Insurance industry weighs in on fund facts debate

It’s been almost 10 days since the comment period for the new “fund facts” document closed, but people are still talking about the problems surrounding the proposed two-pager.

“The way this is being proposed is impractical,” says Leslie Byrnes, vice-president of distribution for the Canadian Life and Health Insurance Association.

Byrnes was speaking to a packed house at the Independent Financial Brokers conference in Toronto on Tuesday. Her issues are similar to those expressed by the mutual fund industry — such as problems surrounding the timing of the document’s delivery — but she also voiced some concerns unique to the insurance industry.

On the mutual fund side, advisors would be required to deliver a two-page document that simplifies details on MERs, a fund’s makeup, and the risks associated with the fund, but the insurance industry is required to provide two point-of-sale documents — the fund facts document and a key facts paper for individual variable insurance contracts (IVIC). This means that insurance advisors will have to have a number of different documents on hand.

“Let’s say you represent five companies, and you’re offering the IVICs that they have, and there are 40 funds available in each IVIC — you’ll be required to carry around hundreds of fund facts to make sure you have the right one that the customer might choose that day,” says Byrnes.

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With such an enormous amount of paper to lug around, Byrnes wouldn’t be surprised if advisors wanted to carry only the documents to funds that they deemed the most important. But that approach brings up a host of problems.

“You’re not going to carry around hundreds of fund facts, so maybe you’ll say, ‘OK, these are the five funds I like in that IVIC, and so I’ll recommend that to the customer,'” explains Byrnes. “If that happens, you’re only providing a few options, and not providing the options that the client has a contractual right to. That’s when it becomes a liability issue.”

Another issue for the insurance industry is that the fund facts document is “very prescriptive.” Byrnes argues that there should be more flexibility with what the document says. Right now, everything, even the font, has been pre-determined by the Joint Forum of Financial Market Regulators, the group tasked with designing the two-pager. “The Joint Forum sets out very specific info that needs to be in these documents. That cuts down on innovation,” she says. “It’s a very rules-based approach, and we’re not sure that’s the best, most effective way to go on this.”

Like the mutual fund industry, the insurance community is concerned about when the fund facts and key facts documents need to be delivered. As it stands, the papers must be delivered at or before the moment of sale. Byrnes says this could interrupt sales over the phone, since the advisor would have to mail or e-mail the document before the transaction could proceed.

An even greater issue for Byrnes is that a new fund fact has to be delivered before every subsequent transaction. “The delays that will entail mean you’ll be left with very frustrated customers,” she says.

Byrnes points out that the proposed framework assumes all customers are the same — that none of them do any research into a fund beforehand. “It takes away customer choice and puts all of them in the same basket,” she says. “It’s fairly paternalistic, and they don’t even have the option to waive receipt of this.”

CLHIA has come up with some ways to remedy the insurance industry’s problems with the fund facts and key facts documents. First of all, Byrnes says the Joint Forum needs to take a principles-based outlook to regulation. Secondly, adopting a fund family approach to the point-of-sale papers would cut down on the various fund facts that advisors need to have on hand.

The CLHIA developed a four-page paper that combines the key facts and fund facts documents. “It puts everything in one place, and it’s fairly easy for the consumer to understand,” says Byrnes. “And you know you’re presenting the full information at the point-of-sale, but you’re not carrying around hundreds of fund facts.”

During the IFB presentation, Byrnes was asked why the fund facts document tries to equate mutual funds with segregated funds when they’re two different products.

“The fundamental answer is that regulators don’t clearly understand the difference themselves,” she explains. “As an industry, we need to be clear about what differences there are. And when the regulators truly understand the differences better, they may be more inclined to take an approach where there is similar but not identical regulation.”

Despite Byrnes’s issues with the point-of-sale documents, she does say that it’s “way better” than the executive summary that already exists. She’s especially enamoured with the two-pager’s “crisp, consumer-friendly” layout. “It’s short and sweet and customers are more likely to understand what they have.”

So what happens now? Byrnes says the Joint Forum will likely issue another paper in the spring, but until then it’s important that the regulators and the insurance industry continue talking. “They have to try and work through an approach that will make sense for our industry and for advisors and consumers. But it’s important the industry be engaged in that process before the next paper comes out.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(10/24/07)