FSRA eyes further seg fund rule changes

Ontario's financial regulator proposes updated amendment to address other concerns over DSCs

FSRA eyes further seg fund rule changes

Having officially put a stop to deferred sales charges (DSCs) on sales of new segregated funds, the Financial Services Regulatory Authority of Ontario (FSRA) is taking another step to address concerns around conflicted compensation in the seg-fund space.

“We are holding further consultations on an updated proposed amendment to the Unfair or Deceptive Acts or Practices (UDAP) Rule,” the Ontario regulator said in a statement today.

Late last month, FSRA announced it is officially banning the sale of new individual segregated fund contracts to consumers under the DSC option within the province. The prohibition, which takes effect today, was first contemplated in November last year.

“The updated proposed amendment would address concerns about deferred sales charges (DSCs) for customers who already own individual segregated fund contracts with DSCs,” FSRA said in today’s statement.

Under FSRA’s new proposed amendment, insurers would be able to simplify the information they give to customers provided they offer “a new sales charge option that is better than a DSC in every way.”

The new proposal considers a sales charge option as unequivocally better for an insured than the DSC if:

  • The percentage amount of any initial sales charge is no greater than in connection with the deferred sales charge;
  • The management expense ratio is no greater than in connection with the DSC;
  • No other fee or charge associated with the sales charge option is less favourable to the insured than under the DSC option; and
  • The sales charge option applied does not raise any new conflict between the interests of the insured and those of the insurer or an agent to the detriment of the insured.

“[T]he advisor chargeback sales charge option is not unequivocally better than the deferred sales charge,” the new proposed amendment states.

Last month, the Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) issued a statement calling on insurers to institute robust controls – including short chargeback schedules, not inappropriately raising 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 – in applying advisor chargebacks to individual seg fund contracts.

“[U]pfront 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,” CCIR and CISRO noted last month.

FSRA is inviting stakeholders to weigh in on the new proposed change to the UDAP rule by June 30.

After reviewing the comments, it will submit a final proposed amendment for approval to Ontario’s minister of Finance.