FSRA introduces first proposed insurance rule for public consultation: the Unfair or Deceptive Acts or Practices (UDAP) Rule

The Financial Services Regulatory Authority of Ontario (FSRA) launched a 90-day public consultation on Friday, December 18, seeking feedback from insurance consumers, industry and other stakeholders on its first proposed insurance rule: the draft Unfair or Deceptive Acts or Practices (UDAP) rule (UDAP Rule).

What you need to know

• FSRA’s proposed UDAP Rule—which applies to insurers, brokers, intermediaries, adjusters and providers of goods and/or services engaged in the insurance sector—focuses on the need for stronger consumer protections in the insurance system by clearly outlining particular outcomes that are unfair or otherwise harmful to consumers.
• The Rule was drafted with the objective of making the supervision of insurance more transparent, dynamic and flexible.
• If approved, the UDAP Rule would replace the existing UDAP Regulation to the Insurance Act.
• Of particular note are changes (i) permitting the offering of incentives in certain non-discriminatory circumstances, and (ii) prohibiting any “unfair discrimination” in features of life insurance or annuity contracts or in rates between like risks in a manner proposed to align with what is discriminatory under the Ontario Human Rights Code.

What are unfair or deceptive acts or practices?

The Insurance Act (Ontario) prohibits “unfair or deceptive acts or practices” (section 439). Regulation O. Reg. 7/00 adopted under the Insurance Act (UDAP Regulation) prescribes specific actions which are considered unfair or deceptive, and may apply to insurers, brokers, intermediaries, adjusters and goods/service providers engaged in the insurance sector such as health service providers, vehicle repair shops, automobile storage facilities and tow truck operators.

Pursuant to the Insurance Act, FSRA has the authority to examine and investigate whether a person involved in the business of insurance has been or is engaged in an unfair or deceptive act or practice. The Insurance Act also allows FSRA to administer different compliance measures, such as administrative penalties, to sanction UDAPs. The concept of an UDAP is central to FSRA’s approach to protecting consumers against a broad range of potential harms in the insurance sector.

Replacement of UDAP regulation with new UDAP Rule 

FSRA has indicated in its notice¹ that it does not view the UDAP Regulation to be aligned with FSRA’s principles-based approach to consumer protection. Additionally, insurance stakeholders have called for a review of the existing UDAP Regulation to allow for more flexibility, noting also that the UDAP Regulation is too prescriptive to enable innovation. A principles-based approach to regulation centres on high-level principles from the regulator, as opposed to a focus on prescriptive rules prohibiting certain actions—this gives regulated entities more flexibility to formulate their approaches to meet expectations. FSRA intends for these changes to facilitate a move toward a regime that is adaptable to change and to allow for a better identification and sanctioning of misconduct in the industry in order to protect the public interest.

In light of this, FSRA has drafted a proposed UDAP Rule in accordance with its rulemaking authority under the Insurance Act and the Financial Services Regulatory of Ontario Act, and is calling for a 90-day consultation, seeking feedback from the general public and all stakeholders on the draft rules. In its Notice of Proposed Rule [2020-002], FSRA sets out the process in which it engaged to draft the proposed UDAP Rule, including consulting with stakeholders and industry leaders and conducting a line-by-line comparative analysis of the existing UDAP Regulation with the CCIR/CISRO FTC Guidance.  

Proposed changes under the new UDAP Rule 

The following summarizes some of the key proposed changes and provisions under the new UDAP Rule.

Definition of Unfair or Deceptive Practices

As mentioned above, FSRA intends to provide outcomes-based UDAP definitions to support a transition to principles-based regulation, while also providing clear and objective standards for deterring misconduct and using examples of unfair treatment, including with reference to the Ontario Human Rights Code. FSRA has expressed its intention to supplement the rules with additional FSRA guidance where permitted.

