Insurance regulation lags securities regulation on several counts. For example, life agents don’t need to disclose referral fees. Nor are they subject to the guidance regarding advisor award programs that was issued by the Canadian Securities Administrators (CSA) and the Canadian Investment Regulatory Organization.
However, provincial regulators have been busy as the national umbrella group co-ordinates with the CSA to close several regulatory gaps.
And insurance regulators are increasingly putting out guidance separate from legislation, said Darcy Ammerman, partner with the national financial services group at McMillan LLP in Ottawa.
“They expect compliance as if [the guidance] were in the legislation,” she said. “Legislation is slow-moving, and regulators are trying to be more adaptable, more reactive to things that are happening in the industry.”
Here are recent developments on the regulatory front.
Regulatory focus: Incentive management
Key developments to 2023
In 2022, the Canadian Council of Insurance Regulators (CCIR) and Canadian Insurance Services Regulatory Organizations (CISRO) released guidance on designing compensation structures that treat clients fairly.
The regulators gave examples of components of incentive agreements that could harm clients, such as ongoing commission amounts that underestimate the level of service expected; incentive arrangements that can result in fees or penalties (e.g., exit fees); excessive incentives for cross-selling optional products; and contests, quotas, bonuses and non-monetary benefits based on sales of specific products over limited periods.
Provincial regulators in Alberta, New Brunswick and Nova Scotia adopted the guidance in 2023, and the Autorité des marchés financiers released its version the same year.
What’s on tap for 2024 and beyond
B.C.’s new Insurer Code of Market Conduct, which is based on the CCIR’s and CISRO’s guidance regarding fair treatment of customers, took effect on April 1.
Earlier this year, Investment Executive asked the CCIR whether it would issue guidance concerning advisor awards. In response, the CCIR reiterated its requirements surrounding fair treatment of customers and placing clients’ interests ahead of the advisor’s. A joint publication from CISRO and the CCIR acknowledges that “recognition programs that are designed to increase sales volumes” may “increase the risk of unfair outcomes to customers,” but does not explicitly prohibit referencing them in client-facing interactions.
Potential impact for insurance advisors
“What regulators are trying to do is ensure there are better outcomes for customers,” said Koker Christensen, partner with Fasken Martineau DuMoulin LLP in Toronto and co-leader of the firm’s financial services group. “The way they’re trying to do that is by not just having a bunch of prescriptive rules, but also having [the fair treatment] principles, which are focused on outcomes.”
Christensen added that market conduct and consumer protection have been major themes in insurance regulation over the past few years, “and I think this is going to continue.”
Regulatory focus: Greater oversight of the LLQP
Key developments to 2023
Last year, the Financial Services Regulatory Authority of Ontario (FSRA) received reports of cheating on Life Licence Qualification Program (LLQP) exams. The regulator imposed a temporary requirement for candidates from World Financial Group (WFG) to take their exams in person.
As of July 1, 2023, the Insurance Council of British Columbia (ICBC) and the Insurance Council of Manitoba no longer offer online LLQP exams, with the latter regulator citing “the security and integrity” of the process for its decision.
In December 2023, CISRO released an LLQP exam policy that outlined exam administration requirements and consequences for cheaters, and prescribed waiting periods for candidates that repeatedly fail the LLQP. Notably, after four attempts, a candidate must retake the prerequisite course and wait one year before making another attempt.
What’s on tap for 2024 and beyond
The ICBC and FSRA both tightened their exam policies earlier this year in response to the CISRO release.
Furthermore, WFG remains subject to an in-person exam requirement, which was originally meant to last three months.
“FSRA is monitoring the results of the pilot program and will be reviewing the length of the program on an ongoing basis,” said Ashley Legassic, senior media relations officer with FSRA. “Currently, no other candidate group is required to write the exam in person. However, candidates who are suspected of cheating are required to rewrite all future exams in person.”
Legassic said that FSRA recognizes the flexibility and convenience that online exam writing provides. The regulator monitors cheating through a third-party virtual exam administrator.
Potential impact for insurance advisors
“The regulators have a public-interest mandate, and a key part of that is to ensure the people they’re licensing are proficient,” said Christina Ashmore, managing director of the IFSE Institute in Mississauga, Ont., which offers certification exams for the LLQP. “To the extent that there’s concern, then I definitely see validity in tightening up the [test-taking] processes.”
“There are more controls when a test is taken in person,” said Darcy Ammerman, partner with McMillan LLP in Ottawa. “So, I can certainly see [the reasons for] concern from regulators and potentially a continuing shift toward ensuring the tests are taken in person.”
Ashmore said virtual testing can still be rigorous, observing that many service companies frequently update their cheating-detection protocols.
Instead of mandating in-person testing, Ashmore suggested, regulators could specify minimum standards for online proctoring, such as a maximum number of students per proctor.
