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1 July 27, 2015 Expert Committee to Consider Financial Advisory and Financial Planning Policy Alternatives c/o Frost Building North, Room 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 initial consultation document of the Expert Committee to Consider 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 $4.1 trillion of life insurance coverage. During 2013 in Ontario, life and health insurers made benefit payments of $36.2 billion, or roughly $696 million a week, to policyholders and beneficiaries. The industry has 68 head offices in Ontario, employs approximately 67,300 people, and invests over $240 billion in the provincial economy. Before responding to the specific questions in the consultation paper, it might be helpful to clarify the use of terminology. The Ontario Insurance Act uses the term "agent" to refer to any person who, for compensation, sells life insurance on behalf on an insurer. It is common practice within the industry, however, to refer to agents as advisors, financial advisors or insurance financial advisors. Where "financial advisor" is used in this response, it refers specifically to persons licensed to sell life insurance. For convenience, "life insurance" is used to refer to a broad range of insurance products including, life insurance, critical illness insurance, accident & sickness insurance and insurance wealth products (e.g., annuities, segregated funds, etc.). Finally, it should be noted that "financial advisor" is used more broadly within the financial services industry. Many of the following comments about financial advisors and the financial advice they provide may apply more broadly to those other sectors but the Expert Committee may wish to confirm that applicability. Canadian Life and Health Insurance Association 79 Wellington St. West, Suite 2300 P.O. Box 99, TD South Tower Toronto, Ontario M5K 1G Association canadienne des compagnies d'assurances de personnes 79, rue Wellington Ouest, bureau 2300 CP 99, TD South Tower Toronto (Ontario) M5K 1G Toronto Montréal Ottawa

2 2 What activities are within the scope of financial planning? Is the provision of financial advice different from financial planning? If so, please explain the difference. Financial advising and financial planning are separate and distinctly different services. Within the life insurance industry, an individual acting as a financial advisor identifies a client's needs for life insurance and makes recommendations about life insurance products that are suited to those needs. In most cases, where a need is identified, the value of the financial advice lies primarily in the acquisition of a product that addresses the identified need. In contrast, financial planning is more comprehensive and the resulting plan has value apart from any specific product or service. Financial planning takes a number of factors into account, including financial management, insurance and risk management, investment planning, retirement planning, tax planning, estate planning and legal considerations. This information is used to develop strategies (i.e., a financial plan) to help meet a client's personal goals, needs and priorities in a way that optimizes his or her financial position. As is suggested by these descriptions, financial advice is generally intended to be implemented immediately. In contrast, financial plans are usually implemented in stages. An important aspect of financial planning is the ongoing assessment and revisions to the strategies as goals are achieved and circumstances change. Is the current regulatory scheme governing those who engage in financial planning and/or the giving of financial advice adequate? Financial advising within the life insurance industry is rigorously and thoroughly regulated. Advice about life insurance products is provided by advisors who are licensed in Ontario as life agents. Provincial statutes establish entry-level proficiency standards for advisors as well as ongoing requirements for continuing education and errors and omissions insurance. Other provincial statutes establish market conduct standards for things such as disclosure and fair practices. To sell insurance products, an advisor must have a contract with the insurer whose product the advisor is selling. Under Ontario Regulation 347/04 Agents, each insurer is required to have procedures that are reasonably designed to ensure that the advisors it authorizes to sell its products comply with the Insurance Act and related regulations and are suitable to carry on business (see Section 12). CLHIA Guideline G8 Advisor Suitability provides detailed advice on assessing the suitability of advisors. Among other things, suitability involves having the general and technical knowledge required to provide sound advice and recommend products suited to the needs of the customer. The situation related to financial planning is quite a bit different. Financial planning has matured as a specialized profession over the past several decades and it now has voluntary standards and designations (e.g., the Certified Financial Planner or CFP). But it is formally recognized in only two provinces, i.e., British Columbia and Quebec. As a result, many consumers are unclear as to the nature of financial planning and there can be inconsistency both in the competence of individuals who hold themselves out as financial planners and in the services they provide. This consultation offers an important opportunity to address this uncertainty and inconsistency.