• Unfair or deceptive act or practice generally: Section 2 of the UDAP Rule defines “UDAP” in terms of particular outcomes that can be expected to result from action or inaction of persons or entities in the insurance sector (other than conduct of lawyers or paralegals). Specifically, section 2 states that “conduct, including inaction or omission, which results in, or could reasonably be expected to result in the outcomes, events or circumstances set out in section 3 through section 10 of this Rule is prescribed as an unfair or deceptive act or practice.”
• Non-compliance with laws: Section 3 provides that any non-compliance with the Insurance Act, its regulations or any FSRA Rules made in respect of the Insurance Act is an UDAP.
• Unfair discrimination: Section 4 defines “unfair discrimination” for the purposes of determining an UDAP as discrimination which contravenes the provisions of the Ontario Human Rights Code or any other discrimination which FSRA has identified as not being reasonable or bona fide in providing or administering insurance. The UDAP Rule prohibits unfair discrimination between individuals of the same class and expectation of life in the amount or payment or return of premiums, or the dividends and benefits payable on life insurance contracts.
• Unfair claims practice: Section 5 provides that certain outcomes associated with any “unfair claim practice” are an UDAP. This includes, but is not limited to, not acting in good faith, and communicating the rights of a claimant in an untimely manner or misrepresenting the claimant’s rights.
• Fraudulent or abusive conduct: Section 6 similarly provides that particular outcomes relating to “fraudulent or abusive conduct” related to goods and service providers are an UDAP, and defines related terms. Such conduct includes unreasonable consideration being paid to a claimant, or information being communicated about the licensing status of a person to a claimant which a reasonable person, in the position of the intended recipient, would consider false, misleading or deceptive.
• Incentives: Section 7 sets out the scope of circumstances in which offering or provision of an incentive is an UDAP and defines related terms. See section below for further information on this. This includes the use of incentives in a manner that involves unfair discrimination or as an inducement for the purchase of an unsuitable insurance product.
• Misrepresentation: Section 8 provides that receipt of inaccurate or misleading information across a variety of mediums with respect to insurance policies, contracts, claims or coverage is an UDAP, and defines related terms. Misrepresentation under section 8 includes receiving certain information that a reasonable person in the position of a recipient would consider to be inappropriate, inaccurate or misleading, including the terms or benefits of any contract or insurance or any comparison of contracts of insurance.
• Prohibited conduct in auto insurance quotations, applications or renewals: Section 9 deems an UDAP any unfair treatment of consumers with respect to quotations, applications or renewals, and provides indicia of unfair treatment, along with providing FSRA with the discretion to determine unfair treatment. Such prohibited conduct includes the use of credit information for automobile insurance quotes, engaging in unfair discrimination, or making the issuance of an auto insurance policy conditional on the insured having purchased another insurance policy.
• Affiliated insurers/lowest rate: Section 10 sets out the circumstances in which a failure to offer the lowest rate available by an insurer or its affiliates to a person requesting a quote for auto insurance is an UDAP.

Incentives

In furtherance of FSRA’s objective of encouraging competition and choice and removing barriers to innovation, the new UDAP Rule would allow insurers to offer incentives to their customers, including rebates or rewards, that meet certain criteria (and do not fit within the definition of a UDAP), with the objective of encouraging good consumer behaviors. This change is in response to feedback from stakeholders that found existing provisions regarding incentives to be overly prescriptive.

With a view to offering rebates and rewards while also protecting consumers from improper rebating, the new UDAP Rule would allow insurers to offer incentives so long as the incentives: (i) do not lead to decisions that are against the interests of consumers; (ii) are not prohibited by law; (iii) are transparently communicated; and (iv) are not unfairly discriminatory or anti-competitive.

 Permitted incentives under the UDAP Rule include:

• offering customers rebates on their auto policy premiums for good driving behavior;
• providing a consumer with a paid-for/subsidized plumbing inspection to help mitigate the risk of water damage-related losses; and
• rewarding consumers with gift cards for behavior that reduces insured risk.

The proposed UDAP Rule relating to permitted incentives is not intended to address the offering of incentives by advisors in the life and health sector, which is prohibited under the Agents Regulation under the Insurance Act. 

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¹ “FSRA’s First Proposed Insurance Rule Released for Public Consultation – the Unfair or Deceptive Acts or Practices (UDAP) Rule”, Financial Services Regulatory Authority of Ontario, ID 2020-018, December 18, 2020.