Ontario’s insurance regulator has launched dozens of enforcement actions against agents who work at some of Canada’s largest insurance brokerages after a review uncovered troubling sales practices.
The Financial Services Regulatory Authority of Ontario released two separate compliance reports early Tuesday that reveal the regulator took enforcement actions against 65 life insurance agents after examining a sample of about 130 advisers at three separate managing general agencies. The FSRA review found the agents broke about 184 rules under the insurance act.
Of the 65 agents who broke rules, 55 per cent were issued monetary penalties, 14 per cent were issued letters of warnings and 18 per cent remain under review by a regulatory discipline officer.
The infractions included unsuitable sales practices, gaps in adviser training, advisers failing to complete continuing education courses as required to maintain an insurance licence, not following best practices and advisers not disclosing conflicts of interest to clients when they are being compensated by insurers.
FSRA’s two recent reports – which include reviews done between May, 2022, and April, 2023 – examined agents from World Financial Group Insurance Agency of Canada, Greatway Financial Inc. and Experior Financial Inc.
“In the period leading up to the recent report, we’ve implemented significant measures to ensure compliance and address concerns,” Greatway’s Chief Compliance Officer Ray Burgher told The Globe in an e-mail. “These measures, including improved training and heightened agent supervision, aim to better serve our clients and align with regulatory expectations.”
Experior chief executive Shelden Smollan told The Globe in an e-mail the MGA has always followed industry standards and that its agents are properly licensed by local provincial licensing bodies.
Mr. Smollan disputes FSRA’s findings in Tuesday’s review saying, “there has been no action taken against Experior or any Experior agents.” During an industry meeting in April where FSRA spoke, Mr. Smollan said the regulator recommended compliance practices to insurers that Experior already had in place.
World Financial Group did not respond to questions from The Globe about the two reports.
Combined, the three managing general agencies represent about 20 per cent of the agents in the Ontario market, with World Financial Group consisting of almost 11,000 agents alone. Almost 80 per cent of these individuals reported being a part-time life agent, with 86 per cent saying they have a second occupation outside the role of a life agent.
“When compensation for life agents is heavily influenced by the sales of individuals they recruit, this creates the potential to focus on recruiting to greater extent than agent suitability and customer needs analysis,” FSRA said in Tuesday’s report.
Managing general agencies are intermediaries that connect distribution networks, such as independent life advisers or agents, with Canadian insurance companies to sell products. In some instances, the agencies use tiered recruitment business models, also known as multilevel marketing or network marketing, where advisers are asked to recruit new advisers, including from their own client base.
Over the past two years, multitiered recruitment business models has been a major focus of insurance regulators, particularly when it comes to adviser proficiency and client accounts. Last year, FSRA issued a compliance order asking Calgary-based Greatway Financial to revise its training regime for its 3,500 agents after finding it could result in unfair or deceptive acts by agents when selling insurance products to clients.
And in August, the Financial Markets Authority, a regulatory and supervisory body for Quebec’s financial sector, imposed a $200,000 administrative penalties and issued orders against World Financial Group Insurance Agency of Canada after a review of its supervision, transactional activities and product suitability found it did not have an adequate compliance system.
In response to FSRA’s recent reports, Mr. Burgher said Greatway’s role in recruiting “essential new agents for Ontario’s middle market remains vital,” and the company is “dedicated to ensuring that efforts result in positive consumer outcomes.”
As a result of the findings published Tuesday, FSRA announced it has set up further investigations into certain managing general agencies business models and has started the process of setting up a new regulatory framework for companies working under the business model, including a rule proposal that will directly look at the types of distribution networks that can be used by the agencies.
“The practices of the life agents selected from the MGAs were observed to be worse than prior reviews of life agents we had specifically selected due to past misconduct or having been the subject of complaints,” FSRA’s executive vice-president of market conduct, Huston Loke, said in an interview. “This is extremely harmful to consumers and points to the need for additional regulatory action in respect of agents, MGAs and insurers.”
FSRA found many inexperienced life agents at the agencies were predominantly selling universal life products – a complex and specialized insurance product that typically allows consumers to pay a fixed premium for a specific amount of death benefit, as well as a second monetary portion to be placed in a savings cash account. The product is considered to be unsuitable for many consumers as it is an expensive product to save for retirement.
Yet, in 2020, FSRA found 56 per cent of insurance policies sold by the three companies were universal life policies. Approximately 92 per cent of Greatway’s $42.8-million gross income for 2020 came from the sale of permanent life insurance products, according to FSRA, of which 99 per cent was from the sale of universal life insurance products.
In 2021, about 57 per cent of policies sold at all three firms were universal life policies.
In some client files reviewed, universal life policies were sold on the premise it was appropriate for almost everyone, without regard to risk or the client’s financial sophistication or personal circumstances. FSRA said lower-cost and lower-risk strategies, such as tax-free savings accounts or registered retirement saving plans, were generally not considered or discussed as alternatives to “overfunded universal life (UL) policies” – where a client is paying a higher than the monthly premium to invest in a tax-free, self-directed investment account.
“FSRA is concerned the insurers and MGAs captured in this report may not have effective oversight processes in place to manage potential risks to the consumer, and to demonstrate suitable sales, particularly in the case of inexperienced life agents selling universal life policies,” the report said.
The introduction of TFSAs in 2009, along with tax rule changes in 2017 that limit contributions to insurance policies, left universal life policies most appropriate for specific niche clients who have typically already maxed out other saving vehicles.
Yet, in 33 per cent of client files reviewed, customers were sold a universal life policy with the implicit purpose of saving for retirement. In 75 per cent of those cases the client did not appear to have a TFSA or RRSP.
In all of these instances, the clients were a single person in their 20s or early 30s with no dependents and only modest income – typically not aligned with the sale of a more complex insurance product.
In almost 30 per cent of the cases reviewed, the client was also carrying high-interest personal debt which was not factored into the product recommendations. The report found universal life funds “may well have been put to better use through investment in TFSAs or by reducing their personal debt.”
In addition to proposing new regulation for the sector, FSRA said it will continue to review insurers where appropriate, continue to take enforcement action when necessary, launch a consumer education campaign and provide enhanced guidance to managing general agencies.