Insurance: Overhauling FSCO

“FSCO’s mandate is to protect the public interest and enhance public confidence, regulating [the]financial sector through registration, licensing, monitoring and enforcement. [But, FSCO doesn’t] do monitoring, [or] do enforcement in any credible manner,” says Harold Geller, associate with law firm McBride Bond Christian LLP in Ottawa. “[This report] should be cause for great concern and immediate action.”

Ontario’s AG recommends that FSCO make various changes to its licensing and regulatory procedures to ensure the regulator meets its mandate.

In an email to Investment Executive, FSCO welcomes the recommendations: “While the financial services regulatory regime by FSCO is generally sound, the audit recommendations will strengthen the oversight of Ontario’s financial services regulation. FSCO is currently developing action plans on the recommendations.”

The AG’s report says that FSCO lacks the appropriate controls to ensure that agents who receive life insurance licences meet all requirements.

Ian Robinson, president of Hamilton, Ont.-based Greengrass Group, agrees: “There are people running around with licences who should not have them. This is a serious matter.”

For example, the AG’s report says that FSCO allows agents to hold life insurance licences without verifying whether their errors and omissions insurance is valid. In addition, FSCO has issued licences to: “a significant number” of agents who have been disciplined by other financial services sector regulators; people who have declared bankruptcy; and people with criminal records – without investigating these agents’ licence applications.

The AG’s report also flags problems with FSCO’s oversight of agents’ market conduct. Specifically, the report notes that FSCO does not conduct compliance examinations unless one is initiated due to a complaint.

SIGNIFICANT DELAYS

Even when complaints are lodged, the report reveals, there are significant delays by FSCO in handling, investigating and resolving those complaints and, in some cases, with a result of weak enforcement action. In fact, several complaints with high risks to consumers have taken several years for FSCO to address. A September 2010 complaint alleging that an agent had forged client signatures, for instance, was not forwarded to the investigations unit until March 2012 – and the case was dropped in June 2014 because of insufficient evidence.

The AG’s report also raises concerns with FSCO’s handling of cases in which life agents were disciplined by other regulatory authorities. Approximately half of Ontario life insurance agents are members of other investment-related regulatory associations, the AG’s report says; yet, FSCO does not have adequate procedures or arrangements to share information with these associations so that FSCO can be notified when disciplinary actions occur.

In some cases, insurance agents with serious disciplinary action against them by another regulator continue to operate for years without being investigated by FSCO. For example, an agent who was permanently banned by the Investment Industry Regulatory Organization of Canada for misconduct that included misappropriating almost $500,000 from a client’s account continued to operate as an insurance agent for three years before FSCO completed its investigation and revoked his license.

“FSCO is not looking at reciprocal enforcements when there’s finding of fraud, wrongdoing and gross negligence,” Geller says.

The AG’s report recommends that FSCO implement controls to ensure that only qualified agents are granted life insurance licences and to take timely action to investigate complaints and establish procedures to identify and investigate agents who have received sanctions from other regulators, among other recommendations.

The AG’s report also recommends that FSCO explore opportunities to transfer more responsibility for protecting the public interest and enhancing public confidence to new or established self-governing industry associations, with FSCO oversight. Specifically, the report says, areas that could be transferred include licensing and registration, qualifications and continuing education, compliance handling and disciplinary activities.

MUCH DIVISION ON SRO

Greg Pollock, president and CEO of the Financial Advisors Association of Canada (a.k.a. Advocis), supports this approach and says Advocis would be well positioned to take on this type of self-regulatory role: “We could put systems in place that would easily and efficiently correct the issues and challenges raised by the AG.”

Although Pollock believes regulators across the country are doing a “reasonably” good job, he raises concern about the broad nature of FSCO’s mandate, which includes responsibility for pension plans, mortgage brokers, credit unions and other industries in addition to insurance.

“[FSCO] has a very diverse area of responsibility. It’s a lot for one regulatory authority to take on, and the focus isn’t there,” he says. “If this were downloaded to an organization such as ours, there would be a lot more focus. And that might help, in terms of both effectiveness and efficiency.”

In provinces in which the licensing and regulation of insurance agents is handled by councils that are dedicated to the insurance industry, such as Alberta and British Columbia, discipline tends to be more aggressive, Geller says.

Robinson agrees that an SRO could be an improvement over the status quo. “It would work well and that would take the pressure off of FSCO,” he says. “It would be good for the industry.”

Robinson notes that the SRO model has been effective for the property and casualty insurance industry, in which brokers are regulated by the Registered Insurance Brokers of Ontario (RIBO) – an SRO established in 1981. “RIBO worked, and it still works to this day,” he says. “And, if anything, it’s tougher than what the regulators used to be.”

However, the Independent Financial Brokers of Canada (IFB), does not support an SRO for life agents. Nancy Allan, executive director of the IFB in Mississauga, Ont., says that although FSCO needs to address the weaknesses identified in the AG’s report, policy changes of a magnitude such as establishing an SRO should be approached careful and in a consultative, transparent manner.

“Generally, IFB supports a harmonized approach to life insurance regulation in Canada,” Allan says. “We do not see an SRO as a necessary step in Ontario, or as an effective way to achieve the goal of harmonization.”

To transfer responsibilities to an SRO, as the AG’s report recommends, FSCO must seek legislative changes in consultation with Ontario’s Ministry of Finance.

Big omissions in E&O coverage

All life insurance agents are required under Ontario’s Insurance Act to have errors and omissions (E&O) insurance to cover clients who suffer financial losses as a result of an agent’s negligence or fraud.

However, the Ontario auditor general’s (AG) 2014 annual report found that as of June 2014, more than 1,700 life insurance agents had received licences from the Financial Services Commission of Ontario (FSCO) even though their E&O insurance had expired as of the issue date. Furthermore, 9,500 active agents – 23.5% of all life agents – had missing or incomplete E&O data in FSCO’s database.

FSCO relies upon E&O insurers to be notified when an agent’s policy has been cancelled or expired. But, as this reporting is not mandatory, only some insurers voluntarily do so. As well, FSCO does not contact all agents whose coverage is reported to have expired.

“The E&O regime is completely deficient,” says Harold Geller, associate with law firm McBride Bond Christian LLP in Ottawa.

To ensure that all life insurance agents are meeting their E&O requirements, FSCO should require notification any time a policy expires, says Ian Robinson, president of Hamilton, Ont.-based Greengrass Group.

“The agents should have E&O,” says Robinson, “and if they cancel it or they don’t pay it, then they should be either suspended or terminated.”

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