Advisor groups critical of proposed new insurance regulations

(August 23, 2005) The already complex web of regulations governing advisors could get a little more onerous, and unnecessarily so, industry groups say, if an insurance review committee proceeds with plans to introduce new legislation related to disclosure of commissions and perceived conflicts of interests.

The Canadian Council of Insurance Regulators (CCIR) and Canadian Insurance Services Regulatory Organizations (CISRO) released the Relationships between Insurers and Sales Intermediaries Consultation Paper at the beginning of the summer and put out a call for comments.

By its own admission, the committee found no problems in the industry during a review of the relationship between insurers and sales representatives. It found that most insurers have written policies and procedures in place to mitigate the potential for conflict of interest, and responses to industry surveys “did not provide evidence of illegal insurance related activity.”

Despite this, the paper goes on to propose a legislative response that would codify the priority of the client’s interest, restrict performance-linked benefits and require extensive disclosure of compensation and ownership arrangements and any other financial interests an advisor might have.

Industry groups say the paper, dubbed “a solution in search of a problem” by some insiders, appears to have been drafted to address issues in the property and casualty (P&C) insurance industry. They say applying the same rules to the life and health side of the industry fails to recognize fundamental differences between the two sectors.

On the life side, for example, compliance officers monitor transactions, underwriters approve a client’s case — considering both health factors and financial suitability — and once a policy is ready for delivery, the client has a 10-day cooling off period to consider the transaction.

Responses to the consultation paper say creating legislation to spell out that a client’s interests come first is redundant in an industry that already has provincial licensing requirements, principles of common law, association codes of conduct, and insurance company policies and procedures in place, not to mention written provisions from various provincial insurance regulators.

“We fail to see the necessity for additional regulation in this area when there already exist clearly stated requirements and standards governing the intermediary-client relationship within the industry,” writes John Whaley, executive director of the Independent Financial Brokers (IFB) association. “IFB’s own code of ethics states first and foremost that it is paramount that a broker shall place the interest of his or her client ahead of all other interests.”

The proposals are “extremely disruptive” Advocis says in its response and could lead to an “exodus” of advisors from the industry, as well as limit consumer choice and hurt customer service.

“We understand that regulators must balance the priority of protecting consumers with that of ensuring the industry is operating efficiently and in a cost effective manner,” says Advocis. “However, it appears counter-intuitive for regulators to now seek to embark on a drive for more regulation in the life and health insurance industry where such an approach is unfounded.”

Whaley points out that the paper also ignores the fact that insurance agents must meet suitability requirements, complete continuing education credits and carry errors and omissions insurance at their own cost.

“That this paper seeks to distill this entire process into a discussion of commission percentages and sales incentives, and furthermore suggests that, because intermediaries are compensated by commission, this create conflicts of interest, is unfair and does not recognize the level of trust between the parties,” he says.

The paper and review of Canadian industry practices was initiated following high profile investigations in the United States in late 2004. Along with the fact that no illegal practices were identified, “there is no evidence to suggest that consumer confidence is weak in the Canadian insurance marketplace,” say the authors of the Advocis submission.

On top of this, industry groups say there are already a number of relatively new self-regulatory initiatives underway, including an extensive package from the Canadian Life and Health Insurance Association and the Joint Forum of Market Regulators, which should be given time to work through the system out before regulators prescribe a new set of rules.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com