Insurance regulators are considering new disclosure requirements for segregated funds in order to avoid any potential regulatory arbitrage between seg funds and mutual funds, said Patrick Déry, superintendent, solvency with the Autorite des marches financiers and chairman of the Canadian Council of Insurance Regulators (CCIR), at the Canadian Association of Independent Life Brokerage Agencies’ (CAILBA) national conference in Niagara-on-the-Lake, Ont., on Wednesday.
Specifically, Déry pointed out during a panel discussion of regulators at the CAILBA conference that the new disclosure requirements introduced under the second phase of the client relationship model (CRM2) have created a potentially imbalanced playing field as they apply to mutual funds, but not seg funds.
“The introduction of those new requirements, that are starting this summer, raise questions of [whether] there are new issues, new gaps in the regulation of seg funds and mutual funds,” he said.
So far, there’s no evidence of regulatory arbitrage, Déry said, as regulators haven’t noticed either a change in market share between seg funds and mutual funds, or a significant number of advisors swapping their mutual fund licences for insurance licences.
Nevertheless, the discrepancies in the product disclosure could create confusion for clients, he said: “From the consumers’ standpoint, regulators are of the view that it makes sense when you are shopping for products or receiving advice, that the type of information and the quality of information you receive should be quite similar.”
Given that there are differences between mutual funds and seg funds, however, disclosure for the two products should not necessarily be identical, Déry, said, adding that the CCIR does not intend to replicate CRM2 requirements for seg fund products.
“Seg funds are not mutual funds,” he said. “Although the investment part is quite similar, there are some guarantees linked to seg funds that make them more similar to insurance products, for which there is already a lot of regulation.”
Regulators will work to develop disclosure rules for seg funds that meet the same objective as the CRM2 rules while taking into consideration the unique characteristics of the products, Déry said.
The insurance industry supports the idea of providing clients with more disclosure of the costs and fees associated with seg funds, according to Leslie Byrnes, vice president of distribution and pensions at the Canadian Life and Health Insurance Association Inc. (CLHIA).
However, Byrnes said she agrees that seg fund disclosure requires a different approach from mutual funds. The disclosure requirements under CRM2 are not as transparent as they could be, she pointed out, as they carve out the distribution costs from the broader management expense ratio (MER).
“Definitely, it was well-intentioned,” Byrnes said, “but it doesn’t end up being that transparent – it only provides disclosure on part of the cost of owning the product.”
CLHIA recommends that seg fund providers disclose the full MER associated with their funds, breaking it down into the costs associated with administration, distribution and insurance, as well as any additional costs and fees.
“We do support greater cost transparency,” Byrnes said, “but we think it needs to be more meaningful to the customer.”
The CCIR plans to publish a consultation paper this spring to discuss potential methods of closing the gap between mutual fund and seg fund disclosure requirements, Déry said.
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