Quebec Giveaway – Millions of dollars lost, jobs cut to entice insurance regulator to join national program (investigation)

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In July 2012, the organization representing insurance regulators across the country dropped a bombshell. The national licensing program, which Quebec had refused to join for years, would be revamped to include Quebec. In return, Quebec’s regulator would receive a contract to educate and license all new Canadian insurance agents, at the expense of private sector firms.

The Canadian Insurance Services Regulatory Organizations (CISRO) and its provincial members had reason to be proud: they were creating a truly national regulatory system that included Quebec, even as the federal government continued to be stymied in its efforts to build a national securities regulator.

Affected stakeholders - around a dozen private sector providers in the life insurance training market. Some provide only instruction and testing. While others also create and publish textbooks and teaching materials sold to students and other providers.
Affected stakeholders – around a dozen private sector providers in the life insurance training market. Some provide only instruction and testing. While others also create and publish textbooks and teaching materials sold to students and other providers.

But not all stakeholders have been celebrating. Many in the industry remain angry and concerned that the deal was inked without their knowledge or input. They question why an overhaul to a system that has been running well was even needed. Private sector companies in this niche education market complain that they will lose millions of dollars of revenue, which will instead land in the coffers of Quebec’s regulator.

Veteran players in the industry say they are concerned that the new training program will raise barriers to entry for the roughly 10,000 new agents in training each year, by making the exam and materials more difficult, and the process more expensive and time consuming.

In fact, it is the regulators themselves who appear most excited about the changes. Officials at the Financial Services Commission of Ontario (FSCO), which played a critical role in designing the overhaul that is to take effect January 1, 2016, knew the deal with Quebec and the other provinces made them look good in political circles.

“The harmonization program is a huge step forward for Canadian insurance regulators and will enhance FSCO’s reputation as a progressive regulator,” a senior FSCO policy analyst wrote in an internal communiqué.

FSCO and the other insurance regulators outside Quebec were so keen to bring the dissociated province into the fold that they had agreed to anoint Quebec’s regulator as the new national education service provider. That regulator is the Autorité des marchés financiers (AMF) and it’s now exclusively responsible for developing, implementing and overseeing the program on behalf of all regulators across the country.

“This was a condition of Quebec’s participation,” internal regulator documents say.

FSCO knew that there would be costs to the deal and its officials ramped up efforts to manage disgruntled stakeholders.

$3-MILLION HERE, $4-MILLION THERE

More than a decade ago, provincial insurance regulators outside Quebec opened the market for education materials to commercial suppliers. Companies could invest capital to create their own textbooks and teaching material based on the regulators’ curriculum design document, which serves as the basis of the insurance agents training course and exam.

Watch 'Stakeholders Side Swiped' - hear from Sam Albanese, Seneca College
Watch ‘Stakeholders Side Swiped’ – hear from Sam Albanese, Seneca College

Quebec had its own needs specific to its civil law, and declined to join the national training program. The AMF may consider that decision to be a mistake, since it’s now the central player in the process to harmonize the national program.

The most vocal opponents of this process are the private-sector providers that have been creating and publishing the textbooks and teaching materials for students outside Quebec. They will lose most of that business to the AMF, which will solely publish the new mandatory textbook.

“What security does any business have working with government,” asks Robert Gardias, president and CEO of Oliver Publishing Inc., the largest provider of teaching materials. “So if a regulator thinks it can do something better, it just takes it over?”

Oliver Publishing was forced to cut a significant amount staff to compensate for an estimated loss of $3-million in annual revenue, Gardias said.

At the same time, AMF is spending approximately $4-million to develop new teaching materials. It expects to recoup these costs through licensing fees charged to private-sector course providers. But if there is any shortfall, the AMF has negotiated terms with the other provinces that their taxpayers will pick up the costs.

Gardias says he took his concerns to each of the provincial regulators and to CISRO. “They told me, ‘your business is none of our business,’” he says.

In a 2013 briefing note prepared for FSCO’s then superintendent, Philip Howell, a senior policy analyst described stakeholder reaction to the “harmonization” of life insurance training as “mixed.”

Referring specifically to Oliver Publishing and Advocis, The Financial Advisors Association of Canada, she warned: “It is possible that they may lobby the Minister and try to gain sympathy for the potential loss of business.”

She assured Howell, however, that the harmonization program was a huge step forward, adding: “Stakeholder reaction is being well-managed by CISRO.”

QUESTIONS ASKED INFOGFX_FINALA FSCO spokesperson declined to comment on the decision-making process behind the new regime, directing enquiries to CISRO.

In an email exchange with Regulator Watch, the chair of CISRO, Ron Fullan, described how the national training system would actually increase the size of the market for businesses and colleges that host training programs. Students in Quebec wishing to write the provincial life insurance exam will now have to complete a course of study through a service provider similar to those in the rest of the country.

In addition, CISRO points out that the new training regime will still allow commercial course providers to develop and sell study materials supplemental to the main text. However, CISRO’s deal with the AMF contractually gives the Quebec regulator copyright to all of the new supplemental material and rights to the existing materials currently produced by the providers.

“We struggle with how much to invest in supplemental materials now because we won’t own it,” Gardias said.

As part of its planning, regulator staff created talking points to help address concerns that might arise, including the charge that regulators were destroying business. One prepared response said: “CISRO could not and did not make a commitment to course providers that the [Life Licence Qualification Program] would never change.”

SOLUTION WITHOUT A PROBLEM?

The new training system promises one standard for all provinces, which is a good thing, say some education providers. It will be easier, for example, for the insurance industry to do business across the country, and the market could see the emergence of more national firms, says Sam Albanese, the Insurance Industry Director for the Centre for Financial Services at Seneca College in Toronto.

