Compliance a new challenge for agents

But by targeting mutual fund dealers, the regulators are also bringing securities-style compliance into the realm of insurance agents, where it has been more or less non-existent. The trend toward dual licensing in the insurance business means that the obligations imposed by the MFDA would also apply to many of those who think of themselves primarily as insurance advisors. And the fear of a securities industry-type SRO breathing down their necks has many in the industry angry and upset.

The dual-licensed community initially feared that an SRO imposed on them by the Ontario Securities Commission and designed to follow closely standards set by the Investment Dealers Association of Canada probably wouldn’t have much understanding of, concern for or relevance to their businesses. To some degree, these fears were well-founded: issues such as the use of personal corporations, bulk transfers and signage affect the dual-licensed insurance advisors and investment advisors differently.

After much wailing and gnashing of teeth, insurance advisors were able get the attention of the new regulators and many of the issues have been sorted out. Larry Waite, chief operating officer of the MFDA, says extensive efforts were made to hear the agents’ concerns. Sometimes it was an unpleasant experience but, Waite says, many of the issues have been smoothed out and he has even received a few apologies from his more vocal critics.

Many of the problems were born out of confusion over just what the new rules and oversight would mean. Advisors have become more comfortable with the MFDA’s objectives, and have accepted the idea that the new SRO is not part of a bank-led conspiracy to drive them out of business, Waite says, even though the lack of bulk transfers remains a nagging issue.

Waite says the actual changes so far haven’t been that significant. Much of the MFDA’s oversight is from the “35,000-foot level,” and it is not yet into detailed compliance reviews.

However, insurance dealer firms and managing general agents themselves are establishing compliance procedures to cover the mutual fund side of their businesses. Some of the bigger ones are now reportedly pushing more heavy-handed compliance procedures down to their insurance advisors — demanding they put their insurance business through the dealer/MGA, for example, although this is not an MFDA requirement — and was never the regulators intention.

Jim Bullock, an insurance industry veteran who is currently registrar at the Toronto-based Peel Institute of Applied Finance, says the efforts of some dealers in pushing agents to put their insurance business through the dealer is a growing issue.

necessary change

The trend is being portrayed as necessary for the sake of compliance, but Bullock himself is skeptical of this rationale. “The dealers have seen the life [insurance business] going elsewhere as a major leak in their income bucket,” he says. “They may identify it as a compliance problem but their concern is lost revenue.”

Bullock says some life insurance-focused advisors have pledged to change dealers because their current shop “wants the business but has no expertise to support and earn the business.” The question that the industry still has to answer is whether it plays the heavy with advisors and tries to take greater control of their businesses or allows freedom to reign.

It also appears that the pressure for tighter compliance will grow even further. So far, the MFDA application process has been exclusively a paper-based exercise. This fall the MFDA expects to begin its full-scale compliance reviews, which will include on-site visits.

Once the process is underway, the regulatory theory will finally be put to the practical test. The MFDA will get a close look at exactly what firms are doing, and firms will get a true taste of its expectations. Waite admits to a bit of trepidation over the process, simply because of fear of the unknown. It’s possible that the MFDA will be quite satisfied with the practices and procedures it finds out in the field, but it’s also possible that the things it uncovers will lead to more rules and more pressure to tighten up compliance.

David Barber, president of the Independent Financial Brokers of Canada, says the first round of reviews will probably be a learning process, as the MFDA gets a handle on the business. Later, however, “they will likely bring down the hammer.” The MFDA expects to have the resources to review every firm every two years, so if there are big changes to be made out of the review process, they’ll have to come pretty quickly.

The insurance industry also faces the prospect of consolidation among provincial securities and insurance regulators. Both Ontario and Saskatchewan have proposals on the table to integrate their respective provincial authorities.

In Ontario, the legislative momentum behind the move appears to have slowed from the fast-track status that the proposed merger of the OSC and the Financial Services Commission of Ontario once had. However, the initiative, begun when the current premier was finance minister, was included in the most recent provincial budget and remains on the agenda.

The fear for the insurance business is that consolidation could mean a greater shift to a securities-style compliance environment — with more rules, compliance responsibilities and increased costs. After all, the initial proposal to create the Ontario Financial Services Commission contemplated that the insurance side of the organization would take on OSC-type rule-making authority and expanded enforcement powers.

Quebec, which has gone its own way in many areas of retail financial services regulation, has proposed creation of a super-regulator governing all of its financial services industries. However, British Columbia and Alberta regulators continue to be skeptical of the gains to be made in merging securities and insurance regulators. IE