On the day that the federal government announced legislation that will prohibit banks from selling products that resemble insurance company annuities, Bank of Montreal (BMO) terminated its Lifetime Cash Flow product.
Insurance companies banded together last year to denounce the BMO product to the Office of the Superintendent of Financial Institutions (OSFI). Their lobbying efforts seem to have paid off.
On Dec. 16, federal finance minister Jim Flaherty announced that his government is introducing legislation to prohibit banks from offering financial products that operate in a similar way to annuities.
“Since taking office, this Government has taken steps to clarify the separation of banking and insurance activities,” said Minister Flaherty. “This will ensure the business of insurance continues to be subject to the appropriate rules and regulations.”
Minister Flaherty’s announcement underlined the importance of the insurance component of annuity products. “To ensure the market for life annuities continues to function safely and efficiently, and to ensure consumers are properly protected, these products are subject to the regulatory framework for insurance companies.”
The Minister noted that some banks have introduced products that perform the same or similar functions as life annuities, but these products are not subject to the same regulatory standards as those sold by insurance companies. Mr. Flaherty did, however, note that the legislation would provide for “grandfathering” with respect to existing products.
The BMO Lifetime Cash Flow product worked more or less like a life annuity. It guaranteed its holders monthly payments for life, except that this promise was not backed by any insurance. This is similar to the structure of a principal protected note (PPN), which allows the product to guarantee payments as well as the invested capital.
Ronald Monet, BMO’s director of corporate communications for Eastern and Western Canada said, “As of Friday, December 16th, we are no longer offering the Lifetime Cash Flow product. BMO has been a leader in developing innovative financial solutions to help Canadians better prepare for retirement. We will continue to ensure that our customers benefit from appropriate solutions and financial products that will help them maintain a lifestyle commensurate with their expectations at the time they retire.”
BMO did not say if it intends to replace the product with an alternative, or what will happen to the customers who own the defunct product.
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