Ontario’s insurance regulator is taking steps to revamp the process by which insurance advisors are disciplined for misconduct.
Although efforts to streamline the process and better punish bad actors are welcome, there are concerns that the changes will lead to judgments being made by individuals with little insurance-sector knowledge and to discipline being imposed before misconduct has been proven.
The Financial Services Commission of Ontario (FSCO) published a consultation paper in August outlining proposals for a new disciplinary hearing process for insurance agents and adjusters. The goal is to modernize the process and bring it in line with the models used in other sectors that FSCO regulates, such as credit unions and mortgage brokers.
“The current process, as set out in the Insurance Act, for making disciplinary decisions about agents and adjusters is about 90 years old,” says Anatol Monid, director of market conduct with FSCO. “It is cumbersome and not aligned with modern disciplinary and enforcement processes and standards.”
Advisor groups agree that the process needs improvement. Under the current model, before the superintendent of financial services can refuse an application for a licence or suspend or revoke a licence, the affected person can request a hearing before an advisory board. The board hears the evidence and makes recommendations to the superintendent, who then decides on the appropriate disciplinary action. Thus, the superintendent – the ultimate decision-maker – does not hear the evidence directly, which can be ineffective.
“It’s a two-step process,” says Susan Allemang, head of regulatory and policy affairs with Mississauga, Ont.-based Independent Financial Brokers of Canada. “And the results of the first step are not necessarily binding on the parties.”
The system became even more complicated earlier this year, when FSCO gained new powers to levy fines, or “administrative monetary penalties,” against insurance advisors who violate the rules. Advisors who appeal these fines must go through a hearing process held by an independent adjudicative body known as the Financial Services Tribunal (FST).
Thus, insurance advisors facing disciplinary actions involving both licensing and fines must go through two hearing processes, with the possibility that the hearings could arrive at different conclusions based on the same facts.
FSCO is proposing to streamline this process by eliminating the advisory board hearing process and having all disciplinary decisions for insurance agents and adjusters handled by the FST.
The sector is generally supportive of this proposal. “The process that [FSCO]is suggesting appears to be less cumbersome,” says Allemang. “This will reduce it to one step, so I think it will be more streamlined and less time-consuming.”
Adds Ed Skwarek, vice president of regulatory and public affairs with Advocis in Toronto: “If it makes it easier and less expensive for the consumer and the financial advisor to resolve differences, that’s a great thing.”
However, advisor groups have some reservations about the proposal. In particular, Advocis has raised concerns about the expertise of the individuals who would be making disciplinary decisions under this model.
The advisory boards used under the current system are composed of three members: a representative of insurers, a representative of agents or adjusters (depending on the case) and a representative of the superintendent. In contrast, the FST does not have reserved seats for adjudicators from the same industry sector as the accused, Advocis notes. Rather, most of the current members on the FST roster are lawyers.
“This is very disconcerting for our members: moving from the [advisory board] to the FST raises the spectre that a disciplinary action involving an insurance agent could be heard by a panel of adjudicators who have no knowledge of what it is like to be an agent in the [sector],” the association says in its submission to FSCO. “We believe that this is fundamentally unjust; in any disciplinary hearing, an accused should be judged by his or her peers.”
Advocis is urging FSCO to revise the rules governing the composition of FST panels to include insurance-sector representatives.
FSCO’s consultation paper also proposes other amendments to the disciplinary process, some of which would strengthen the superintendent’s enforcement powers. For example, the paper proposes giving the superintendent authority to issue interim orders to suspend an advisor’s licence in cases in which there’s a risk of harm to the public and there’s a delay in the hearing process; and to continue to take disciplinary action against individuals who no longer are licensed. The latter proposal would eliminate the possibility that advisors could avoid disciplinary action by surrendering their licence.
Any steps to punish offenders more effectively are positive, Skwarek says, as they improve the reputation of the business: “I think the [sector], by and large, likes it when the regulator can deal definitively and strongly with bad actors.”
But insurance-sector groups say that as regulators gain new powers, they must ensure they’re applying discipline only in situations in which it’s warranted. In particular, if FSCO proceeds with introducing interim orders to suspend licences, Advocis says, the use of these orders should be “exceedingly rare.”
According to the Advocis comment: “Limiting [an advisor’s] ability to work and earn income clearly creates serious repercussions, and the significance of this harm must be considered in light of the fact that an interim order is issued before the agent has the ability to appear before an adjudicator and present evidence and arguments.”
© 2013 Investment Executive. All rights reserved.