rules and regulations written on folder

Insurance advisors are grappling with growing compliance requirements. Over the past decade, insurance watchdogs, both global and domestic, have ramped up their efforts to protect consumers.

The latest development is the inaugural report from Canada’s Fair Treatment of Customers (FTC) working group. This group was formed after the Canadian Council of Insurance Regulators (CCIR) stated in its 2017-’20 strategic plan that customer needs and rights will be a priority. In September 2018, the CCIR and the Canadian Insurance Services Regulatory Organizations released Conduct of Insurance Business and Fair Treatment of Customers (an FTC guidance), which lays out conduct recommendations for provincial insurance regulators.

Those recommendations include specific references to the proper handling of conflicts of interest, as well as advice on how to disclose product information. Insurers and intermediaries also are urged to place “customers’ interests ahead of their own.”

A statement from the FTC working group, released on Nov. 4, indicates that insurance stakeholders are working on ways to “promote and advance” the FTC guidance. As of November, eight jurisdictions had crafted and adopted standards related to the FTC guidance.

However, the working group’s report states, “It can be challenging to measure objectively and demonstrate an existing, evolving and ongoing commitment” to the guidance. Furthermore, there “may be a disconnect” in the front-line broker community, creating a barrier to adoption.

The current FTC guidance isn’t final: the working group is reviewing insurer incentive programs that award “top-selling intermediaries” and “create an obvious conflict by their very nature.” The working group also expects to add a clarification to the best-interest concept.

Insurers, agencies and the advisors who work with them haven’t felt the full impact of the FTC guidance as yet for two main reasons.

First, work related to the guidance “is in early stages,” with organizations still trying to incorporate the FTC recommendations, says Eric Wachtel, co-chair of regulatory and legislative issues at the Canadian Association of Independent Life Brokerage Agencies (CAILBA) and national chief compliance officer with Mississauga, Ont.-based IDC Worldsource Insurance Network Inc.

Second, insurance advisors and firms already have adjusted their practices to reflect client- focused industry guidance released in 2016 by the Canadian Life and Health Insurance Association Inc. (CLHIA), CAILBA and other groups. That document, The Approach: Serving the Client Through Needs-Based Sales Practices, includes guidance on providing proper disclosure to clients and setting clients’ expectations through delivering documents such as Reasons Why letters that explain product suitability.

As a result, Wachtel says, “We already see increased audit activity of advisors.”

For example, the Financial Services Regulatory Authority of Ontario and insurance carriers have been actively conducting reviews of how advisors’ practices compare with The Approach, Wachtel says, noting that “carrier audits are much more frequent.”

The rise in the frequency of audits also is a product of the CCIR’s 2017 requirement for companies to submit annual statements on market conduct, Wachtel adds.

Lisa Lawlor, director of distribution practices with Kingston, Ont.-based Empire Life Insurance Co., says an increase in company-driven audits of intermediaries, such as managing general agencies and brokers, “really brings compliance to the forefront. [Reviews] help advisors understand their obligations, and we’re getting better at explaining [those obligations].”

Lawlor notes that audits must be annual and random, per industry guidelines, and says the FTC guidance represents a “codification of current practice; all of the things we’ve been doing all along, as an industry, have been based on fair treatment of the customer.”

While the insurance industry has largely accepted heightened compliance requirements, the FTC guidance is useful, says Wachtel: “There can be a tendency by some advisors to view the compliance procedures of The Approach as ‘red tape’ that serves no purpose. But, when viewed within the context of FTC, advisors can understand the ultimate goal of ensuring customers are treated fairly.”

Earleen Moulton, vice president of compliance with London, Ont.-based BridgeForce Financial Group Inc. and a CAILBA board member, holds a similar view: “For a lot of advisors, you might be tweaking your process, but it is business as usual. There are some [advisors] who, for too many years, have been missing too many steps [with clients]. That’s why [regulators] are trying to all talk about the same things.”

