The Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) released proposed segregated funds guidance for consultation on Jan. 8, 2025. The insurance regulators have invited industry stakeholders to provide comments on the draft guidance by April 8, 2025.
The guidance raises expectations for insurers and distributors regarding the design, sale, and servicing of segregated fund products.
The CCIR and CISRO aim to establish uniform rules across Canada that will offer consumers consistent protection, whether they invest in segregated funds or mutual funds.
“This guidance closes gaps in the conduct standards related to the sale and servicing of IVICs (individual variable insurance contracts) as opposed to mutual funds, ensuring that customers are treated fairly,” says Huston Loke, chair of the CCIR.
“The proposed CCIR/CISRO Consolidated Segregated Funds Guidance creates a consistent national standard for insurers and intermediaries, to be implemented by each province and territory,” adds Patrick Ballantyne, Chair of CISRO.
Four key areas of focus
Regulators have identified four areas where expectations regarding segregated funds will be tightened:
- Know your customer, know your product, needs analysis and recommendations.
- Robust controls around the use of a sales charge option in which an insurer pays an intermediary for selling segregated fund contracts and requires the intermediary to repay some or all of the commission if customers withdraw money within a specified time (also called advisor chargeback sales charge option).
- Segregated funds total cost reporting, as stated in the final guidance published April 20, 2023.
- Corporate governance, segregated fund administration and financial matters.
Addressing potential conflicts of interest
By demanding robust oversight of segregated funds with commission chargeback options, regulators are reinforcing a stance they expressed in May 2023. They had voiced concerns that, without proper controls, less experienced or lower-income advisors might be tempted to sell unsuitable products to clients.
Under the current proposal, CCIR and CISRO expect insurers offering segregated funds with chargeback commission options to have and maintain controls that ensure fair treatment of clients. These measures must also identify and manage “actual or potential conflicts of interest” associated with this option.
Insurers will also be required to offer alternative acquisition fee structures alongside chargeback options, as well as another class or series of the same segregated fund with different fee structures.
Additionally, they must ensure that commissions offered to advisors for selling funds with chargeback options are comparable to the commissions for selling other funds with alternative fee structures in the same category.
A positive outlook for distribution
Responding to questions from Insurance Portal, François Bruneau, vice president, administration, at the managing general agency Groupe Cloutier, called the consultation process good news for the segregated fund industry. “This compensation model will be preserved going forward,” he says.
Bruneau identifies two key benefits of the chargeback commission model:
First, it helps new advisors enter the industry “by providing them with immediate income, compared to standard service fees, which are collected gradually on a monthly basis.”
Second, Bruneau explains that the chargeback model enables advisors to serve modest investors. “This immediate compensation makes it easier for advisors to profitably work with clients who have fewer assets,” he adds.
