The Financial Services Consumer Alliance is offering a warning to any advisors who have read or will be reading this text written by Alain Theriault in the Insurance Journal.
First, we believe that the content of this text is one sided and gives the impression that life settlement activities can be criminalized by insurers through the illegal sanctioning of advisors as seen by the threats made by Manulife and its employee Couture. In regards of Couture’s statements that advisors could face negative consequences from the AMF for having facilitated a life settlement, we believe that before publishing such a statement which can only create a climate of unjustified fear and harm policy owners, Theriault as a journalist should have verified this statement with the AMF.
TO BE CLEAR: Contrary to what Couture has suggested, there cannot be any negative consequences from the AMF for being involved in a life settlement if the advisor acted professionally according to his code of ethics. It is not the role of the AMF to make or modify laws. It is the role of the AMF to apply the law and the law states that life settlements are legal in Quebec. As for Couture’ suggestion regarding the tax authorities, it is none of the business of Revenue Canada or Revenue Quebec to legislate how and how much value a policy owner can get out of his policy for the moment the policy owner pay the taxes if any are owed.
We also believed that Theriault should have sought the point of view of a consumer advocate which would have provided some form of balance to the content of his text. It is clear that consumers have very different expectations and perspective than insurers.
Finally, before publishing Morin’s (Desjardins) legal interpretation of article 2418 of the Civil Code of Quebec, the Insurance Journal should have sought and included the opinion of an independent lawyer not working for an insurer. FSCA does not agree at all with Morin’s interpretation of the law and Desjardins’ position. We are extremely worried that Morin’s statement published in this journal could be used by advisors to mislead policy owners as to their rights to transfer an insurance contract to a third party or to enter into a life settlement. FSCA’s position is stated later on in this article. Advisors should use extreme caution before relaying Morin’s interpretation of article 2418 to a customer in regards to a life settlement or a transfer of ownership. FSCA would like to emphasize that the duty of care in this situation is owed by the advisor to the policy owner and not to the insurer.
It is interesting that aside from Amy Plamondon of Groupe Cloutier no one is considering the customer perspective in regards to life settlements.
If life settlements are considered by policy owners, this reveals a need and this need cannot be ignored by the industry. FSCA has not decided yet whether life settlement is the solution to this need and this is why this issue will be part of the top of our agenda in 2014/2015. Life settlements will be one of the four investigations that will be launched by FSCA. The results of this investigation will allow FSCA to make recommendations to the regulators regarding life settlements through the publication of an industry report and will allow FSCA to determine whether existing policy owners have been harmed by the existing commercial practices of insurers. I can state that if this report was to advocate the creation of a secondary market for the sale of life insurance, you can be certain that FSCA would require that this market be highly regulated which is not the case at the present for provinces where this market can legally exist.
What is a legal life settlement from a customer’s perspective?
FSCA believes that a legal life settlement only involves existing life policies where there was a real and intangible insurable interest at issue of the policy. However, with time this insurable interest has changed and has become irrelevant or diminished because of changing family, economic, health or social conditions. As a result, the policy owner is contemplating surrendering the policy for cash value or because the premium payment cannot be maintained by the policy owner any longer. In some provinces, such customers have the right to settle their policy for a sum other than the cash value which is referred as the fair market value (FMV) and which is paid by a related or unrelated third party. In fact, the FMV of a policy is considered the true value of a policy under the Income Tax Act for many financial transactions.
Advisors should read carefully our Advisors’ Standards of Conduct regarding these types of life settlements which you will find below.
There is also a legal contractual life settlement existing in all provinces. This type of settlement exist when there is a contractual provision in a life policy where a policy owner can request an advance on their life benefit or withdrawal of cash value because of a disability, critical illness or long term care condition.
Advisors should read carefully our Advisors’ Standards of Conduct regarding these types of contractual life settlements which you will find below.
FSCA does not consider as legal life settlements existing insurance schemes such as personal loans which are provided to individuals conditional to the unjustified issue of a NEW life policy without an insurable interest and its assignment to the lender. We consider this as exploiting consumers and trafficking in life insurance. FSCA will fight against any such schemes and will not rest until business or individuals involved in such practices cannot conduct such unsavory business.
