In its newly released Segregated Funds Working Group Issues Paper, The Canadian Council of Insurance Regulators (CCIR) says disclosure requirements will change for segregated funds.
Released for public consultation, the paper is centred on the regulatory frameworks for segregated funds/Individual Variable Insurance Contracts (IVICs) and mutual funds.
In a statement, the CCIR says this is an opportune time to set out a current understanding of the comparative regulatory frameworks for IVICs and mutual funds, including existing and potential gaps that may need to be addressed in order to protect consumers.
One of the big announcements in the paper is the CCIR’s announcement that disclosure requirements for segregated funds are coming.
“It is no longer a matter of when the disclosure requirements will change but how these requirements will change. The CCIR must address the issue now and determine what changes to disclosure requirements must be implemented,” the paper says.
The paper highlights that the ultimate desired outcome is for fair treatment of customers, especially in how customers make use of the information provided.
Gaps between mutual and seg funds
As of July 2016, the new CRM2 regulatory changes will come into effect in the mutual fund industry and the CCIR is now concerned about the growing gaps between mutual fund and seg fund regulation, especially with respect to dual- licensed advisors. The issues paper addressed the differences in the regulatory frameworks for segregated funds and mutual funds and identifies opportunities for further harmonization. The paper also considers the impact the regulatory framework has on consumer protection and consumer choice.
The CCIR identified several areas in which there are gaps between mutual funds and segregated funds/IVICs. These include:
Disclosure – The need to ensure that customers are given complete and accurate disclosures and particularly on potential or actual conflicts of interests.
Fees and Compensation – With growing international attention looking into the way fees are charged and the compensation received for the provision of financial advice, compensation issues have also become a key interest of the CCIR. The issues papers sums up findings from recent reports, including that from the Brondesbury Group and by Professor Douglas Cumming’s team. Among other issues, these reports looked at such issues as embedded intermediary compensation and other forms of compensation that could give rise to actual or perceived conflicts of interest. In its issues paper, the CCIR says that “Although the studies did not include segregated funds, the results might be extrapolated to the sales of IVICs.”
Charges and Compensation Reports – With the implementation of CRM2 for mutual funds it will result in less similarity with IVICs compensation disclosure. This difference may result in investors not fully understanding the fees that are being charged for the two types of product, what the fees represent, and the impact on their investment returns.
Consultation paper feedback
The CCIR has opened up a 60-day consultation period on the issues paper. The deadline to provide submissions is July 15, 2016. Interested parties are asked to submit feedback to address whether the CCIR’s understanding of the topics are accurate and whether all significant gaps have been identified.