Many life insurance agents in Ontario are falling short in their compliance responsibilities – especially regarding the disclosure of conflicts of interest and keeping records, according to the results of a recent suitability review. As a result, insurance advisors can expect that the regulators will begin keeping a closer eye on advisors’ sales practices.
The Financial Services Commission of Ontario (FSCO) recently conducted a review of life insurance agents’ suitability practices to assess the process that advisors use to make recommendations to clients. That review, which included a questionnaire completed by a random sample of 1,348 life agents, revealed that although most agents are utilizing appropriate sales practices, some appear to be cutting corners in certain aspects of the sales process.
“There were a couple of areas with room for improvement,” says Anatol Monid, director of market conduct with FSCO.
One of FSCO’s primary concerns with the review’s results relates to the disclosure of conflicts of interest – a regulatory requirement that was added to the Ontario Insurance Act in 2004.
Specifically, only 90% of those surveyed said they always disclose conflicts of interest and potential conflicts of interest to clients; only 50% said they always disclose such conflicts in writing, as they’re required to do – a finding that Monid calls “troubling.”
This latter concern reflects a broader theme that FSCO identified in the results: many of the disclosures and procedures associated with the sales process are being done verbally, with no written records or documentation for the most part. That’s problematic, Monid says, because advisors should be able to demonstrate the steps they take to assess a client’s insurance needs and to decide upon suitable products.
“Having proper documentation of recommendations, analysis, disclosure [and] discussions with clients is helpful for both FSCO and the agents in addressing compliance,” says Monid. “If they are not documented, we don’t know that it occurred.”
Although insurance advisors are not explicitly required to keep records of all of their activities, it’s certainly a best practice to document as many things as possible, says Susan Allemang, head of regulatory and policy affairs with Mississauga, Ont.-based Independent Financial Brokers of Canada.
In particular, she urges advisors to keep a copy of each client’s needs assessment.
Suitability
“They should have written needs analyses,” she says, “so that if someone were to come back and question the suitability of a particular product or recommendation, they could back it up with what they looked at at the time and how they came about making that recommendation.”
One reason advisors may not realize the importance of record-keeping is that many have not experienced a compliance examination in which they’ve been required to demonstrate their processes and procedures.
Among the advisors who completed FSCO’s suitability questionnaire, only about 50% said they have ever undergone a compliance review, which suggests that many firms are not reviewing their advisors’ practices regularly.
That’s another concern for FSCO, Monid says, especially given the compliance shortcomings revealed by the recent review: “There’s no statutory requirement to conduct a compliance review, but a practice of reviewing an agent’s business would be beneficial in ensuring that they are in compliance with the law.”
Given the problems identified in the suitability review, Monid says, FSCO plans to begin conducting more on-site compliance reviews with agents and insurers.
In many cases, says Allemang, advisors may be failing to comply simply because they are unaware of their responsibilities.
“It may be an awareness issue,” she says. “That tells us that we need to go back out and remind people and make sure they’re doing that written disclosure.”
Pierre Sasseville, national compliance officer with Kitchener, Ont.-based Financial Horizons Inc., believes that many insurance advisors are having trouble staying on top of their compliance responsibilities in general because regulatory requirements have increased so drastically in the past few years.
“There’s more and more regulation throughout Canada – it’s not only in Ontario,” Sasseville says. “They went from having practically no regulation to, now, a lot of regulation.”
Conflicts of interest, in particular, have been a key focus for regulators in recent years, as regulators seek to ensure that product recommendations are not being influenced by such factors as incentive-based compensation or referral arrangements.
The Canadian Council of Insurance Regulators and the Canadian Insurance Services Regulatory Organization developed a set of best practices for managing conflicts of interest in 2006 – and some of the provincial insurance regulators have tweaked their rules since.
Conflicts of interest
It’s a subject that’s challenging to regulate, as conflicts of interest can be difficult to identify and to assess in practice. In some cases, advisors may not realize that they have conflicts of interest that should be disclosed.
“[Advisors] probably don’t understand what a conflict of interest or a potential conflict of interest is,” Sasseville says. “They need to be educated.”
In Ontario, insurance advisors can expect more regulatory initiatives regarding this topic. FSCO plans to release a report highlighting the results of its review this summer, as well as a series of bulletins to educate agents on their obligations under the law.
FSCO will also eventually conduct a followup suitability questionnaire, as well as a more in-depth investigation into advisors’ sales practices.
“We will be assessing the advice that consumers receive during the sales process,” Monid says, “to determine whether there is a sound basis for the advice being given.”
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