No Substitute for (Protection)

Quebec’s financial regulator, Autorité des marchés financiers (AMF), delivered an important message in February when it imposed penalties on a number of car dealerships and a damage insurance brokerage in connection with certain illegal business practices. At the same time, the AMF issued a wake-up call to consumers and the entire insurance industry, including auto dealers and insurers.

A total of nine auto dealers and a brokerage firm were fined by the AMF because of replacement insurance violations. Amounting to several thousands of dollars, the penalties were imposed pursuant to Quebec’s Act respecting insurance (ARI), the Act respecting the distribution of financial products and services (ARDFPS) and various AMF notices.

ABUSIVE AND CONFUSING PRACTICES

As a result of various Regroupement des cabinets de courtage d’assurance du Québec (RCCAQ) reports and AMF investigations, abusive practices – all of which were prejudicial to consumers’ interests – were found to be prevalent at the dealerships. The violations included pressuring consumers to take out insurance to obtain financing or, in the event of a partial loss, requiring them to use a specific dealer for vehicle repairs.

The AMF also noted that some car dealerships were engaging in insurance areas that are the exclusive purview of certified professionals. For example, when purchasing vehicles, some clients were offered not only replacement insurance (FPQ No. 5), but also products covering civil liability and vehicle damage (FPQ No. 1), even though such sales are exclusively reserved for AMF-registered insurance agents and brokers.

The AMF’s announcement brought the following paradox to light:  Why are auto dealers still authorized to sell FPQ No. 5 when sales of insurance products are only meant to be carried out by certified representatives?

In view of the recent fines, this question has acquired a new relevance.

LOOKING BACK

From 1992 to 2010, auto dealers were authorized to sell vehicle replacement warranties. However, there were so many similarities between these warranties and replacement cost insurance that the AMF questioned whether or not the warranties were actually a form of insurance.

Quebec’s Court of Appeal subsequently took up the matter and in the spring of 2008, issued a ruling that replacement warranties were actually a form of insurance since they related to a purely accidental event, not to a vehicle defect.

The following year, the AMF was obliged to take a stand: replacement warranties became replacement insurance and, subsequently, fell within the jurisdiction of the AMF.

The court ruling, coupled with AMF’s position, makes clear that auto dealers should have stopped selling FPQ No. 5. However, the change represented a loss of a lucrative market, prompting them to make multiple representations to the AMF. They were subsequently allowed to continue selling these products, but were subject to stricter regulations.

Effective August 1, 2010, replacement insurance was offered by the network of insurance brokers and agents, as well as by the network of auto dealers, culminating in the recent unfortunate consequences and ongoing broker concerns.

It should be noted that replacement insurance is not available in any other Canadian province. The problem with auto dealers is unique to Quebec.

JUST THE BEGINNING

Needless to say, the AMF’s decision to impose fines sparked a strong reaction among the car dealers involved, who subsequently filed an application for a judicial review of the court rulings. The matter is scheduled to be heard by Quebec’s Superior Court.

In its ongoing defence of consumers, the RCCAQ maintains the matter is far from settled, although it welcomes the fines imposed by the AMF. In fact, the RCCAQ has been calling for fines to be imposed on non-compliant dealerships for the past three years.

Although the AMF’s decision marks a major step forward in the fight to root out these harmful practices, the RCCAQ believes it is naive to think that such practices will end overnight. As such, the brokers association will continue its efforts to denounce these practices until such time as a specific provision is adopted, as part of the ARDFPS review, in which an equitable regulatory framework is put in place for chief financial officers at all auto dealerships, or the right of auto dealers to sell replacement insurance is revoked.

WAKE-UP CALL

When it imposed penalties back in February, the AMF brought the auto dealers back into line. But is also sent a clear message to insurers, as well as to consumers.

The AMF voiced certain concerns about insurers operating in the replacement insurance market, particularly in connection with absent or inadequate policies, procedures and controls among insurers overseeing the distribution of FPQ No. 5. This could end up fostering the emergence and maintenance of sub-standard practices.

The AMF noted that under Section 420 of the ARDFPS, insurers must take all necessary steps to ensure that their distributors have in-depth knowledge of the products they sell. It also referred to Section 222.2 of the ARI, under which all insurers are required to follow sound business practices, provide potential clients with adequate information on products or services, and act fairly in their dealings with them.

The AMF also issued a wake-up call to consumers. Its advice in this regard is designed to help them make enlightened choices when buying insurance in connection with vehicle purchases.

In its prepared statement, the AMF reported that only AMF-registered insurance agents or brokers are authorized to advise consumers on insurance matters and/or to compare auto insurance products available in the marketplace.

A number of auto dealers got the message and took immediate action to ensure compliance. They include the Park Avenue Group, which launched its own brokerage firm shortly after the AMF announced that it would be imposing fines.

By creating a brokerage in association with an established firm, Park Avenue Group, made up of 18 dealers in Quebec, has taken steps to ensure compliance with the rules governing distribution of products and services while also meeting its clients’ insurance needs.

The AMF also notified all auto insurance industry stakeholders that it intends to take steps to eradicate practices that violate the ARI and the ARDFPS, as well as to ensure that all consumers are treated fairly.

The AMF is authorized to impose administrative penalties or to initiate criminal proceedings against anyone who breaks the law. Further, it is authorized to issue orders requiring insurers to stop marketing insurance products via distributors.

The matter may not be settled, but the AMF’s message is crystal clear.