Harmonizing insurance and securities regulation has been a niggling issue for many years, in Canada and beyond. Quebec’s financial markets regulator, the Autorité des marchés financiers (AMF), thinks that “the time is ripe” for reflection on this topic. A key goal: apply the same commission disclosure rules to segregated funds and mutual funds.The regulator broached this topic during a panel discussion at its annual Rendez-Vous in mid-November. The AMF pondered the possible standardization of regulation of some insurance and securities products seen as similar, to make the financial sector run more smoothly. Segregated funds, sold by insurers, were spotlighted in this analysis.
Although disparities between seg funds and mutual funds stem from the specific features of each sector, compliance should be uniform. A double standard can lead to regulatory gaps, which may hinder the financial sector and go against consumer’s interests, says Eric Stevenson, superintendent, Client Services and Distribution Oversight at the AMF, who led the panel.
“The AMF has been consulted several times about regulatory arbitrage risks, notably by the Investment Industry Regulatory Organization of Canada (IIROC). The Autorité therefore sees this joint reflection with industry players as essential,” says Louise Gauthier, director, Distribution Policies and SROs, at the AMF. “The securities industry has changed its tune: it now fully endorses regulation. I think the time is ripe for the reflection we are starting today.”
Bruno Michaud, senior vice president – Administration and Sales, at Industrial Alliance, sees less of a need to review the regulation of these products, because he feels consumer protection is guaranteed. “When it comes to the client experience, segregated funds and mutual funds are the same. The products are identical, apart from the insurance guarantee. In both cases, clients are protected in terms of security and compliance,” he says.
“Frankly, all these regulation and compliance questions are not exactly pressing for consumers, who mainly want a compass to help them navigate the sea of existing products,” says Stéphanie Grammond, a personal finance columnist for the daily newspaper La Presse.
“The IIROC published a report that proves that consumers don’t remember their advisor’s title or the products purchased, especially when the features are similar. For investors, the line between all these products is very fine,” Grammond adds.
In 2009, the G20 asked the International Joint Forum, made up of the International Organization of Securities Commissions (IOSC), the International Association of Insurance Supervisors (IAIS) and the Basel Committee on Banking Supervision (BCBS), to review regulatory approaches for the banking, securities and insurance sectors. The G20 also asked the Joint Forum to recommend improvements.
The impact of the Forum will be felt in Quebec, the panelists underlined. As of July 2016, financial advisors will have to give their clients more precise information under new securities trading regulation. Each year, they will have to produce amortization schedules for their clients. In addition, charges must now be published in current dollars.
“I think disclosure of commissions won’t change much. However, there is a risk of inequity in mutual fund distribution. It will spark heated debates,” Bruno Michaud warns. “You need the same rules for mutual funds and segregated funds.”
Stéphanie Grammond eagerly awaits the new rules. “This is very good news because half of investors do not know the return on their products. I think there will be positive effects in relations between investors and their advisors.”
She also wants to see standardized regulation between securities and insurance products. “The same rules should be applied to segregated funds. Why should they be immune from these rules? Mutual funds and segregated funds need the same rules.”
The AMF agrees that the new standards are a step forward, but they must be harmonized across similar products. “We found the right quantity of information to transmit to clients,” Louise Gauthier says. “I think its the insurance industry’s turn to adopt the same rules.”
“In sales of both securities products and insurance products there are three main steps: needs analysis in insurance, which corresponds to knowing the client; updating client information; and product knowledge. In the end, advisors must have the same obligations,” Gauthier says.
Another key question: redefining the role of the advisor – especially given the advent of new technologies and online purchasing.
“In insurance and securities alike, only professionals are authorized to give advice,” Louise Gauthier explains. “Yet insurers want to sell products online with no advisor involvement. If a product is offered online, it must be subject to the same regulation regardless of the tools used,” she says.
“Will the concept of advisor evolve?” Bruno Michaud wonders. “The Internet is there precisely to help clients avoid making missteps. Advisors and the Internet must work together.”