3 3 What legal standard(s) should govern conflicts of interest and potential conflicts of interest that may arise in financial planning and the giving of advice? Over the past decade, financial sector regulators and industry stakeholders have focussed considerable attention on effective management of conflicts of interest. In 2006 the Canadian Council of Insurance Regulators (CCIR) formally endorsed three principles for managing conflicts of interest. These are: 1. Priority of the client s interest: An intermediary must place the interests of policyholders and prospective purchasers of insurance ahead of his or her own interests. 2. Disclosure of conflict or potential conflict of interest: Consumers must receive disclosure of any actual or potential conflict of interest that is associated with a transaction or recommendation. 3. Product suitability: The recommended product must be suitable for the needs of the consumer. Ontario Regulation 347/04 Agents requires agents to provide clients with written disclosure of any conflicts of interest, actual or potential, that might be associated with a transaction or recommendation (see Section 16). More generally, these principles are supported by industry reference documents developed by CLHIA. Advisor Disclosure establishes a disclosure protocol and provides concrete examples of the type of disclosure advisors should provide to clients before a sales transaction. The Approach provides a step-by-step description of the needs-based sales process for life insurance. In 2008 CCIR reported on an assessment of how well the industry had implemented its three principles. It found that support among both insurers and advisors was high. More recently, securities regulators in Canada have conducted consultations aimed at clarifying the duty of care required of mutual fund representatives. Among other things, these consultations have asked whether representatives should have a fiduciary duty towards their clients. Most of these discussions have contemplated situations in which advice is tied to the sale of a specific product. It is worth noting that, for financial planning, conflicts of interest are less likely to arise. In situations where the financial planning ends with delivery of plan, it is difficult to see how a conflict of interest might arise so long as the planner has acted honestly and did what he or she undertook to do. Where the financial planner goes on and, for example, recommends and sells a specific life insurance product, the planner would then be acting as a licensed life agent. In such situations, the standards for life insurance sales would apply. It would seem, therefore, that the current regulatory framework effectively addresses conflicts that may arise in the course of financial planning. To what extent, if at all, should the activities of those who engage in financial planning and/or giving financial advice be further regulated? As was noted earlier, it is important to distinguish between financial planning and financial advice. With respect to financial advice, and more specifically, licensed agents selling life insurance, the existing regulatory framework provides effective consumer protection. The situation related to financial planning is different.

4 4 The Financial Planning Standards Council (FPSC) has established standards of competence, ethics and practice for financial planners. In Ontario, however, these standards are voluntary so individuals who hold themselves out as financial planners do not need to be certified or comply with the standards. The FPSC has proposed that regulations be established to enforce the certification structure, governance and oversight mechanisms that already exist for financial planners. CLHIA strongly recommends that the FPSC proposal be adopted and implemented in Ontario. What harm(s) and/or benefit(s) do consumers experience in the current environment? It is important to establish some context for this question. The aftermath of the market crash in 2008 was, and continues to be, disruptive for many Canadians. But due in large part to effective regulation of financial institutions and the sound recommendations of financial advisors, Canadians arguably fared better than citizens in other parts of the world. Moreover, in Ontario alone, insurers annually pay over $36 billion in life and health insurance benefits. In addition to these tangible benefits, insurance wealth products such as annuities and segregated funds provide additional peace of mind. This practical, realworld experience is echoed in the 2014 findings of a Financial Sector Assessment Program (FSAP) audit of OSFI, FSCO and AMF insurance regulation that was conducted by the International Monetary Fund. The FSAP report generally concluded that Canadian insurance regulation supports international Insurance Core Principles for regulation. That being said, CLHIA agrees that the absence of a regulatory framework for financial planning creates uncertainty. As FPSC notes, almost half of Canadians believe, incorrectly, that the financial planning profession is regulated. This means that many people in Ontario may be putting their faith in individuals who lack even the basic competence to do what they are holding out to do. This, however, is a very specific and limited concern. Accordingly, it should be addressed with specific and targeted measures such as those outlined in the FPSC proposal. Should consumers have access to a central registry of information regarding individuals and entities that engage in financial planning and the giving of financial advice including their complaint or discipline history? Life insurance regulators make information about life insurance agents (i.e., financial advisors) publicly available in two different registries. Individual provincial regulators all have electronic databases that enable the public to verify the status of an advisor's licence. As well, the Canadian Insurance Regulators Disciplinary Actions (CIRDA) is a national electronic database that allows the public to look for disciplinary decisions about advisors. Information about complaints is only helpful if the complaint is well founded. Publishing complaints before they are investigated and disciplinary decisions are made is likely to be counterproductive. In addition to the obvious negative effect for the advisor, false allegations may be harmful to consumers if they reduce access to advisors, either by discouraging individuals from entering the field or by causing consumers to unnecessarily narrow their search for an advisor. On balance, therefore, the public information that is currently available about life agents appears to strike an appropriate balance. Similar information about certified financial planners is available to the public on the FPSC website.

5 5 In Summary The roles of the financial planner and the financial advisor are fundamentally different. The former takes a comprehensive approach to develop strategies aimed at helping individual clients make the most of their resources and achieve their financial goals. The latter analyzes specific needs of a client and recommends specific products to address those needs. In the case of financial advisors working within the life insurance industry, the current regulatory scheme is fully developed and effectively protecting consumers. Financial planners working in Ontario have no similar regulatory scheme. This regulatory gap creates confusion for consumers and may place them at risk. CLHIA agrees that this gap should be addressed. CLHIA further recommends that the gap be addressed specifically and in a targeted manner so as to avoid duplication of regulation within the financial services industry. CLHIA recommends the FPSC proposal of enforcing a single, unified set of standards for financial planners. This involves creating title and holding out restrictions and making financial planners accountable to an oversight body that understands the profession and represents the public interest. If it would be helpful, we would be pleased to discuss these comments and our recommendations in more detail. Sincerely, Original signed by Peter B. Goldthorpe Director, Marketplace Regulation Issues