Canada’s Proposed Ban on Banks Selling ‘Annuity-like’ Products Not Expected to Happen Here

Photo Credit: Bill Longshaw: Photo Credit: Bill Longshaw:

We get their blasts of arctic air during the winter, but a proposal by the Canadian government that would prohibit banks from selling life annuities is not anticipated to sweep into the U.S.

Back in December, Canada’s Ministry of Finance proposed a ban on banks selling what it termed life annuity or “annuity-like” products. Since the U.S. and Canada share a border, would such an action be likely here? Not very, say industry insiders, due to long-standing U.S. regulations that allow banks to sell annuities and other life insurance products.

Further, the problem doesn’t appear to be widespread in Canada. According to Frank Zinatelli, vice president and general counsel for the Canadian Life and Health Insurance Association in Toronto, only one bank, the Bank of Montreal, had issued life annuities. Banks are prohibited from selling or underwriting such policies by established Canadian law, he notes.

“They can’t sell any annuity where the liability is contingent on the death of a person, that’s essentially what the legislation says,” Zinatelli says. “These life annuities are insurance products, which can only be sold by life insurance companies. That’s been the law forever.”

Zinatelli says the government “is going to move relatively quickly” to enact the legislative amendment banning banks from selling such products.

“The government saw that there were some products that were being introduced that essentially did the same thing as a life annuity does,” he says. “Consequently, they determined that the state rules should apply to those products as they do with the life annuities. In the insurance legislation there are very specific rules with respect to how life annuities should be treated. So if these other products are not covered by the same kind of rules, then there could be some risks that are protected under insurance legislation but are not otherwise protected. So they wanted to provide the same kind of protection for all those types of products.”

The proposal includes a grandfather clause for contracts previously sold by the bank. “They will continue to be valid products, because you don’t want to put the consumer at a disadvantage,” Zinatelli says.

In the U.S., banks have been permitted to sell annuities and other insurance products for more than a decade since the enactment of the Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999. That legislation essentially tore down the previous barrier between banking and insurance set out in the Glass-Steagall Act of 1956,

Kevin McKechnie, executive director of the American Bankers Insurance Association (ABIA) in Washington, D.C., points out that Glass-Steagall only prevented banks from underwriting insurance, not selling it. He recalls that there was some initial pushback from independent insurance brokers and agents when the Gramm-Leach-Bliley Act was initially proposed.

“One of the big political problems was the independent insurance brokers and agents were concerned, to put it mildly, that there was going to be a competitive problem,” McKechnie says. “Yes, there was some competition, but that only worked to the benefit of consumers. And there was generally more availability of product since there was a better take-up.”

Banks have indeed reaped much cash from the sale of annuities. According to the ABIA, income earned from the sale of annuities at bank holding companies rose 22.6 percent to a record $2.26 billion in the first three quarters of 2011, up from $1.85 billion during the same nine-month period in 2010.

The majority of bank insurance activity in the U.S. is through agency or brokerage sales, McKechnie notes. Instead of constituting a risk, it allows the bank to diversify its revenue streams. Further, there are enough regulatory controls in place under the law to mitigate any potential pitfalls, he says.

Having banks sell insurance products gives consumers more choice under one roof, which is especially important at a time when traditional retirement programs, like Social Security, are under siege and consumers are looking for secure retirement products, argue McKechnie and other annuity advocates.

Kim O’Brien, president and CEO of the National Association for Fixed Annuities, doesn’t see any change to the current law. In an email statement, she wrote:

“Given the importance the Obama administration has given to annuities (see the Middle Class Task Force memo,” she writes, “and the ongoing requests for comments on retirement preparedness from the DOL and Treasury) and the importance of the banking channel to annuity access and sales, we don’t see anything on the horizon at either the federal or the state level that would suggest the U.S. is looking to change the distribution of annuities through banks.”

Moreover, she points out that banks account for more than 20 percent of annuity sales in the U.S., citing LIMRA stats from 2009 and 2010, thus making banks “an important distribution arm for annuities.”

In 2010, roughly $32 billion of annuities were sold through banks, O’Brien says, again citing numbers from LIMRA. “And that number appears to be growing because LIMRA reports that as of the first three quarters of 2011 already $28 billion of annuity sales have been sold through banks,” O’Brien continues.

At a recent NAFA summit, participants said they welcomed banks expanding their footprint in fixed annuity sales.

McKechnie says that while has been some talk of repealing the Gramm-Leach-Bliley Act, it’s unlikely to happen.

“If we go back the other way, as some have suggested, it never would have been possible for Bank of America to buy Merrill Lynch during the crisis. A bank couldn’t own a securities broker,” McKechnie says.

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