The Autorité des marchés financiers (“AMF”) recently released a draft version of its Incentive Management Guideline (“Draft Guideline”), which applies to Québec-regulated insurers, financial services cooperatives, trust companies, savings companies and other authorized deposit institutions.

The Draft Guideline supplements the AMF’s Sound Commercial Practices Guideline, drawing on international best practices and the AMF’s own experiences as a regulator. It covers some of the same ground as the CCIR-CISRO working group’s ongoing consultation on incentive risk (in which the AMF plays a leading role), which could eventually result in regulatory duplication or inconsistency for the insurance sector in Québec. No other province has released incentives management guidance.

It should be noted that the Draft Guideline consultation is separate from the AMF’s current, more general consultation on its proposed updated Sound Commercial Practices Guideline.

Released on November 4, 2021, the AMF’s announcement invites public comments, with a submission deadline that has been extended to February 18, 2022.

Background

One of the expectations set out in the Sound Commercial Practices Guideline is that real or potential conflicts of interest be avoided or managed in a way that protects the Fair Treatment of Customers (“FTC”) principle. The Draft Guideline focuses on financial institutions’ incentive arrangements because of their potential, when not carefully designed or managed, to create conflicts of interest. It adds further expectations relating to the management of such arrangements, which arrangements can include:

• Monetary incentives, e.g. commissions or performance-based salaries/bonuses; and
• Non-monetary incentives, e.g. performance-based rewards or privileges.

Performance criteria can be either quantitative (e.g. sales volume) or qualitative (e.g. client satisfaction).

Expectations

The AMF’s expectations fall into four categories, as follows:

• Governance;
• Managing incentive arrangements;
• Identification and assessment of risks of practices that could adversely affect FTC; and
• Quality monitoring.

While the AMF purports to take a principles-based approach, the Draft Guideline uses language that is more “mandatory” in tone than might have been expected and often appears to require financial institutions to take specific actions in order to achieve the expected outcomes. Throughout the Draft Guideline, the requirements/outcomes are phrased as, for example, “ensure”, “satisfy” and “identify”, rather than, for example, “reasonably designed to” ensure, satisfy or identify.

Governance

The Draft Guideline summarizes the AMF’s governance expectation as follows:

The AMF expects financial institutions’ decision-making bodies to place FTC at the centre of decisions concerning the way incentive arrangements are managed.

The implications of this expectation for directors and officers are set out in some detail in the Draft Guideline.

While the board of directors might normally be expected to set the tone for FTC and provide high-level stewardship, while leaving the day-to-day details of implementation to management, the Draft Guideline creates specific expectations for directors at the operational level:

• Ensuring that committees responsible for monitoring changes in business structure and identifying practices that could affect FTC are also ensuring that incentive plans are consistent with client interests;
• Ensuring that incentive arrangements that are not consistent with FTC are changed in a timely manner; and
• Ensuring that clients that are harmed by a practice that adversely affects FTC are dealt with appropriately.

The AMF’s expectations for senior management include:

• Overseeing incentive arrangements in order to manage any risk they pose to FTC;
• Reviewing incentive arrangements in collaboration with the risk management, compliance and human resources departments at least once per year; and
• Assessing the impact of an identified practice that adversely affects FTC and ensuring that clients that are harmed by such a practice are dealt with appropriately.

Managing incentive arrangements

At the most general level, the Draft Guideline states simply that “the AMF expects incentive arrangements to be managed in a manner that ensures FTC”. However, it elaborates on this expectation in a number of ways:

• Extending the requirement to satisfy FTC obligations to intermediaries and more broadly to any other person offering the financial institution’s products or services on its behalf, which appears, in the case of insurers, to potentially blur the line between tied agents and independent brokers who are not subject to control by the carrier; and
• Establishing a set of criteria for incentive mechanism design, which include such detailed recommendations as ensuring that (among others):
  • performance targets are well defined;
  • incentives are consistent with the level of service expected;
  • variations in incentive arrangements do not result in differing charges for the same product depending on which intermediary is offering it;
  • ensuring that incentive arrangements for managers do not result in the application of pressure on staff or intermediaries that could adversely affect FTC;
  • information is collected that allows for the identification of individuals, sales teams, lines of business, products and trends that are particularly at risk of adversely affecting FTC; and
  • appropriate corrective measures are established, including chargeback mechanisms by which awarded incentives can be clawed back.

Identification and assessment of risks of practices that could adversely affect FTC

The AMF expects financial institutions to “identify and regularly assess the risks of practices that could adversely affect FTC arising from incentive arrangements.” Two appendices to the Draft Guideline provide additional detail, as follows:

• Appendix A lists 17 “key indicators” that an individual or sales team is incentivized in a way that creates an increased risk of adversely affecting FTC, including, among others, frequent chargebacks/product replacements/cancellations, disproportionate sales of high-commission products and a lack of variety in products sold.
• Appendix B lists 24 incentive features that increase those risks, including, among others, “Incentives awarded for sales of a specific product for a limited period of time”, “Incentives awarded on a discretionary basis” and “Monetary incentives representing a significant portion of a person’s remuneration package”. The Appendix also identifies certain incentive risks that may be created in a financial institution’s agreements with intermediaries.

The identification and assessment of these risks requires:

• Regular review of incentive arrangements;
• Focusing on incentives that are based primarily on quantitative performance targets and criteria;
• Consideration of the combined impact of multiple sales arrangements on the same sale, of sales campaigns focused on particular products and of intermediaries’ incentive arrangements (among others); and
• Assessment of the likelihood that practices could adversely affect FTC.

Quality monitoring

Finally, the AMF expects financial institutions to have controls in place to identify any inappropriate sales or practices related to incentive agreements. This expectation is strongest for incentive arrangements that are most likely to result in practices that adversely affect FTC.

Quality monitoring includes:

• Ensuring that those conducting the monitoring are well trained and independent;
• Taking into account the risk to FTC that each type of practice poses;
• Using various types of controls to assess interactions with clients (e.g. direct observation, mystery shopping, client surveys); and
• Regularly analyzing the results of sales quality controls to ensure that they are effective in identifying concerns or issues relating to FTC.

Next Steps

As noted above, the comment period closes on February 18, 2022. For further information and instructions for submitting comments, please see the AMF’s November 4, 2021 announcement.

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