Insurance industry challenged by regulatory reform

“The pace and volume of regulatory change and the complexities in the marketplace have really put a much greater focus on compliance, and knowing your product and knowing your client,” said Susan Allemang, director of policy and regulatory affairs with the Independent Financial Brokers of Canada (IFB).

Added Greg Pollock, president of Advocis: “There’s more and more and more regulation, that at the end of the day, in our view, does not always get to the root of the problem.”

For example, the panelists pointed to the extensive reforms included in the second phase of the Client Relationship Model (CRM2) and the ongoing debate around imposing a fiduciary duty against financial advisors.

In addition, the Canada Revenue Agency (CRA) and the Department of Finance continue to adjust the tax rules pertaining to insurance policies, which is impacting the strategies used by many advisors and their clients, said Kevin Wark, president of the Conference for Advanced Life Underwriting (CALU).

“Clearly, both the CRA and Finance have insurance under the microscope,” Wark said. “They believe it is a product that has certain tax advantages.”

Although many of the changes are inevitable, Pollock said the industry could better take control of the regulatory agenda by raising the bar within the industry and adopting a “professions model”. Specifically, Advocis recommends strictly regulating the use of the title “financial advisor” and requiring all advisors to belong to a professional association, meet certain proficiency standards, continuing education requirements and codes of conduct.

Many elements of this model were reflected in Bill 157 – a private member’s bill introduced in February by an Ontario Liberal member of provincial parliament (MPP), which Advocis supported.

“What the bill does, in our view, is it allows us to set, as a profession, our own destiny,” said Pollock. “Change is coming. We can continue hiding if we want, but it’s coming, it’s happening. We need to seize the agenda and set that direction. Or, we can sit back and just let the regulators continue to throw all of these compliance rules and things at us.”

However, IFB does not agree with this approach, Allemang said.

“We felt there are already a number of regulatory bodies in place, and creating a new SRO and adding to the cost and compliance burden of financial advisors, who for the most part are already compliant, it wasn’t going to solve the issue of unregistered, fraudulent types of advisors from participating in the marketplace,” she said.

The industry is already proactive about participating in consultations with regulators when regulatory changes are being contemplated, Allemang added, and she said that’s an effective way of ensuring the industry’s input is taken into consideration.

Leslie Byrnes, vice president at the Canadian Life and Health Insurance Association (CLHIA), agreed that the industry must be cautious about increasing the level of regulation.

“We have a system that works right now,” she said. “I think one of the challenges with Bill 157, if it did go ahead, is that you would end up with another layer of regulation.”

Wark said it is important for the industry to educate policymakers as much as possible to ensure policy reforms do not have unintended consequences.

Canadian regulators are not the only ones driving regulatory reforms. The insurance industry is increasingly facing pressure to ensure its regulatory standards are in line with those at the international level, such as the International Association of Insurance Supervisors’ (IAIS) Insurance Core Principles, noted Byrnes. As a result, she said the insurance industry must keep a close eye on developments abroad.

“We need to remain aware and cognizant of what’s going on on the international scene, and continually assess how developments could and/or should apply here,” said Byrnes. “Our regulators are certainly paying attention.”

She noted that an audit of Canadian market conduct regulators by the International Monetary Fund (IMF) in 2013 found that the regulators in this country have a high level of compliance with the Insurance Core Principles.

“The good news is that Canada fared really well in this assessment,” Byrnes said.

Although this is encouraging, Byrnes said the audit also identified areas of improvement. Specifically, it suggested that the Financial Services Commission of Ontario (FSCO) could be more proactive in its regulation of market conduct, and it called for the implementation of recommendations made in 2012 by the Canadian Council of Insurance Regulators (CCIR) with respect to the regulation of managing general agencies (MGAs). Those recommendations called for better standardization of MGA rules and responsibilities, and for insurers to do their due diligence before contracting with MGAs and to have a system for monitoring what MGAs are doing.

The industry has indeed made progress on implementing those recommendations, Byrnes said. Specifically, she said insurers are poised to begin monitoring how MGAs are doing through an annual compliance survey. She said CLHIA and CAILBA have been working together to develop a new resource document to help MGAs ensure they have the appropriate processes and policies in place.