1. Financial Services Commission of Ontario (FSCO) Regulatory Update
IFB Fall Summit-November 1, 2016 Izabel Scovino, Director, Market Conduct Branch,
Heather Driver, Director, Licensing Branch

2. AGENDA Licensing Update Monitoring and Compliance Update Enforcement
Review of Significant Enforcement Cases
Recent Enforcement Activities
What’s Next in Enforcement
WRAP-UP
Questions and Discussion

3. Licensing Update

4. Ongoing Licensing obligations
Keeping FSCO’s Agent Errors and Omissions (E&O) Insurance Records up-to-date
STATUTORY OBLIGATION
Effective June 2015, annual updating of E&O policy number and insurer
Failure to respond can result in enforcement action (fine, suspension, revocation)
Failure to update FSCO’s E&O records will lead to a public notice on FSCO’s website
Insurer are expected to have a compliance system in place (O. Reg. 347/04, s. 12)

5. Ongoing licensing obligations
ON-LINE LICENSE RENEWAL REMINDERS
Transition to full on-line renewal reminders
Keep your contact information and addresses current with FSCO
STATUTORY OBLIGATION (O. Reg. 347/04, s. 5.1)
Failure to do so can lead to enforcement action (fine, suspension, revocation)

6. Ensuring compliance - Upcoming Licensing Link ENHANCEMENTS
Beginning this Fall 2016, FSCO will be adding new information to its’ licensing system to collect information about life insurance agents insurer contracts.
FSCO will require that life insurance agents provide the names of the life insurance companies they represent, are under contract with and/or for whom they are selling products.
At a minimum this information should be provided when life insurance agents are renewing their licence and updating their E&O information on Licensing Link.

7. Ensuring compliance - Licensing Link ENHANCEMENTS CONT’D
On the life insurance agent renewal application, there would be a new dropdown list with the names of all life insurers; for new life insurance agents, this list would be read only and would default to the sponsor.

8. Ensuring compliance - Licensing Link ENHANCEMENTS CONT’D
2) When life insurance agents are updating their E&O information, Licensing Link will also request the names of all life insurers, they represent. It would default to sponsor for sponsored life insurance agents and would be mandatory for unsponsored life insurance agents.

9. ENSURING COMPLIANCE - Licensing Link ENHANCEMENTS CONT’D
3) Life insurers would be able to download the list of life insurance agents that indicated that they represent them.

10. ENSURING COMPLIANCE CONT’D - Benefits of Licensing Link
Information is processed in real time.
It is fast and easy to use.
It is available 24 hours a day, 7 days a week.
Starting November 1, 2016, life insurance companies will be able to download a list of their independent life insurance agents, including FSCO’s record of the E&O expiry date for each life agent.
Life insurance companies will only be able to see the names of life insurance agents who have contracts with them. They will not be able to see the names of the other companies life insurance agents represent.
Insurers have an extra tool that they can use to effectively monitor their life insurance agents.

11. Monitoring and Compliance Update

12. 214 targeted life insurance agent examinations
More than half of life agents examined are independent agents
More than half of the life agents examined sold 1-5 policies in the past year
Years of experience of life insurance agents examined:
72% over 10 years
25% between 2 and 10 years
3% less than 2 years
Assessment of Adherence to the Product Suitability review:
We looked at adherence to CLHIA guidance documents, including Guideline G2 IVIC SUITABILITY NEEDS-BASED SALES PRACTICES (This is specific to Seg funds) as well as the Advisor Disclosure which sets out how best to provide good information about the product, and how it meets the needs of client, information about the company offering the product, and the advisor and the advisor’s business relationships.
We reviewed adherence to FSCO bulletins, including…
Borrowing to Purchase Life Insurance Products - Risks and Suitability Bulletin No. G-05/14
Bulletin No. G-10/04 - New Agent Licensing Regulation 347/04 (and Revocation of Regulation 663), Enhancements to FSCO's Internet Application System and Changes to the Life Licence Qualification Program Examination Fees (This was for conflicts of interest. It talks about ouher requirement as well)
And of course overall best practices as laid out in the product suitability review.

13. Insurance Act and Regulations - Findings
2016/2017 Life insurance Agent Examinations
Insurance Act and Regulations - Findings
Rate of
non - compliance
Findings,
As you can see the main areas in need of improvement are with the disclosing conflicts or potential conflicts of interest, as well as disclosing the name of the insurer that the agent represents.
Disclosure requirements were predominately identified in file reviews. In most cases, in a sample of 5 files, not all had a missing a disclosure (i.e. 2 of 5 or 3 of 5). In those instances, we worked with the Insurance Agent to develop remedial action plan to ensure consistency in their files.
Where violations were more egregious, action was taken, which will be discussed further in the presentation.

