Insurtech – AMF clarifies the rules applicable to the online distribution of insurance products as of June 2019

On October 17, the Autorité des marchés financiers (AMF, Quebec’s securities regulator) held a public information session on the proposed framework for distribution by internet and distribution other than through a representative of insurance products and financial services. This session was held as part of the consultation period recently launched by the AMF to gather comments from interested individuals on the draft of the Regulation respecting alternative distribution methods (the Draft Regulation), expected to govern the distribution of insurance and financial service products without the intermediary of a natural person and distribution without a representative.

Indeed, following the adoption of Bill 141 and as appears from the Draft Regulation, the AMF intends to specify the terms and conditions of the distribution of financial products and services by two alternative modes, namely (i) distribution without the intermediary of a natural person (the distribution by Internet), and (ii) distribution through a distributor as per Title VIII of the Act Respecting the Distribution of Financial Products and Services (the ADFPS) (distribution without a representative).

This update provides an overview of some of the important elements addressed at the public information session of relevance to the modes of distribution by Internet and distribution without a representative.

Offer of financial products and services by a firm without the intermediary of a natural person

What products can be distributed over the internet without the intermediary of a natural person?

First of all, it should be noted that the AMF confirmed that it intends to limit the nature of the insurance products that may be distributed without the intermediary of a physical person. This flexibility offered by the AMF seems to us to be partly attenuated by the fact that firms wishing to take advantage of distribution by Internet without a representative’s assistance will have to ensure that they implement technological tools capable of advising clients on their needs in the same way that a representative would be required to do so, and also provide clients with the same information and documents that a representative would normally have to provide based on the products offered and the applicable regulations.

Thus, meeting this burden for some more complex insurance products solely through technological tools does not appear at first glance to be a small task. In addition, when AMF analysts were questioned by certain stakeholders about how firms that will practice distribution by Internet could comply with certain specific obligations, they replied that the Draft Regulation’s objective is to put in place a legislative framework conductive to technological innovation, but that it will be the firms responsibility to develop the technological tools to meet the applicable requirements.

In light of these comments, it appears to us that the new legislative and regulatory framework in its current form will favour industry players with the financial capacity to quickly develop high-performance technological tools that enable appropriate distribution of a variety of products while meeting all the requirements usually applicable to a representative.

How should the products be distributed by a firm?

A firm that wishes to take advantage of distribution by Internet must ensure that it develops and implements a "platform," i.e. a digital space, allowing it to directly interact with the client. The platform must meet several regulatory requirements set out in the Draft Regulation and will therefore, in our opinion, necessarily be the result of collaboration between technological and legal resources.

For example, the platform should allow the firm to detect and, where necessary, automatically suspend or terminate any action initiated on the platform when the proposed product does not meet the client's needs or when a contradiction or irregularity in the information provided by the client may lead to a result that is inappropriate for the client. It goes without saying this obligation places a significant burden on firms, especially since it will be their responsibility to demonstrate to the AMF that their platform meets the regulatory obligations applicable to distributed products.

In addition, the Draft Regulation also requires firms to develop, adopt and implement procedures for the design, use and maintenance of their platform. In particular, the procedures must describe the operation of the platform and the applicable control measures. They must also allow the identification, management and mitigation of internal and external risks related to the platform.

Finally, the Draft Regulations set out certain obligations regarding the information that must be transmitted to the client through the platform. While some information only needs to be transmitted at specific stages of the transaction, other information must be visible at all times on the platform. A priori, it seems to us that this large volume of information which must always be visible will make it difficult to use, in certain contexts, an application for cellular units, especially since the AMF has confirmed that the prescribed information must be absolutely visible and cannot be heard. The firm must also make available at all times on its platform a sample policy for each product offered. It will be interesting to see how the AMF will respond to some of the comments made during the consultation on the competitive issues raised by this requirement, including the online availability of some exclusive amendments.

What will be the representative's role when distributing financial products over the Internet?

The AMF confirmed during the consultation that a representative must take the necessary steps to ensure that representatives authorized to act for the firm do so in a timely manner with clients who express a need for it.

Although the AMF does not recommend the requirement that representatives be available at all times, it nevertheless believes that firms should take measures to mitigate the risks of transactions that do not comply with legislative and regulatory obligations outside of representatives' hours of availability. The nature of these measures has not been specified, but it seems to us that a customer who requires a representative’s services outside of availability hours and who is therefore unable to obtain answers to his or her questions should not be able to subscribe for the product or service in question until he or she has obtained answers to his or her questions from the appropriate representative.

