Personal Finance

Position paper calls for transparency on the costs of advice, insurance and investment management.
By Rudy Luukko | 18/12/17

Regulators that oversee segregated-fund insurance contracts aren't satisfied with being weak on disclosure. They're taking steps to implement new transparency regulations for seg funds, some of which would be tougher than those that now apply to mutual funds.

About the Author
Rudy Luukko is editor, investment and personal finance, at Morningstar Canada. Before joining Morningstar in 2004, he worked as an editor and writer for various general, specialty and institutional media. He holds a Canadian Investment Manager (CIM) designation and a Bachelor of Journalism degree from Carleton University. A former chair and founding member of the Canadian Investment Funds Standards Committee (CIFSC), he has also co-authored courses for the Canadian Securities Institute. He welcomes your comments at but cannot provide individual advice. Follow Rudy on Twitter: @RudyLuukko

Details of new requirements concerning what life insurance companies would need to disclose to holders of seg funds are contained in a position paper released on Dec. 13 by the Canadian Council of Insurance Regulators (CCIR).

Early in the new year, CCIR intends to publish a prototype disclosure document for seg funds, which it will test in consumer-focus groups before consulting with industry stakeholders.

The CCIR proposals call for the disclosure document to be provided annually to investors. This is the same frequency that applies to mutual-fund companies under the provisions, known as CRM2, which were phased in starting in July 2016 by securities regulators and that are now fully in force.

Some of the CCIR recommendations have a familiar ring for mutual-fund investors. The new rules would require insurance companies to express in dollar amounts, for each seg-fund contract, the costs of advisor compensation, such as trailer commissions and point-of-sale commissions paid by companies on sales of deferred-sales-charge funds. This is similar to what mutual-fund companies and their distributors are required to disclose annually.

In some respects, the insurance regulators would go beyond what's required under CRM2. If implemented, the proposed seg-fund rules would also require insurance companies to express in dollar terms the annual costs of investment management and of the insurance provisions. Mutual-fund regulations require management fees and management-expense ratios to be disclosed, but these are expressed in percentage terms rather than the dollar amounts that would be required for seg funds.

As part of their push to protect seg-fund holders from conflicted advice, the regulators also propose to require that the insurance companies disclose how much they're paying in sales incentives. Companies that pay travel and accommodation costs for salespeople attending conferences would need to disclose the approximate or actual costs of these perks.

In a release accompanying the position paper, CCIR chair Patrick Déry said consumers "want to understand and be able to compare the products that are available to them. But, they also want to know what it is going to cost." Déry, who is superintendent, solvency, with Quebec's Autorité des marchés financiers (AMF), said the new disclosure framework will inform consumers of not only the performance of their segregated funds, but also their costs.

The costs of maturity guarantees and death benefits of seg funds depend on the level of protection. A 75% maturity guarantee, for example, is cheaper than a full 100% guarantee. Typically, as noted in the CCIR paper, management-expense ratios of seg funds are 0.5% to 1% higher than for comparable mutual funds.

Greater transparency for seg-fund costs would address the risk of regulatory arbitrage by financial advisors who are dually licensed to sell mutual funds and life-insurance contracts, the CCIR says. Currently, dually licensed advisors who are uncomfortable with the CRM2 disclosure provisions for mutual funds can instead steer their clients toward seg funds. This becomes a consumer-protection issue if seg funds are being sold to investors who are saddled with additional costs for insurance benefits that they don't want or need.

The CCIR paper states that while there are anecdotal statements from stakeholders and media reports that regulatory arbitrage is occurring, it found no evidence that this is the case. "However, in order to protect consumers, the CCIR seeks to proactively amend standards where appropriate to ensure that intermediaries have little incentive to prioritize their interests over those of their clients," the paper said.

Regulatory arbitrage would become much more of an issue if securities regulators were to follow through on their proposals to ban embedded advisor compensation for mutual funds. Under such a ban, dually licensed advisors could still be paid directly by companies for sales of seg funds, but not for sales of mutual funds.

So far, the insurance regulators are taking a hands-off approach on the thorny issue of whether embedded compensation, such as trailer commissions paid out of fund-management fees, should be banned for seg funds. Depending on what mutual-fund regulators decide to do in 2018, the CCIR may feel compelled to take a stand on embedded commissions in a future position paper.

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