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CLHIA releases compliance guidelines as part of its response to recommendations from regulators

By Megan Harman | November 2014

Insurance advisors could begin seeing more compliance audits and a higher level of oversight of their day-to-day sales activities by their managing general agencies (MGAs) as the industry adopts a set of standardized compliance practices for the MGA distribution channel.

The Canadian Life and Health Insurance Association Inc. (CLHIA) recently released a reference document entitled MGA Compliance: A Risk-based Approach for Compliance Programs in the MGA Channel. This document is intended to serve as a guide for MGAs in developing compliance policies regarding advisor screening and monitoring, as well as other compliance responsibilities.

The guidelines are part of the industry's response to recommendations from the Canadian Council of Insurance Regulators (CCIR) in 2012 that clarified the responsibilities of MGAs for the distribution of life insurance products and called for greater harmonization of best practices in the governance of MGAs.

"[The CLHIA's guidance] is following up on the regulators' direction," says Peter Goldthorpe, director of marketplace regulation issues with the CLHIA in Toronto, "to increase the amount of standardization within the industry, [create] more consistency, and [foster] a better understanding of roles and responsibilities."

The CCIR's 2012 paper indicated that insurers - not MGAs - are responsible for supervising the conduct of agents who sell their products. That paper emphasized that even when insurers outsource responsibilities to MGAs, insurers are still on the hook for ensuring those responsibilities are met. As a result, insurance companies are facing pressure to pay closer attention to the compliance and oversight procedures in place at their MGA partners.

That, in turn, says Susan Allemang, head of regulatory and policy affairs with Independent Financial Brokers of Canada in Mississauga, Ont., is putting pressure on MGAs to keep a closer eye on their advisors.

"The insurers are monitoring the MGAs more closely," Allemang says, "so the MGAs are going to be monitoring the brokers' activities more closely as well."

Because MGA compliance practices vary considerably among firms, however, it can be difficult for insurers to assess and compare each firm's procedures, as well as for advisors to keep track of the requirements of each MGA.

"It's a patchwork of different things that different MGAs do," says Arnold Scheerder, compliance chairman at the Canadian Association of Independent Life Brokerage Agencies in Toronto.

The CLHIA's new guidelines aim to establish greater consistency among firms by providing a clearer indication of the specific practices that insurers expect MGAs to have in place.

Specifically, the guidelines outline the screening process that MGAs are expected to follow when entering into a contract with a new insurance agent, as well as MGAs' responsibilities regarding the ongoing monitoring of advisors and reporting protocols.

For example, the guidelines specify that MGAs should monitor for situations in which advisors: have undue influence in persuading clients to buy certain products; sell products that don't meet clients' needs; engage in certain controversial sales practices; and fail to disclose potential conflicts of interest, among other things. Any potential concerns that MGAs identify should be reported to insurers as soon as possible, according to the guidelines.

"This will give MGAs the guidance to have a good look at [their compliance regimes]," Scheerder says, "and make sure they didn't overlook anything."

However, the new guidelines won't necessarily lead to uniform compliance regimes across the industry. Because the insurance industry adheres to a risk-based regulatory regime, MGAs have flexibility in the policies and procedures that they implement to manage the risks they face.

"What the insurance regulation generally does," Goldthorpe says, "is establish general principles for the outcomes and then leaves it up to the industry to decide how to achieve those outcomes. The practices that we're describing in our reference document are one way of achieving those outcomes."

Insurance companies periodically assess the compliance practices of their MGA partners through a standardized CLHIA survey. Beginning Jan. 1, 2015, insurers will be required to conduct that survey with each MGA at least once a year to ensure the compliance controls are up to standard.

The extent to which MGAs will need to tweak their compliance practices to meet the new guidelines will depend on the scope of their existing compliance framework. Some MGAs will have to make significant investments to bring their practices up to standard, whereas other MGAs have comprehensive compliance regimes in place that meet or exceed the new CLHIA guidelines.

For example, Vancouver-based Customplan Financial Advisors Inc. probably won't need to make any changes to meet the new guidelines, according to CEO Karl Krokosinski: "We have been doing this compliance for 20 years. What [the CLHIA] just brought out is just a minimum standard."

Similarly, Kitchener, Ont.-based Financial Horizons Inc. is ahead of the curve with its compliance regime, according to David Stewart, executive vice president, national sales and training. Still, he says, it's a challenge - and an expensive proposition - for MGAs such as Financial Horizons to keep up with the rapid pace at which compliance responsibilities in the insurance industry are growing and evolving.

"We're going to have to continue to invest in our compliance department," Stewart says. "I don't feel like we're done, by any stretch of the imagination."

Even at MGAs that already have comprehensive oversight in place, Scheerder says, advisors may notice an increase in compliance requirements and auditing activity under the new guidelines as MGAs feel more pressure to demonstrate their protocols to insurers. For example, he adds, MGAs may ask advisors for more records and documentation.

"A lot of monitoring is being done, but it's not necessarily visible to the advisor," Scheerder says. "It may now become a little bit more visible, in that MGAs may decide that they're now going to follow up and verify certain things."

This possibility should remind advisors to document their activities as much as possible, Allemang says: "You need to have your pieces in place, and you need to be able to point to the documentation to show that it's in place."

Although the new compliance regime may mean more work, Allemang says, it will be helpful for advisors to have greater consistency in requirements at various MGAs.

"Consistency allows everybody to know what's expected of them," Allemang says. "If this streamlines things and makes it easier for the advisor, then it will be a positive thing."

The compliance guidelines come in advance of a new CLHIA guideline that will set out a broader framework for insurer/MGA relationships. CLHIA Guideline G18: Insurer-MGA Relationships, which takes effect on Jan. 1, 2015, describes the roles and responsibilities for the various parties in the MGA channel consistently with those outlined in the CCIR's 2012 position paper.

"We should pull up our socks," Scheerder says, "because if we do not - guess what? - regulators may do it. And then you're being told what to do."

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