Pity the poor banks. Their standout performance during the financial crisis has boosted their standing with the rest of the world, but it doesn’t seem to have bought them many friends in Ottawa. It appears they are still losing their war with the insurance lobby.

The big Canadian banks have weathered the global financial crisis better than most of their rivals — a feat that can be attributed to a combination of robust regulation, wily management and no small measure of good luck. As a result, Canadian policy-makers have been basking in their reflected glory on the world stage, crowing about how the rest of the world’s financial systems need to be run more like Canada’s.

Hopefully, that position doesn’t extend to the federal government’s approach to competition in financial services — because, on that count, Canada’s financial-sector policy-makers are still clinging to an anachronistic approach.

Euromoney magazine’s Finance Minister of the Year for 2009, Canada’s Jim Flaherty, is directing the banks to halt their advance into online insurance marketing. The move reflects a long-standing federal policy preventing the banks from competing freely in the insurance business by selling these products through their branch networks. However, earlier this year, the Office of the Superintendent of Financial Institutions ruled that the banks could market insurance on their websites, on the basis that these sites don’t constitute branches.

Now, the finance minister appears to be meddling with that decision, which is just the kind of political interference that undermines sound regulation.

Moreover, it represents an unjustified restriction on competition that would likely benefit consumers if it were permitted. There’s no question that Canadians hate their banks, but this doesn’t change the fact that they benefit from their ruthlessly competitive instincts in the cost of banking and investment products and services.

There may well be good reasons for limiting the power of the banks, but arbitrary edict is hardly the way to craft sound policy.

Notwithstanding the recent plaudits from the rest of the world, it appears that there’s still not much to admire in the way Canadian policy-makers handle the financial services file.