“For example, upfront commission may motivate advisors (particularly less experienced advisors who have lower incomes) to sell this product to customers for whom the product is not suitable,” they said.
While the industry maintains that the chargeback structure facilitates access to advice for certain clients and warns against banning its use, the regulators said the risks demand, “at a minimum, robust control measures to ensure customers are treated fairly when this option is used.”
The controls they have in mind include measures such as using a short duration for chargeback schedules; permitting clients to redeem a portion of their holdings without triggering chargebacks; and not running promos that involve temporary commission boosts to drive sales.
The regulators also indicated that insurers shouldn’t “inappropriately” increase seg funds’ management expense ratios due to their use of upfront commission structures.
To that end, the regulators said they’ll develop guidance on controls firms need to have in place, which will be incorporated into planned guidance on designing and selling seg funds generally.
That broader guidance, which is to apply to all compensation structures, will aim to ensure that clients are treated fairly and receive suitable advice, that reps are properly trained, and that risks involving leverage and other strategies are properly managed.
The guidance will be issued for public comment before being adopted, the regulators noted.
Additionally, the CCIR and CISRO indicated that they plan to share their findings on the risks associated with the use of chargeback structures with the Canadian Securities Administrators (CSA) and “monitor any work the CSA undertakes with respect to similar compensation models on the sale of mutual funds.”
The regulators also stressed that they will “continue to monitor the customer outcomes relating to upfront compensation” in seg funds.
“Should CCIR and CISRO become aware of unfair outcomes in the future, we will consider taking further action,” they said.