Regulatory focus: Restricted licensing regimes
Key developments to 2023
In February 2023, New Brunswick joined Manitoba, Saskatchewan and Alberta in legislating rules governing sales of incidental insurance, which refers to coverage sold in conjunction with related products and services provided by people who are not fully licensed agents.
Common examples include travel insurance sold by a travel agent and funeral-expense insurance sold by a funeral director.
B.C. also is moving toward a restricted licensing regime, having launched a consultation on the subject in late 2022. The ICBC began developing a new licensing framework in May 2023.
What’s on tap for 2024 and beyond
B.C. continues to develop its framework, and will consult stakeholders as needed. Once the licence framework is finalized, it will be submitted to the province’s minister of finance for approval. Implementation would follow.
Potential impact for insurance advisors
Restricted licensing has not led to material challenges for fully licensed insurance agents in provinces in which restricted licensing already exists. Some industry observers have applauded the expansion of the legislation, saying it opens up consumer choice and leads to more uniformity across Canada.
However, industry groups warn that regulators must carefully monitor suitability and coercive selling tactics under such a regime.
Seg funds: What to watch
FSRA now asks insurers to scrap the deferred-sales-charge (DSC) option for new deposits to existing segregated fund contracts if possible. If the DSC option can’t be dropped, insurers must provide investors with disclosure to help them determine whether to continue making deposits.
FSRA permits insurers to simplify the information they provide clients when offering a new sales charge option that is “better than a DSC in every way.” Notably, upfront commission structures do not qualify for this disclosure relief.
The national insurance regulatory groups also are planning to issue guidance on the ways seg funds should be sold and serviced by insurers and intermediaries.
The DSC ban did not include a ban on upfront commissions (a.k.a. advisor chargebacks). This structure requires advisors to repay part of their commission to the fund company if the investor redeems their units before a certain date.
However, regulators believe these structures risk causing harm to clients, and are developing guidance on the sorts of controls required to ensure fair treatment of clients. (Securities regulators are also reviewing the use of chargebacks for mutual funds.)
And a reminder: total cost reporting rules for seg funds are expected to take effect on Jan. 1, 2026, with investors expected to receive their first reports under the new rules in 2027, for the year ending Dec. 31, 2026.
MGA supervision in the spotlight
FSRA closed a consultation in February on proposed targeted guidance for insurers, life agents and managing general agencies (MGAs).
The proposal, which clarifies the conduct FSRA considers when determining licensing suitability, was issued following regulatory examinations that exposed an array of troubling business practices.
“[FSRA] uncovered some things that made them uncomfortable and were not great for consumer protection,” Ammerman said. “So, what they’re trying to do is create some more specific guidance around that, tailored to what each of the [insurance] entities needs to do.”
For example, the proposal clarifies that MGAs are responsible for ensuring their directors, employees and agents comply with all regulations.
Ammerman doesn’t expect FSRA’s proposal will change much after the regulator considers the comments. “Suitability criteria are already set out in the Ontario Insurance Act, so it’s FSRA’s interpretation of the legislation that’s already out there,” she said. “They’re focusing on what MGAs need to do specifically, versus agents themselves versus the insurer.”
The guidance from FSRA is more specific than before, Ammerman said, which she hopes will minimize the risk that some responsibilities fall through the cracks.
“The insurance company has ultimate oversight over everything, but it’s difficult for them to wrap their arms around the totality of what they need to pay attention to,” she said. “Going forward, [hopefully] each of the entities knows what they’re responsible for and how to have proper oversight over the entire system.”
Ammerman said improved guidance could lead to improved outcomes: “I do think this will cause the industry to take a deeper look at what’s happening.”
Recent developments in MGA supervision
Oversight of MGAs has been building across Canada over the past decade, Ammerman said.
British Columbia first introduced guidelines for MGAs in 2012, then refined them in 2022 after finding “differing interpretations of the roles and responsibilities of life insurance agencies holding different insurer/agency contracts. This has resulted in inconsistent compliance and oversight of the distribution of insurance by life insurance agencies.”
In addition to the ICBC’s 2022 update, other regulators have recently issued guidance concerning MGAs:
- On Jan. 1, 2020, a new insurance act and regulations came into force in Saskatchewan requiring MGAs and third-party administrators — not just insurers and agents — to be licensed. Saskatchewan was the first jurisdiction in Canada to enact this requirement, Ammerman said.
- On Feb. 1, 2023, new rules came into effect in New Brunswick requiring MGAs to obtain intermediary licences.
On April 24, 2023, the Office of the Superintendent of Financial Institutions (OSFI) issued Guideline B-10, which states that OSFI expects institutions to “manage the risks related to all third-party arrangements and emphasizes that [institutions] retain accountability for business activities, functions and services outsourced to a third party.”
This article appears in the May issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.