FSRA tightens the screws on seg fund DSCs

The Financial Services Regulatory Authority of Ontario (FSRA) is moving ahead with a rule change that cracks down on the use of deferred sales charges (DSCs) for investors with existing segregated fund contracts.

The regulator is adopting an amendment to its conduct rules that will require insurers to scrap the DSC option for future deposits to existing seg fund contracts, if possible. In cases where the DSC option can’t be dropped, the rules will require insurers to provide investors with disclosure to help them determine whether to continue making deposits.

The revised rule will also require companies to give investors disclosure about their options for seg fund contracts where the DSC has been eliminated.

The tougher rules around DSCs are intended to beef up conduct standards and enhance consumer protection.

FSRA has already adopted rule changes designed to curb the use of DSCs by seg funds, in line with the policy approach taken by the Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO), amid concerns about “the high risk of poor consumer outcomes associated with DSCs” in the sale of seg funds.

Insurance regulators sought to largely eliminate DSCs in new seg funds following the adoption of a ban on DSCs by securities regulators that took effect on June 1, 2022.

However, FSRA concluded that it was necessary to “create more customer protections with respect to DSCs” — namely protections for investors with existing seg fund contracts.

The move to adopt the rule changes follows two rounds of consultation on the proposals. FSRA has now submitted the rule changes to the provincial Minister of Finance for approval. The new requirements would take effect on March 23 if approved.

The initial consultation on the proposed amendment closed in early 2023, and a second consultation was carried out after regulators made material changes to the initial proposals.

According to FSRA’s notice detailing the changes, the CCIR and CISRO are also planning to issue guidance on how seg funds should be sold and serviced by insurers and intermediaries.

The guidance will “go beyond disclosure” and help ensure seg fund contracts, seg fund selections and other transactions such as beneficiary designations “will be suitable for customers,” FSRA said.

In that same notice, FSRA stressed that insurers are expected to treat customers fairly. “[R]emoving non-DSC options so customers could only make deposits to existing contracts on a DSC basis would not be considered treating customers fairly,” it said.