The Financial Services Regulatory Authority of Ontario (FSRA) is introducing a rule change that aims to restrict the application of deferred sales charges (DSC) to investors in segregated fund arrangements.
The regulator is adopting an amendment to its rules of conduct that will require insurers to remove the DSC option for future deposits into existing SEG fund contracts, where possible. In cases where the DSC option cannot be removed, the rules will require insurers to provide investors with information to help them determine whether to continue making deposits.
The amended rules will also require companies to disclose to investors information about available options for SEG fund contracts where DSC has been eliminated.
The tightening of DSC regulations aims to strengthen standards of conduct and increase consumer protection.
The FSRA has already adopted rule changes to restrict the use of DSCs by SEG funds, consistent with a policy approach taken by the Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organization (CISRO), amid concerns about the “high risk of adverse consumer outcomes associated with DSCs” when selling SEG funds.
Insurance regulators have taken steps to completely eliminate DSC from new segmented funds following the introduction by securities regulators of a DSC ban that came into effect on June 1, 2022.
However, the FSRA said it was necessary to “create greater customer protections in relation to DSCs” — namely, protection for investors with existing SEG fund arrangements.
The decision to adopt the rule changes follows two rounds of consultation on the proposals. FSRA has now submitted the rule changes to the provincial Finance Minister for approval. The new requirements will come into effect on March 23 if approved.
The first consultation on the proposed change closed in early 2023, with a second consultation taking place after regulators made significant changes to the original proposals.
According to a FSRA release detailing the changes, the CCIR and CISRO also plan to issue guidance on how insurers and intermediaries should sell and service segmented funds.
As the FSRA states, the guidance “goes beyond disclosure issues” and is intended to help ensure that SEG fund agreements, SEG fund selection and other transactions, such as beneficiary designations, “are suitable for clients.”
In the same announcement, the FSRA stressed that insurers are expected to treat customers fairly. “(P)removing the non-DSC option so that customers can only make payments into existing policies on a DSC basis would not be considered fair treatment of customers,” it said.