14. Adherence to Best Practices - Findings
Life insurance Agent Examinations
Adherence to Best Practices - Findings
Top Four Findings
Rate of non-compliance
214 exams
Needs assessment not documented
29%
Letter of engagement not prepared
Records of client discussions not documented
19%
Policy illustrations not retained
14%
Findings for adherence to best practices:
Needs assessment not documented 29% of the time, is fairly consistent with what we saw in the product suitability review. You’ll recall in the previous slides where 60% always, leaving 40% who most of the time, sometimes do, rarely do. So we were overly surprised to see this figure, but feel that this is an area for improvement.
The remaining 3 were grouped together as one main theme in the Product Suitability review under documentation, again you’ll recall the other 60% figure that pertained to always documentation reasons recommendations. The examination further broke down the documentation best practice to these three categorize, and again we found that comparatively the results to be fairly consistent with the product suitability and in need of improvement.
Letter of engagement – discloses fees being charged, on-going services that will delivered throughout the client relationship, whether client wants predetermined products or advice from the agent.

15. FINTRAC and PIPEDA - Findings
Life Insurance Agent Examinations
FINTRAC and PIPEDA - Findings
Findings
Rate of non-compliance
214 exams
No FINTRAC policy and procedures
20%
No privacy policy and procedures
17%
We did not share individual agent information with agencies, however we intend on providing general statistics based on our reviews.
We found a fairly low level of instances where P&P did not reflect FINTRAC or PIPEDA requirements. However, when considering of 214 agents reviewed, 40 or so did not have access to P&P which address these areas, it’s a

16. 2016/2017 Life insurance agent Examinations
FSCO is shifting from awareness to enforcement (i.e. FSCO will take regulatory action where there is evidence of non-compliance with written disclosure requirements)
FSCO will consider recommendations to government failure to meet best practices persist
Assessment of Adherence to the Product Suitability review:
We looked at adherence to CLHIA guidance documents, including Guideline G2 IVIC SUITABILITY NEEDS-BASED SALES PRACTICES (This is specific to Seg funds) as well as the Advisor Disclosure which sets out how best to provide good information about the product, and how it meets the needs of client, information about the company offering the product, and the advisor and the advisor’s business relationships.
We reviewed adherence to FSCO bulletins, including…
Borrowing to Purchase Life Insurance Products - Risks and Suitability Bulletin No. G-05/14
Bulletin No. G-10/04 - New Agent Licensing Regulation 347/04 (and Revocation of Regulation 663), Enhancements to FSCO's Internet Application System and Changes to the Life Licence Qualification Program Examination Fees (This was for conflicts of interest. It talks about ouher requirement as well)
And of course overall best practices as laid out in the product suitability review.

17. 2016/2017 Life insurance agent Examinations
FSCO is expanding its program to better understand the types of concurrent occupations/arrangements life agents have and the implications that may exist to their insurance clients
FSCO has concerns around referral arrangements related to the selling of high risk syndicated mortgage investments
The Mortgage Brokerages, Lenders and Administrators Act requires persons to be licensed as a mortgage broker or agent if they provide more than the name and contact information to a mortgage brokerage, broker or agent
Agents engaged in unlicensed mortgage brokering activities are acting unlawfully and placing their life agent license at risk
Assessment of Adherence to the Product Suitability review:
We looked at adherence to CLHIA guidance documents, including Guideline G2 IVIC SUITABILITY NEEDS-BASED SALES PRACTICES (This is specific to Seg funds) as well as the Advisor Disclosure which sets out how best to provide good information about the product, and how it meets the needs of client, information about the company offering the product, and the advisor and the advisor’s business relationships.
We reviewed adherence to FSCO bulletins, including…
Borrowing to Purchase Life Insurance Products - Risks and Suitability Bulletin No. G-05/14
Bulletin No. G-10/04 - New Agent Licensing Regulation 347/04 (and Revocation of Regulation 663), Enhancements to FSCO's Internet Application System and Changes to the Life Licence Qualification Program Examination Fees (This was for conflicts of interest. It talks about ouher requirement as well)
And of course overall best practices as laid out in the product suitability review.

18. 2016/2017 Life Insurance Company Examinations
Assess an insurer’s level of compliance with obligations under the Act, along with the CLHIA Guidelines/Reference Documents, and to assess readiness with respect to ICP-19: Conduct of Business
Examination focuses on the screening, training, compensation and oversight of life agents by the insurer, which can then be assessed for effectiveness at the agent level through life agent examinations

19. Scope of Insurer Examination
The examination program consists of four parts which focus on the following areas:
Assessing the model employed by the Insurer (independent, MGA, etc.) If MGA model is used, then assessing outsourcing factors, contracts etc.
Insurer Distribution Model
Evaluating policies and procedures, advisor suitability factors as well as nature, timing and extent of trainings conducted.
Agent Screening, Selection and Training
Reviewing policies and procedures, agent compensation structure, incentives, key performance indicators and performance measures.
Remuneration Structure
Verifying policies and procedures, insurer review of regulatory database, random check of agents per CLHIA Guideline, operational audits of agent files, reporting agent misconduct etc.
Oversight/Supervision of Agents

