Quebec’s financial services regulator, the Autorité des marchés financiers (AMF), is paying close attention to sales incentives.
According to a draft sales conduct guide published in March and currently under review, the regulator does not want sales incentives offered by financial institutions to interfere with the fair treatment of consumers. The AMF hopes that companies will establish global remuneration policies to deal with the matter.
The AMF project affects most financial institutions, including both life insurers and property casualty insurers.
In an interview with The Insurance and Investment Journal Julien Reid, director of standards and deposit insurance in the AMF’s solvency unit, said that the guidelines do not forbid sales contests because they are neither laws nor regulations. “It is an expectation of the Autorité, which wants to encourage a corporate culture in the industry, he said.
The AMF says it wants to apply international best practices for consumer protection.
The AMF defines an incentive as a benefit offered by an institution to its management, its sales people, or to any other person involved in the relationship between the institution and the client who could influence the attitude or behavior of these people.
The regulator is focusing on non-financial benefits such as tickets to cultural or sporting events, trips, sales contests or promotions which could encourage sales people to offer or sell specific products, remuneration strategies that could include bonuses (such as commissions or premiums) linked to sales volumes generated or to reaching minimum results, and business models that are based principally on commissions and short term sales objectives.
The AMF’s project also asks institutions to disclose the different kinds of remuneration on their web sites.
Will managing general agents (MGAs) be subject to the guidelines?
Impact on MGAs
Mr. Reid says that MGAs will not be directly affected by the project since they are not insurers as defined in Quebec’s Act respecting insurance. However, the project will still have an indirect effect on MGAs since they will need to conform to processes put into place by insurers, and these will need to comply with the guidelines.
The newest version of the guidelines are available on the AMF’s web site. The regulator invited the industry to submit comments up until April 22. After examining the submissions, the AMF expects to publish a final version of the document in a few months. The industry will have a two-year transition period in which to put procedures into place.
Asked about the effect outside of the province, Mr. Reid replied that the guidelines were limited to Quebec. However, federally chartered insurers who are active in the province will need to comply, he explained.
The AMF is the first Canadian regulator to establish a framework for incentives. But others might follow their example, according to Mr. Reid. Furthermore, he says the Canadian Council of Insurance Regulators is interested in regulating incentives.
Formerly an important player in regulation at the AMF and now a lawyer in private practice, Yan Paquette says the project lacks teeth. Mr. Paquette was director of self-regulatory organizations, compensation and distribution practices at the AMF. He now deals in litigation and regulatory compliance at the Langlois Kronström Desjardins law firm.
According to Mr. Paquette, the guidelines could have gone further. While it is a step forward in business practices, he says it remains a weak gesture compared to the securities industry, where sales contests are no longer allowed. “Other developments will follow. A ban on sales contests could be the next step,” he comments.
Mr. Paquette says that another weak point is the difficulty in filing a complaint. If a customer feels aggrieved, he may bring his case to the AMF, but how can he prove that he was wronged? He says this would be a nearly impossible task given the similarity of products, and points out that the client is not the one who is best able to tell them apart.
The project is a step forward because it obliges insurers to take an interest in the effect contests have on the consumers interests, says Mr. Paquette. Previously advisers were under that obligation, now insurers are as well.
Asked for his description of an ideal situation, Mr. Paquette suggested that neutral contests be created. For example, the sale of one policy would give participants one participation point, and a draw could be held for the winners.
However, Mr. Paquette says hat he knows that this kind of formula is difficult to apply. “There needs to be competition between insurers and it should not be prevented. Regulation is indeed a balance between what is desirable and what is prohibited.”
He says it will be interesting to follow the project in light of the industry’s reaction. If the industry does not adopt the philosophy behind the expectations of the regulator, he predicts that the regulator will move further towards banning sales incentives.