CCIR/CISRO – Discussion Paper on Upfront Compensation in Segregated Funds
As part of the 2021 budget, the Government indicated its intention to consult on fighting predatory lending by lowering the criminal rate of interest (currently set at 60%). The consultation paper asks a number of questions relating to the criminal rate of interest and the impact of high-cost installment loans. The consultation does not consider payday loans which are regulated provincially. Questions include those related to whether the interest rates set by high-cost alternative lenders is a reflection of the credit risk of the borrower, or set to comply with the interest rate ceilings, as well as the impact to credit availability if the rate were to be lowered. The Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) are consulting on concerns they have regarding upfront commissions used in the sale of segregated funds and individual variable insurance contracts (IVICs). Earlier this year, CCIR and CISRO already stated that the use of Deferred Sales Charges (DSCs) in segregated fund contract sales should cease fully by June 1, 2023. The consultation paper notes that upfront commissions in the sale of segregated funds create potential issues relating to conflicts of interest where consumers rely on advisors to sell them a suitable product and the advisor is paid by the insurer for the sale and servicing of those products. The primary purpose of the consultation is to better understand compensation arrangements in segregated funds and IVICs, and what changes to upfront compensation may be needed to improve customer outcomes. A number of targeted customer outcomes are outlined in the consultation, including a regulatory approach which effectively addresses conflicts created by upfront compensation which can misalign the interests of insurers, intermediaries and customers, enhance customer awareness of intermediary compensation and reduce the risks of mis-selling segregated funds and IVICs over securities products by dually licensed intermediaries due to different upfront compensation arrangements.
Overview of the Council’s Comments:
The council is strongly supportive of initiatives to increase cost and fee transparency in the sale of insurance products. We support the ban on deferred sales charges (DSC) in segregated fund sales and believe both Upfront Commission structures (DSC and Advisor Chargeback) should be banned because of the irresolvable conflicts they place between Intermediaries and their clients.
Our key comments are summarized below:
- We agree that upfront commissions in segregated funds raise conflict of interest concerns because a consumer relies on the intermediary’s advice to purchase a suitable product, and the intermediary is being paid by the insurer for the sale.
- We believe that the Advisor Chargeback option deeply compounds the conflict-of-interest issue described above and should also be banned.
- We are concerned that fee disclosures do not provide consumers with the information needed to properly assess the impact of all costs and fees on their returns, especially with the lack of ongoing disclosure on intermediary compensation.
In our view, dually licensed salespeople, who often make insurance product sales, might be incentivized to sell the less-regulated product.
- We believe the principles to manage or avoid conflicts of interest should be directly reflected in the insurance legislation or regulation.
- We believe the obligation of adherence to conflict-of-interest rules could be directly imposed on licensed individuals, through the enhancement of regulatory structures and mechanisms, and additional guidance could be provided with respect to regulatory expectations as it relates to the comparability of available products.