Nov. 2 (Bloomberg) -- A proposed ban on Internet insurance sales by Canadian banks will have an “impact” on Bank of Nova Scotia’s insurance business, said Christopher Hodgson, head of the bank’s Canadian unit.

“There’s no doubt that it has an impact,” Hodgson said in an interview in Toronto. “I can’t tell you necessarily what it’s going to look like or isn’t going to look like.”

Canada’s third-largest bank announced in August it was expanding its insurance offering with online advertising, new home and auto products and the opening of its first stand-alone insurance branch. About two months later, Finance Minister Jim Flaherty told banks to “quickly” remove insurance advertising from their Web sites, saying it violates rules that prevent lenders from selling insurance in their bank branches.

“It was a surprise,” said Hodgson, 55. “We see insurance as a big opportunity for our industry.” Canadian banks have been restricted since at least 1923 from selling most types of insurance in their branches. Hodgson said he’d like to see a “level playing field for banks,” with insurers.

Scotiabank plans to comply with Flaherty’s request, and is in “ongoing discussions” over how to proceed, he said. Most Canadian banks, including Toronto-based Bank of Nova Scotia and Royal Bank of Canada, are still advertising insurance on their Web sites.

“It’s a very complex issue to figure out how to regulate the Web,” said Barbara Stymiest, Royal Bank’s group head of strategy, treasury and corporate services. “How do you define what links are, what home pages are?”

Record Profit

Bank of Nova Scotia will look at new products and expand in businesses such as creditor insurance to make up for potential changes in online advertising, Hodgson said on Oct. 30.

Hodgson’s Canadian banking had record earnings of C$500 million ($463 million) in the third quarter on increases in personal lending and deposits. The unit represented more than half the bank’s overall profit in the fiscal third quarter.

“The organic investments we made in the business, as well as acquisitions in a number of different businesses, are contributing to the growth that we’re seeing,” Hodgson said.

Scotiabank increased its asset-management operations through the purchase last year of E*Trade Financial Corp’s Canadian unit for $442 million. The bank also owns more than a third of mutual-fund company CI Financial Corp. and a stake in money manager DundeeWealth Inc.

Acquisitions

Potential acquisitions, such as increasing the bank’s stake in Toronto-based CI Financial, aren’t “a slam dunk” because lenders will be required by regulators to set aside more capital, Hodgson said.

Scotiabank will open about a dozen branches next year and as many as 15 in 2011 in “higher-growth” areas throughout Canada. The company opened six branches this year.

“There’s going to come a point a few years down the road where we will slow that down,” Hodgson said. “We do not expect to just continuously open up bricks-and-mortar around the country.”

The bank may also expand in Montreal and Quebec City to increase its presence in Quebec, where it has about 54 branches.

“Quebec is an important market,” Hodgson said. “Over the course of the next three or four years, we will absolutely look to grow our presence in Quebec.”

To contact the reporter on this story: Sean B. Pasternak in Toronto at spasternak@bloomberg.net.

Last Updated: November 2, 2009 00:00 EST