Insurance regulators state their intentions regarding seg fund compensation

The Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) jointly issued a statement May 15, revealing the conclusions they’ve reached regarding upfront segregated fund compensation and advisor chargebacks, in particular.

The regulators published the CCIR and CISRO discussion paper on upfront compensation in segregated funds in the fall of 2022. Based on the results of that consultation, the interjurisdictional associations of regulatory authorities have drawn a number of conclusions, discussed in the statement, and have released the plans of action that they intend to pursue.

They say without appropriate control measures there is a risk of customer harm if insurers pay intermediaries for selling individual variable insurance contracts (IVICs) but require the intermediaries to repay commissions if clients withdraw money early.

“The insurance industry believes the advisor chargeback gives some customers a way to access advice and that there may be unintended negative consequences if this option is banned,” they acknowledge, but add that the risks posed by such practices require, at a minimum, certain control measures to ensure customers are treated fairly when the option is used. 

To help, the regulators say they are developing expectations and guidance regarding the design, sale and servicing of IVICs, and plan to publish the draft guidance for public comment.

“CCIR and CISRO believe that the risk of negative outcomes of upfront commissions such as advisor chargeback in segregated fund sales, call for, at a minimum, robust risk control measures and regular reviews of the effectiveness of these controls,” they write.

They add that insurers offering the advisor chargeback sales charge option should manage the conflict of interest by using shorter duration chargeback schedules, by permitting a portion of investments to be redeemed without incurring a chargeback and by avoiding time-limited increases to commission payments for promotional purposes. “The CCIR and CISRO are also working on expectations on standards of care for the sale and servicing of segregated funds,” they add saying control measures should ensure customers receive suitable advice, manage risks associated with leveraging and provide appropriate product training to ensure that products are suitable for targeted clients.

“CCIR and CISRO remain concerned that advisors (in particular, inexperienced advisors) may sell products such as IVICs to customers for whom the product is not suitable,” they state.

“We recognize that there are many connections between product suitability and conflicts of interest involved with compensation, and believe it is important to release guidance that deals with both aspects, to provide comprehensive conduct expectations,” they add. “Stakeholders will have an opportunity to comment on both sets of measures during the consultation period for the market conduct guidance.”