement of this policy,” said Jack Aubry, a spokesman for the Department of Finance.
At least one other Canadian bank was considering launching similar products had BMO been allowed to continue, according to sources.
The issue was highly contentious within the financial industry. As the baby boomers age, many of them are expected to use products such as annuities to provide steady retirement income. So financial institutions are putting all of their muscle into ensuring that they have the right products for that demographic group.
The life insurers took this issue to the regulator, the Office of the Superintendent of Financial Institutions, complaining that if banks got into the business of annuities, they would have an advantage because they are not required to adhere to the same capital rules as insurers. The insurers also feared that BMO’s move would represent the “thin edge of the wedge,” as banks become increasingly bold about pushing into the insurance arena in any way they can.
Royal Bank of Canada , for instance, in recent years began building insurance offices right next to its bank branches, a strategy that other banks and credit unions have since adopted to sidestep rules preventing them from selling insurance in their branches.
It is not clear whether BMO had found a valid loophole under the laws as they’re currently written, but Chisholm Pothier, a spokesman for Mr. Flaherty, said the decision to clarify the law “requires legislation and only the Minister can introduce legislation.”