The so-called “Chinese wall” that separates banks from their insurance subsidiaries is about to be extended to the online world. Soon the rules pertaining to physical separation of banking and insurance businesses will extend to bank websites or “virtual branches.”

It’s a minor regulatory change with a big message for banks, say insurance industry observers: no matter the type of space in which banking and insurance branches operate, distinct barriers will separate the two.

If the amendments proposed by the Department of Finance pass, banks not only will be unable to sell certain products online, they also will be unable to post direct links to their insurance websites from their banking web pages.

The Department of Finance is proposing to amend the Bank Act to include “web promotion,” an amendment that would mean a bank is restricted from providing on its banking website a link to another web page or a website that sells “unauthorized” insurance — that is, insurance other than that related to “credit protection,” a term that includes travel insurance, credit card insurance and mortgage insurance.

The restrictions also would include advertising or promoting insurance policies unrelated to authorized (credit protection) products.

For example, under the proposed rules, Toronto-Dominion Bank would no longer be able to post a link to TD Insurance (www.tdinsurance.com) from its main banking website (www.tdcanadatrust.com).

As the situation stands, the Bank Act prohibits banks from promoting or selling unauthorized insurance products, such as life insurance and living benefits, within their bank branches. Efforts to extend those rules to the web have been brewing over the past two years. This past summer, federal Finance Minister Jim Flaherty had announced that bank-owned insurers would no longer be permitted to sell authorized insurance products on the web.

This is yet another development in the struggle between the Department of Finance and the banks since the banks entered the insurance sector, says Lawrence Geller, founder and president of L.I. Geller Insurance Agencies Ltd. , an insurance consulting firm in Campbellville, Ont.: “They are simply trying to reiterate that they want a ‘separation of church and state,’ as the saying goes.”

So far, the Big Five Toronto-based banks — TD, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Royal Bank of Canada — have been co-operative.

For example, the TD Canada Trust website reveals no mention of or link to TD Insurance; however, the TD Insurance website can be accessed either directly or through the bank’s main corporate website (www.td.com).@page_break@A similar situation exists at RBC; the only direct link to the RBC Insurance Services Inc. website (www.rbcinsurance.com) is found on the RBC website (www.rbc.com) after the user has selected “Canada” as the point of entry.

Considering that 50% of insurance policies are sold over the web, according to Neil Skelding, president and CEO of Mississauga, Ont.-based RBC Insurance, more restrictions not only hamper traffic to the bank’s website, they also work against the consumer.

“This change will reduce access to information about insurance products at a time when more and more Canadians are choosing the web for research and purchases,” Skelding says. “It’s going to be more difficult for us to serve our clients… but we remain committed to providing complete financial advice within whatever limits the government sets.”

A statement from the Toronto-based Canadian Bankers Association calls the proposed amendments “anticompetitive”: “We live in the Internet age, where consumers are doing their research and shopping online for a variety of services, including financial products. Imposing artificial and inconvenient barriers is not in the best interest of the consumers.”

While the extension of the rules may make it more difficult for a consumer to get direct access to a bank-owned insurance website, Geller says, the rules are protecting consumers. “If banks were subject to the same suitability rules as licensed agents, it would be different,” Geller says. “But they aren’t, which is why the government keeps instituting separations.”

Byren Innes, senior vice president and director with Toronto-based insurance consultancy NewLink Group Inc. , says the proposed amendments are in response to banks’ ability to find loopholes in government regulations: “Banks have always tried to push the envelope in terms of what they can and can’t do around their insurance business, and this [development] is regulators clarifying those boundaries.”

RBC pushed those boundaries three years ago, when it began setting up bank branches and insurance branches next to each other. A banking branch using RBC’s royal blue and gold logo signage would be on one side of a retail complex, while on the other side was an RBC Insurance branch, whose signage colours were reversed.

“Since those branches were set up in such a manner that you physically had to leave the banking branch and walk outside on the street to get to the insurance branch, they were being compliant,” Innes says. “It really set the tone for what a bank could and couldn’t do.”

If banks were unclear about the boundaries of the Bank Act when it comes to the web, the proposed rule is intended to ensure they do understand, Geller says: “Regulators are saying the rules are the rules. And no matter how big you are, you can’t ignore them.” IE