MGAs must

Like it or not, managing general agents (MGAs) must accept they have vicarious and even direct liability, and therefore have a duty to supervise the advisors with whom they deal, according to Peter Lamarche, president financial services, Blonde & Little.

Speaking at the Advocis Symposium on The Future of Financial Services Distribution in Canada, Lamarche suggested those MGAs that deny they’re liable are living in the past, when the MGA’s role was largely tracking commissions.

But the demise of carrier career shops swelled their ranks and forced MGAs to offer additional products and services in an effort to differentiate themselves from their competitors. Once the MGAs began offering technical support, marketing assistance, and underwriting services, they were on the hook for legal liability.

Lamarche pointed out the advisor is responsible for a litany of things, from statements and claims made to clients, to recordkeeping, disclosure, privacy and adherence to the insurance industry code of conduct.

“In our view, those things are clearly your area of responsibility,” Lamarche said, speaking on behalf of CAILBA. “In the not-too-distant past, most of these things were the responsibility of your primary insurer. They stepped in and made sure all the recordkeeping was done and you were onside.”

The carriers still bear some responsibility, he said, including product integrity, guarantees of performance, their own presentation documents, and training their reps. But since walking away from the career-shop model, carriers have been distancing themselves from liability.

“We have a fear that too much liability will be placed at our doorstep by the other stakeholders, particularly the insurers, who would like nothing more than to enjoy the lack of accountability that mutual fund manufacturers enjoy,” Lamarche said.

In assessing the MGA’s role, he pointed out that the MGA is not at the table with the client, and is not responsible for the product.

“CAILBA’s decision regarding financial advisor supervision will not include product suitability. It’s just not part of our area of responsibility, nor could we ever envision being able to do it. This is the advisor’s responsibility.”

The responsibility of the MGA, he suggested, is in knowing their advisors.

“Knowing your financial advisor is akin to knowing your client as a financial planner,” he said. “We believe it’s a reasonable expectation that an MGA knows who their financial advisors are.”

Gerry Matier, executive director, Insurance Council of British Columbia, agreed, saying regulators don’t expect the MGA to scrutinize every product a client is sold.

He admitted the ICBC can only dig so far into the past of an advisor applying for a license, and that once licensed by the council it is somewhat unfair to expect the MGA to conduct a thorough background check on a prospective advisor.

But MGAs should take the time to know the history of the agent since they were first granted their license. Frequent movement from one MGA to another should raise a red flag.

As for the level of supervision, the only way an MGA could judge individual product suitability would be to dissect the entire financial plan – an unrealistic prospect given the volume of business they face.

“There has to be a process in which we are educating [agents], we have good educational standards and there is also a standard that advisors have to get to,” said Matier. “As part of that, there also has to be supervision. Somebody has to be overseeing new agents as they come into the business.”

He is convinced this direct supervision is not the role of the MGA, but that they should be careful in their dealings with a new agent.

While the insurance industry does not require the same KYC documentation as the investment industry, Matier says the advisor had better be able to support each recommended product within the context of the overall financial plan.

“Product suitability is a non-starter for us,” Lamarche stated. But the MGA should keep a sharp eye out for clearly suspicious activity. An agent who suddenly starts placing much larger policies than usual, for example, or a freshman putting in place a complex financial plan. In either case, it might be perfectly legitimate, but it’s worth a second look.

Lamarche offered one final piece of advice for the financial advisors in the audience: “When that client complaint comes, and it will, everyone — regulators, clients, insurers and MGAs — will find someone to blame, and if your only defence are good intentions, then the search for someone to blame will have been successful.”

(11/27/09)