Opinions are strong on both sides. The issue is whether the life insurance industry should begin following mutual fund regulations and tie brokers to just one managing general agency in the name of compliance. Many argue that the public would be better protected, while others say brokers would loose too much of their independence.
The answers to these questions have put life insurance distributors at odds. On the one side, most managing general agencies (MGAs) support (and some are actively pushing for) a move to adopt the kind of regulations practiced in the mutual fund industry. On the other side, brokers fear the result would be a loss of necessary independence.
Presently, mutual fund representatives can only do business through one mutual fund dealer, and the dealer is responsible for monitoring the reps’ business transactions. The regulators, in turn, overlook the operations of the dealer, and compliance for both parties is key. This culture of compliance, however, does not exist to the same extent in life insurance, and brokers are free to deal with more than one MGA at the same time.
The argument put forth by the MGAs is that increased compliance would give them greater control over their brokers’ sales activities and therefore help protect them against legal liabilities. Moreover, MGAs argue that the increased supervision on brokers’ activities would help protect consumers.
Supporters of compliance like Kevin Cott, President of the MGA, Qualified Financial Services Inc. (QFS), argue that by having 100% of the broker’s business, they can better understand if they are dealing with an ethical broker.
“Compliance creates a better level of broker…when a broker solely deals with one MGA, the MGA knows if they are dealing with an ethical broker, since they monitor all their business,” he says.
Currently, there are no laws preventing MGAs from writing contract clauses limiting brokers from doing business elsewhere.
Assante is one of the few MGAs that already restricts the majority of its brokers from dealing with other MGAs. “We have a strong commitment to compliance,” says Shaun Devlin, Vice-President of Compliance at Assante. Mr. Devlin says that by meeting compliance requirements, it is less likely for a successful lawsuit. This, he says, benefits the MGA, the advisor, and the client. Mr. Devlin adds that he can see compliance becoming a trend that other MGAs will impose.
For consumer protection
Public protection is paramount, agrees David Baird, President of the full-service MGA, Ten Star Financial Services. “People have been defrauded!” he says referring to bad apple brokers. “In every business you have people that do bad things, we have to be aware that they do exist and we have to try and get them out of the business,” says Mr. Baird.
“I know there are a lot of life insurance brokers and some associations that are upset and not pleased with the way things are going. They feel they will lose their freedom if they are put under a main distributor but the truth is they won’t, they can always switch to another distributor,” he says. “They have to understand that there needs to be a cost-effective way of policing everyone. They are not picking on the good guys, but it is the very small percentage of bad guys that create all the problems for everybody else.”
Mr. Baird uses the example of brokers who fail to trade a segregated fund, or forge a cheque or take advantage of elderly people. He says it is crucial to have a safety net the public can use to protect themselves.
When a broker is tied to an MGA, it becomes the MGA’s duty to take immediate action and investigate the charges, continues Mr. Baird. If the MGA fails to do so, it can lose its livelihood and license. Therefore, it lays a certain level of responsibility on the MGA’s shoulders, in turn protecting the client.
“What are you going to do have hundreds and hundreds more government employees to handle every complaint? The government can’t afford that!” exclaims Mr. Baird.
Adding, “You have to make somebody else feel terrified. We’re terrified not to do it properly. If we tolerate somebody else doing a bad thing, we are as guilty as them, if the regulator finds out, we’re out of business.”
Loss of independence is also not an issue for Richard Boivin, First Vice-President, Judicial and Compliance Affairs at Cartier Partners. If a broker is forced to deal through one MGA, Mr. Boivin says that it does not take away their independence. He explains that as long as they remain a self-employed worker, they will still remain free to move their business.
It is more of an issue for brokers selling only life insurance than dual-licensed individuals because they are used to that compliance environment explains Paul Brown, Chair and CEO of Hub Financial. “…certainly for life brokers at this point, independence is a major issue.”
Independence at stake
Independence is certainly a major concern for David Barber, President of the Independent Financial Brokers of Canada (IFBC). He says that it is an extremely misleading statement to say broker independence would remain should the mutual fund system be superimposed on life insurance.
“It is a gross misstatement of the truth…that is the excuse the [mutual fund industry] always gives. ‘If you don’t like your dealer move.’ But they make it impossible to move!” points out Mr. Barber. He adds that the exception is Quebec’s system, where it is easier for a rep to change dealer.
As well, Mr. Barber adds that the benefit to dealing with several MGAs is that brokers have availability to more products, since product offerings differ among MGAs. As well, he says that the compensation level also varies among MGAs.
Brokers also suggest that there are a number of other reasons to tie brokers to one MGA besides consumer protection. It would certainly help their profits, states Mr. Barber.
A broker (who wished not to be named) added that another motive behind the MGAs praise for compliance is due to the tremendous pressure they face from insurance companies. Insurers want their products to be sold, and if quotas are not met, the insurer may stop doing business with an MGA, in turn decreasing the MGA’s profit margin. The broker explained that with compliance, MGAs would face less stress. By having 100% of the broker’s business, it would ease the pressure since MGAs could easily meet insurer quotas.