Finally, FSCA considers that it is an infraction for an advisor to buy a policy of one of their client or pay the premium of a policy of one of their client. FSCA also considers that it is a conflict of interest for an advisor to receive any form of compensation for having facilitated a life settlement and as a result this conflict of interest and remuneration must be disclosed to the client. Also different provincial legislation prevents advisors to be in a conflict of interest even if disclosed and therefore for these provinces, such remuneration would be considered illegal.
FSCA’s answer on life settlements:
I am extremely disturbed by what I have read in the Insurance Journal. If what I have read is true, I can state that FSCA will take the legal actions required to stop the practices mentioned by the Insurance Journal and will ascertain if a Class Action is required to recover the damages done to policy owners. Until then FSCA guidelines regarding life settlements are pretty simple and are founded upon one sacred principle. Insurers cannot include in their agent contract, any contract provisions that would violate current laws and regulations pertaining to the financial industry. Under current regulations, a financial advisor owes a fiduciary duty to his client and this duty cannot be limited contractually.
Based on this principle, FSCA expects advisors to always act in the best interest of their clients even if this displeases insurers. In the case of life settlements, FOR PROVINCES WHERE IT IS LEGAL, where a policy owner is considering surrendering his life policy because he can’t afford the premium or because he needs the cash value, we expect advisors to adhere to the following Standards of Conduct:
Standards of Conduct for life settlement for provinces where it is legal:
1. We first expect the advisor to inform his client that his policy has a fair market value. As stated by Richard Garneau actuary of cabinet Gouleau Garneau all life policies have a fair market value. However for this fair market value to be real there must be a third party willing to buy or offer a loan on the policy.
2. It is the duty of the advisor to advise the client of the different options on how to realize the FMV of their policy such as a transfer to a charity, transfer to a privately held corporation, leveraged arrangement or through a life settlement if this option is legal in the province where the advisor is licensed.
3. By informing his clients of the different options available, FSCA considers that an advisor will have fulfilled his fiduciary duty to the client. When this point is reached, the advisor must consider his duty towards the insurer.
4. A duty to the insurer for life settlement only exists if the advisor has an agent contract with the insurer. The agent contract can prohibit the advisor from getting directly involved in the set up of a life settlement.
5. If the advisor is prohibited from being involved in the set up of a life settlement, the advisor should at this point inform the client of the existence of such contractual provision since this would represent a conflict of interest and taint any advice given by the advisor on whether or not the client should proceed with the life settlement.
6. The advisor should counsel the client to seek independent advice before proceeding with the transaction if he is prevented contractually from helping the client.
7. If the advisor still wishes to inform the client of his negative position towards life settlements, he must ensure that is objections are communicated with objectivity and integrity and not relying on lies of half truths as illustrated by the statements made by employees of insurance companies found in the Insurance Journal.
This is why I am extremely concerned by the statements made by the employee Couture of Manulife. Instead of educating advisors on their duty, Couture uses fear and threats to influence advisors in acting against the best interest of their clients. In Quebec, life settlements are legal. It is the duty of the advisor under the Law pertaining to financial services and products and code of ethics to inform their clients of the existence of this legal option if the client is considering surrendering his policy. FSCA will be ready and willing to legally help any advisors who are persecuted and sanctioned by Manulife, the AMF or Chambre Financiere for having helped a client with a life settlement.
Normally we would ignore Manulife’ statement that it can use the AMF to sanction advisors helping their client in using a legal option in order to protect their profit margins. However two of FSCA investigations in this matter have uncovered disturbing trends that the AMF could be used in such a fashion. In 2015, FSCA intends to legally address this situation.
Standards of Conduct for contractual life settlement in all provinces:
Many policies offer a contractual life settlement on the death benefit or cash value upon an event called the triggering event which can be a disability, critical and terminal illness or long term care need.
If a policy owner qualifies for such a contractual settlement, it is the position of FSCA that the policy owner has the right to obtain the best terms and conditions in regards of this settlement. As a result, we will protect the right of the policy owner to shop for the best deal or offer by shopping around and comparing the terms and conditions offered by the insurer against the terms and conditions offered by a non-insurer. In fact the legal precedent has existed for more than 20 years whereby a policy owner can shop around in order to decide between a policy loan (offered by insurer) and a leveraged loan (offered by non-insurer) despite antiquated provincial legislation in some provinces that prohibits such leveraged loan.
