The ban on deferred sales charge (DSC) structures that will come into effect for mutual funds on June 1 will also be adopted for ring-fenced funds, insurance regulators warned today.
Citing a “high risk of poor consumer outcomes” and concerns about whether DSCs violate expectations that customers will be treated fairly, the Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) have signaled their intention to ban DSCs for funds segment
Regulators urged insurers to “refrain from new sales of DSCs under segregated fund contracts pursuant to the June 1, 2022 Securities Prohibition and expect to cease such sales by June 1, 2023.”
Regulators will also launch a joint consultation later this year to examine the use of up-front commissions in segmented funds, driven by the same investor protection concerns about embedded fee structures that have preoccupied securities regulators in recent years.
“Upfront commissions in segregated funds may raise similar concerns… in terms of potential conflicts of interest and alignment of costs and services,” regulators said in a statement.
Given these concerns, regulators said they are “considering what other changes may be needed to upfront commissions” for segmented funds, including a possible ban on upfront commissions.
“The consultation will give consumer advocates, the insurance industry and other interested parties the opportunity to share their perspectives on this issue. It will also serve as a benchmark for the industry to provide an update on progress towards ending the use of DSC for the sale of new contracts into segregated funds,” they said.
Following the consultation, regulators “intend to rapidly provide policy position and guidance on upfront commissions on the sale of segregated funds.”
In addition to the goal of improving customer treatment, regulators have indicated that their actions on DSC and upfront commissions generally reflect a desire to prevent regulatory arbitrage that could arise from applying markedly different rules to very similar products such as mutual funds and segment funds
In a statement, the Canadian Life and Health Insurance Association Inc. (CLHIA) said the industry supports regulators’ efforts “to better align the regulatory environment for segregated funds and mutual funds,” including their plan to end the DSC funds segment.
“Our industry looks forward to continuing to work with CCIR and CISRO on this important initiative,” CLHIA said.
