FSRA – Consultation on updated proposed amendments to the Unfair or Deceptive Acts or Practices Rule

June 30, 2023

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FSRA – Consultation on updated proposed amendments to the Unfair or Deceptive Acts or Practices Rule

Letter Summary:

The proposed amendments to the UDAP involves DSCs for customers in existing individual segregated fund contracts (no new DSCs are permitted after June 1, 2023). The amendments would permit insurers to provide simplified disclosure to customers if they provide customers with a new sales charge option that is better than a DSC. The amendments provide four criteria to be considered in determining whether a sales charge option is better than a DSC, and that specifically, an advisor chargeback sales option is not unequivocally better than a DSC. The simplified disclosure would focus on the new sales charge option and could be provided after the change in option, rather than a detailed description all of the other sales charge options available prior to any change which would have to be provided in circumstances where the sales charge option is not an improvement.

Overview of the Council’s Comments:

The Canadian Advocacy Council (CAC) has submitted a letter to the Financial Services Regulatory Authority of Ontario (FSRA) regarding the latest proposed amendments to the Unfair or Deceptive Acts or Practices Rule (UDAP Rule). While the CAC supports the amendments, it is concerned that the changes do not go far enough in protecting policyholders from unfair sales charge practices.

The CAC reiterates its support for the ban of all upfront compensation structures, including advisor chargebacks, across the insurance and investment industry. They believe that such conflicted compensation structures should be uniformly prohibited to ensure consistent standards and avoid regulatory arbitrage. The Council emphasizes that advisor chargebacks pose irresolvable conflicts of interest and should be banned. They argue that disclosure alone is insufficient as a conflict mitigation tool, especially when there are inadequate controls to ensure that the information is effectively communicated and understood by policyholders. The CAC advocates for additional supervisory tools and broader rulemaking authority be granted to FSRA to further address conflicts in agent conduct and to strengthen regulatory oversight.

The CAC notes the ongoing review by the Canadian Securities Administrators (CSA) and the Canadian Investment Regulatory Organization (CIRO) regarding chargebacks in the mutual fund industry, and believes this presents a unique opportunity for regulators in both the insurance and securities sectors to address the conflicts posed by these fee structures through regulatory prohibitions.

In conclusion, the CAC urges FSRA to ban advisor chargebacks outright, emphasizing that this would better align agents and their customers, and would help to eliminate compensation structures that distort the interests of agents relative to those of their customers. They believe such a ban would effectively limit undesirable outcomes and promote the trust and integrity of the insurance and securities industries.