BC Insurance Council outlines duties, responsibilities of life agents in the sale of exempt market securities
The Insurance Council of British Columbia has outlined the duties and responsibilities of life insurance agents who are involved in the sale of exempt market securities.
Exempt market securities, sometimes called “alternative investments” are investment vehicles that do not require the seller to hold a securities registration in B.C. While the products are not life insurance products, they can be sold through life insurance agents.
The Council says that while the sale of these investments is regulated, it has concerns when they are sold by life insurance agents.
“More specifically,” the Council wrote in a notice, “Council is concerned with life agents that do not hold a securities registration but engage in the sale of exempt market securities. For life agents that hold a securities registration, their activities are monitored by their securities or mutual fund dealer.”
Council says the recent example of an experienced life agent highlights its concern.
Council says a retired client with a limited income moved a portion of her conservatively-investment retirement portfolio to an exempt market security. The investment turned out to be a scam and while the agent was duped as well, Council says he should never have recommended the investment to his client.
The Council found the life agent had set out on an “irresponsible course of conduct that was incongruent with the interests of his client.” Council found the agent’s actions made him unsuitable to hold a license and canceled his life insurance license for a minimum of two years.
As a result of this situation and others, Council has set out guidelines for life agents who do not hold a securities registration to follow when marketing exempt market securities to their clients:
- Holding out: clients often consider their life agent to be their financial advisor, and therefore, knowledgeable about all financial products, not just insurance. Consequently, a client may presume that when a life agent recommends an exempt market security the recommendation is based on the life agent’s knowledge and experience. Without sufficient disclosure, a client may presume that when a life agent recommends an exempt market security the recommendation is based on the life agent’s knowledge and experience. Without sufficient disclosure, a client may falsely believe that a life agent’s license qualifies the life agent to sell an exempt market security or that the life agent’s license validates the sale of such products, which is not the case. A life agents who does not hold a securities registration should, prior to engaging in the sale of exempt market securities, provide written disclosure to the client explaining:
- His/her qualifications and experience relating to exempt market securities;
- How funds are to be handled;
- The risks relating to these products; and
- The fact they are not regulated.
- Unsuitable transactions: a life agent has a responsibility to understand all aspects of the exempt market security that he/she is recommending to a client. When a recommendation is made, the life agent must be able to demonstrate that the recommendation is consistent with the client’s financial knowledge and risk tolerance; and
- Separation of business: clients need to understand that their funds are not “protected”, as they would be if it were an insurance transaction. A life agent must keep exempt market security business separate from his/her insurance practice and should disclose to the client how funds will be handled.
The Council added that life agents have a duty to exercise due care and attention when engaging in the sale of exempt market securities. “Failure to exercise due care or to follow the above guidelines when recommending exempt market securities can bring into question a life agent’s competency and suitability to hold a life agent’s license.”