Advisor chargebacks need robust controls, say regulators

CCIR and CISRO set out minimum measures, tease broader draft guidance for standards of care on seg funds

Advisor chargebacks need robust controls, say regulators

Following a fall 2022 consultation on the use of upfront compensation in segregated funds, Canadian insurance industry regulators are calling for control measures to protect consumers from risks related to advisor chargebacks.

In a statement today, the Canadian Council of Insurance Regulators ("CCIR") and the Canadian Insurance Services Regulatory Organizations ("CISRO") said that without appropriate control measures, the use of the advisor chargeback sales charge option in individual seg fund contracts could lead to consumer harm.

“For example, upfront commission may motivate advisors (particularly less experienced advisors who have lower incomes) to sell this product to customers for whom the product is not suitable,” they said.

The insurance industry argues banning advisor chargebacks can create unintended negative consequences, as they offer some customers a way to access advice. But because of the risks, the regulators said there should at least be “robust control measures” and regular reviews to ensure fair treatment of customers when this option is used.

Insurers that use advisor chargebacks, the regulators added, should also put in place certain minimum risk control measures, including short chargeback schedules; not inappropriately raising seg-fund MERs as a result of paying upfront commission; and letting a certain portion of an investment be redeemed every year without triggering a chargeback, among others.

Customers should be educated about their sales charge options at the point of sale and throughout the effective duration of their chargeback schedule, CCIR and CISRO said. Insurers should also make customers aware and given them greater control over the conflicts of interest that arise from advisor chargebacks, they added.

The regulators also called for other measures to monitor for unfair treatment, including data collection to assess the effectiveness of the controls put in place.

As insurance regulators across Canada work how to approach DSC bans in seg funds in their respective jurisdictions, CCIR and CISRO said it will develop draft guidance laying out the standards of care it expects for sale and servicing of seg funds across all sales charge options.

Under that guidance, which will be released for public consultation, insurers will be required to implement control measures to make sure customers receive suitable advice during purchases or other transactions related to individual seg funds, and manage risks from a leveraging or replacement strategy involving an individual segregated fund.

Insurance firms will also have to train their salesforce to target the right customer groups, explain individual seg funds correctly to customers, and understand what information they need to get from customers to ensure suitability.

Intermediaries who work with other intermediaries to sell individual seg funds under a chargeback compensation scheme, the CCIR and CISRO added, will be expected to adopt similar risk control measures.

“We recognize that there are many connections between product suitability and conflicts of interest involved with compensation, and believe it is important to release guidance that deals with both aspects,” they said. “Stakeholders will have an opportunity to comment on both sets of measures during the consultation period for the market conduct guidance.”