Insurance regulators’ move to scrap deferred sales charges (DSCs) on segregated funds — and to consider a possible ban on seg funds’ upfront commissions — is a good step toward closing the yawning gap between insurance and securities regulation.
For too long, that gap was permitted to widen. While securities regulators took long overdue action to enhance investor protection, such as banning DSCs, insurance clients remained vulnerable.
Now, with the demise of DSCs on the horizon, insurance regulators are stepping up to ensure that seg funds don’t become a refuge for unscrupulous reps who can no longer sell investment funds under toxic fee structures. Investor advocates flagged this risk when securities regulators finally banned investment fund DSCs.
By warning firms against selling DSC seg funds after the investment fund ban kicks in on June 1 — and planning for a formal ban of their own by mid-2023 — insurance regulators are taking an important stand.
Closing the gap between insurance and securities rules removes a tangible risk for clients and avoids a potential reputational threat for firms while curbing the temptation of regulatory arbitrage.
The move also demonstrates welcome resolve from the insurance regulators, which have often failed to stand up for retail consumers in the face of powerful commercial interests.
In addition to outlawing DSCs, insurance industry authorities signalled they will examine seg fund commissions with an eye to confronting the conflicts of interest and investor-protection issues that arise from embedded fee structures.
Hopefully, this represents the start of more harmonized standards for clients across the insurance and the securities sectors when it comes to obvious substitute products such as seg funds and investment funds.
One day, the insurance regulators might even lead the way in advancing consumer protection rather than playing catch-up with their counterparts in the securities sector.
This editorial will appear in the forthcoming February issue of Investment Executive.