On May 27, 2024, the Financial Services Regulatory Authority of Ontario (FSRA) launched a public consultation on its new proposed rules that will affect all insurers that offer customers individual variable insurance contracts (also known as individual segregated funds contracts). The objective of this consultation is to obtain feedback from stakeholders, including customers, insurers and investors, as part of FSRA's ongoing commitment to transparency and protecting the interests of life insurance customers. FSRA invites stakeholders to review the proposed rule and provide feedback before July 26, 2024.
These proposed rules will make the expectations set out in the Individual Variable Insurance Contract Ongoing Disclosure Guidance published by the Canadian Council of Insurance Regulators and the Canadian Securities Administrators (CSA) in 2023 mandatory for Ontario segregated funds. Under the proposed rules, customers will get the first set of enhanced statements for the year ended December 31, 2026 in early 2027.
Although insurers are already required to provide annual statements to customers, the proposed rules will require insurers to increase the amount of information provided on those statements. The current requirements do not match the Insurance Guidance's enhanced requirements. It is noted in the consultation paper that absent the proposed rules, there are also no current requirements for insurers to provide ongoing, specific reporting to owners on the cost of owning segregated funds after the initial point of sale. The new statements will need to include information such as:
- the total cost of investing, including ongoing embedded fees such as management expenses and trading expenses;
- additional information on the segregated funds' investment performance;
- a customer's right to guarantees under their segregated fund contracts and how certain actions might affect their guarantees; and
- information to more easily allow customers to compare the cost of owning segregated funds with the cost of owning other investments.
In addition to seeking general comments on the proposed rule, FSRA notes it does not have statutory authority to provide exemptions and is thus seeking feedback on whether additional exceptions are appropriate for some of the new requirements where it would not be in a customer's best interest to require full compliance, such as if it would result in costs to customers that would exceed the benefits.
We note that a recent study released by the CSA that analyzed the effects of the earlier cost disclosure reforms of Phase 2 of the Client Relationship Model (CRM2) applicable to certain investments showed that the industry responded the way regulators had anticipated when they implemented the cost transparency measures (we wrote about the study in last month's bulletin here). The CSA had concluded that MERs and management fees decreased for both mutual funds and ETFs over the study period, although the CSA cautioned that the observed changes in industry behaviour could not be attributed directly to CRM2 because of other potential factors.
In Brief
2023 Annual Report of OSC's Investor Advisory Panel: Staying Safe
Earlier this month, the Ontario Securities Commission's Investor Advisory Panel (the Panel) released its annual report. The Panel is an advisory committee to the OSC, that represents the views of retail investors on policy and rule-making initiatives. Among other topics, the Panel examined risks and opportunities for retail investors from the digitalization of financial services, digital engagement practices by trading platforms, and the use of AI by those wishing to commit fraud. Other topics looked at by the Panel include the expansion of alternative assets, such as crypto, being made available to retail investors, as well as privately placed alternative assets such as private equity and private debt.
The Panel had several suggestions for improving investor protection, including the following:
- evaluating the types of advice that could benefit DIY investors;
- compliance reviews of "finfluencers";
- measuring the effect of the Client Focused Reforms (CFRs) on investors;
- strengthening oversight of crypto trading platforms and addressing ease of access to alternative assets which are considered speculative and high-risk;
- increasing investor awareness of fraud risks; and
- using the Designated Fund (funds from sanctions and settlements) so that is it seen to directly benefit investors.
With respect to DIY investors, the Panel is concerned that investors who may not be sophisticated can too easily access leverage-based or other complex investments on order execution only (OEO) channels, and thus investors may not receive the information needed to offer them increased protection. Suggestions include requiring OEO firms to publish risk warning pop-ups or product disclaimers immediately prior to the placing of trade orders by clients. In connection with the CFRs, the Panel believes it is important to review whether they have resulted in unintended consequences, such as a reduced product shelf or additional compliance fees being passed along to investors.
The Panel also mentioned dispute resolution in its report, supporting the CSA's binding authority proposal for the Ombudsman for Banking Services and Investments (OBSI).
Watching for the Signals: CIRO Releases Results of First Investor Survey
Early this month, the Office of the Investor at the Canadian Investment Regulatory Organization (CIRO) released the results of its first investor survey (together with the Innovative Research Group), which was intended to provide insights into trends and financial concerns impacting investors in Canada. The report is very robust and includes data relating to several themes, including financial goals and challenges, investment decision making and risk, the investor-advisor relationship, familiarity with complaint-handling procedures, and familiarity with fraud/scam attempts.
Perhaps unsurprisingly, investor confidence in achieving personal financial goals is being affected significantly by the rising cost of living, and thus only 21% of Canadians surveyed said that they felt "very confident" about meeting financial objectives. Similarly worrying, 28% of Canadians (and as high as 40% of 18–34-year-olds) indicated they needed to borrow money to cover daily expenses. Of note, 30% of investors surveyed held or hold cryptocurrency assets, even though 60% of Canadians think the investments are extremely or very risky.
In our article above relating to the Investor Advisory Panel to the OSC, we noted the panel's concerns about finfluencers. The concern appears to be backed up by findings of the survey, where approximately 28% of Canadians surveyed look to financial influencers, forums and social media for guidance on financial matters. Of these individuals, 44% indicated that the information received from these types of sources is "equally as valuable" as the information they would get from a traditional advisor. For respondents that used social media, 59% received information and advice from YouTube videos.
Of the DIY investors surveyed, approximately 40% said they would utilize tools or features relating to asset allocation or portfolio construction if those were made available
With respect to questions relating to investor redress and complaint handling, investors were asked about the organizations that regulate investment advice in their home province, and 73% of investors indicated they didn't know, while 13% indicated there was no such organization.
The report is a very interesting read and provides a snapshot of current investor sentiment in Canada.
Important Reminders
Rules of the Road: OM Update Requirements
As you may recall reading in our earlier bulletin articles, amendments to National Instrument 45-106 Prospectus Exemptions (NI 45-106) that took effect on March 8, 2023 (the Amendments) require issuers that rely on the offering memorandum (OM) prospectus exemption in Ontario to consider whether their OM needs to be updated. Updates may be necessary to include interim financials for the most recently completed six-month period where a distribution is ongoing, if more than 60 days have elapsed since the end of the second interim period. For issuers with a December 31 year end, this means considering whether the issuer's June 30 financial statements trigger the need to update the OM by August 29. Amending an OM to include the semi-annual financials may necessitate updates to other disclosure in the OM to ensure that it continues to meet the OM form requirements as of the date the OM is amended. An exemption is available if the issuer appends an additional certificate to the OM certifying that:
- the OM does not include a misrepresentation when read as of the date of the additional certificate;
- there has been no material change in relation to the issuer that is not disclosed in the OM; and
- the OM, when read as of the date of the additional certificate, provides a reasonable purchaser with sufficient information to make an informed investment decision.
In either case, the updated OM must be filed with the OSC and any other applicable regulators within 10 days of a distribution.
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