The changing regulatory landscape requires “a bit of a change in [advisor] behaviour,” Moulton adds, “and [advisors] do have to spend more time on compliance – and there’s no way to get around that. The stakes are higher, but once [advisors] get their practices in place, then it’s just maintenance.”

Wachtel foresees a bigger shift. Greater client engagement has “widened the field of view [of advisors], often turning what might have been just a product sale into more of a planning trail,” he says. “Emphasis on the FTC [guidance] has not yet translated into new documentation requirements or steps for advisors.” However, he adds, those advisors who are following The Approach already offer more in-depth services for their clients.

As wealth planning becomes more prominent for insurance advisors, gaps between securities- and insurance-focused advisor regulation could shrink. Across the entire financial services industry, “there’s generally more focus on the importance of fair outcomes for consumers, which ultimately benefits the [industry],” says Brent Mizzen, assistant vice president of market conduct policy and regulation with CLHIA in Toronto.

Lawlor, too, foresees convergence of advisor requirements: “There are a lot of similarities between [insurance and investments]. The end goal for both is the customer having what [he or she] needs.” However, there are also “natural differences” in how advisors and companies operate in each space, she adds.

As the FTC working group continues to look at areas to improve, Moulton hopes the industry will pause periodically to assess the impact of evolving insurance guidance. “We can’t continue to be out of step” with investment disclosure practices, she says, especially because products such as segregated funds are sold on the same platform as investment products. Says Moulton: “We now have an opportunity to really get on the same page.” IE

Evolution of insurance industry oversight

2006: The Canadian Council of Insurance Regulators (CCIR) and Canadian Insurance Services Regulatory Organizations (CISRO) endorsed three principles for managing conflict of interest, agreeing that the industry should develop approaches to address the principles.

2011 (Oct.): International Association of Insurance Supervisors (IAIS), a group of supervisors and regulators from nearly 140 countries, adopted Insurance Core Principles (ICPs).

2012 (Oct.) to 2018 (Nov.): Twelve of the ICPs were updated, including ICP 18 and 19, which deal with insurance intermediaries and their codes of conduct.

2015: The Ontario government launched a review of the Financial Services Commission of Ontario (FSCO) and the Deposit Insurance Corporation of Ontario (DICO). In same year, CCIR and CISRO developed a co-operative approach, using the ICPs as reference.

2016 (March): The Ontario Ministry of Finance released its final review of FSCO and DICO mandates and suggested significant regulatory changes for financial services industry oversight in Ontario.

2016 (Nov.): The Canadian Life and Health Insurance Association, Advocis, the Canadian Association of Independent Life Brokerage Agencies and the Independent Financial Brokers of Canada released The Approach: Serving The Client Through Needs-Based Sales Practices — a response to the CCIR and CISRO principles from 2006. The Approach was preceded by a public policy paper on promoting a customer-focused system, released in the spring.

2017 (Feb.): CCIR unveiled its annual statement on market conduct, due for the first time that spring, as way to collect information on insurance industry practices and conduct.

2017 (June): The Ontario Ministry of Finance appointed the first Financial Services Regulatory Authority (FSRA) board.

2018 (April): The FSRA CEO was named and the first progress report released from the regulator.

2018 (May): CCIR and CISRO released draft joint guidance on industry expectations based on the global ICPs. The guidance was out for comment until mid-June of that year.

2018 (Sept.): CCIR and CISRO released final joint guidance on industry expectations called Conduct of Insurance Business and Fair Treatment of Customers. At same time, FSCO released similar guidance.

2019 (Jan.): FSRA published its draft 2019-20 priorities.

2019 (June): FSRA assumed FSCO’s responsibilities, and the CCIR executive committee representative for Ontario changed.

2019 (July): By this time, eight jurisdictions had adopted and created guidance related to the fair treatment guidance, with the remaining five at various stages of implementation.

2019 (Oct.): FSRA issued a new guidance framework to standardize oversight on a pilot basis through March 2020. 

2019 (Nov.): The fair treatment guidance working group, first mentioned in CCIR’s 2017-2020 strategic plan, released its inaugural communique. The statement discussed industry questions about the guidance and the group’s focus going forward.