Life insurance agents reminded of obligations and responsibilities to clients in sales with upfront commissions

Published August 23, 2023

A number of publications from regulators was previously shared to licensees which outline concerns relating to incentive management and upfront commissions in the sales of segregated funds, as well as informing licensees of the June 1, 2023 ban on the use of deferred sales charges (DSCs) in individual variable insurance contracts (IVICs). This article reminds licensees of their obligations under the Insurance Council’s Code of Conduct and provides a summary of the relevant publications and resources.
A DSC is a back-end fee that is charged to the client if the client redeems their investment prior to the length of time set out in their contract term, or if the client changes the sales charge option within their segregated fund contract. Specifically, this compensation structure can create conflicts of interest by incentivizing advisors to favour products with this charge option over more suitable products for their clients. IVICs, also known as individual segregated fund contracts, are investment products with features similar to mutual funds including remuneration and fees. An IVIC is an individual life insurance contract under which the insurer’s liabilities vary in amount depending upon the market value of a specified group of invested assets in segregated funds. IVICs include a provision in an individual life insurance contract under which policy dividends are deposited into segregated funds.
Licensees are reminded of their obligations under the Insurance Council’s Code of Conduct and how it relates to the sale of IVICs and segregated funds. The Code of Conduct communicates standards of conduct and expectations for licensees including the need for licensees to put a client’s best interest first, to disclose all material information, and act with integrity, competence and utmost good faith. Agents and agencies are expected to ensure the client is aware of the different commission structures and that the agent recommends the policy that best suits the client’s needs which may not be the commission structure the agent prefers. The Code of Conduct’s Appendix A Conflict of Interest Guidelines further assists licensees in understanding issues relating to conflicts of interest and provides direction on how to plan for and address situations when a conflict of interest arises.
In addition to Insurance Council Rules and Code of Conduct, the Insurance Council will issue practice advisory notices and guidelines to further expand on many of the principles and requirements. Licensees are encouraged to review Insurance Council Practice Advisory Notice ICN 22-002 and the Guidelines for Life Insurance Agencies: Role and Responsibilities in the Distribution of Life Insurance in British Columbia as it provides general guidance to life agents and agencies.
Additional resources and regulatory publications
In the February 2022 What’s New, the Insurance Council advised licensees that the Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) — the two national organizations for Canadian insurance regulators — were initiating a consultation on upfront commissions in sales of segregated funds and were intending for insurers to completely cease the use of DSCs in segregated funds by June 1, 2023. Regulators also urged insurers to refrain from selling new DSC sales in segregated fund contracts by June 1, 2022 in line with the Canadian Securities Administrators (CSA) ban on DSCs in mutual funds.
In May 2023, the BC Financial Services Authority (BCFSA), the regulator of insurance companies authorized to conduct insurance business in BC, issued their Advisory titled Elimination of Deferred Sales Charges instructing all insurance companies authorized to conduct insurance business in British Columbia to refrain from issuing IVICs that are subject to DSCs effective June 1, 2023. BCFSA’s accompanying Regulatory Statement emphasized their concerns about potential harm to consumers from DSCs and the desire to avoid regulatory arbitrage in the sale of IVIC or mutual fund products.
Following the CISRO/CCIR 2022 consultation, the publication titled CCIR-CISRO Position on the Discussion Paper on Upfront Compensation in Segregated Funds was released and summarizes the consultation findings addressing concerns with upfront commissions in segregated funds. The paper outlines recommendations and expectations for insurers on standards of care for the sale and servicing of segregated funds. It also includes expectations that insurers put a number of control measures in place with a particular focus on the handling of all sales charge options, as well as advisor chargebacks. A key difference between DSCs and advisor chargebacks relates to who reimburses the insurer for the cost of the intermediary’s compensation when the client redeems the segregated fund units before the end of a fixed or pre-determined schedule. Under the advisor chargeback option, it is the intermediary who returns all or a portion of the commission they received from the sale of segregated funds back to the insurer based on how long the customer held the segregated fund units under the pre-determined schedule. Whereas under the DSC option, it is the client who would pay the insurer a redemption fee based on how long the client held the segregated fund units according to the pre-determined scheduled.

Additionally, CCIR and CISRO released the Incentive Management Guidance along with a Q&A for Incentive Management Guidance to provide insurers and intermediaries additional details to complement the Conduct of Insurance Business and Fair Treatment of Customers guidance.
The Insurance Council collaborates on initiatives with other provincial and territorial regulatory authorities of insurance intermediaries across Canada through the forum of Canadian Insurance Services Regulatory Organization (CISRO). This collaboration has the goal of supporting a consistent approach to consumer protection through our regulatory authority of insurance intermediaries. Similarly to CISRO, CCIR (Canadian Council of Insurance Regulators) is a forum of Canadian regulators overseeing insurance companies and other insurance regulatory authorities, which includes the BC Financial Services Authority (BCFSA).