Remarks by Huston Loke, Executive Vice President, Market Conduct, FSRA
C.D. Howe Institute, Toronto, Ontario
October 31, 2023
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This afternoon, I want to speak to you about FSRA and our commitment to consumers and consumer protection.
I want to draw your attention to the work we are doing to identify harmful practices, future problems for customers, and what we are doing to address these issues. Because these critical financial services that we oversee are not just a series of rules or checkboxes. They are about fulfilling a purpose for consumers. What do I mean by that?
Many years ago, I pursued a recreational private pilot license and used to walk down to the Island Airport to take flying lessons. For anyone who thinks there is too much regulation in financial services, I would draw your attention to aviation regulation!
You need a license to use the radio and a rating to fly at night. There is an instrument rating, and different licenses for single engine, twin engine, high performance twin engine, and for carrying passengers. All of these are carefully designed with one purpose in mind – to allow pilots and passengers to be able to fly. Safely and confidently.
So when we speak of regulation, I would like us to look at all the rules for all the services that we oversee and see that they are not just a series of check boxes. At FSRA, we think about the outcome for the consumer. In financial services. What is the equivalent of “taking flight”? You don’t seek out a mortgage for fun. You’re looking for a home for your family. You’re not looking for an insurance policy. What you really want is to protect your business or family, or leave a legacy. That is the purpose for that consumer. That is the purpose for FSRA. That is taking flight.
At FSRA, under the leadership of our chief executive officer, Mark White, our vision is Safety, Fairness, and Choice. We regulate, engage in rulemaking, supervise, and, where necessary, take enforcement action. We do this with consumer protection top of mind. We have rules and regulation, but we are always thinking about the outcome for consumers. We are looking at the purpose behind the activity. After all, that is what the customer needs. That allows us to be more efficient with resources. And it allows us to be risk based and to focus on areas of greatest concern.
FSRA launched just over four years ago and we have made substantial progress in this short period of time. For example:
- We developed a new Unfair Deceptive Acts and Practices rule that uses a principles-based approach that focuses on outcomes.
- We have launched our title protection framework for financial planners and advisors so that for the first time, there are minimum standards that are in place for professionals that use the titles Financial Advisor and Financial Planner. Up until now, anyone could have used those titles.
- We received exemptive powers for innovation that can be used to consider new business models that benefit consumers. This sits under an innovation office headed by my colleague Glen Padassery.
- Further, we are taking enforcement actions that are communicated transparently to the public, and have statutory whistleblower protection. These areas are run by my colleague Jordan Solway.
Let’s talk now about credit and mortgages. Prior to my time at FSRA, and before I was at the OSC, I was president of what is now DBRS Morningstar and I would frequently walk from our offices in lower Manhattan to 99 Church - home to a competitor – Moody’s Investor Services. My visits were not related to finance. It was to admire art. Their global headquarters was adorned with a massive metal frieze. And it wasn’t just art, it was art that spoke to credit and the promise and purpose of credit. I was always impressed by the inscription. It’s a quote from a speech delivered in the US Senate and it says [paraphrase]:
“Credit is the creation of modern times and belongs in its highest perfection only to the most enlightened and best governed nations. It has done a thousand times more to enrich nations than all the mines of the world.”
In today’s context, replace the word “credit” with the word “mortgage” and I think you would be describing the potential that homeowners have in the form of equity in their house.
At FSRA, we regulate mortgage agents, brokers, and administrators in Ontario. Just like in aviation, where the purpose is flight, mortgage broker regulation is to support the ability of a buyer to acquire the home of his or her dreams. Perhaps to fund a child’s retirement. How many entrepreneurs have launched businesses with the help of a line of credit secured by a mortgage?
Buying the home of your dreams, investing in a better future for your children, launching a small business and growing the economy. That, my friends, is “purpose”! And that is the purpose behind mortgage lending.
But the environment today is tough. Fixed rate mortgage rates have nearly doubled. Some banks are reporting that a fifth of their mortgages are in negative amortization – that is, mortgage balances are not shrinking despite monthly payments from borrowers. We know this is not sustainable.
Some homeowners will be unable to qualify for traditional lending. Some homeowners may turn to private lenders, which can provide a short-term solution, but which can erode all the equity accumulated over a lifetime of work, or include terms that are unfair to the consumer. How do we enhance safety and fairness, while preserving choice in such an environment? Let me tell you about an initiative that will be announced shortly, it’s about mortgage suitability. It’s about FSRA looking forward to the risks that consumers may face tomorrow, and recognizing the need for action today.
