Regulators Weigh In on Seg Fund Compensation

by AdvisorAnalyst Writers

The Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) have expressed their worry about the use of advisor chargeback structures in segregated fund (seg fund) sales, citing potential consumer risks. They plan to address these concerns in upcoming guidelines.

The chargeback structures in question require representatives to refund a portion of their initial sales commission if customers withdraw their money within a particular timeframe. These structures, the regulators suggest, could potentially lead advisors, especially those who are less experienced and earn lower incomes, to recommend the product to clients for whom it may not be suitable.

The insurance industry defends chargeback structures, arguing that they allow certain clients easier access to financial advice. The industry also cautions against completely prohibiting the use of these structures. However, the regulatory bodies maintain that these structures, if used, require strict control measures to ensure customers are treated fairly.

Some of the control measures proposed by the regulators include implementing a short time period for chargebacks, allowing customers to withdraw a part of their funds without triggering chargebacks, and avoiding sales strategies that temporarily increase commission to boost sales. They also suggested that insurance companies should not unjustifiably hike seg funds' management expense ratios due to upfront commission structures.

In response to these concerns, the CCIR and CISRO plan to create a set of guidelines outlining necessary controls that companies need to implement. These guidelines will be part of a broader guidance on designing and selling seg funds. This comprehensive guidance will apply to all compensation structures and aims to ensure fair treatment of clients, provision of suitable advice, proper advisor training, and effective management of risks associated with leverage and other strategies.

Before finalizing these guidelines, the regulators will open them up for public commentary. Moreover, they plan to share their findings on chargeback structures' risks with the Canadian Securities Administrators (CSA) and keep a close watch on any actions taken by the CSA regarding similar compensation models in mutual fund sales.

The CCIR and CISRO have pledged to continuously monitor customer outcomes related to upfront compensation in seg funds. They assured that, if they notice any unfair practices in the future, they will consider additional action to safeguard consumers.

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