CCIR recommends major changes to seg fund disclosure

Seg funds are often compared to mutual funds as they both involve the pooling and professional management of assets, however the products differ in that seg funds are structured as life insurance contracts that guarantee 75% to 100% of the contract holder’s contributions.

The consultation was prompted, in part, by the second phase of the client relationship model (CRM2), which introduced hefty new disclosure requirements related to costs and performance for mutual funds. Given the similarities between seg funds and mutual funds, the introduction of stringent new rules for one product, but not the other, raised concerns about the potential for regulatory arbitrage.

“CRM2 has created a gap in the level and type of disclosure given for mutual funds and for segregated funds,” the position paper states.

As a result, the CCIR recommends changes to seg fund disclosure to bring that information more closely in line with the information clients receive about their mutual fund investments.

Specifically, the CCIR paper outlines a detailed list of information that must be included on seg fund investors’ annual statements, including:

• all charges for the year, in dollar amounts, with the management expense ratio (MER) broken out to show management fees, distribution costs and insurance costs explicitly;
• all remuneration paid during the year for the provision of services in connection with the contract;
• changes in the net asset value of the contract in dollar amount;
• redemption value;
• total personal rate of return, net of charges, calculated using the money weighted method for the last year, three years, five years, 10 years and since issue; among various other items.

The CCIR paper specifies that the information should be conveyed in plain language and should allow for ease of comparison between mutual funds and seg funds.

“Times are changing and so are consumer needs. Consumers want to understand and be able to compare the products that are available to them. But, they also want to know what it’s going to cost,” says Patrick Déry, chairman of the CCIR, in a statement. “The new disclosure framework will ensure that consumers are informed of not only the performance of their segregated funds, but also all of the details of what it costs.”

The CCIR also recommends that risk classification for seg funds should align with the Canadian Securities Administrators’ prescribed methodology for risk classification of mutual funds.

The disclosure requirements are not identical to those facing mutual funds, however.

“There was also consensus that the requirements of CRM2 could not be simply transferred to segregated funds, because of the many differences between the products and their distribution models,” the CCIR paper says. “However, it would be important to try to achieve a consistent outcome in terms of transparency.”

For example, the paper notes that the CCIR’s consultations revealed support for providing more detailed cost disclosure for seg funds compared with CRM2. Specifically, whereas CRM2 mandates disclosure of distribution costs rather than the overall cost of the investment product, the CCIR recommends the disclosure and breakdown of all actual product costs, including distribution, administrative expenses and insurance fees.

The CCIR intends to publish a prototype disclosure document for seg funds in early 2018, which will provide an example of what compliance with the new disclosure requirements will look like. Insurers will be required to ensure that consumers are provided with all of the new required information; however, they will have flexibility in terms of the layout and design of their disclosure documents.

The CCIR recommendations also extend far beyond disclosure. The paper addresses the oversight of insurance advisors and differences between the rules facing mutual fund advisors and insurance advisors who sell seg funds.

For example, the paper recommends that there should be an equivalent standard of care for those dealing in seg funds and those dealing in mutual funds. The CCIR urges insurance and securities regulators to collaborate to ensure that the standard is appropriate for both products and is not “the source of confusion for consumers.”

The paper also recommends that insurance regulators should consider harmonizing or adopting the know-your-product due diligence requirements that currently apply to mutual fund representatives. In addition, it suggests that insurance advisors should be required to perform needs-based analysis practices for seg funds and provide clients with copies of the needs analysis and product recommendations.

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