Insurance: Gaps in compliance

However, some agents still do not comply with such rules as maintaining errors and omissions (E&O) insurance, providing necessary disclosure to clients and meeting the requirements under federal anti-money laundering and privacy legislation.

“We don’t have the compliance rate we want,” says Heather Driver, director of licensing at FSCO, who spoke at the Independent Financial Brokers of Canada‘s (IFB) autumn summit in Toronto in early November.

FSCO’s 2015-16 compliance review included on-site examinations of 214 agents, and targeted individuals with a high risk of non-compliance. So, the results may not reflect the broader advisor population, says Susan Allemang, head of regulatory and policy affairs with IFB in Mississauga, Ont.

Nonetheless, Allemang says, the results suggest that agents need to be reminded of their compliance responsibilities: “We all would like to see 100% compliance, so that no one is the subject of an administrative penalty, or worse. So, we’ll alert people to make sure they stay on top of [their regulatory obligations].”

FSCO’s days are numbered. Ontario Finance Minister Charles Sousa has indicated that the government plans to create a new Financial Services Regulatory Authority, based on recommendations from an expert panel that reviewed the mandates of FSCO, the Financial Services Tribunal and the Deposit Insurance Corp. of Ontario (DICO). The new regulator, which will replace FSCO and DICO, will have greater autonomy from the government and stronger enforcement power, as well as more of a consumer focus, according to Sousa.

However, until the new regulator is operational – expected to be in 2018 – FSCO will continue with its mandate. And in the time that regulator has left, it appears set on bolstering enforcement to encourage compliance with the rules.

In the first half of 2016, FSCO imposed 68 administrative monetary penalties (AMPs), compared with 67 in all of 2015. The monetary value of AMPs levied in the first half of 2016 total more than $450,000, vs $150,000 in all of 2015.

Such penalties can be an effective way for regulators to encourage compliance, says Allemang: “[Assessing penalties] is a deterrent, and it certainly can be used as a deterrent without having to resort to suspension or revoking a licence in applicable cases.”

Disclosure is one matter on which FSCO is focused in order to improve compliance. The regulator’s 2015-16 review found that only 76% of agents surveyed are providing clients with written disclosure on all the insurers that the agent represents, as is required by regulation. In addition, 79% of agents under review were providing clients with written disclosure of conflicts or potential conflicts of interest, as is required. Although those figures are a significant improvement from the 46% compliance rate in FSCO’s 2013 review, the regulator’s latest compliance report states that further improvement is needed.

Given that these requirements have been in place since 2004, says Lawrence Geller, president of Campbellville, Ont.-based L.I. Geller Insurance Agencies Ltd., the lack of compliance is surprising: “I don’t understand how people aren’t aware of something that happened in 2004.”

Regarding the licensing requirement to maintain E&O insurance, FSCO’s review found that 98% of agents were compliant. Although that’s a high number, it’s not high enough, Driver says: “We want to see 100% compliance. This is such a fundamental protection for the client and the insurance agent.”

FSCO’s review also identified insufficient adoption of industry best practices, including documenting a needs analysis in life insurance transactions (71% of agents complied), and providing letters of engagement (71% complied). Although best practices are not formal regulations, FSCO expects agents to adhere to these practices. If adoption rates don’t improve, the report states, FSCO will consider recommending that the government implement formal regulations in these areas.

The FSCO review also flagged lack of compliance with Financial Transactions and Reports Analysis Centre of Canada requirements (only 80% of agents adhere to those rules) and with the Personal Information Protection and Electronic Documents Act (83% adherence).

Geller says that insurers and managing general agencies (MGAs) need to do a better job of helping agents meet their regulatory requirements. “Agents are throwing up their hands,” he says.”They’re burying their heads in the sand, because [regulatory matters] are too much for them to think about.”

FSCO wants more help from insurance firms. This year, it began requiring agents to identify the primary insurer that they do business with when renewing their licence. FSCO then looks to those insurers to help resolve any outstanding compliance issues involving their agents. MGAs probably will play a role in that requirement as well, Allemang says, as many insurers delegate certain compliance functions to MGAs.

Firms have an important role to play, says Mike Cunneen, senior vice president of the wealth and estate planning group at London, Ont.-based Freedom 55 Financial. He says Freedom 55 conducts regular internal audits of agents and trains them in compliance and best practices: “If we want to improve those results as an industry, I think we have to invest the time, as [Freedom 55] has done here, in terms of building that culture of compliance.”

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