OSC/FSCO Merger: Significant Change for Ontario Insurers

On April 12, 2001, the Ontario Government issued a consultation draft called “Establishing a Single Financial Services Regulator”. The draft provides proposed legislation that would result in the merger of the Ontario Securities Commission (OSC) and the Financial Services Commission of Ontario (FSCO). The effect of this legislation would be a significant step towards the harmonization of the regulation of financial services in Ontario. The proposed Ontario Financial Services Commission (OFSC) would have wide ranging regulatory authority over the financial services industry in Ontario. The proposed legislation is important for the insurance industry since it will significantly affect the way insurance is regulated.

The intent of the new legislation is less duplication, more efficiency and better consumer protection. There are a number of inconsistencies and overlaps as to how financial services are regulated in Ontario. For example, the OSC regulates the sale of mutual funds while FSCO regulates the sale of segregated funds. It is likely that the model for the regulation of financial services that Ontario is proposing will be also be adopted in other provinces.

The regulation of the sale of financial services products is a major part of the new legislation.

New portfolio

It is important that there is consistency as to what type of licenses are required for the sale of financial services products. The OFSC will have responsibility for administering the Insurance Act as well as parts of the Registered Insurance Brokers Act, the Motor Vehicle Accident Claims Act, and the Compulsory Automobile Insurance Act. In addition to responsibilities under insurance related statutes, the OFSC will administer the Securities Act, Commodity Futures Act, Pension Benefits Act, Credit Unions and Caisses Populaires Act, and Mortgage Brokers Act. The OFSC will take over the responsibilities of FSCO for the Loan and Trust Corporations Act, the Prepaid Hospital and Medical Services Act, and the Marine Insurance Act. It will also assume the responsibilities of the OSC under the Ontario Business Corporations Act and the Corporations Act.

The Superintendent of Financial Services will be replaced by two officers, the Superintendent of Insurance and the Superintendent of Pensions. The OFSC will operate in a manner similar to the OSC. There will be a Chairman of the OFSC, as well as a board of directors. All members of the OFSC will be appointed by Cabinet. Hearings will be conducted by members of the OFSC and not by an independent tribunal with the exception of pension matters which will be dealt with by a separate pension tribunal.

Under the consultation draft, regulatory powers and responsibilities will be centralized with the OFSC. The OFSC can delegate many of its powers to individual members of the commission, superintendents and directors.

The OFSC will also have authority to assign to a self-regulatory organization the power of superintendents or directors with respect to certification, licensing or registration. This provision is also adopted from the securities regulatory model which allows for registration matters to be handled by self-regulatory organizations such as the Investment Dealers Association, and the newly created Mutual Fund Dealers Association.

Enforcement ability

The consultation draft places a significant emphasis on the enforcement capabilities of the OFSC. The consultation draft provides that the OFSC will have OSC-style investigative powers under all of the statutes that it will administer. It also allows the investigative powers of the OFSC to be used for the purpose of enforcement proceedings in other provinces or states. These two developments introduce significant change in the regulation of the Ontario insurance industry.

The OFSC will have OSC-style ruling power under the Insurance Act. Rules may be made by the OFSC with respect to matters where cabinet may currently make regulations. Some matters will remain subject to regulation making only. The rule-making power of the OFSC will have a binding effect. Rule-making is used as an alternative to making regulations under an act. Rule-making is considered to be a significant improvement over regulations since it is not necessary for cabinet to proclaim them. As a result, binding rules can be introduced more quickly and in an easier manner.

The rule-making power will allow the OFSC to make binding rules in a number of areas with respect to the regulation of insurance. The Superintendent of Financial Services currently issues guidelines to the insurance industry which are expected to be followed but which do not have a legally binding effect. It is expected that the current guidelines will be replaced by rules. This will provide greater certainty as to what regulation must be followed by insurance companies.

A negative aspect of the rule-making power is that it will take a significant amount of time for new rules to be finalized. Periods of up to one year may be required in order for consultation to be made. The rule-making heads of authority under the Insurance Act (Ontario) are extensive, including the follow areas:

Requirements for the granting or renewal of licenses;

Errors and omissions insurance for agents and adjusters;

Standards of business practice and conduct of insurers including the marketing and sale of insurance, settlement of insurance claims, delivery of notices of changes in insurance benefits and premiums and market conduct audits and surveys;

Requirements relating to the regulation of conflicts of interest;

Permitted investment policies and practices for segregated funds; and

The sale and marketing of segregated fund products.

Insurance implications

The consultation draft is an important legislative initiative for the insurance industry. If implemented in its current form, the OSC/FSCO merger will change the way in which the insurance industry is regulated in Ontario.

The first round of consultations regarding the merger occurred in the fall of 2000 and did not provide sufficient feedback for the Ontario Government to feel confident in going forward with the merger legislation. A second consultation was held on the proposed merger during the spring of 2001.

During the past few years, the OSC has adopted a much more aggressive approach to investigation and enforcement of violations of the Securities Act. The OSC currently has significantly greater powers than those of the FSCO. It is likely that the combination of new powers, as well as changes as to how the legislation is enforced, will have an impact on the insurance industry in a number of ways.

It is likely that violations of the Insurance Act will be prosecuted on a more proactive basis. Hearings similar to those conducted by the OSC will also likely become common.

It is interesting that the position of Superintendent of Insurance will again be established. The position of Superintendent of Financial Institutions was established when FSCO was created to replace the Ontario Insurance Commission. Although this might appear to be a step backwards, the new position of Superintendent of Insurance will have a more defined role and greater powers in certain areas including with respect to enforcement.

One possible concern is that the Superintendent of Insurance will not have rule-making power. Rule-making will be done by the commission and it is unlikely that this power will be delegated. As a result, the Superintendent of Insurance will not have the ability to unilaterally make rules. All proposed rules must be approved by the commission. The current ability of the Superintendent of Financial Services to issue what are generally considered to be binding guidelines to the insurance industry will be lost.

Another concern is that the positions of Superintendent of Insurance and Superintendent of Pensions are being established without a similar position being created for the securities industry. This suggests that the commission will directly regulate the higher profile securities industry while delegating power to superintendents in the in surance and pension areas. As a result, it is possible that the insurance industry may not get the same attention or priority on issues from the commission as the security industry.

Outdated

Finally, it is important to emphasize that Ontario’s Insurance Act continues to be significantly out-of-date. Although the new rule-making power may result in more regulatory certainty, it will not be a substitute for new insurance legislation. The Ontario Government is looking for input with respect to the proposed merger. The new legislation will have a significant impact on both the regulation of insurance in Ontario, as well as the distribution of it. It is important for the insurance industry to be aware of the changes that are being proposed and provide comments on the suitability of them.