However, it is not a given that all MGAs would make a goldmine says Mr. Cott. He notes that MGAs who focus on service would benefit, but MGAs concentrating solely on compensation would lose out. He recognizes that with compliance, QFS would gain 100% of some broker’s business, but that it would also lose others.
Mr. Brown is curious about the real motive for greater compliance on the life side. He questions if it would really benefit the client or if rather, it would be in the best interest of the Mutual Fund Dealership Association (MFDA) and the Independent Dealer’s Association (IDA) since it would give them more control over distribution.
But while many brokers hypothesized that the MFDA, the IDA, the Ontario Securities Commission (OSC) and the Financial Services Commission of Ontario (FSCO) were behind the movement to implement compliance in life insurance, the regulators say the idea is unfounded.
“We don’t have a position on that because we don’t regulate insurance, we regulate the mutual fund dealers,” says Larry Waite, Chief Operating Officer at the MFDA. Rebecca Cowdery, Manger Investment Funds Regulatory Reform at the OSC, and Martin Ship, Director of Corporate Policy and Public Affairs at FSCO, echoed the same views.
Another point in favour of compliance is that it will simplify the business process. Mr. Cott explains that a broker at one point will pass away or leave the industry. If the broker was dealing with multiple MGAs, it becomes much more complicated to track down the client’s documents. He says it is much easier when all the files are kept in one environment.
As well, Mr. Boivin explains that since the products are so complex, the consumer may have difficulty understanding many of them, therefore, the clients would be better protected if there were compliance on the life side.
It would simplify things if the rules were harmonized, says Mr. Boivin. If there were accordance between the mutual fund and life insurance sectors it would facilitate business, he explained. He stresses that it does not make sense to have different rules for similar products being sold in both sectors.
Echoing Mr. Boivin’s view, Mr. Cott says that clients’ information should remain confidential. He explains that clients should be told who is looking at their private information. “If you ask the majority of clients where their insurance policy goes, many would say, straight to the insurance company,” says Mr. Cott. With compliance, only one MGA would handle the client’s personal records, not a number of them.
Additional side effects
What about the cost of greater compliance? If the life insurance model were to change, Mr. Baird adds that MGAs should be prepared to shell out money, explaining that it can get pricey and time-consuming.
“From my expenses and overhead it is a bad thing,” highlights Mr. Baird. Stressing that it would require checking every trade, checking all advertising and producing all the documentation, the same amount of work he presently faces on the mutual fund side. He adds that an auditor would also be needed to fly into Ten Star’s 33 life insurance branches to randomly check files.
The creation of an underground industry is another concern of brokers. There already exists an underground industry today, but it would be full-blown if compliance became mandatory, states the broker who wished to remain anonymous.
He provides the example of captive agents and their companies who bypass the system by creating distribution alliances with other MGAs to get the products they need for their clients. The source explained that brokers tied to contracts, continue to work with multiple MGAs without getting caught.
Education not regulation
Mr. Barber does not see a need to superimpose the mutual fund system on the insurance industry. Rather, he sees the need to further define and develop the life industry. He explains that the mutual fund system is hardly flawless and one that the life insurance industry should not mimic.
“We are already running into thousands and thousands of complaints regarding predatory dealers who are conducting themselves unethically. There are lot of complaints from people who are finding that the very rules that these systems have put in place, have been used to manipulate and exploit the intermediaries,” stresses Mr. Barber.
Concerning client protection, Mr. Barber does not see how consumers would benefit should the life industry develop a similar model to mutual funds. He explains that mutual fund dealers insist their proprietary products should be the focus of attention in the individual independent’s package.
“[In mutual funds] the preference is given to their proprietary funds, and that in no way serves the best interest of the consumer. That entire system needs to be revamped and revised, it is not capable of supporting an independent distribution network,” he notes.
In regards to the number of claims that many life insurance rack up due to wrongly selling complicated products such as universal life, Mr. Barber says the mutual fund model will not solve the problem. “Universal life is a matter of education, not only a question of educating the consumer but the individual brokers,” he says.
Mr. Barber adds that disclosure at the point of sale would help alleviate future problems. He explains that clients should be fully briefed on the policy and that the client should sign a contract, indicating they understand the product they are buying.
Whether someone is for or against increased compliance, Mr. Brown highlights that a move in that direction is unavoidable. “With the condition of the marketplace and the nature of the products being sold and the amount of money being invested in these products, [compliance] is certainly a big issue,” states Mr. Brown.
Adding, “It is inevitable the products which we sell now on the segregated fund side and the universal life side are so aligned that it is inevitable that there will be increased compliance and security.”
Mr. Brown explains that he is surprised that the mutual fund compliance system has yet to be applied to life insurance. “When I looked into my crystal ball three or four years ago, I thought it would have happened by now…it appears the regulators on the insurance side and the securities side are not in synch therefore nothing has happened.”
Despite its unknown arrival date, he stresses that it is important that the distributors position themselves and be prepared when compliance becomes mandated in life insurance.