Regulators to ban DSCs for seg funds

The ban on deferred sales charge (DSC) structures that takes effect for investment funds on June 1 will be adopted for segregated funds too, insurance regulators warned today.

Citing a “high risk of poor consumer outcomes” and concerns about whether DSCs violate the expectation that customers be treated fairly, the Canadian Council of Insurance Regulators (CCIR) and the Canadian Insurance Services Regulatory Organizations (CISRO) signalled their intention to ban DSCs for seg funds.

The regulators called on insurers to “refrain from new DSC sales in segregated fund contracts in line with the June 1, 2022 ban in securities, and expect a transition to a cessation of such sales by June 1, 2023.”

Later this year, the regulators will also issue a joint consultation to examine the use of upfront commissions in seg funds, driven by some of the same investor protection concerns about embedded fee structures that have preoccupied securities regulators in recent years.

“Upfront commissions in segregated funds may present similar concerns…in terms of the potential for conflicts of interest and alignment in cost and services,” the regulators said in a release.

Given those concerns, the regulators said they are “contemplating what other changes may be needed in upfront commissions” for seg funds, including a possible ban on upfront commissions.

“The consultation will give consumer advocates, the insurance industry and other stakeholders the opportunity to share their perspectives on this matter. It will also serve as a checkpoint for the industry to provide a progress update with regard to ending the use of DSCs for new segregated fund contract sales,” they said.

Following the consultation, the regulators “intend to move forward swiftly with a policy position and guidance on upfront commissions in sales of segregated funds.”

Along with the goal of improving the treatment of clients, the regulators indicated that their action on DSCs, and upfront commissions generally, reflects a desire to prevent regulatory arbitrage that could be created by having starkly different rules for highly similar products, such as mutual funds and seg funds.

In a statement, the Canadian Life and Health Insurance Association Inc. (CLHIA) said that the industry supports the regulators’ efforts “to better align the regulatory environments for segregated funds and mutual funds,” including their plan to put an end to DSC seg funds.

“Our industry looks forward to continuing to work collaboratively with the CCIR and CISRO on this important initiative,” CLHIA said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.