It should be noted that the representative who works with a client must, of course, ensure compliance with all usual ethical obligations. Indeed, based on the level and impact of his or her intervention with the client, he or she may be held liable. In addition, firms must ensure they record in the client's file all the information presented to the client through the platform and, if applicable, a representative. By asking firms to collect this information, the AMF ensures it can distinguish between the representative's responsibilities and that of the platform.

It should also be noted the AMF confirmed during the session that answers to technical questions on how to use the platform may be answered by stakeholders who do not qualify as representatives. However, we believe that firms must be extremely cautious and ensure that no advice is provided by these stakeholders so that a client who requires such services from an stakeholder is immediately redirected to a representative associated with the firm and authorized to act in the required discipline.

Offering financial products and services through a distributor  

What changes are applicable to the applicable legislative and regulatory framework to distribution without a representative?

Although distribution without a representative is already permitted under Title VIII of the current version of the ADFPS, it is important to note that the applicable regulatory framework will be substantially modified by the coming into force of the Draft Regulation scheduled for June 13, 2019.

First, it should be noted the Draft Regulation proposes to replace the current distribution guide with two documents: the fact sheet and the summary. On the one hand, the main purpose of the information sheet is to provide the client with information on obligations under the ADFPS and respond to sources of consumer dissatisfaction. The model fact sheet to be used was developed by the AMF and is available in Schedule II of the Draft Regulation. On the other hand, the summary focuses on the product offered through the distributor. It must meet certain specific conditions and present certain specific information that is essentially similar to that required in the distribution guide currently used.

We believe the Draft Regulation significantly increases the burden on insurers intent on distributing insurance products through a distributor. Indeed, under the Draft Regulation, the insurer will be responsible for monitoring and supervising the offering of insurance products by its distributors. To do so, it will have to adopt and implement procedures for supervising and training its distributors and the natural persons to whom they entrust the task of dealing with clients, in order to ensure compliance with the requirements set out in the ADFPS and the Draft Regulation.

The training offered by insurers must cover the insurance product, its target audience, the coverage offered, the eligibility criteria and applicable exclusions and limitations, the distributor's legal obligations, the insurer's complaint-processing policy, practices promoting the fair treatment of the client and the filing of a claim. The insurer must also ensure the compliance of the website used by its distributor and set up an assistance service to answer a distributor's questions regarding each product offered. A priori, it seems to us that these new provisions will significantly increase insurers' potential liability risk and that, consequently, insurers must ensure adequate procedures are in place to demonstrate that they have properly fulfilled their supervisory obligations.

We also believe the new regulatory framework applicable to distribution without a representative will require significant coordination between insurers and distributors. Indeed, the insurer must be able to provide at any time, at the client’s or AMF’s request, all the information and documents presented to the client when the latter was offered the insurance product by the distributor.

In addition, as soon as the client subscribes for or enrolls in to an insurance contract with a distributor, the insurer must provide him or her with a summary of the information collected from the client and the policy, insurance certificate or temporary insurance. In response to a question on this subject, the analysts also pointed out that these obligations must be fulfilled immediately after the client has subscribed for or enrolled in to an insurance contract with a distributor. The distributor, must ensure it sends the client a notice of recession in accordance with the form set out in Schedule 5 of the Draft Regulation.

Finally, the new regulatory framework also intends to impose initial and annual disclosure obligations on insurers to the AMF for certain information prescribed in the Draft Regulation. These obligations are intended in particular to enable the AMF to fully exercise its supervisory role.

How should the products be distributed by a firm?

An insurer that practices distribution without a representative may allow a distributor to offer its insurance products online, i.e., on the distributor's website. It would then be the insurer's responsibility to ensure the compliance of the site used by its distributor, in particular by ensuring the fact sheet and summary are provided to the client at the time provided for in the Draft Regulation.

In addition, the specific rules applicable to firms that carry out distribution by Internet would not apply to distributors who offer their products via the Internet. However, it should be noted that the insurer is liable for acts performed regarding the subscription for or enrollment in an insurance contract by distributors or natural persons to whom they entrust the task of dealing with policyholders or participants. In addition, the insurer must ensure that the product summary and a sample policy for each product offered by a distributor are available at all times on its website.

Conclusion

As mentioned earlier, this legal update does not constitute a full analysis of the legislative and regulatory framework applicable to distribution by Internet and distribution without a representative, but is instead intended to provide a summary of certain particularly relevant points. In light of several comments and responses made during the public information session, it seems likely the Draft Regulation will undergo some changes at the end of the consultation period. In this regard, it will be interesting to measure the impact of the public consultation on the final wording of the Draft Regulation.