Court upholds broker regulator’s new rule on perceived conflict

B.C.’s Supreme Court says a new rule enacted by the province’s broker regulator, which bans any licensed insurance brokers from engaging in insurance business for strata corporations that share a common ownership with the insurance brokerage, is reasonable and fair.

FS Insurance Brokers Inc. (FSIB) challenged the Insurance Council of B.C.’s new rule. FSIB shares common ownership with a strata property management company called First Service Residential BC (FSR). FSIB is concerned the new rule could potentially prohibit the firm from engaging in insurance business with strata corporations managed by FSR.

FSIB asked the court to require the Insurance Council of B.C. to decide whether its new rule applied to FSIB’s business model and to find the council’s new rule invalid because it was unreasonable and unfair.

The court narrowed the scope of its inquiry. It said the two sides had already agreed that the council would investigate whether or not FSIB’s business model was contrary to the new rule. Also, both sides agreed to the terms of a court injunction preventing the council from taking any enforcement action against FSIB until its investigation was done.

And so, the court examined whether the council’s new rule was reasonable and fair.

FSIB’s business model

The court started by looking at FSIB’s business model first. FSIB provides services to strata councils in B.C. managed by FSR.

“Although FSIB is licensed to provide insurance agency services, it does not act as the insurance agent of record to FSR-managed strata corporations in B.C.,” as the court explains in a decision released Monday. “Rather, FSIB contracts with another insurance agency, BFL Canada Insurance Services Inc. (BFL), to provide insurance to strata corporations managed by FSR. FSIB educates, advises, and supports, strata corporations managed by FSR in choosing insurance, and works with BFL to design insurance for strata corporations in BC.

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“FSIB earns its income from receiving a portion of the commission that BFL receives from insurance carriers. FSIB only earns income if FSR-managed strata corporations choose to purchase insurance through BFL.”

FSIB maintains its services in B.C. are “not insurance business,” meaning the council’s new rule does not apply.

Was the new rule reasonable?

The court first examined whether or not the council’s new law was reasonable. Its started by looking at whether the council’s new law conformed to the purpose of a new provincial bill introduced four years ago. The court found some ambiguity there.

In June 2020, the province introduced Bill 14, which proposed the following amendment to the Strata Property Act and the Financial Institutions Act, among others:

“178 (1) An insurer, officer, agent or employee of an insurer, insurance agent or insurance salesperson must not pay or allow to be paid, or offer or promise, a commission or compensation to a person who is not an insurance agent licensee or insurance salesperson licensee.”

The Insurance Council of B.C.’s new law followed from this regulatory change. The new rule states:

“7(11.2) A licensee cannot engage in insurance business for a strata corporation when there is common ownership between the [brokerage] licensee and a corporation, business or other entity that provides strata management services as defined by the Real Estate Services Act to that same strata corporation. Common ownership includes ownership arrangements involving holding companies, immediate family, and significant individuals.”

FSIB said the council’s rule sought to prohibit sharing all referral fees — regardless of whether or not the insurance brokers were licensed — on the basis of a common ownership between brokerage and property management company. But changes to Bill 14 banned only referral fees to unlicensed brokers.

Since the council’s new rule did not follow the purpose of Bill 14, it was unreasonable and therefore invalid, FSIB said.

The court agreed some ambiguity existed in how the council interpreted the legislative change.

But that wasn’t the whole story, as the court ruled.

“Analyzing only whether the [council’s] new rule adheres to the purposes of [Bill 14’s rule change] is too narrow a lens through which to review the reasonableness of the new rule,” the B.C. Supreme Court found. “I must assess the reasonableness of the new rule in the context of the legislative scheme as a whole.

“In this regard, the new rule is reasonably related to the object and purpose of the legislative scheme governing the regulation of insurance agents under the Financial Institutions Act.

“The new rule creates a license condition that avoids what, in the Insurance Council’s view, could be a real or perceived conflict of interest. Creating license conditions that seek to avoid conflicts of interest is consistent with the Insurance Council’s delegated role in the overall statutory scheme.

“The new rule, by that measure, is reasonable.”

The new law was also fair, the court ruled, saying council previously rejected a licence request from another insurance brokerage with ties to a property manager on the basis of a perceived conflict.

Plus, the council had followed its usual procedure for introducing a new law, which includes a public notification and consultation period.

Feature image courtesy of iStock.com/Dilok Klaisataporn