Some insurance agents in Ontario are failing to comply with the requirements and best practices related to managing conflicts of interest and, as a result, regulatory changes may be necessary, according to Anatol Monid, executive director, licensing and market conduct division at the Financial Services Commission of Ontario (FSCO), who spoke at the Independent Financial Brokers of Canada’s fall summit in Toronto on Wednesday.
Compliance examinations that have been conducted so far this year have revealed that some insurance agents are not meeting all of their regulatory requirements, Monid said. Specifically, he pointed out that of the 79 examinations FSCO has conducted this year, 10% revealed that agents were not disclosing actual or potential conflicts of interest to their clients in writing, as they’re required to do under Ontario Regulation 347/04.
“Our offsite [compliance review activity] continues to show that there is a lack of statutory written conflict of interest disclosure,” Monid said. “As such, FSCO has to do some assessment about a regulatory response to correct this systemic contravention.”
FSCO first identified compliance deficiencies related to this disclosure rule in a 2013 questionnaire that it conducted on insurance agent suitability practices. At that time, 90% of agents surveyed said they always disclose conflicts of interest and potential conflicts of interest to clients, but only 50% said they always disclose such conflicts in writing, as they’re required to do.
Although the latest numbers signal an improvement over the 2013 findings, any compliance failures are concerning, Monid said: “Our onsite examinations are validating that they are still not being followed strictly enough.”
The written disclosure rule is part of a broader framework for managing conflicts of interest in the sale of life insurance products. That framework includes three principals that the Canadian Council of Insurance Regulators endorsed in 2006: the interest of the consumer must be placed ahead of the advisor; actual and potential conflicts of interest must be disclosed; and the product that is recommended must be suitable for the needs of the client.
Each provincial regulator has taken a different approach to regulating conflicts of interest and Ontario, for one, did not adopt new regulations to reflect those three principals. “We didn’t put them into law,” Monid said. “We said we were going to see how the industry follows up.”
Given the compliance deficiencies that FSCO is now observing, however, he said the regulators may need to consider introducing more regulation in this area.
“It’s troubling that there are already laws in place that some life insurance agents are not following,” he said. “That leaves us with no choice but to think that more regulation may be necessary.”
Compliance examinations are a new phenomenon to most insurance agents in Ontario. Prior to 2014, Monid said FSCO primarily reviewed compliance practices at the firm level, and very rarely conducted compliance examinations of individual insurance agents.
However, he said it is important for FSCO to ensure individual agents are adhering to the law and following industry best practices.
“We are piloting our new approach to compliance in this sector,” he said.
FSCO plans to conduct more compliance examinations in the months to come, and once it has a more comprehensive sample, it will publish a report outlining the findings.
“Those findings are then going to inform us on how we should proceed with our regulatory compliance examinations in the future,” Monid said. “Are we focusing on the right things? Do we need to change our questions? Do we need to ask for more information in advance?”
Generally speaking, Monid said the regulator is pleased with the level of regulatory compliance that it has observed among life insurance agents.
“Your industry is largely compliant,” he said. “We’re very happy with the general conduct.”