June 6, 2016 Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives c/o Frost Building North, Room 458 4 th Floor, 95 Grosvenor Street Toronto, Ontario M7A 1Z1 Expert Committee: The Canadian Life and Health Insurance Association (CLHIA) is pleased to provide comments on the Expert Committee's preliminary policy recommendations as set out in Financial Advisory and Financial Planning Policy Alternatives. Established in 1894, CLHIA is a voluntary trade association that represents the collective interests of its member life and health insurers which, together, account for 99% of the life and health insurance in force in Canada. Our members contribute to the financial well-being of millions of Canadians by providing a wide range of financial security products, including almost $4.2 trillion of life insurance coverage. During 2014 in Ontario, life and health insurers made benefit payments of $40.3 billion, or roughly $775 million a week, to policyholders and beneficiaries. The industry has 67 head offices in Ontario, employs approximately 69,100 people, and invests over $265 billion in the provincial economy. In a letter dated July 27, 2015 CLHIA provided comments on the Expert Committee's initial consultation. Throughout this letter, "initial response" refers to that letter. In our initial response, we suggested that fundamental change to the existing regulatory framework for financial services is not required and that it is more appropriate to address existing gaps in a more targeted regulatory approach. We are pleased that the Expert Committee agrees with this approach and is recommending more targeted regulation to address issues it has identified. We believe the Expert Committee's specific recommendations, taken as a whole, reinforce the distinction between financial planning and financial advising that we made in our initial response. As discussed below, we believe the best way to reinforce this distinction is to focus on regulating those who hold themselves out as financial planners. Regulation of Financial Planning We agree that individuals who hold out as financial planners should be regulated. Further, we strongly recommend that holding out be the basis of regulation in this area. Canadian Life and Health Insurance Association 79 Wellington St. West, Suite 2300 P.O. Box 99, TD South Tower Toronto, Ontario M5K 1G8 416-777-2221 www.clhia.ca Association canadienne des compagnies d'assurances de personnes 79, rue Wellington Ouest, bureau 2300 CP 99, TD South Tower Toronto (Ontario) M5K 1G8 416-777-2221 www.accap.ca Toronto Montréal Ottawa
We also strongly recommend against attempting to define financial planning and then regulating those who engage in that activity. The definition of financial planning in Appendix A of the Expert Committee's report is quite sweeping. The phrase "any review and analysis of present and future financial needs" could be interpreted, for example, as including the sort of needs analysis that licensed life agents do when making recommendations about life insurance. Such an activity based approach would inevitably lead to confusion as to the scope as to who is to be regulated and to unnecessary overlap with the needs analysis activities of life insurance representatives On this point, where we refer to the regulation of financial planning throughout this letter, we have in mind the regulation of those who hold themselves out as financial planners. With respect to the recommendation that the regulation be carried out by existing regulators, it is not clear how this will be implemented. If the role of the individual regulators is limited to recognizing a set of standards, this approach might be workable. If, however, the role of the regulators is broadened to involve development of standards and/or investigation and enforcement, it may be difficult to maintain consistency of regulation with this approach. Last year the Mutual Fund Dealers Association consulted on standards that should be required for registrants who hold out as financial planners. This may suggest the outline of an effective approach whereby existing regulators (i.e., the Financial Services Commission of Ontario or its successor, the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association) require that their licensees who hold out as financial planners comply with a prescribed set of standards. Harmonization of Standards We agree that requirements for education, training, credentialing and licensing of persons who hold out as financial planners should be established in a single set of standards. The Expert Committee did not provide clear direction on what the standards should be. Well known and established standards for financial planning already exist and it would seem appropriate for the Expert Committee to recommend one of these. In our initial response, we recommended the standards that have been developed by the Financial Planning Standards Council. If the Expert Committee believes there are short-comings in these standards, the discussion could have been usefully advanced by identifying these weaknesses and proposing specific enhancements. Statutory Best Interest Duty In our initial response we described the duty of care that has been established by the Canadian Council of Insurance Regulators (CCIR) for managing conflicts of interest. For making recommendations about life insurance products, we believe effective consumer protection is provided by a duty to (1) put the client's interest ahead of those of the advisor, (2) disclose conflicts of interest and (3) recommend suitable products. This has proven to be an appropriate and effective standard for those providing advice about life and health insurance. 2
The Canadian Securities Administrators (CSA) is currently consulting on this matter. In its Consultation Paper 33-404 Proposals to Enhance the Obligations of Advisors, Dealers, and Representatives Toward Their Clients, the CSA notes that there is no consensus among securities regulators on the value to the consumer of a statutory best interest standard. Of particular note, several regulators are of the view that specific targeted reforms also recommended by the CSA in the same consultation will be more effective in terms of providing protection to consumers. Turning back to the regulation of financial planning, we respectfully submit that specific targeted reforms, such as the other preliminary recommendations made by the Expert Committee, are the best way to effectively protect consumers. Exemptions If a standard is recommended that differs materially from the three principles described above, it would need to be reviewed to determine the need for exemptions. Referral Arrangements We have concerns about this recommendation. In its rationale, the Expert Committee states that consumers seeking financial advice or planning should be assured they are receiving these