'Serious consumer protection concerns': Insurance watchdog moves to ban controversial fee

Following a similar ban in the mutual fund industry, a Canadian regulator is moving to end a controversial commission on funds sold by insurers.

Deferred sales charges are a potentially hefty commission levied on customers who withdraw funds before the end of a contract.

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If it becomes a rule, the use of DSC commission on existing segregated funds would be restricted.

After years of complaints from consumers and seniors, provincial securities regulators decided to ban DSC charges for mutual funds in 2019. Senior citizens were sold mutual funds with contracts of up to seven years and were charged significant fees if they took out their money earlier.

The FSRA proposed to regulate the insurance industry in Ontario after the mutual fund ban.

The FSRA has heard that consumers feel they have been unfairly treated when they are required to pay early redemption fees. Due to the fact that deferred sales charges have already been banned in mutual funds, it was important to make sure that regulations addressed concerns about these fees.

Customers may need access to their investments before the end of a contract if the commission raises serious consumer protection concerns.

The investor advocates argued that the long-term commitment with the prospect of early redemption fee was more beneficial to the fund seller than to the investor.

Loke said that insurers and agents in Ontario need to treat customers fairly.

Changes to FSRA's Unfair or Deceptive Acts or Practices Rule would give customers control over and access to their money and allow them to sell, move, or redeem funds as needed.

Interested people can make submissions to FSRA during the consultation period.

The Ontario Securities Commission did not join other provincial watchdogs in eliminating the commission option when the national ban on deferred sales charges on mutual funds took effect in June.

After a rare public disagreement with the Ontario government over its plans in the fall of 2018, the OSC decided to place restrictions on the use of deferred sales charges, rather than banning them.

The OSC capped client age, hold period and dollar value, and insisted that redemption fees be waive in cases of financial hardship, but critics complained this would not deal with inherent conflict of interest in the compensation model and would only partially mitigate investor harms.

The OSC banned the commission option on mutual funds in May of 2021, joining its dozen provincial and territorial counterparts.

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