Canada's financial regulator is investigating Bank of Montreal's sale of an new savings product that executives at rival financial companies say violates the federal prohibition on dealing insurance products in bank branches.
The Office of the Superintendent of Financial Institutions (OSFI) confirmed that it is reviewing a new product the bank is selling, called BMO Lifetime Cash Flow, which provides 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 are angry about this new product, which they claim is essentially an annuity.
The battle illustrates the growing difficulties that the Conservative government is having in its effort to prevent banks from straying towards insurance. Ottawa has a long-standing rule against allowing banks to use their vast networks of branches to sell insurance. Insurance companies and the brokers who represent them have lobbied hard for that policy to continue. Last year, Finance Minister Jim Flaherty even moved to stop banks from promoting or selling insurance on their online banking websites, after brokers and insurers succeeded in persuading Ottawa that the websites are the Internet equivalent of a branch.
Despite those regulations, banks are working hard to muscle into the market. Royal Bank of Canada chose to combat the rules by building insurance offices right next door to many branches, in some instances separating the two with little more than a thin dividing wall. More recently, Bank of Nova Scotia has started using a similar strategy.
BMO's launch in January of the Lifetime Cash Flow product has provoked a particular backlash among insurers for its resemblance to an annuity, an insurance product that is similar to a pension. The buyer of an annuity signs a contract to invest a specified amount of money in return for guaranteed payments at a later date.
But the country's fourth-largest bank by assets said it has structured the product so that it is onside Ottawa's rules. "Banks are in the business of taking deposits, and this is a deposit product backed by the strength and stability of Bank of Montreal," a spokesman for the bank said in an e-mail. "It is not an insurance product."
The insurance industry's lobby group argues that BMO's new product is giving the bank an unfair advantage because it doesn't have to adhere to the same capital requirements as a life insurer.
"In our view, this product does not appear to be compliant," the Canadian Life and Health Insurance Association wrote in a letter to OSFI this month. "And it may well represent 'the thin edge of the wedge': if permitted, it will likely lead to other structured products that are designed to replicate life annuities."
Canadian laws have banned banks from selling most types of insurance in their branches since 1992. The rules stemmed from concerns that the banks might have too much influence and link the granting of credit, such as a mortgage, to insurance, such as home insurance.
Banks are allowed to sell certain types of insurance, such as travel insurance and credit-related insurance, in their branches. The Conservatives made a pledge during the 2006 election campaign to maintain the restrictions on the marketing of insurance.
In the case of a BMO product, a customer makes a deposit that is invested in the bank's line of mutual funds and after 10 years receives guaranteed cash payments equal to 6 per cent a year, paid monthly. Those payments continue for 15 years. After that, the customer continues to receive 6-per-cent interest income (based on the original deposit) on an annual basis for the rest of her life or as long as they hold the product.
"The main difference with this and similar products offered by BMO and our bank competitors is that customers can maintain the deposit for as long as they choose - instead of a fixed term," BMO said in an e-mailed statement. "We developed it in response to calls for the financial services industry to offer innovative solutions that provide steady and reliable cash flow for Canadian retirees."
If OSFI decides that the product is acceptable, it's likely that other banks will offer it as well.
In its letter to the regulator, the Canadian Life and Health Insurance Association argued that "promising to make payments for life is a key feature of a life annuity, which is life insurance. As well, by offering a guaranteed payment stream contingent on a life, the bank would appear to be taking on longevity risk."
Aside from the restrictions on banks selling annuities, the life insurance association argued that this gives banks an unfair advantage. "We are not aware that the bank providing the 'life guarantee' for the product under discussion is required to hold anywhere near the capital or reserves that are required by an insurer that assumes longevity risks for its life annuity products," the letter to OSFI stated.