Insurance regulators remain concerned that using advisor chargeback structures to sell seg funds poses a risk to consumers – a risk they plan to address in future guidance.
In a joint announcement, the Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organization (CISRO) said that following a public consultation on the use of upfront compensation models in segregated funds, they determined that “there is a risk of harm to the customer” through structures advisor chargebacks. These compensation models require reps to pay back a portion of their sales commission upfront if customers redeem their funds within a certain period.
“For example, an upfront commission may motivate advisors (particularly less experienced, lower-income advisors) to sell the product to clients for whom the product is not suitable,” they said.
While the industry maintains that the chargeback structure makes it easier for some customers to access the advice and warns against banning its use, regulators said the risk requires “at a minimum, robust controls to ensure that customers are treated fairly when using this option.”
The controls they have in mind include measures such as the short duration of chargeback schedules; allowing customers to redeem some of their holdings without triggering chargebacks; and not running promotions that include temporary commission increases to increase sales.
Regulators also indicated that insurers should not “inappropriately” increase seg fund management expense ratios due to their use of upfront commission structures.
To this end, regulators said they will develop guidelines on the controls companies must have in place, which will be incorporated into planned guidelines for the overall design and sale of seg funds.
These broader guidelines, which are intended to apply to all remuneration structures, will aim to ensure that customers are treated fairly and receive appropriate advice, that representatives are properly trained and that risks associated with leverage and other strategies are appropriately managed.
Regulators noted that the guidance will be made available for public comment before adoption.
Additionally, CCIR and CISRO indicated that they plan to share their findings on the risks associated with the use of chargeback structures with the Canadian Securities Administrators (CSA) and “monitor any work undertaken by the CSA with respect to similar compensation models for the sale of mutual funds.”
Regulators also stressed that they will “continue to monitor client performance on upfront compensation” in segment funds.
“If CCIR and CISRO become aware of unfair impacts in the future, we will consider taking further action,” they said.