He also praises the AMF for its professionalism during the transition. But he questions why it was necessary to nationalize a system that had been operating well through free enterprise.

“The issue for most of us is the take-it-or-leave-it way in which this was done,” as well as the lost revenue streams, he says.

The regulatory overhaul comes at a time when insurance products are more complicated than ever and the consumer is more informed than ever. In this environment, institutions such as Seneca College are trying to emphasize to recruits the need to sell advice rather than just products.

“If we are the ones developing the 21st century advisor, surely we should be consulted,” Albanese says. “We start by asking what skillsets and knowledge will be needed, and then we work our way backwards to develop it.”

He remains concerned that the AMF education will be tougher, more time consuming and pricier, creating a higher barrier to entry at a time when the insurance industry is overweight with agents in their 50s and 60s.

The new textbook from the AMF, for example, is more than 800 pages, about twice as long as what most providers outside Quebec are using today, he said.

Through its spokesperson, Sylvain Théberge, the AMF declined to comment on the subject.

FOI-ACCESS GFX
Access the full FOI packet – Financial Services Commission of Ontario

CISRO says the new curriculum has been created with input from industry experts in five provinces. It says the new training system will prove beneficial by testing relevant knowledge and skills and breaking the material into four sections, each with its own modular exam. It also points out that the AMF is the only regulator with “educational experts” already on staff.

However, the regulators do not suggest, or provide any evidence, that the AMF’s experience and expertise is in any way superior to what the private market is providing.

CISRO does say that standardization will eliminate the wide variance in pass rates between the country’s private sector course providers. In 2013, it ranged from just 62 percent (Primerica Life Insurance Co.) to 98 percent (Canadian Securities Institute). However, the regulator does not seem to have addressed which end of this spectrum is optimal, or where the AMF results are likely to fit on the scale.

In an letter to stakeholders in 2014, Fullan explained that standardized material “also fulfills an important consumer protection need, as it defines the minimum breadth of knowledge required by regulators for a new licensee, rather than having that minimum standard determined by others.”

Course providers say that about 80 percent of the material they create comes from the curriculum design document and is already the same.

“If anything needed updating, we would have done it,” said Gardias. “We would have been open to any changes [regulators] wanted. We’re obviously very motivated.”

ORIGINS

The decision to give one organization the key contract for educating and licensing regulated professionals is not unprecedented. Canada’s financial services industry, for comparison’s sake, relies on the Canadian Securities Institute (CSI) to provide licensing education and testing for credentials. The CSI, owned by Moody’s Analytics, has been the exclusive provider of the Canadian Securities Course for decades. But that may change soon. The Investment Industry Regulatory Organization of Canada (IIROC), which regulates brokerage and investment firms is considering an historic break up of the CSI monopoly on securities training.

So at a time when the securities industry may move away from a one-provider model, where did the harmonized insurance plan originate? CISRO presents the overhaul as its response to a system that was delivering inconsistence exam results and operating with insufficient governance.

Internal communications, however, suggest the idea for the national approach came from Quebec. If so, the notion that the existing education system was failing loses credibility; Quebec had never been a part of it.

Claims of an outdated governance model also look like weak justification for the overhaul. First, there is no indication that the model could not have been updated within the existing system.

Second, internal documents show that FSCO chose to introduce a formal governance structure specifically to counter the risks of losing control of the education and licensing system to Quebec’s newly empowered AMF.

“Using the services of another regulator as opposed to a third party commercial provider means that FSCO would have less control over the work and the associated costs of services,” the documents say.

The first item under the subsequent heading, “controls contemplated to address these risks,” is “a formal governance structure.”

THE CODE

Even regulators are regulated, to a degree.

Ontario accounts for about 46 percent of all the life insurance licensing exams written in Canada. Not surprisingly, the provincial regulator, FSCO, has been a driving force behind the overhaul of the education and licensing system.

In Ontario, the Regulator’s Code of Practice lists as its number one model for regulatory reform, “Involving stakeholders in policy and legislative development from the outset.”

When CISRO dropped its bombshell on the industry in July 2012, attendees of the large meeting at the FSCO offices in Toronto were stunned. Originally scheduled for two hours, the meeting was completed in just 45 minutes, according to the accounts of several people present.

By regulators’ own accounts, the only involvement by industry in the four months preceding and following this meeting was a series of workshops designed to “update the profile of the knowledge and skills required for entry-level life insurance licensees.”

“None of us knew this was coming,” says Albanese. “Unbeknownst to us, the negotiations [with Quebec and other provinces] were complete. There was no input from any of the providers.”

The Regulator’s Code of Practice also lists three best regulatory practices, including “support economic growth within the province.”

“Regulators should recognize that in addition to protecting the public interest, a key element of their activity will be to encourage, when possible and appropriate, economic progress,” the code says.

There’s little doubt that by agreeing to Quebec’s terms for creating a national licensing body for the insurance industry, Ontario’s regulator has destroyed a small, but lucrative market for public sector firms providing exam material.

Perhaps the process would have received more scrutiny if the money involved was greater than a few million dollars a year. And perhaps officials see the benefits of creating a national system as superseding the finer points of their own code. These are not issues they are willing to discuss publicly.

Simon Avery – RegulatorWatch.com – June 29, 2015

Sr. Writer & Analyst for RegulatorWatch.com 

Simon Avery is a writer and editor who has worked as a business reporter for The Globe and Mail, The Associated Press, The Wall Street Journal and the National Post. He specializes in governance, financial markets, telecom and technology.

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