Managing general agents live a life that securities and mutual fund dealers can merely dream about — largely unregulated, essentially undefined in the legislation. And they are thriving. But giving their growing importance as distribution conduits in the life insurance business, should they come under regulatory oversight?
In the insurance industry distribution chain, which runs from policy manufacturer to client, MGAs are classic middlemen. Insurance companies that don’t want to bear the expense of supporting a captive sales force essentially outsource the costly wholesaling tasks to MGAs, who in turn deal with the brokers who ultimately sell the policies to clients.
They form a critical link in the sales process but, for the most part, this business goes on without much scrutiny from regulators.
David Juvet, managing partner for Toronto’s Equinox Financial Group and chairman of the market conduct committee of the MGAs’ trade association, the Canadian Association of Independent Life Brokerage Agencies, says MGAs historically have flown under the regulatory radar. There are a couple of reasons for this: MGAs are something of a legislative chimera and most clients don’t know they exist. Issues that attract regulatory attention generally start with customer complaints, Juvet says.
Because the identity and function of the MGA is unknown to most customers, MGAs typically have not generated much regulatory scrutiny. Problems with an insurance product tend to fall at the door of the manufacturer. Client service issues are usually the responsibility of the front-line reps. MGAs play an important part in the process, but because many of their key functions, such as training reps on new products, are done with materials developed by the insurers, the regulatory risk tends to fall back on the insurance companies.
The other big factor keeping MGAs out of the regulatory spotlight is that there is no hard and fast definition of what an MGA is or what one does.
Jim Bullock, registrar at the Peel Institute of Applied Finance in Toronto, says MGAs are more or less unknown in insurance legislation. Because there is nothing in the legislation that defines an MGA, they face no special rules or regulations or even capital requirements. “It’s the Wild West out there,” Bullock says.
For example, MGAs may or may not be licensed as agents, depending on the type of business they carry out. Those who are licensed are subject to the same requirements as all licensees. Those who aren’t face no other rules aimed at the MGA function.
The only requirement regulators make of MGAs is ensuring that a life company does not pay compensation for acting as an agent to an entity without an agent’s licence. “In other words, MGAs are licensed largely to enable their function as conduits for compensation to selling agents,” says Ed Rothberg, general counsel to Advocis, the Toronto-based trade association for insurance and financial advisors.
Rothberg notes that if MGAs provide only administrative services in the distribution process — and don’t act as conduits for compensation — they aren’t even required to be licensed as agents.
So far, there’s no indication that regulators feel any urgency to get MGAs under their oversight.
Juvet says insurance regulators have been preoccupied with other matters, such as possible mergers among securities regulators, and simply keeping up with ongoing regulatory issues. Without any compelling problem spurring regulators into action, no one is fighting to bring the MGAs to heel.
Solvency hasn’t been considered much of an issue, either, because, as Bullock points out, client dollars aren’t really at risk with MGAs. If an MGA goes down, agents may lose some commissions, but that is viewed as a business matter, not a regulatory one.
That doesn’t mean there isn’t some argument to be made for regulatory oversight of the MGA business. “We have a system of regulation for distribution that does not reflect the structure for distribution,” says Rothberg, who has pointed out the gap to regulators.
The reasoning echoes Advocis’ stance that securities regulation improperly focuses on product sales and ignores the importance of advice.
Rothberg argues that securities regulation is dysfunctional because it “focuses on dealers, treats other sales intermediaries only as employees of a dealer and disregards the reality of retail financial services businesses that are controlled by those nominal employees [whom] are neither dealers nor employees.