On Dec. 13, 2017, the Canadian Council of Insurance Regulators (CCIR) released its Segregated Funds Working Group Position Paper, and in it they outlined their recommendations to bring segregated fund insurance disclosure in line with that of mutual funds and other securities. According to the CCIR, Canadians had more than $318 billion invested in segregated funds in 2016, so this growing asset class is almost a quarter the size of mutual funds. For dual-licensed financial advisors and their dealerships, this means that many of the recent business process and technology changes resulting from the second phase of the Client Relationship Model (CRM2) and Point of Sale (POS) regulations will be required of them in the months ahead.
For years, regulators from various sectors have listened to their respective industries’ objections to proposed change, hesitating to impose new requirements due to the perceived differences between products and customer needs. This has changed. In its position paper, the CCIR recommends harmonization of regulations from various industries in an effort to achieve a consistent outcome in terms of customer disclosure and transparency. The regulator cites technology as the tool that will enable this harmonization and has become less sympathetic to the nuances that differentiate insurance products from other financial products, recommending technology be leveraged for better oversight of both insurers and advisors and as a means of improving investor communication.
Unlike mutual fund managers and manufacturers of other securities, life insurers are legally responsible for the conduct of advisors representing them in the sale of seg funds. The CCIR indicates that insurers should increase their oversight of sales and distribution and suggests that technology should be better utilized to assist in this oversight. Advisors who leverage dealer platforms to help automate and audit their compliant activities will be ahead of the game.
While the CCIR is not yet ready to impose “know your client” procedures for seg fund investors, documenting attempts to contact the client for an annual check-in will help to prove that the advisor is fulfilling his or her duty with regard to suitability. “Know your product” and other due-diligence requirements for advisors are also expected to be raised to levels contemplated in the mutual fund industry. The regulator recommends that advisors provide clients with copies of the documentation on their needs analysis and product recommendations. All of these expected changes point to the importance of more robust technology than many insurance salespeople use currently, if they are to comply with the disclosure requirements outlined by the CCIR.
As mutual fund dealers have just done with the implementation of new CRM2 client statements that more clearly outline performance and costs, seg fund intermediaries must now begin the exercise of identifying the data sources and calculations necessary to produce these new client reports. The CCIR has also indicated that requirements for delivery of updated Fund Facts documents for segregated funds should align with mutual fund requirements. This could be a significant change for seg fund investors, many of whom have not been provided disclosure documentation since their first purchase — in some cases many years ago. Clients will need to be reminded upon each subsequent purchase how they can access Fund Facts online or request a hard copy, in accordance with their preferences. Dealerships and their advisors who have already implemented technology that complies with CRM2 reporting and POS document delivery standards will have an easier time accommodating the new seg fund disclosure rules.
It has been nearly 20 years since the Joint Forum of Financial Market Regulators first set out to harmonize the disclosure rules among securities, insurance and other financial products. It was almost 10 years ago that the Canadian Securities Administrators and the CCIR abandoned their efforts to align regulations for mutual funds and segregated funds, respectively, amid cries from the industry of product arbitrage and an unfair playing field. Then, as now, the regulators countered that they would rely on participants within the larger mutual fund industry to figure out the business and technical implications of their recommendations, and then they would cast their regulatory net wider.
The CCIR is now back, suggesting insurance brokers will need to up their game in some cases, as there should be an equivalent standard of care for those dealing in segregated funds to those dealing in mutual funds.