The Financial Regulatory Apartheid

The Canadian Securities Administrators have put forth a proposal regarding mutual funds fees which include recommendations as to the purpose of trailing commissions.

While this discussion is worthwhile and needs to happen to ensure that there is a complete synergy between the remuneration of the advisor and financial well being of the client there is a major problem existing in the financial industry.

The problem: The Insurance Industry

While on the securities and mutual funds side of the industry, the regulators have constantly been moving forward by updating their regulations and questioning industry practices, this is exactly the opposite on the insurance side of the industry.

In fact, most regulations have not changed for the last 40 years in the insurance industry while there has been a convergence between segregated funds and mutual funds. Segregated funds are the equivalent of mutual funds however they are manufactured by insurance companies and can only be sold by advisors who possess an insurance license.

At first segregated funds were very different than mutual funds because they offered very valuable death benefit and capital guarantees and the ability to reset these guarantees based on the performance of the investments. In purchasing these segregated funds, the client was able to insure the investment risk of losing his capital and even his growth.

As insurance companies through demutualization became more and more averse to insure risk since they had to allocate reserves reducing significantly short term profits at the displeasure of their shareholders, these insurance companies have reduced significantly the guarantees available under segregated funds.

In fact we can now state that the guarantees offered by segregated funds have no value and a segregated fund in terms of risk exposure is the same as mutual funds.
Why then regulation applying to segregated funds have not changed to become similar to mutual funds?

This is a good question. Regulations have not changed in 40 years. A lot of commercial practices prohibited under mutual funds are legal if you are selling segregated funds. As a result, many advisors have used this to simplify their practices by avoiding regulations through selling only segregated funds.

Each time regulators are approached and are asked when they are going to deal with the issue, the industry is only offered a vague answer. The only regulator that was clear was the AMF (Quebec) and it basically stated that it did not believe it was its responsibility to monitor or comment on the commercial practices of the insurance companies.

How can insurance companies have such power over provincial regulators? Is this normal?

The Financial Regulatory Apartheid

It is clear that if the Canadian Securities Administrators push forward with their proposal it will create a financial regulatory apartheid where investment products offered by the insurance industry will benefit from an incredible and enormous advantage by having a special status that is not justified. This will precipitate a crisis that will have no precedent.

It is clear what an advisor will decide between recommending a mutual fund with no trailing fees and segregated fund with trailing fees. We can also expect large transfer of assets from mutual funds to segregated funds if this apartheid issue is not addressed.
In the end when a sale force composed of advisors is put into a position to sell the same product and given the opportunity to avoid regulations, this will create a divide between the confidence of the customer and the integrity of the advisor.

This crisis and this financial apartheid cannot take place. The regulators should concentrate in modernizing insurance regulations to the standards of mutual funds regulations



  1. […] Ceci a créé une distorsion entre l’industrie de l’assurance qui peut par exemple vendre les mêmes investissements utilisant des pratiques prohibées dans l’industrie des valeurs mobilières ou en distribuant l’assurance selon des pratiques prohibées en assurance e générale. Ceci fut le sujet d’une lettre de ma part au « Canadian Securities Administrators » en relation à de nouvelles réglementations sur les fonds mutuels alors que le même investissement en assurance n’est absolument pas réglementé. […]

  2. […] This created a gap or distortion between the insurance industry which can for example sell the same investments using some of the practices prohibited for the sale of mutual funds or by distributing insurance according to practices prohibited in the general insurance industry. This was the subject of a letter from me to the “Canadian Securities Administrators” in relation with new regulations regarding mutual funds whereas the same investment in insurance is absolutely not regulated. […]

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