ALBERTA INSURANCE COUNCIL
(the “AIC”)
In the Matter of the Insurance Act, R.S.A. 2000 Chapter I-3
(the “Act”)
And
In the Matter of Kewcorp Financial Inc. / James Kew Financial Services
(the “Agency”)
As represented by
Designated Representative, James Kew (64053)
(the “DR”)
DECISION
OF
The Life Insurance Council
(the “Council”)
This case involved an allegation pursuant to s. 467(1)(c) of the Act. Specifically, it is alleged that the Agency failed to disclose that the Agency engaged in a business other than the insurance business in relation to exempt market securities on renewal applications for corporate certificates of authority, specifically the online renewal applications for life and accident and sickness (“A&S”) insurance submitted on January 9, 2006 through to the online renewal applications for life and A&S insurance submitted on December 31, 2009. In so doing, it is alleged that it contravened s. 467(1)(c) of the Act. This case shares the same factual underpinnings as that commenced against the DR and his alleged failure to disclose another business or occupation when renewing his personal certificates of authority. While dealt with under a different decision (Case 67592) the facts and submissions are almost identical and are, therefore, repeated to a certain extent in this decision.
Facts and Evidence
This matter proceeded by way of a written Report to Council dated September 21, 2015(the “Report”). The Report was forwarded to the DR for review and to allow the Agency to provide the Council with any further evidence or submissions by way of Addendum. The DR signed the Report on September 29, 2015 and submitted an addendum by way of a letter.
The Agency has been licensed since December 13, 2000 for the sale of life and A&S insurance. Between the 2006 and 2008 certificate terms the DR completed and submitted the Agency’s online renewal applications. Each of these applications required that the DR disclose whether or not the Agency was engaged in a business other than insurance since the date of its last application. On each of the 6 forms the DR answered “No” on the Agency’s behalf. Beginning with the Agency’s renewal applications dated January 5, 2009, the DR answered “Yes” to the question, “Engaged in any business other than the insurance business?” and disclosed the occupation as “Financial Planning”.
By letter dated March 20, 2015 a Mutual Fund Dealers Association of Canada (“MFDA”) representative advised (“EM”) provided the AIC with information regarding a complaint that two of the DR’s clients (“BM” and “DM”) registered with the MFDA. As the matter was not within the MFDA’s jurisdiction, EM forwarded the file to the AIC. Amongst the accompanying file material was a letter from BM and DM which advised of their concerns in relation to the purchase of the exempt securities on July 15, 2008. BM and DM advised that they were “requested” to sign a subscription to purchase units of Investicare Seniors Housing Corp. (“ISHC”). Also enclosed was a copy of a letter signed by BM and DM that requested the cancellation of one of their insurance policies. This letter appeared on the Agency’s letterhead and directed that the funds resulting from the cancellation be forwarded to BM’s self-directed RRSP with Canadian Western Trust (“CWT”). The letter also advised, “The above noted policy was sold to me/us. It was not an appropriate investment under our circumstances.” A statement of transactions for the cancelled policy and copies of “Subscription for Units” agreements in relation to the purchase of real estate investment units in ISHC, by BM and DM were also among the documents provided to the AIC.
On April 1, 2015 the AIC investigator wrote to the DR and requested that he provide information about the BM/DM transaction and the DR replied by letter dated April 8, 2015. In his reply he wrote, among other things, as follows:
…4) Your comments that James Kew is listed as the “Advisor” on CWT account summary document is worthy of comment in so much as all transactions related to that account are done on a self-administered basis. All accounts with CWT are self-administered as in the client is responsible for and makes any trades as an individual responsibility. Any fees associated with the account are the sole responsibility of the client directly with CWT. Kewcorp and or [sic] James Kew does not receive any compensation from CWT and the use of the term “Advisor” is completely arbitrary on the part of CWT. The wording of your letter implies the use of the term “Advisor” is a misrepresentation of some kind however no such representations have been made as noted!...
In addition to the letter, the DR provided a copy of a “Referral Fee Agreement” dated October 4, 2005. The agreement is between ISHC and the Agency and indicates, “AND WHEREAS the [Agency] has agreed to introduce the Offering to certain individuals and refer them to the Corporation on the terms and conditions hereinafter contained (the ‘Clients’).” Section 4 of this agreement, “Payment of Referral Fees”, sets out the compensation payable to the Agency. It indicates that 8% of the aggregate subscription proceeds received from purchasers of units introduced to the Corporation by the Agency. However, it also anticipated the DR’s and Agency’s role as being no more than providing a copy of the offering memorandum to an individual.
