Suitability review finds room for improvement: FSCO

“A combination of economic uncertainty and the growing complexity of financial innovation have made products less transparent to consumers, and some products have unique or complex features that may not be well understood by consumers and intermediaries,” said Neil. “All of this increases the potential for unsuitable sales transactions.”

A random sample of 1,348 life insurance agents completed the suitability review survey, and FSCO had more in-depth face-to-face discussions with a small sample of agents.

“While both the questionnaire results and the face-to-face meetings indicate that best practices are largely being followed,” Neil said, “the same results did indicate areas for improvement.”

The results indicate that most agents are engaging in a comprehensive sales process that involves collecting pertinent details about the client and his or her insurance needs.

Of the agents surveyed, 98% said they engage in a fact-finding mission either always, or most of the time, to gather as many relevant details as the client is willing to provide, in order to assess his or her financial situation. In addition, 90% of agents said they conduct a needs assessment to determine the client’s insurance needs, and use this assessment to determine which products to recommend to clients.

A vast majority of advisors are also consistently providing clients with information about the products and services that are recommended, and are discussing alternative options in cases where clients cannot afford the recommended product.

However, the results show that many advisors are failing to appropriately document these processes, Neil said. Of those surveyed, roughly 30% said they either do not conduct a needs assessment, or conduct it only verbally, rather than putting it in writing.

“Most point of sale activities are still done only verbally, with no supporting records of those discussions,” Neil said. “Only 53% of agents indicated that their sales practice activities are in writing.”

Advisors are also falling short of their conflict of interest disclosure requirements under the Ontario Securities Act, according to Neil. Only 90% of the agents surveyed said they always disclose to clients any potential or actual conflicts of interest, and this disclosure is provided in writing only 51% of the time.

“This means that 10% of agents still do not always disclose any potential or actual conflicts of interest to their clients,” Neil said. “In addition, in almost half of the cases, those who disclose are not providing written disclosure, as required by the law.”

Added Neil: “It is the superintendent’s expectation that all agents comply with the law and provide written disclosures of conflicts, or potential conflicts of interest, 100% of the time. It is important for agents to note that where best practices may specify minimum performance standards, they do not supersede regulatory requirements.”

Regulatory representatives from other provinces said the results of FSCO’s review are likely indicative of the sales practices in place not only in Ontario, but across the country.

FSCO plans to publish a full report of the suitability review findings, and expects the industry to address the compliance gaps that were revealed. Since the review did not include a qualitative assessment of the insurance sales process, Neil said regulators will likely take additional steps to further evaluate suitability practices.

“Further work is necessary to assess whether or not the consumers are getting good advice, and suitable products,” she said.

The suitability review survey was mandatory for agents who were selected to participate, and although a majority of agents completed the survey, slightly less than 100 agents did not respond, and will likely face an administrative monetary policy as a result, according to Neil.