Revealed - timeline for implementation, if approved
Ontario's Financial Services Regulatory Authority (FSRA) has submitted a proposed amendment to the Unfair or Deceptive Acts or Practices (UDAP) Rule to the Minister of Finance aimed at strengthening protection for life insurance customers who have segregated fund contracts. The proposed changes would prohibit insurers from issuing new individual segregated fund contracts that impose charges on customers for early access to their investments.
The amendment would also ban insurers from changing existing segregated fund contracts to add deferred sales charges (DSCs) or make the DSC less favourable to customers. Furthermore, it would only allow insurers to replace existing contracts that involve DSCs with very similar contracts if they do not restart the time period that allows them to charge for early withdrawal.
If the proposed amendment is approved by the Minister, it will take effect 15 days after approval. The ban on the use of DSCs in new contracts will come into effect from June 1, 2023. This move is aimed at improving transparency and fairness for customers who purchase segregated fund contracts, which are similar to mutual funds, but also offer insurance protection.
The proposed amendment to the UDAP Rule follows concerns raised by customers and advocates about the use of DSCs in segregated fund contracts. DSCs are fees that customers pay if they withdraw their funds before a set period. These fees can be substantial and can sometimes lock customers into a contract for an extended period, reducing their ability to access their investments when needed.
The proposed amendment aims to provide greater protection for customers by preventing insurers from imposing DSCs on new contracts and reducing the use of DSCs in existing contracts. The move is expected to provide greater flexibility for customers to access their investments and reduce the potential for disputes between customers and insurers.
In addition to the proposed amendment, the FSRA also plans to launch consultations on an updated version of another amendment to the UDAP Rule. The updated amendment will address concerns about DSCs in contracts that already exist and will introduce customer protections around the use of DSCs.
The proposed changes include customer disclosure requirements and simplification of the information that customers receive if their insurer uses its pre-existing contractual right to switch the customer from a DSC to a sales charge option that is in all ways more favourable to the customer. In this situation, early disclosure may not be required for the switch.
The proposed amendments are part of a wider effort by the FSRA to improve transparency and fairness for customers who purchase segregated fund contracts. The changes are expected to provide greater protection for customers and reduce the potential for disputes between customers and insurers.
