The Financial Services Commission of Ontario has issued a consultation paper on developing a regulatory system for viatical settlements in Ontario.

Typically, viatical settlements allow a life insurance policy owner to sell the policy to a third party (viatical settlement company) at a rate discounted from its face value. The owner usually has a terminal illness and needs financial resources to cover medical or other expenses. The owner changes the beneficiary of the policy to the buyer, and when the owner dies, the buyer gets the pay-out under the policy.

Currently viatical settlements are not allowed in Ontario, and won’t be until an appropriate regulatory regime has been developed and approved by the provincial cabinet to oversee viatical settlement business. The regulatory system will be administered by FSCO under the Insurance Act and will include provisions to ensure that policyholders and investors are informed and protected.

The regulations will cover licensing, enforcement and consumer protection activities The system will also set out the terms and conditions under which an insured can enter into a viatical settlement contract. The settlements will be restricted to individuals with a life expectancy of less than two years, as certified by an Ontario physician.

Those who want to conduct business in viatical settlements in Ontario must be licensed in a form approved by the Superintendent, and the licensing regime will be similar to the current licensing requirements under the Insurance Act.

FSCO says the system will establish requirements to ensure that those wishing to conduct viatical settlements in Ontario meet standards of integrity, financial soundness and competence that is required in other business segments and persons that FSCO regulates.

The commission will set out provisions for viatical settlement contracts to protect the policyholders, insurers and investors and conditions under which viatical settlement contracts may be entered into. It will require that full, plain and true disclosure be given to investors.

The investment protections measures currently under the Securities Act, that will apply to viatical settlement businesses have alreadey been transferred into the draft regulation, so the public won’t have to deal with two regulators and two systems of registration.

FSCO says the proposed draft regulation is based on regulatory systems in other North American jurisdictions that permit viatical settlement business. Comments on the draft are due to FSCO by August 17.