Canadian insurers and advisors are finally starting to feel the regulatory pressure they have been under is easing — for the first time in almost a year.

The pressure, believed by insurance industry representatives to be unwarranted, began in mid-2005 after a widely publicized crackdown by New York Attorney General Eliot Spitzer on fraudulent bid-rigging within the insurance industry in the U.S. Spitzer’s actions sparked an extensive examination by Canadian regulators into how the Canadian insurance industry manages potential conflicts of interest.

The tone in Canada changed in February, when the industry practices review committee, established in 2004 by the Canadian Council of Insurance Regulators and the Canadian Insurance Services Regulatory Organizations, released its third paper on managing conflicts of interest. In the most recent paper, there is no sign of the aggressive stance taken in the committee’s June 2005 and November 2005 papers, which had threatened a new layer of provincial regulation.

Instead, the latest paper makes three recommendations intended “to enhance and harmonize” best practices for managing “actual or potential” conflicts of interest in the insurance industry. The committee is looking for industry responses by March 24.

The paper is widely viewed by the industry to be more conciliatory, and also more respectful of the initiatives that have been undertaken by industry and advisor organizations in recent years to deal with the management of conflicts of interest.

The Canadian Life and Health Insurance Association “is pleased the regulators are proceeding on a principle-based approach,” says Wendy Hope, vice president, external relations, for the CLHIA in Toronto.

At the Independent Financial Brokers of Canada in Mississauga, Ont., Susan Allemang, the IFB’s head of regulatory affairs, says: “We’re encouraged that they are taking a progressive approach, and not implementing further regulations at this point. They’ve listened to the industry and taken our concerns into account.”

Advocis also welcomes the change in tone. Sara Gelgor, Advocis’s vice president of regulatory affairs in Toronto, says the committee “has taken a much more workable approach,” as the industry is in the best position to determine how best practices may be applied and harmonized across the country.”

The committee recommendations are as follows:

> Priority of client’s interest: an insurance intermediary (broker or agent) must place the interests of insurance policyholders and prospective purchasers ahead of his or her own interests.

> Disclosure of conflict or potential conflict of interest: consumers must receive disclosure of any actual or potential conflict of interest that is associated with a transaction or recommendation.

> Product suitability: the recommended product must be suitable for the needs of the consumer.

The codes of conduct for many regulatory, industry and advisor organizations already embrace these principles, but the wording of the provisions differs from jurisdiction to jurisdiction. The committee wants to promote harmonization to avoid situations in which brokers and agents operating in more than one jurisdiction have to comply with differing requirements.

The IFB has “no problem” with the recommendations, says Allemang. The IFB has issued guidelines on market standards that its members adapt to their own practices. However, she says, it remains to be seen how the committee will harmonize the various wordings found throughout the country.

Advocis asserts the principles in both its code of conduct and its Best Practices Manual, says Gelgor.

With regard to disclosure, the committee says that there are jurisdictional differences that need to be harmonized. Some elements that should be disclosed include: the insurers represented by the advisor, as well as any insurers who get a significant volume of the advisor’s business; the extent of the quote search that the advisor undertakes; and the overall method of compensation.

The committee recognizes that insurers can provide much-needed capital to brokerages and agencies to support distribution channels. It notes, however, that agents, brokers and insurers should ensure that any financial arrangements should not conflict with the interests of consumers.

The committee calls upon insurers, for example, to make public disclosures on their Web sites, and to offer clear and concise information about their financial relationships with brokers and agents, including loans, compensation methods and any non-monetary benefits, such as travel rewards.

Gelgor notes a joint industry initiative to establish disclosure standards, which came into force in November 2004. Ontario Insurance Regulation No. 347 requires advisors to disclose all actual or potential conflicts of interests in writing to clients. The CLHIA and advisor organizations came together to help develop the regulation, she says, and Advocis members across the country have adopted it, even in provinces that have less stringent rules.

@page_break@Meanwhile, the IFB has been busy educating both members and non-members who attend the organization’s “summits,” held regularly throughout the country. “We have reminded all our members, not just the members in Ontario, that disclosure is good business practice,” says Allemang.

The IFB has a disclosure letter template on its Web site, which can be adapted to an individual advisor’s practice.

The committee is making the recommendation regarding product suitability because “suitability is a more direct measure of success in managing conflicts of interest,” says Gelgor.

It gives a few examples of achieving suitability: conducting fact-finding appropriate to the client’s needs; and assessing needs flexibility based on underlying risk, the client’s objective and the complexity of the product on offer.

Both Advocis and the IFB say that providing product suitability is part of the service that advisors offer. The committee agrees. Nevertheless, there is some question about how the regulators will monitor compliance with the recommendation. “We’ll have to follow up [to see what the committee wants],” says Allemang.

Notably, the committee has backed away from two issues raised in its previous reports that advisors found threatening: defining the meaning of an “independent” advisor and prohibition of performance-linked remuneration.

The committee says the concerns may effectively be addressed by the three recommendations it has put forward in this latest paper.

“That’s good,” says Allemang. “It’s positive that the regulators went out and did all this research to find out that these weren’t the big issues as they thought.”

Once industry comments are in, the committee will review and finalize its recommendations, and present them to the CCIR and CISRO in the spring. Provincial regulators will then assess their respective regulations to see if changes are required. IE