Regulator to review client relationships

Says Grant Swanson, FSCO’s acting superintendent of insurance: “We want to know what happens at the kitchen table, if you will.”

The major focus of the review will be to examine the processes life insurance agents use when making recommendations to clients and how the agents ensure those recommendations are suitable for those clients. FSCO also will look at the processes that insurers employ in creating and distributing their products.

Although insurers and managing general agencies are part of a life insurance transaction, the FSCO review targets the sales activities of life agents because they are closest to the clients, says Ed Skwarek, vice president of regulatory and public affairs for Advocis, based in Toronto.

“Since insurers and MGAs aren’t at the kitchen table,” says Skwarek, “they place a lot of trust in the advisors that are out there working to establish deep relationships with clients to understand their needs and service them properly.”

For compliant brokers, says John Dargie, president of Mississauga, Ont.-based Independent Financial Brokers of Canada, “As long as they are doing things right, they shouldn’t have a problem with this.” The IFB is a not-for-profit association that educates and represents independent brokers in Canada. “FSCO’s review is a part of the compliance due diligence that the industry should be doing more of anyway.”

Brokers that are dually licensed to sell mutual funds have become accustomed to being audited by the Mutual Fund Dealers Association of Canada, Dargie adds: “The MFDA does a lot of audits, so [life agents are] well prepared for other regulators to do the same.”

As part of the FSCO review, life agents will be asked for their client files so the regulator can examine the notes and documents the agents keep regarding their client correspondence.

“The idea here,” says Swanson, “is for us to see what actions the agents have taken to ensure they understand the needs of the client, to ensure the client understands the product that [he or she] bought.”

Advisors are required to keep records of their communications with clients. But the reality, says Lawrence Geller, president of L.I. Geller Insurance Agencies Ltd. in Campbellville, Ont., is that “most agents are running so fast to make a living, they don’t always keep up their rigour in maintaining those types of records in a client file.”

Geller recommends that agents keep logs of client conversations, as well as ensure that clients sign a “letter of engagement” whenever entering into a conversation about a specific need or product.

Making sure that clients understand the products they are buying and how their needs are being fulfilled is a part of advisor best practices at Advocis, says Skwarek: “Members should feel confident in keeping track of that type of communication, since it is a part of their code of ethics, ongoing training and continuing education as an Advocis advisor.”

Meanwhile, Skwarek adds, Advocis has no specific rules regarding how advisors should go about maintaining their client files: “This is really up to them.”

In line with the provincial and federal governments’ focus on financial literacy, FSCO also has made financial literacy part of its examination of the insurance sector. The review “will also consider the actions life insurance agents and companies are taking to support the financial literacy of their clients.”

This the first time financial literacy has been formally included in the regulator’s objectives, notes Swanson: “A few years ago, there wasn’t any discussion of financial literacy. But expectations have changed.”

FSCO will investigate whether advisors are helping their clients understand life and health insurance products, which have grown in complexity over the years, says Byren Innes, senior vice president and director with Toronto-based insurance consultancy NewLink Group Inc. “The reality,” he says, “is that most good advisors are already spending a large amount of their time educating their clients and ensuring that the products they sell are suitable. However, [this] isn’t mandatory.”

In addition to examining the market conduct of life agents, FSCO also plans to review the final recommendations of the Canadian Council of Insurance Regulators on the role and responsibilities of managing general agencies. The CCIR’s review of the independent channel began last February, and its final paper is expected to be released this month.

It’s anticipated that FSCO will focus on the insurance companies’ role in the independent channel, says Doug McLean, executive director, insurance, with the British Columbia-based Financial Institutions Commission, “[and] adopt a position in line with the CCIR that insurers are ultimately responsible for the transactions conducted on their behalf.”

The Insurance Council of British Columbia called for tighter supervision of life agents in its January paper on MGAs, suggesting that MGAs have a duty to ensure an agent’s experience fits the products he or she sells. Based on what the CCIR says, FSCO will review this area.

FSCO also intends to work with the Ontario government to implement administrative monetary penalties in the life insurance sector, as is outlined in the province’s 2012 budget.

Such penalties, known as AMPs, are a regulatory tool that allows a regulator to charge fines for minor administrative or general offenses without a hearing process. Ontario’s Insurance Act does not allow AMPs, so FSCO must go through a tribunal process each time it wishes to fine an individual or corporation.

“If and when the legislation is amended,” Swanson says, “AMPs [will] allow us to be more timely in our actions, as well as more flexible when we discipline.”IE

© 2012 Investment Executive. All rights reserved.