FSCO updates disclosure guidelines for life agents

(December 2, 2004) Ontario’s life insurance regulator has amended the province’s Insurance Act to include disclosure requirements related to potential conflicts of interest.

The Financial Services Commission of Ontario says that “an agent who holds a life insurance licence shall disclose in writing to a client or prospective client any conflict of interest or potential conflict of interest of the agent associated with a transaction of recommendation.”

As a practical way of interpreting the new regulations, FSCO suggests that life agents ask themselves the following questions:

1. Where an incentive is available, would the advice or product recommendation be different if the incentive did not exist?

2. How would the circumstances appear to a reasonable, informed third party?

“That’s straightforward,” says Grant Swanson, FCSO’s executive director, licensing and market conduct. “If the answer to the question is that you would have never have sold this product if there wasn’t a significant commission differential or that you would qualify for a trip, it’s pretty apparent that has nothing to do with the client’s interest.”

“A conflict will be found to exist where an advisor is influenced by extraneous factors of which the client has no knowledge,” the regulation states. “Conflicts are not in and of themselves illegal, but they must be disclosed to the client.”

“We also go on to say that conflicts of interest are not the only thing agents have to be mindful of,” Swanson adds. “The regulation also talks about coercion and undue influence. It’s really reflecting modern standards of openness and transparency.”

FSCO’s new rules also prohibit an agent from engaging in any other business that could jeopardize his integrity or independence.

“That’s the same standard that RIBO (Registered Insurance Brokers of Ontario) applies,” says Swanson. If agents engage in another occupation, they have to assess whether it’s a conflict, whether the conflict can be eliminated by restricting who is solicited and must declare any other occupations on licence application and renewals.

The new policy also requires disclosure of all distribution arrangements, including the names of all insurers and financial product providers that the agent represents.

There are no changes to errors and omissions insurance requirements (at least $1m) or to continuing education credits (a minimum of 30 hours every two years).

The FSCO update does not address the contentious issue of compensation disclosure for life agents — but Swanson says the regulator is sending out questionnaires on the subject to life insurance firms this week and is asking for responses by December 17.

“We’re asking questions to establish current practices,” Swanson explains. “We’re not taking a view that any particular practice is good or bad. But once we have that in place, it forms a basis for informed policy making.”

FSCO has a team of six staff working full-time on the project and expects to issue a policy on compensation disclosure early in the new year.

Last month, Canada’s property and casualty (P&C) insurance industry agreed to provide full disclosure of how its brokers are compensated, beginning in the new year. The Insurance Bureau of Canada said P&C insurers will be required to provide full disclosure on their websites by January 1, 2005, of information concerning the way in which all sales intermediaries are compensated.

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However, the diverse compensation structures in the life insurance industry make FSCO’s job more difficult.

For instance, some life insurance firms “levellize,” or average out, compensation, so the agent receives roughly the same percentage of premiums every year. Others provide much higher commissions in the first year of a policy, as much as 150% [of the premium] in some cases, with much smaller commissions for subsequent years the policy remains in effect.

Terry Taylor, chief operating officer at Advocis, says he’d be surprised if FSCO requires life agents to get into those kind of specifics.

“It depends how deep you want to peel back the layers of the onion,” he says. “But even if you volunteer to your client that you get most of your commission upfront, there’s a reason for that: not only are you providing services for the client, you are also providing an underwriting service for the insurer. So you’re getting paid for services you perform for both parties, it’s not just selling the policy.”

In addition, life agents are compensated differently depending on the volume of business they generate.

“Most reasonable people will expect that an advisor will be compensated for the advice they give,” Taylor says. “And they also understand that the more business an advisor sends to an insurer, there’s going to some sort of commercial quid-pro-quo between the producers and reps.”

“I don’t think there’s anything wrong with the structure, I think it’s easily defended.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com

(12/02/04)

Doug Watt