In a notice on May 23rd, the AMF informed insurers and advisors that the existence of orphan policies was in violation of several articles of the Law on the distribution of financial products and services and of the Insurance Act.
However the AMF went much further than this. Instead of interpreting the law, the AMF modified and added words to the law therefore usurping the legislative powers of the elected legislators in regards to when an unlicensed individual can receive commission from the sale and service of an insurance product.
A lot of people have said that I am hard on the AMF because I have stated that when it comes down to solving problems in the insurance industry, the AMF acts like a bull in a china shop. As you will see, I am quite charitable with this analogy because by usurping the powers of our elected officials and by making a new law, the AMF has introduced unprecedented changes with undeterminable consequences.
This is not the first time I faced bureaucrats who believe they can circumvent the Parliament or Assembly by changing the law in order to solve a problem while hiding their lack or competence and action for the last 40 years. The Federal Department of Finance tried to do the same thing by modifying the definition of a death benefit found in the Income Tax Act stating that for death benefit to be death benefit it must have a net amount at risk. This would have rendered all T100, Whole Life and many Universal Life taxable at one point in time. I called a senior official at the department of finance to advise him of this and he started blaming the financial industry instead of acknowledging that the mess surrounding the taxation of life insurance was the result of ignoring problems for the last 40 years. I started to write in Marketing Option on this issue and the rest is history.
This is what the AMF is also doing and it is not going to work. But before explaining how the AMF conditionally legalized the payment of commission to unlicensed individuals, let’s take a quick look at what are orphan policies.
There will always be orphan policies because licensed advisors die, retire, move on… However the status of an orphan policy can only be and was always temporary and transitional. In the career agent distribution channel there is a process to assign these policies to a licensed advisor through a buyout or simple assignment. The problem resides in the Independent distribution channel where such process does not exist and the status of an orphan policy is permanent destroying the right of the client to continuity of service.
This means the problem of commission paid to unlicensed individuals is a problem unique to the Independent Channel. This is how the AMF has decided to resolve this problem. The AMF has stated that an unlicensed individual can receive commission in relation to the sale and service of live insurance if this individual sold the policy and therefore was licensed at the time of this sale. This major change to the law by adding this condition and extra wording will have the following consequences:
1. Term conversions
A term conversion is not the issue of a new contract. It is simply a modification of an existing insurance contract whereby the policy owner is exercising the conversion clause of his contract. While the policy is converted, the policy issue date remains the same, the ETP of the policy remains the same, the ACB of the policy remains the same and if the policy has been more than 2 years in effect the suicide and misrepresentation cause does not apply. A conversion is a continuation of the original policy.
Based on the AMF changes to the law, the now unlicensed advisor who has sold the policy that is now converted will be able to receive legally the commission associated with this conversion.
2. Buyout of blocks of business
If an advisor buys a block of business and become unlicensed it is now illegal for him to receive the commission of service in relation to this block of business as he was not the one who sold these policies. However he can continue to receive the commission of service for the policies he has sold.
3. Segregated funds
Contrary to insurance policies, segregated funds commission is not vested. Why is a mystery? This means however there has been many changes for the agent of service on seg funds and therefore a high degree of probability that the advisor servicing and receiving the commission did not sell the seg fund originally. When this advisor ceased to be licensed it constitute an infraction for him continue receiving the commission if he has not sold the policy originally.
This will certainly have an impact on the value of blocks of business. This will also end once and for all the payment of the commission of service to the estate of a dead advisor. This is now illegal and constitutes a penal infraction.
It is clear that the AMF has not thought about the consequences of the changes it has introduced. When you think that the AMF has known about this problem for more than 20 years, you would think they would come up with something showing some thoughts and understanding of the situation. Faced with the inability of the AMF to understand the insurance industry, I have to laugh and ask this last question:
How many AMF employees does it take to screw a light bulb? None, because they are all in the dark trying to figure out if they were licensed to change the light bulb when it was made.