“Segregated fund contracts and mutual funds are products with certain similar characteristics, including some compensation and fee structures,” the two said in a joint statement last Thursday. “The CCIR and CISRO are of the view that there is a high risk of poor consumer outcomes associated with DSCs in segregated fund sales and this form of sales charge is not consistent with treating customers fairly.”
‘We were pleasantly surprised’
While the CCIR and CISRO acknowledged the risks of potential conflicts of interests and misalignments of costs and services provided in using DSCs for seg funds, as well as regulatory arbitrage, they didn’t say they’re banning the practice yet. Instead, the insurance regulators “[urged] insurers to refrain from new DSC sales in segregated fund contracts in line with the June 1, 2022 ban in securities,” adding that they expect a transition to stopping such sales by June 1, 2023.
For Ken Kivenko, President of investor advocacy group Kenmar Associates, the ban couldn’t come soon enough.
“We were pleasantly surprised to hear the announcement,” Kivenko says. “We submitted, letters, analyses, research, and anonymized cases showing the harmful effects of DSC seg funds. I don’t know if that’s what prompted the announcement, but we have to compliment the regulators for acknowledging they’re unsuitable, and saying they’ll take care of it.”
Kivenko notes that while the DSC ban for mutual funds is set to take full effect on June 1, the products will still cast a six-year-long shadow for investors. Investors who buy funds sold before that deadline will be subject to the normal DSC schedule for those products, he says, which means unless they wait until 2028 to make redemptions on those products, they run the risk of paying charges unknowingly.