CLHIA-ACCAP

8 Recommendation 8: We recommend that regulators consider parameters on new incentive travel programs, along the lines noted above. (iii) Disclosure of distribution costs for wealth products Individual Variable Insurance Contracts (IVICs, also called segregated funds) are offered by life and health insurance companies and distributed by life-licensed advisors. They are often compared to mutual funds and the question arises as to whether regulatory consumer protection for both is sufficiently similar. IVICs and mutual funds are fundamentally different in some respects, in that IVICs are insurance products which offer protection against loss of capital and, in some cases, guarantees related to payout levels, all of which are backed by capital reserves and governance requirements set by prudential regulators. There are no similar guarantees or consumer protection for mutual funds. However, similarities between the two products exist, from the consumer's perspective, in that they both involve investments which can have variable returns (albeit with downside protection, in the case of IVICs). Some years ago, insurance and mutual fund regulators developed common point-of-sale disclosure regimes which require that consumers receive disclosure about the investment option in a brief document called Fund Facts, as well as, in the case of IVICs, brief disclosure about the IVIC contract and its features in a Key Facts document. The Fund Facts document requires disclosure of the Management Expense Ratio (MER) of the fund, in percentage terms. This regime was fully implemented for IVICs in January 2011, and will be fully implemented for mutual funds in 2016. Meantime, mutual fund regulators have adopted a "Client Relationship Model 2" approach that will, as of mid-2016, require that distribution firms (mutual fund dealers) provide distribution costs, in dollar terms, in annual statements. There has been some suggestion that IVICs should follow the CRM2 approach and provide distribution costs in their annual statements. While we understand the desire to have some commonality in approach, we do not believe it is appropriate for IVICs to mimic CRM2. For one thing, there are differences between the two products, e.g., the manufacturer rather than the distributor produces annual statements for IVICs, some of the specific costs for mutual fund dealers don't apply for IVICs, etc. But more fundamentally, we believe that the CRM2 approach, while well-intentioned, is not as comprehensive or transparent as it could be. It carves out distribution costs (the monies paid to the mutual fund dealer) from the full MER. We believe that the full MER is more relevant to the consumer as this is the amount deducted from a consumer's investments for administration, distribution and service. As an industry, we support more detailed cost transparency for consumers, in a manner that is meaningful and relevant to consumers. This would mean disclosure of the MER and any additional costs or fees. The MER should be broken down into its component parts which, for IVICs, would be administration, distribution and insurance. Further, we believe that this standard of full cost transparency should apply to similar products, such as mutual funds. Current disclosure requirements for IVICs are set out in the industry Guideline G2, Individual Variable Insurance Contracts relating to Segregated Funds and adopted as regulation in Ontario and Quebec. We anticipate the necessary changes could be made within this framework. Details, including implementation approaches, would need to be worked out between regulators and the industry.

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