CLHIA-ACCAP

Establishing a Licensing Regime for Distribution Firms We are of the view that in today's multifaceted distribution market, a regulatory structure that does not fully include distribution firms may unintentionally lead to a silo-effect in oversight practices. Further, we believe that conducting oversight in silos makes it more difficult for regulated entities to meet expectations and introduces the possibility for oversight gaps to emerge between silos. Even in Quebec, which arguably has a stronger regulatory approach through recognizing distribution firms as separate entities, oversight gaps could emerge. For example, in the MGA channel, it is not uncommon for an advisor to contract with multiple insurers through an MGA in order to access to a wide variety of insurance products for his or her clients. Under this scenario today, there may not be a single regulated entity in the distribution chain that has a fulsome view of the advisor's entire book of insurance business. While insurers have systems in place to monitor for advisor misconduct, the oversight done by each insurer in this scenario would be conducted in a silo that is limited to the business placed with that particular insurer. This may make it more difficult to detect advisor misconduct that may cross insurers, such as churning. By contrast, the MGA in this scenario is well-positioned to monitor for such misconduct. Throughout Canada today, insurers and MGAs and other distribution firms are expected to have oversight practices designed to prevent, detect and address advisor misconduct. Over the years, the industry has taken steps to clarify roles and responsibilities for oversight and to standardize industry practices (e.g., CLHIA Guideline G18, Insurer-MGA Relationships). Such guidance reflects the industry's belief that, in some cases, distribution firms may be in the best position to provide fulsome oversight of an advisor's activities. We believe that formalizing such oversight responsibilities for distribution firms through a regulatory licensing regime would help to address any potential gaps in the structure. A regulatory licensing regime would also clarify the oversight responsibilities of insurers and distribution firms while acknowledging their respective practical oversight capabilities. 1 | Definition of a Distribution Firm In our proposed model, a distribution firm would be defined as an MGA, national account or an affiliated entity within an insurer that handles relations with career agents or independent agents dealing directly with the insurer. This definition would be supported by a regulatory licensing regime setting out a clear accountability role for these entities. 2 | Licensing & Standards The licensing regime for distribution firms would establish minimum standards for oversight of advisors and clarify the accountability for entities engaged in distribution. Under such a system, a distribution firm that failed to carry out effective oversight could lose its licence. 2

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