LIFE INSURANCE COUNCIL OF SASKATCHEWAN

Transcription

1 LIFE INSURANCE COUNCIL OF SASKATCHEWAN PROPOSED SEGREGATED FUND MARKETING GUIDELINE Purpose of the guideline The marketing of mutual funds is subject to specific regulation by the Mutual Fund Dealers Association (MFDA). The marketing of segregated funds is regulated but is not subject to specific regulations similar to the MFDA. 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 difference in the regulatory oversight has been noted by regulators. There is currently an initiative by federal and provincial regulatory authorities to bring the marketing disclosure requirement of the two products into harmonization. Council is obligated to regulate in the interests of the consumer and it is not appropriate to have significantly less oversight in the marketing of segregated funds than is mandated in the marketing of mutual funds. The purpose of this guideline is to alert and inform individual agents and managing general agents of how Council intends to apply the misconduct provisions set out in Bylaw 8. Authority to act 1. The Saskatchewan Insurance Act, under Section 466.1, (4), (c), provides for the delegation of powers to a Council to establish and enforce ethical, operational and trade practices for members of occupational groups in the insurance industry. 2. The Saskatchewan Insurance Council Regulations establishes Council and permits Council, under Section 9, (1), (b), to make bylaws establishing ethical, operational and trade practices for persons to whom the council has issued a licence. 3. Council Bylaw 1, Section 4 says Council: (a) may make bylaws as allowed by the act and regulations. (e) shall establish bylaws governing the ethical, operational and trade practices for licensees. 1

2 4. Council Bylaw 8, Section 2, says that a licensee may be guilty of misconduct if the licensee: (i) fails to reasonably ascertain through prudent fact gathering a consumer s insurance needs. (j) fails to ensure that a consumer or insurer is fully informed of all relevant information that will allow the consumer or the insurer to make an informed decision. (k) fails to reasonably carry out a consumer s lawful instruction. (p) fails to maintain proper records. (q) fails to follow sound business practices. Marketing Guideline Council s intention in this guideline is not to duplicate the MFDA rules but rather provide guidance to licensees on how Council will consider how a licensee has dealt with a consumer. Courts have consistently held a licensee is a professional and has a fiduciary duty when dealing with a consumer. Council will apply this high standard when considering the conduct of a licensee. Council will apply the misconduct sections referenced below using the rationale set out. 1. Bylaw 8, Section 1, (a) says misconduct is a question of fact but includes any matter, conduct or thing, whether or not disgraceful or dishonorable that is contrary to the best interests of the consumer or licensees or insurance companies. In the sale of investment products a high level of competence, knowledge, care and skill is expected and will be looked for. If that is not evident a licensee may be held to not have acted in the best interests of the consumer. A licensee marketing investment products is strongly encouraged to learn the principals of investing and in particular the concept of asset allocation. The consumer is relying on the expertise of the licensee to provide knowledgeable advice on the investment products being offered by the licensee. 2. Bylaw 8, Section 2, (i) says that a licensee who fails to reasonably ascertain through prudent fact gathering a consumer s insurance needs may be guilty of misconduct. Segregated funds are investment products and as such a properly completed know your client document (KYC) is an essential part of determining a consumer s needs. 2

3 A KYC document, to be effective, must be able to assess four critical factors respecting the consumer, and they are: 1. The consumer s investment time horizon; 2. The consumer s risk tolerance; 3. The consumer s investment knowledge; and 4. The consumer s investment objective. An effective KYC document should as well provide important information respecting the consumer that will provide a compliance person with sufficient information to assess the product being recommended to the consumer. The KYC document must be kept current and up to date. Council will generally accept an annual updated KYC to be adequate. 3. Bylaw 8, Section (j) says that a licensee who fails to ensure that a consumer or insurer is fully informed of all relevant information that will allow the consumer or the insurer to make an informed decision may be guilty of misconduct. A licensee recommending a segregated fund has an obligation to disclose clearly in terms easily understood by the consumer the nature of the underlying investments being recommended. Where the underlying investment in the segregated fund is equity based the licensee must ensure that the risks of equity investing are clearly explained and understood by the consumer. When a licensee recommends and or puts in place a leveraged loan strategy, the licensee must ensure through proper disclosure documents that the risks of borrowing have been fully disclosed and acknowledged by the client. A licensee will be expected to be able to demonstrate that proper fact finding has been undertaken to confirm that the consumer has sufficient financial resources to make the interest payments and/or meet a potential margin call. When surrender charges apply these must be disclosed in a form that is easily understood by the consumer. When a limited trading authorization in favour of the licensee has been obtained it must not permit any discretionary trading by the licensee. This will mean that no additions, switches or deletions can be done without the client s approval. Whenever disclosure is required a signed acknowledgement of the disclosure document must be obtained from the consumer. A signed copy must then be given to the consumer and a signed copy kept in the consumer s file. 3

4 4. Bylaw 8, Section (f) says that a licensee who fails to reasonably carry out a consumer s lawful instruction may be guilty of misconduct. All lawful instructions from a consumer must be carried out, even when a licensee disagrees with a consumer s instruction. In the event a licensee disagrees with the instruction of the consumer, the licensee will be expected to have documented evidence of the advice given and the reason for it. 5. Bylaw 8, Section (p) says that a licensee who fails to maintain proper records may be guilty of misconduct. The absence of any of the following documents may be held to be misconduct: (1) A record of client contact. (2) A current signed copy of a KYC document. (3) A signed leveraged loan risk disclosure document if applicable. (4) A signed copy of a limited trading authorization if obtained. (5) Proper documentation evidencing trade instructions and confirmation of trades. Where verbal instructions are given, additional written confirmation is strongly advised, unless calls are recorded and retained for future reference. 6. Bylaw 8, Section (q) says that a licensee who fails to follow sound business practices may be guilty of misconduct. A licensees conduct may fall within one or more of the preceding sections, but will generally be judged against what a prudent professional would do with respect to the circumstances of the segregated fund transaction. The MFDA requires each dealer to have a compliance person who oversees mutual fund transactions and ensures there is compliance with the MFDA rules governing the marketing of mutual funds. Council s revised bylaws that came into force January 1, 2007 require all licensed agencies to identify a designated person to be responsible for the overall management and supervision of the agency. Council will expect the designated person to be able to demonstrate to Council that a reasonable level of oversight is occurring that is similar to that expected of the compliance person in a mutual fund dealer. For example, all new segregated fund transactions will need to be reviewed by the designated person to ensure that they are suitable for the client. This will mean a KYC has been reviewed and the product selection is consistent with the risk tolerance and stated objectives of the consumer. When a leveraged loan strategy is used the designated person will need to see in addition to the KYC a completed loan disclosure document setting out the risks of the leveraging strategy and a cash flow document that demonstrates the consumer can safely handle any payments that may become necessary. 4

5 In addition the designated person will need to satisfy himself or herself that the agent has a record keeping system that will provide a record of client contact, discussions, agent recommendations, and any mandatory point of sale disclosure documents that may be required. A managing general agent (MGA) will need to make sure their designated person required by Council s bylaws is providing a level of compliance that is comparable to a dealer in the mutual fund industry. Council will expect an MGA to have a good working knowledge of Council s bylaws and guidelines. For example, Council will expect an MGA to ensure that agencies and or individual agents contracted through the MGA have compliance procedures in place to ensure proper records are being kept, a KYC is completed annually and when a leveraged loan strategy is used all of the appropriate disclosure and suitability requirements outlined above for agencies and an individual agent has occurred. Segregated Fund Guideline (June 7, 2007) 5