MGA association unveils project to address rising compliance demands

By Donna Glasgow | November 12 2010 02:25PM

An association for managing general agencies is developing a four-phase solution intended to help its members deal with proliferating compliance demands. Peter Lamarche, President of the Canadian Association of Independent Life Brokerage Agencies (CAILBA) and President of Blonde and Little Financial Services, presented the project for the first time publicly to an audience at the Insurance and Investments Convention held Nov. 9 in Montreal.

In the last couple of years, MGAs have had to deal with numerous new compliance demands such as the Privacy Act, the National Do Not Call List, anti-money laundering rules, disclosure requirements and more, explained Mr. Lamarche. As well, regulators are expected to soon release a national paper on MGAs. 

And, insurers are stepping up the pressure with verifications of MGAs’ compliance policies and procedures, Mr. Lamarche added. “The insurers now are coming along and starting to conduct audits, surveys, changes of contracts.”

In addition, “the proliferation of litigation that the insurance side of the business is now seeing” is also making compliance a front-burner issue for MGAs. “Up until recent years, litigation seemed to be limited to the securities side. But we’re seeing more and more of that,” he explained.

All of these factors have made it “painfully evident” that MGAs must have formal compliance regimes, but such regimes take time and money to build and maintain, which would be onerous for many MGAs. To help its members, CAILBA asked itself “why would we do this individually?” Mr. Lamarche said. As a result, last month, CAILBA’s board passed an initiative to build what it calls CAILBA’s Compliance Toolbox.

This toolbox will be a service provided to CAILBA’s 50 members, which represent about 75 to 80% of all production from the independent channel. Broken down into four phases, this project will, in phase one, supply MGA members with a generic set of compliance documents, policies and procedures that MGAs can use for all compliance and diligence issues.

“The idea was, in the simplest terms, if you were a modest or small sized MGA you simply take these forms, these contracts, plug your corporate name in, identify who your officers are, adopt all the recommendations in the procedures manual to implement these things, and you would have a very strong foundation and basis for building your own internal compliance module,” Mr. Lamarche explained.

He says the Compliance Toolbox could save CAILBA members a great deal of money. “If you were to build this from the ground up as an individual MGA, excluding the cost of compliance officers or systems, you’d probably be looking at a cost of $50,000 to $100,000 just to put these things together.” There will be no cost for CAILBA members to access the compliance materials beyond their usual membership fees. The scheduled launch of this phase of the project is spring 2011.

Mr. Lamarche adds that large MGAs generally already have compliance regimes in place, but they are still backing CAILBA’s project since they see a value in it as a benchmark that they can use to compare their own systems.

The second phase of the project is to provide ongoing compliance consultation support and customization of a firm’s compliance regime. The third phase will involve maintaining and updating the Compliance Toolbox information. And, the fourth phase would be aimed at developing a “CAILBA Accredited Compliance Standard.”

If CAILBA can successfully develop its project to this point, Mr. Lamarche says MGAs may be able to leverage compliance accreditation with insurers for better services, faster turnaround times, fewer audits, and perhaps more compensation. Agents would also value working with an MGA that held such accreditation, he said.

Mr. Lamarche says CAILBA’s approach to the compliance issue is all about managing business risk. “We may not like the changes we need to make. We may not enjoy it. We may not like the litigation and the liability…but we better respond to it.” He added that MGAs should respond from a perspective of managing business risk because, “if you have ever been involved in anything relative to a compliance-related client complaint or litigation, you know those costs come right off your bottom line.”

Impact on advisors

Why would advisors care about this project? Mr. Lamarche says that when it comes to compliance, advisors and their MGAs are in it together. “There is vicarious responsibility and liability between advisors and their distributors. If you are with a distributor who is poorly organized and doesn’t have processes and procedures in place…you should be concerned.”

Mr. Lamarche added that it is natural for MGAs and advisors to resist the increasing burden of compliance, but he recommends they don’t hold back on putting necessary procedures in place. “I’m going to suggest that you really should take a look at how you’re doing your business and if you were sued tomorrow or challenged tomorrow on your practices, would they stand up to the test of a third party?”

Insurer audits

Mr. Lamarche also revealed that CAILBA is working on another project to make life easier for MGAs who have recently been inundated with compliance-related surveys from multiple insurers.

“Ourselves, in consultation with the Canadian Life and Health Insurance Association (CLHIA), are now working on a draft of a common survey audit that all of the insurance companies would subscribe to.” The goal of this project is to allow MGAs to complete one survey which would then be available to all the insurance companies with which they do business.