By Typhaine Letertre, Project Manager, Communications
As part of my Liaison magazine duties, I often come into contact with stakeholders whose expertise is second to none! André Bois, an experienced litigation lawyer with Tremblay Bois Mignault Lemay and a longstanding RCCAQ advisor, is foremost among them.
In the run-up to the Bill 188 review, I encourage you to read Mr. Bois' most recent column on ownership limits, which appeared in the latest edition of Liaison magazine. Then ask yourself the following question: do I have a clear understanding of the 20% rule?
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Most brokers are familiar with the 20% rule, i.e. the ownership limit designed to guarantee 
the independence of insurance firms. But do they have all the information they need to apply it correctly? André Bois takes a look at the question.
Brokers are certainly aware that their business relationship with insurers includes an ownership limit designed to maintain their independence. This is clearly set out in section 148 of the Act respecting the distribution of financial products and services (ARDFPS):
"Not more than 20% of the shares of a firm or voting rights attached to its shares may be held directly or indirectly by financial institutions, financial groups or legal persons related thereto."
What brokers may not know is that this provision was adopted long before the ARDFPS was enacted in 1998—and it has another unstated objective that is even more important.
A little history
In 1963, lawmakers first expressed a desire to preserve brokerage firms' independence. Section 32 of the Insurance Brokers Act stipulates that a majority of voting shares must be held by a broker or a family member. Unfortunately, in the early 1980s, two insurers found a way to circumvent this provision. As a result, a debate was launched in conjunction with the preparatory work for the Act respecting market intermediaries (adopted in 1989). This debate shaped the (unnecessary?) efforts to maintain this measure.
In his consultation document, then finance minister Pierre Fortier stated: "This measure follows numerous representations by intermediaries, particularly insurance brokers seeking to ensure the independence of their profession and thus to allow consumers to do business with a truly independent intermediary. This measure will also give various financial institutions access to an independent network, providing them with a privileged means of distributing their products without having to invest massively in acquiring or creating a network from scratch."
This principle was retained; the final formulation was found in the Act respecting market intermediaries and later in the ARDFPS.
What history doesn't tell us
The stated objective was to guarantee brokers' objectivity and professional independence. But there was another unstated yet fundamental goal: to maintain a distribution network in Quebec that was not controlled by multi-national or Toronto-based interests. Mr. Fortier feared that control of brokerage firms would be wrested away, as it had been for securities brokerage firms after the Bank Act had been amended to allow banks to buy up brokerages. In the space of less than two years, banks had seized control over the entire network, which had previously been independent.
Misinterpreting a good provision
Although this provision was essential, the way it has been interpreted by the Autorité des marchés financiers (AMF) has been a source of confusion and no longer seems in line with lawmakers' intentions. Section 148, however, is clear.
Say a firm has three classes of shares (A, B and C.) Under the provisions of section 148, an insurer cannot hold more than 20% of Class A shares, 20% of Class B shares or 20% of Class C shares. However, according to the AMF's notice of interpretation, the 20% limit may only apply to voting shares (e.g. Class A), while an insurer could own up to 100% of the other classes of shares.
Under that interpretation, a broker, even if he or she held 80% of the voting rights, could still feel the insurer's influence; after all, money talks! Is that a convenient move by the AMF aimed at appeasing certain major insurers that had previously circumvented the rule? The question is relevant, even though a number of hefty fines were imposed in the past. Still, this interpretation has stirred up enough confusion that some stakeholders believe they are acting legally.
The 20% rule is a professional, economic and political issue that not only has a useful role to play, but should also be correctly interpreted and monitored. If there are any doubts as to its interpretation, they should be resolved in favour of insurance firms' independence.
