The Autorité des marchés financiers (the “AMF”) recently released an issues paper on managing conflict of interest risk in relation to incentives paid by insurers to firms, independent representatives, independent partnerships and certified representatives in the insurance of persons and damage insurance sectors.
The paper states that, in order to ensure consumer confidence and fair dealing, the design and management of incentives must take into account potential conflicts of interest in the sales process. The AMF has been taking a step-by-step approach to raising awareness in the insurance sector about conflicts of interest. In May 2014, the AMF sent a self-assessment questionnaire to 219 insurers licensed in Quebec. The AMF released the results in a July 2015 report. Among other things, the report identified incentives management as one of the “areas requiring vigilance” and found that incentives may create a risk of a conflict of interest.
According to the AMF, any incentive intended to stimulate, convince or encourage people to act in their own interests could interfere with the fair treatment of consumers if offsetting mechanisms are not in place. The AMF stated that incentives presenting one or several of the following criteria could encourage a conflict of interest:
- the incentive is calculated only on premium volume or amount invested, and no other criteria promoting the fair treatment of consumers is taken into account;
- the incentive is triggered based on the achievement of a performance threshold, either individually or as a group;
- the incentive is geared to the sale of a specific product or product category; and
- the incentive is intended to promote the salesperson’s reputation.
Based on the above four criteria, the AMF assessed the conflict of interest risk for the following compensation practices as follows:
- Low Risk Incentives:
- Salary: Low risk as salaries are usually fixed. Salaries do not factor in account sales volume and performance is not geared towards sale of a specific product.
- Fees and service charges: Low risk as fees do not take into account sales volume or performance and are not geared toward the sale of a specific product. Fees and service charges are used infrequently in the insurance sector.
- Medium Risk Incentives:
- Commissions: Medium risk as commissions are calculated only on sales volume. Differences among commissions for competing products can also lead intermediaries or representatives to promote products that are not the most suitable to meet the client’s needs. Commissions are used widely as remuneration in the insurance industry.
- High Risk Incentives:
- Bonuses: High risk because they are directly linked to a premium volume and a performance threshold, which puts pressure on representatives and intermediaries that might cause them to place their own interests before those of a client. The accumulation of incentives could also lead to promoting a specific insurer’s products.
- Contests: High risk as representatives could be tempted to focus production in a single area in order to win the contest. The AMF notes several insurers have discontinued contests involving trips and conferences since the release of a report by the Canadian Life and Health Insurance Association (“CHLIA”) in 2016. While the AMF considers this is a good start to managing incentives, the AMF believes that a comprehensive assessment of risk related to all forms of incentives should continue.
- Other benefits: High risk as it may prompt representatives to increase their sales volume to obtain the resulting benefit. Examples include membership in select clubs, the awarding of titles (e.g., sales manager), access to an IT platform or software, and client referrals. The AMF is also concerned that titles may mislead the client as the client might believe that the representative earned the title because of his or her competence.
The paper concludes by posing seventeen questions to insurance industry stakeholders, in order to move forward with the discussion on the risk of certain incentive categories interfering with the fair treatment of consumers and the control and supervision mechanisms that should be implemented to mitigate this risk. The AMF intends the information it gathers to serve as a reference in developing and reviewing frameworks as it continues its work in this area.
The issue of how to manage conflict of interest risk in relation to incentives is a topical subject in the financial sector in Canada and around the world. The Canadian Securities Administrators (“CSA”) is currently examining several aspects related to conflicts of interest stemming from compensation arrangements and incentive practices. The Investment Industry Regulatory Organization of Canada (“IIROC”) has also recently published a Guidance Notice on the proper management of conflicts of interest, and compensation-related conflicts in particular. The ultimate objective of these initiatives is the same – to protect users of financial products and services.