In the world of stocks, bonds and mutual funds, there are usually dealers who handle the transactions on behalf of buyers and sellers. The securities commissions and their delegates (MFDA and IIROC) regulate the dealers, who have a stable of registered advisers who work for them. This is not the case with life insurance. There, the insurers are the sellers. They make the products (life insurance) which they sell to clients. Agents contract with the insurers to get the right to sell these products to clients.
In Ontario, the insurance regulator is the Financial Services Commission of Ontario (FSCO). In life insurance, FSCO regulates agents and insurers. It does not regulate agencies when they sell life insurance. Consider these questions for the regulator to answer:
· Who should monitor, manage or supervise the agents?
· Who should make sure that the agents know all the necessary information about these complex products?
· Who should make sure that the agents sell the right product to each client?
The regulator's answer in each case is "the insurer". There is no dealer in between insurers and agents. Many agents have contracts with agencies, called “managing general agencies” or MGA’s. These agencies contract with insurers and with agents. However, MGA’s are not recognized by insurance legislation. According to law, the insurer is responsible to monitor the agent to act in the best interest of the client. Insurers may not contract out of this responsibility.
What is suitability in life insurance?
“Suitability” in the investment world refers to whether the product fits the needs of the client. In the insurance world, however, “suitability” refers to whether the agent is up to the job. Consider these questions that insurers must answer:
· Is the agent properly trained to deal with clients?
· Has the agent undertaken improper transactions?
· Has the agent been convicted of a criminal offense?
· Basically, can the agent be trusted to give proper advice to clients?
In the insurance context, suitability focuses on the agent, not the client. This obligation rests with the insurer - to screen its sales force. Insurers are obliged to report any agents who conduct business in a way that casts doubt on their suitability.
To make matters confusing, the Ontario regulator has adopted the investment suitability standard imposed in the securities world by the Ontario Securities Commission. In its 2014 Bulletin G-05/14 (reproduced in full here), FSCO said this:
It is the responsibility of life insurance agents to determine their clients’ risk tolerance and make recommendations that are appropriate to that risk tolerance. Agents should also explain to clients the rationale for a recommendation.
This mirrors the securities obligation.
What are the consequences to clients?
In securities, regulators impose a duty of compliance on dealers. In insurance, the compliance obligation is referred to as "monitoring". In the absence of monitoring for suitability of the agent, insurers run the risk that poor sales practices result in clients buying unsuitable products.
There is a conflict of interest inherent in all sales transactions involving professionals. The salesperson only gets paid if there is a sale. The salesperson may tend to sell the product with the highest commission. Indeed, insurers may incent the sale of poorer products by raising the applicable commissions.
Insurers must therefore "monitor" their sales force diligently. Poor sales practices by their agents should lead directly to corrective action to protect clients. Agents are qualified to sell life insurance with minimal training. If insurers augment this training with programs that extol the benefits of their own proprietary products, this endangers the very clients who insurers are duty-bound to protect.
Consider that agents often contract with several insurers. Although there is a recent movement to reduce the number of agents who can sell the products of specific insurers (see article here), insurers are responsible for all of the agents who are still under contract with them.
Insurers have a duty to their clients of utmost good faith. If an insurer knows about misconduct by an agent, the insurer must report that agent as being unsuitable. Not up to the task. Not worthy of trust from client. And so, the suitability obligation applies to the insurer's duty to its clients. Untrustworthy and incompetent agents can cause great damage to their clients. And consider that an agent who goes unreported may cause damage to clients of other insurers.
The insurance industry is slowly but surely trying to raise the low standards of its sales force. Unfortunately, most of the problem arose because it costs too much to train new agents and educate them about insurance products. When insurance companies must pay damage awards, this can be a strong incentive to improve the quality of the service to clients.
If you have a claim because of the poor advice or performance of a life insurance agent, contact the experienced lawyers of the Financial Loss Advisory Group of MBC Law Professional Corporation. For more information, visit www.lifeclaimdenied.ca.
Harold Geller is a founding member of the FLAG, the Financial Loss Advisory Group of MBC Law Professional Corporation. He is often consulted by regulators and consumers organization about life insurance industry issues.