Insurance agents prepare now for tougher compliance standards

“Over the past decade, there’s been an increasing muddying in the distinction between what we used to call the four pillars of the Canadian financial services industry,” said Lawrence Geller, president of L.I. Geller Insurance Agencies Ltd. For instance, he pointed out that many banks, credit unions and trust companies are now selling insurance products and mutual funds, while insurance companies are more commonly getting into the investment business.

The role of advisors has similarly evolved to encompass a much broader set of activities, said Ralph Cuervo-Lorens, litigation partner with Blaney McMurtry LLP.

“Not surprisingly, we’ve seen a muddying, a mixing up, a confusion, and an evolution of the role of the financial advisor,” he said. “Many of you have multiple roles; many of you have multiple licenses.”

Insurance agents, in particular, are expanding into investment products in far greater numbers, according to Barry Papazian, barrister and solicitor with Papazian, Heisey, Myers.

Regulators have struggled to keep up with these industry changes, the panelists said. “The regulation, and the law, has not kept pace with that evolution of the business,” said Cuervo-Lorens.

Indeed, since each of the four pillars of the financial services business has historically been regulated in a very different way, this trend presents major challenges from a regulatory perspective, Geller said.

“There’s no longer a level playing field, where the consumer can expect the same nature of regulation of everyone who sells any given type of product,” he said.

However, the panelists noted that regulators have begun taking steps to level out the regulatory requirements across the board. For instance, Papazian pointed out that the Financial Services Commission of Ontario (FSCO) recently launched a suitability review of insurance agents, which could lead to new suitability rules, similar to the ones facing investment advisors.

“Ultimately, I see a trend there towards similar documentation of that exchange between clients and advisors, dealing with risk tolerance, knowledge, assets and so on,” Papazian said.

For advisors, this will likely mean more rules, paperwork and oversight. “There’s this trend to a higher level of compliance requirements, and a higher level of supervision,” he said.

Given the likelihood that they’ll face new requirements, advisors should get into the habit of going above and beyond the compliance standards that they currently face, the panelists said. They suggest keeping detailed notes of all client meetings and conversations. In particular, advisors need to be able to demonstrate that they’ve appropriately assessed each client’s level of investment knowledge, and thoroughly explained any products that they’re recommending.

“It ultimately comes down to having to justify that this product was understood by the [client],” said Papazian. “You’ve got to be very compliant.”