CCIR/CISRO – Discussion Paper on Upfront Compensation in Segregated Funds

November 7, 2022

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CCIR/CISRO – Discussion Paper on Upfront Compensation in Segregated Funds

Letter Summary:

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: 

In our view, dually licensed salespeople, who often make insurance product sales, might be incentivized to sell the less-regulated product.