services from individuals with appropriate credentials and licensing. This seems to suggest that the Expert Committee views making a referral as giving advice. While a referral may be viewed as a recommendation, it does not seem reasonable to view it as financial advice. The Expert Committee appears to be contemplating a specific set of circumstances that is not typical of many referral fee arrangements. Two examples of common referral arrangements are a lawyer preparing a will for a young couple expecting their first child and an accountant preparing a tax return for a client interested in making charitable donations. In either of these situations, the lawyer or accountant may refer the client to a life agent and receive a fee for this referral. We are not aware of any regulations that require that both parties in a referral arrangement be licensed. Where referral arrangements are regulated, the general approach is to require that the licensed party disclose the nature of the arrangement, including associated compensation. Of note, the Mutual Fund Dealers Association Rule 2.4.2 on Referral Arrangements explicitly acknowledges that the arrangement might be between a Member or Approved Person and another person or company. Finally, it should be noted that these requirements are generally intended to address conflicts of interest. The question of whether the person giving advice is licensed is effectively addressed by identifying licensed persons on a registry. For all these reasons, we strongly encourage the Expert Committee to carefully reconsider this recommendation. Titles and Holding Out We agree that individuals who hold themselves out as financial planners should be regulated. 3
We question the need to develop a list of approved titles for other licensed persons in the financial services industry. A number of stakeholders have commented on the variety of titles in use in the financial services industry and suggested this is a cause of confusion. We are not aware of any evidence that this variety is actually causing confusion. What is more, a short list of generic titles is not without its own difficulties. In practice, many advisors are dually licensed or possess multiple designations that qualify them as having expertise in specialized areas. Coming up with single titles that relate to even the most common combinations of licences and designations may be problematic and result in a list that is poorly understood by the consumer. The alternative of requiring that all the titles be listed on the business card is no less likely to be confusing once multiple titles are displayed. We think it is likely that the greatest confusion and uncertainty results from unregulated use of the title of financial planner. With respect to titles in other areas, a more effective approach might be to develop principles-based requirements that titles not be misleading. Central Registry Consumers are already able to check specific registries to see if an advisor is licensed. Information about a life insurance advisor's licence status in Ontario is available on Licensing Link and notices of disciplinary actions against an advisor are on Canadian Insurance Regulators Disciplinary Actions. Information about mutual fund advisors is on the National Registration Search. And the website of the Financial Planning Standards Councils has search features to find a Certified Financial Planner and to confirm a planner's certification status. A central registry would provide consumers with a convenient, one-stop source of information about persons licensed in financial services. However, creating and maintaining such a registry without duplicating existing services could be a significant undertaking and require substantial resources. For these reasons, the costs and benefits of such a registry would need to be carefully assessed before acting on this recommendation. Financial Literacy and Investor Education We agree that regulators, educational institutions and the industry all have a role to play in improving the awareness and understanding of Canadians in the area of financial services. Through CLHIA, the industry maintains a number of on-line brochures that provide consumers with up-to-date, plain language information about our products and services. As part of our active support of Canada's National Financial Literacy Strategy, we have a representative on the National Steering Committee on Financial Literacy and participate in Financial Literacy Month events. In addition, many insurance companies support the financial literacy with their own initiatives. Issues for Further Consideration While we agree that the issues identified by the Expert Committee merit further consideration, we have a couple of concerns. 4
The first concern relates to raising these issues as part of the recommendations. Many of the specific recommendations point to a need but offer little in the way of direction about potential solutions. For this reason, acting on them will involve considerable time and resources on the part of both regulators and the industry. More specifically, we agree that there is a need to regulate those who hold themselves out as financial planners and are concerned that identifying other issues may distract from this important task. The second concern relates to the suggestion that there is a need for a simplified approach to dealing with consumer complaints. The Financial Services OmbudsNetwork is intended to provide an accessible service for handing consumer complaints in the areas of life and health insurance, banking and securities, and property and casualty insurance. At least in the area of life and health insurance, we believe that the OmbudService for Life & Health Insurance (OLHI) is doing an effective job. Accordingly, we are not sure what the Expert Committee is contemplating when it talks of the need for a simplified approach. There may be some gaps in the service that OLHI is able to provide and these gaps may merit discussion but we do not believe the model needs to be fundamentally altered. General Conclusion We agree that persons who hold out as financial planners should be regulated and we are pleased that the Expert Committee both recognizes this need and recommends a targeted approach to developing the required regulation. In light of the importance of this issue and the models that exist for regulatory standards, the Expert Committee should consider providing more direction on what the standards for financial planners should be. We have suggested the outline for more substantive direction in our comments. If it would be helpful, we would be pleased to expand on these thoughts or respond to specific suggestions that the Expert Committee might be considering as it finalizes its recommendations. Sincerely, Original signed by Peter B. Goldthorpe Director, Marketplace Regulation Issues 5