Provincial regulator eases on seg fund proposal

By Mark Noble | October 12, 2007 | Last updated on October 12, 2007
4 min read

The Saskatchewan Insurance Council has revised its controversial segregated fund marketing guidelines. The new document, to be released on October 16, is expected to take a much softer line.

In June, the Council released a document entitled Proposed Segregated Fund Marketing Guidelines, which presented guidelines to be used during a disciplinary hearing to determine if a licensee has broken a council bylaw.

The document included the suggestion that licensees who market segregated funds learn the principles of investing and asset allocation. Licensees were also strongly encouraged to disclose the underlying investments within a seg fund and ensure their clients are well aware of the risks associated with leveraging to invest.

The Council was forced to retreat from these guidelines after facing considerable opposition from organization and individual advisors who submitted written concerns or voiced their complaints at open forums in Saskatoon and Regina.

Many of the critics worried the guidelines were actually proscriptive bylaws similar to those the Mutual Fund Dealers Association uses to regulate mutual funds. The Council’s proposal, in fact, opened with a direct comparison.

“The marketing of segregated funds is regulated but is not subject to specific regulations similar to the MFDA,” the document stated. “Mutual funds and segregated funds are similar in design and performance. The single notable distinguishing feature is a guarantee of the principal component of segregated funds.”

The committee responsible for the initiative has created a new document of what are now called guidance notes, says John Waugh, the Council’s director of compliance.

“Council will look at the recommendations from the committee and will review what they’ve heard from the industry and what they’ve heard at the open forums to determine if the new document has addressed those concerns,” he says. “What will come out will be quite different than what the first draft was.”

Advocis was one of the organizations that expressed concern. Sara Gelgor, Advocis’s vice-president of regulatory affairs, says the Council didn’t realize the document was being interpreted as new regulation.

“The [format did] introduce some new requirements. What we heard from the Council was this was not their intention. Their intention was to provide guidance with respect to the existing rules,” Gelgor says.

Gelgor is confident the guidance notes will be more in line with the principles-based approach her organization strongly supports.

“The Council has been very open to consultation. They’re very interested in hearing the industry’s perspective and I am quite confident that they will incorporate the views from industry. Any initiative that comes out of the Council is not something that is going to impose more rules,” she says.

In the U.S. insured investments are considered investment products and are regulated by the Securities Exchange Commission, while in Canada, insurance regulators monitor them.

Critics of the Canadian system have argued the separate set of regulations for mutual funds and segregated funds is unfair, and that either seg fund sellers have to be held to the same standards as mutual fund sellers or vice versa.

Waugh says the Council initiated the proposal because the definitions of its principal-based rules were vague and caused confusion.

“Council saw at various [disciplinary] hearings there was a misunderstanding from licensees as to what extent those principals can be applied when a complaint is received,” Waugh says. “Just what does it mean to act in the interest of the consumer, maintain proper records or determine a consumer’s needs? Those are very broad.”

The Council’s retreat is the opposite of what has been happening south of the border, where the SEC recently enacted very comprehensive laws that dictate how variable annuities, a type of seg fund, are marketed.

This move followed years of complaints about agents selling deferred variable annuities, which can defer any income for up to 10 years, to seniors and retirees. Since most seniors require immediate income, in many cases, deferred annuities are completely inappropriate for elderly clients.

Variable annuities as a whole are very new to Canada and are represented by products like Manulife’s IncomePlus or Sun Life’s SunWise Elite Plus.

Gelgor says Advocis may change its position if problems started to arise, but she believes the principal-based regulation in insurance is the best way to safeguard seg fund investors.

“Until such time as there is a reason to move away from it, we would urge such regulators to continue to adhere to a principles-based models,” she says. “We’re certainly not seeing a flurry of complaints amongst consumers about segregated funds and we don’t have a problem in the industry about advisors’ advice in dealing with segregated funds. Therefore we don’t have a problem in the industry.”

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Mark Noble