To protect consumers who need help with their mortgages, next month, FSRA plans to publish mortgage suitability guidance that will interpret the meaning of “suitable” when it comes to mortgage brokering practices. Just as there is an obligation to ensure investment suitability, mortgage brokers and agents will be required to demonstrate suitability for borrowers. Why is this mortgage right for me? What are the terms of the mortgage? How can I qualify later for a lower interest rate? These are critical questions for borrowers and families. And they can help protect against mortgages that are not suitable. That enlightened creation of credit fulfils the “purpose” for a family if the mortgage is suitable. Mortgage brokering allows homeowners to access equity in their home; to realize their dreams and meet their needs with access to credit. We can achieve this while requiring protection for borrowers. That is what we mean by regulation with “purpose”. Again, helping to ensure consumers are “taking flight”.
Let’s talk next about auto insurance. Here in Ontario we have a lot of cars and a lot of drivers, approximately 10 million drivers and growing.
Owning a car offers greater mobility and independence, greater choice of where to live, greater opportunity, and perhaps even a better-paying job. That is the “purpose” regulators are trying to support through the regulation of auto insurance.
In Ontario, the law says that customers must be quoted the lowest rate for which they are eligible. This is informally referred to as the “take all comers” requirement.
We believe that certain insurers may not have understood their obligations and may have used algorithms or distribution partners such as brokers or online quoting aggregators to delay quotes for customers, or to flag risks that certain insurers knew would be less profitable. Applying quotas to distribution channels or flagging certain customer types for manual underwriting would mean that the customer would experience a delay in obtaining a quote or not receive a quote at all. I will adapt a legal saying and suggest to you that “a quote delayed is little different from a quote denied”. And that is a problem. FSRA made it a priority to fix it. We met with CEOs of insurance companies. We wrote a series of “Dear CEO” letters. We conducted interviews with brokers, agents, and insurers. We worked with RIBO, the regulator for insurance brokers. FSRA published guidance to make it crystal clear that inappropriately delaying a quote was not acceptable.
We then took action to restore compliance and consumer trust in the system. FSRA required that insurers cease such practices, review their operations using their compliance and internal audit functions, and report back to the regulator. By taking these steps we were able to resolve the issue in a timely manner, and we believe that today, the take all comers requirement is being met. Let’s bring it back to “purpose”. By addressing Take All Comers with a principles-based and outcomes focussed approach, Ontario drivers now have access to the lowest price in accordance with filed rules. Again, we are helping to ensure consumers can “take flight”.
Also helping people soar in their day to day lives is the piece of mind offered by life insurance. These products provide critical protection for individuals, families, and businesses. They provide financial security and allow customers to make better decisions.
Last year, the life insurance industry paid out $114 billion in benefits to improve the lives of Canadian consumers. But regrettably, there is another side to this story, and it has to do with mis-selling.
Our research showed that two-thirds of life insurance business was being written through Managing General Agents, or MGAs. We came across a particular model of MGAs where agents would not only sell insurance, but would recruit other agents who would also recruit other agents, who would then recruit other agents.
We have since reviewed the practices of three MGAs that used this tiered recruitment model. Together, they represent 12,000 agents in Ontario alone. When we reviewed documentation and files, we found that screening and training was inadequate. Sometimes, poorly trained and inexperienced recruits were being instructed to sell complex products to customers who, in some cases, had no apparent need for insurance. Based on our sampling, most customers had modest incomes, yet they were being sold complex permanent products such as Universal Life. Some customers had high interest rate debt and no evidence of registered accounts. These practices are inconsistent with the promise of protection made by insurers, and cause harm to customers.
Half of the files we reviewed resulted in regulatory action. I’ll say that again. Fifty percent of the agents reviewed required regulatory action. This conduct is deeply, deeply disturbing. Insurance exists to provide critical protection for individuals, families, and businesses, and here we had MGAs where there was inadequate oversight and inappropriate training. The “purpose” of insurance for these customers was not there. Forget about “taking flight”. The customer is grounded.
We have taken regulatory action in connection with two MGAs. Another provincial regulator has also taken enforcement action. FSRA also took enforcement action in respect of fifty percent of the agents reviewed. We have published these troubling findings and will continue our work with additional supervision and, where appropriate, we will follow up with enforcement action.
I would like to conclude with a few thoughts.
FSRA is a young regulator that is committed to making life better for Ontario consumers.
We are going to great lengths to ensure individuals, families, and businesses are treated fairly and get the mortgage that’s right for them, get the lowest auto insurance rate possible, and see to it that they are able to purchase a life insurance policy that meets their needs today and well into the future.
We strongly believe that regulation has a “purpose”. It is a catalyst for progress and a safeguard against cheating and unethical behavior. That will guide us towards a brighter, fairer and more secure future.
Personally, I don’t have the time to take to the skies as a pilot anymore. But through the work we do, I have the satisfaction in knowing that we are helping to ensure countless others are “taking flight” and realizing their life-long goals and dreams.
I look forward to answering any questions you might have.