Insurance advisors have been bombarded with new compensation disclosure requirements since last fall. But advisors are sceptical about the need for such initiatives and whether they can even be enforced.
First, the Financial Services Commission of Ontario (FSCO) issued a new regulation on disclosure last November, then the Canadian Life and Health Insurance Association (CLHIA) followed suit with its list of new disclosure requirements for advisors in December and now the Joint Forum of Financial Market Regulators has released its practice standards.
The Joint Forum was formed in 1999 by the Canadian Council of Insurance Regulators (CCIR), the Canadian Association of Pension Supervisory Authorities (CAPSA) and the Canadian Securities Administrators (CSA) as a mechanism for coordinating the development of a harmonized approach to regulatory issues.
The Principles and Practices for the Sale of Products and Services in the Financial Sectors issued by the Joint Forum highlights eight principles that are focused on integrity, honesty, professionalism, clarity and putting clients’ interests first. Among other things, the General Information Disclosure principle states that the client is entitled to disclosure about the intermediary’s business relationships that are relevant to the transaction.
Suggestions not regulations
David Wild, chair of the Joint Forum and chair of the Saskatchewan Financial Services Commission, says that the principles are suggestions and not regulations. He also stresses that the Joint Forum did not issue the principles to follow in the steps of FSCO or the CLHIA. Rather, he says, the association had been working on the principles for the past six years. “With that goal in mind, the Joint Forum set out to develop a common language to express minimum standards that should apply to the conduct of all financial services intermediaries in their dealings with consumers.”
When the Joint Forum announced its new principles, however, a landslide of reactions were posted on the advisor chat list, For Advisor’s Only (FAO). So much so that the FAO created a survey to gage advisor reaction of whether full compensation disclosure is needed.
In an interview with The Insurance Journal, David Barber, president of the Independent Financial Broker’s of Canada (IFBC), explains that he has no problems with the Joint Forum’s recommendations and that the IFBC worked on the committee that developed it.
He states, “We support what the Joint Forum is suggesting within various boundaries. It is making recommendations but it is not legislated. I think that is the key and we have put that into our requirements for membership. But my objections are with individuals in their paranoia who are trying to go on the premise that there is an absolute fundamental need for full disclosure of compensation in our industry.”
He explains that both from an insurance company standpoint, and from a registrant standpoint, there is no need for full disclosure nor is there a demand for it.
“When somebody has a disability and they have a cheque in their hand, they want to kiss you. It may have taken you two years of twisting their arm to get them to buy it, but ultimately you convince them because you know it is in their best interest. Never in that entire process do they say, ‘how much is in it for you Mr. Agent?’”
He adds, “I think that it is very important that we understand what the issue is all about. The investigations have stemmed from the Spitzer inquiry in the U.S. And as far as I can determine we do not have the same problems here. Therefore, there is no need for extensive retooling of the compensation requirement.”
Harley Lockhart, an advisor for close to 20 years, says it will be difficult for him to disclose his compensation amount since he does not know what it is. “I choose not to know since I do not want my decisions to be influenced. When I started in 1986 and I was pressed for cash, I found myself at a quandary, I was wondering what I made my decisions based on, so I decided to stop knowing how much commission I was receiving.”
He does inform his clients, however, that he is receiving some-type of commission – even though his customers are not asking for it. “I have been in the business since 1986 and a half-dozen clients have asked me how much I am paid,” he says. Therefore, he argues, any suggestion that the consumer is overly concerned is a fabrication.
But the Kelowna, B.C.-based advisor says he is in the process of putting together a document that consumers will have to sign – acknowledging that he informed them about the compensation.
“I am doing it not because of client pressure but because of regulatory pressures. I have a great concern that as an industry if we don’t become proactive, the regulator will become involved and create a system that is unworkable. This is what happened in Great Britain,” he states.
“If you are a shoe-salesman and you had to disclose everything that an advisor had to, then everyone in this country would be barefoot. It is unreasonable. The focus is on the wrong place: it should be on the professionalism of people in the business.”
He adds that the vast majority of products available are regulated and reliable and the insurance industry as a whole has a reputation for security. “One of the things that impressed me the most about this industry is the degree of caring that agents have for their clients. At times, agents care more about their (clients’) financial affairs than the clients themselves.”
Overall, he says, these new regulations are “exercises appearing to do something without doing anything.” Instead, he says, they should concentrate on such things as advisors requesting peer audits of their business. That would bring more protection.
Jim Bullock, registrar of the Peel Institute of Applied Finance and a long-time advisor, says that the whole talk of compensation disclosure is irrelevant since no one will be monitoring the situation.
“Most advisors have never read the Insurance Act and its regulations. Since 1995 in Ontario, we have had a regulation requiring agents to disclose in writing at the first meeting a list of the companies they represent and the services they provide. That regulation was recently augmented in November by FSCO, that they must also disclose any conflicts of interest,” explains Mr. Bullock.
“The regulation was put there to address conflicts of interest and it wasn’t being obeyed. And now they are saying all conflicts of interest to make sure they don’t miss anything. But if agents are ignoring black letter law then what effect will guidelines have on them? None. There is no power behind them.”
He adds that the Joint Forum is an attempt to bring approximate harmony and the first step is to publish a set of guidelines that all the regulators agree to. Now it will probably be in 20 to 40 years before anything is actually done. “It will be a long time before they all get around to rewriting the rules,” remarks Mr. Bullock.
Nonetheless, he emphasizes, that he still applauds the Joint Forum for the initiative. “I have no problem with their guidelines. The only thing I am upset about is that it has taken them six years to come up with the guidelines. Instead, in those six years you could have had all the regulators rewrite their rules to include these provisions.”
As an advisor, Mr. Bullock reveals that he has never disclosed the compensation he receives. “No one ever asked,” he explains, adding, “although every single client I know, knows I receive a commission.” He also points out that there are no audits in the life insurance industry. “I have been in the business for 30 years and no insurer has ever gone through my files.”