20. Formal process introduced in January 2016
FSCO Reviews sanctions by other regulators
Formal process introduced in January 2016
Sources include other insurance and financial services regulators
Over 2000 sanction notifications received to date resulting in 62 matches
40 (52%) of cases involve life agent
Top Three Causes for Sanctions by Other Regulators
Lack of file maintenance
Making unsuitable recommendations
Misappropriation of funds
Assessment of Adherence to the Product Suitability review:
We looked at adherence to CLHIA guidance documents, including Guideline G2 IVIC SUITABILITY NEEDS-BASED SALES PRACTICES (This is specific to Seg funds) as well as the Advisor Disclosure which sets out how best to provide good information about the product, and how it meets the needs of client, information about the company offering the product, and the advisor and the advisor’s business relationships.
We reviewed adherence to FSCO bulletins, including…
Borrowing to Purchase Life Insurance Products - Risks and Suitability Bulletin No. G-05/14
Bulletin No. G-10/04 - New Agent Licensing Regulation 347/04 (and Revocation of Regulation 663), Enhancements to FSCO's Internet Application System and Changes to the Life Licence Qualification Program Examination Fees (This was for conflicts of interest. It talks about ouher requirement as well)
And of course overall best practices as laid out in the product suitability review.

21. Enforcement Cases at a Glance

22. Enforcement - Case Example #1
FSCO ENFORCEMENT ACTION FOLLOWING REPORT OF SANCTIONS BY ANOTHER REGULATOR
FSCO actively monitors disciplinary action taken by other regulators as part of determining the suitability of licensees
Case Example 1: a FSCO life insurance agent was banned for life and fined over 30k by the Mutual Fund Dealers Association (MFDA); MFDA investigated for concerns about improper connection between his insurance and mutual fund businesses
Licensee did not cooperate with the investigation and this contributed to the serious MFDA action
FSCO became aware of MFDA action and pursued own enforcement action. As part of enforcement FSCO examines the evidence and assesses whether there is a likelihood that behavior exhibited in one financial sector would be likely to re-occur
If warranted, FSCO will take action to manage any potential risk to consumers and the public
In this case example FSCO suspended the insurance agent for 9 months, required that the MFDA fine be paid and further imposed 2 years of supervision following the suspension along with requirements for an ethics course
Enforcement action is posted - permanently - on FSCO’s website

23. Enforcement Case Example #2
FSCO ENFORMCENT ACTION FOLLOWING COMPLAINT ABOUT INFRACTIONS UNDER LEGISLATION THAT FSCO DIRECTLY ENFORCES (INSURANCE ACT)
Case Example 2: An insurance agent, on many occasions, diverted clients’ cash premiums for her own use. FSCO conducted an investigation where the licensee was not cooperative, e.g. failed to attend interviews or provide information
The agent had her licence revoked for having been guilty of a fraudulent act or practice and for demonstrating incompetence or untrustworthiness to transact business
Enforcement action is posted – permanently - on FSCO’s website

24. Enforcement Case Example #3
FSCO ENFORMCENT ACTION FOLLOWING COMPLAINT ABOUT INFRACTIONS UNDER LEGISLATION THAT FSCO DIRECTLY ENFORCES (INSURANCE ACT)
Case Example 3: An insurance agent was reported by his employer to be “churning” commissions generating almost 10% on their book of business; activities included the inciting of inappropriate behavior by clients and other agents
Agent and employer did agree to settle the matter
FSCO still pursued enforcement action for specific and general deterrence reasons
Agent was suspended for 2 years, had to agree to pay back their employer (according to terms of that agreement) and had to take an ethics course at own expense
Enforcement action is posted – permanently – on FSCO’s website

25. Enforcement Actions in 2015:
ENFORCEMENT – Fsco’S RECENT enforcement actions RE
FSCO takes appropriate regulatory action when there is non-compliance with legislation and regulations that relate to the regulated sectors.
Enforcement Actions in 2015:
67 Administrative Monetary Penalties,
a total of $150,790
42 Letters of Caution
3 Refusals
37 Revocations
10 Suspensions
8 Cease & Desist Orders
1 Prosecution
Enforcement Actions in 2016 (up to the Second Quarter):
68 Administrative Monetary Penalties, a total of over $450,000
23 Letters of Caution/Warning
5 Refusals
17 Revocations
11 Suspensions
2 Cease & Desist orders

26. ENFORCEMENT - Future Enforcement Action
FSCO is looking to strengthen the gate to ensure that only qualified persons and businesses conduct business across regulated sectors
Focus on more thorough suitability assessment for applicants
Learn from enforcement approaches used by other financial service regulators across jurisdictions and industries
Encourage more effort and compliance by both agents and insurers (e.g. oversight)

27. Questions and Discussion
WRAP-UP
Questions and Discussion