The Canadian Council of Insurance Regulators (CCIR) is calling for industry input on how to address key gaps between the regulations pertaining to mutual funds and segregated funds in an issues paper released on Monday.
The paper, compiled by the CCIR’s Segregated Funds Working Group, highlights the comparative regulatory frameworks for seg funds and mutual funds. It concludes that existing and potential gaps in areas such as disclosure may need to be addressed in order to protect consumers.
For example, the CCIR paper notes that the implementation of the second phase of the client relationship model (CRM2) has resulted in mutual fund compensation disclosure that differs considerably from the disclosure provided for seg funds.
“This difference may result in investors not fully understanding the fees that are being charged for the two types of product, what the fees represent, and the impact on their investment returns,” the CCIR paper states.
The document also addresses regulatory discrepancies in such areas as investment performance reporting, risk classification methodology, oversight of intermediaries, conflicts of interest and best interest standards.
The CCIR paper notes that differences in the regulatory framework of similar products may exist to reflect their respective and unique features. However, it notes that if one structure is perceived to be less onerous than the other, there may be an incentive for intermediaries to sell the products regulated under one regime over the other.
“The potential exists for individuals who are dually licensed to sell both mutual funds and life insurance products to let self-interest influence their product recommendations,” the CCIR paper states. “This is contrary to providing fair treatment to the customer or acting in the client’s interest.”
The paper adds that although the CCIR is not aware of any statistical evidence to demonstrate that regulatory arbitrage is occurring within the mutual fund/seg fund sectors, amendments may be necessary to ensure that consumers are protected.
The CCIR paper poses 20 questions for stakeholders and invites any other relevant feedback that will assist regulators in ensuring that the regulation of seg funds both protects consumers and ensures a competitive and efficient marketplace.
The deadline for submissions is July 15.
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