FSCA believes that the relevant legislation pertaining to the right of the policy owner in this situation can be found in the Federal Competition Act. Any actions or statements made by advisors, insurers, MGA or any other parties to prevent a policy owner from getting a second opinion on his settlement will be considered as violations of the provisions of the Federal Competition Act such as unfair restraints of trade. Such violations will be documented by the FSCA and it will become our priority that those involved in these infractions be prosecuted under the powers of this Act. Here are the standards of conduct for advisors in regards to contractual settlement:
1. We first expect the advisor to do his duty and help the client in qualifying with the insurer for this contractual settlement in the case of disability, critical and terminal illness or long term care.
2. We then expect the advisor to inform his client that his policy has a fair market value. As stated by Richard Garneau actuary of cabinet Gouleau Garneau all life policies have a fair market value. However for this fair market value to be real there must be a third party willing to buy or offer a loan on the policy.
3. It is the duty of the advisor to advise the client of the different options on how to realize the FMV of their policy such as a transfer to a charity, transfer to a privately held corporation, leveraged loan or through a life settlement.
4. We believe that in this case, the insurer cannot contractually prevent an advisor through the agent contract from helping the client in obtaining a better settlement for his policy than what is offered by the insurer. For example a third party loan on the FMV of the policy could be better suited than withdrawing the CSV of the policy in the case of severe disability putting the policy coverage at risk if this disability later creates financial difficulties to the policy owner where he is unable to pay the premium. With no CSV the policy would lapse… In a leveraged loan situation, the CSV would still be there to support the policy.
5. We expect advisors to help policy owners who find themselves in such a dire situation because of disability, critical illness or long term care to help policy owners get the best value out of their policy and to choose the best method to achieve their goal. In this case advisor cannot be neutral. He is not an agent of the insurer. His duty is to the policy owner. There cannot be two masters.
FSCA’s position on article 2418 of the Civil Code and Desjardins’ interpretation of this article
FSCA considers Morin’s opinion on the article 2418 to be a very selective interpretation of the Civil Code. Under article 2418, at issue or at transfer of a policy, an insurable interest must exist. However the insurable interest can be waived in writing by the insured as stated in the law.
It is clear that in a life settlement where the policy owner is the person insured that such written consent would exist in the agreement for the life settlement. If the policy owner is not the person insured, a separate written consent would need to take place with the insured and the insured must have the legal capacity to waive this insurable interest. In other words, no 90 year old suffering of dementia can waive this right.
In our investigation of life settlement and following Morin’ statement we will pay particular attention to Desjardins policies and if we found that such statement was used to prevent policy owner from entering into a life settlement, we are more than willing to legally test our legal interpretation of 2418 again Morin’s interpretation.
FSCA also cautions advisors against relying on general comments such as those made by Morin and to look to the particulars of each situation. In fact as stated by Daniel Kahan, many life settlements may be established under reverse mortgage principles. As you should know under a reverse mortgage there is no change of ownership. The same could apply to a life settlement where the policy would be simply collaterally assigned with a change in the beneficiary designation. If there was a change of ownership, the existence of the loan would create the insurable interest. Clearly 2418 would not apply.
Finally FSCA cautions insurers and their employees against influencing advisors in acting against the best interest of their clients by giving the wrong information or by making threats. If this would result in the advisor committing an infraction, in several provinces, in this regard, the infraction of the advisor would be deemed to be the infraction of the employee and insurer as we can see in article 482 of the Law pertaining to the distribution of financial products and services:
482. Every insurer that helps or, by encouragement, advice or consent or by an authorization or order, induces a firm or an independent representative or independent partnership through which it offers insurance products or an executive officer, director, partner, employee or representative of such a firm or independent partnership to contravene any provision of this Act or the regulations is guilty of an offence.
FSCA takes very seriously the lack of professionalism shown by insurance employees in their statements made in the Insurance Journal. If this is the best of what this industry has to offer, this industry is in dire need of a change of leadership. This type of unrestrained and irresponsible arrogance towards consumer’s right will not be tolerated anymore.
CEO and Founder
Financial Services Consumer Alliance