On July 30, 2015 the investigator wrote to the DR and to request further information as to the DR’s involvement in preparing and drafting the July 15, 2008 letter to Transamerica. In further regard to this letter, DM and BM faxed the investigator on August 11, 2015 and indicated that the DR typed the letter on their behalf for them to sign. They also enclosed ISHC documents that the DR provided to them. Among other things, these documents state that “Investicare Units are ONLY made available through an exclusive network of Financial Professionals.” They said that the handwritten notations on this document were made by the DR and that they were part of his “sales pitch.” The clients also provided a letter from the DR, dated February 15, 2014. This letter, on the Agency’s letterhead reads as follows:
[SB} has sent or will be sending another Unit Holders Report! The highlight is that he has sold the Kelowna property (a good offer this time in theory). We are going to get a chance to vote on the terms and conditions and I am recommending we vote “No”. I am not usually a contrary person however I feel that the sale price, combined with the fact that the building is now finished (and ready for lease) are frankly - lousy! Please call me to discuss if you are of a mind to however, as with the first vote please note: “a no vote means a cash call and is not the easy way out” [sic] All of these properties are first class, both from a construction perspective and aesthetics. In addition the investment perspective itself remains, since the demographics and the real property security have not changed!
As to the write-down of assets mentioned in [SB]’s last Unit Holders report (perhaps 2nd last depending on timing). This was done at my behest (albeit with a little arm twisting). [SB] has on a number of occasions mentioned that we could be facing a loss of up to 50% so in my negotiations with [CWT] I used that number. The big question would be why? – it is fairly simple! We have a number of Retirement Income Holders (RRIF) that were receiving active income from CWT via their Investicare holdings. These RRIF holders received some income in 2012 (the 1st full year of no income payments from Investicare) but due to RRIF regulations they received an income slip for something more than they actually received. In other words they were required to pay income tax on income they did not receive. The same thing will happen for 2013 except in the 2013 calendar year these RRIF holders will receive an income slip for the entire year. The write down reduces the income reporting requirements by approximately 50% so needless to say our (all) RRIF holders will only be required to report income based on the 50% slip. [sic] (bearing in mind that these people have not received anything – yet). There is no escaping the RRIF regulations so this softens the blow for income tax – albeit temporarily ( this income when received will not be taxed since the tax will already have been paid). Are we going to lose 50% of our investment? We may or may not be facing a 50% loss but that remains to be seen! As noted please contact me should you wish to discuss the matter.
In his addendum dated October 2, 2014 the DR characterizes his action in and around the transactions as nothing more than him referring business to someone else. He then comments on the clients and other investments they have, the nature of the application forms and whether the questions are asked multiple times, the number of referrals he made in this case and in other types of referrals (such as mortgages and tax free savings accounts) and then refers to recent controversies related to “Uber”. Finally, he alleges bias on the part of the investigator and alleges that the clients did not initiate a complaint with the AIC notwithstanding the fact that the clients repeatedly corresponded with the investigator to raise their concerns and provide additional information.
.
Decision of the Council
Section 467 of the Act requires that an agency disclose whether or not it engaged in a business other than insurance since the date of its last application. While there are a number of reasons for this requirement, the main one is public protection in that entities cannot hold a certificate of authority to act as an insurance agency if it conducts other business that places it in a position where it could exercise undue influence or coercion or it in a potential conflict of interest. There are many businesses that do not raise any such concern. However, it is not up to an agency or its designated representative to decide whether or not another business activity falls into these categories.
In order to prove that the Agency contravened a section of the Act as alleged in the Report, we must be satisfied that the activities undertaken Agency (through the DR) behalf constitute other business. The evidence must then also prove that the Agency did not disclose the information to the AIC on its renewal documents. As this is a strict liability matter, it is not necessary for the AIC to prove that the DR and Agency intentionally withheld information or intended to mislead the AIC and these objective elements of the offence are proven by examining his activities and the application forms. If we find that the information should have been disclosed, the onus would then shift to the Agency to prove that it took all reasonable means to avoid the offence.
The evidence before us proves that the Agency entered into a “Referral Agreement” whereby the DR would “introduce” Agency clients to certain investments and “…provide them with a copy of the Offering Memorandum….” In exchange for this referral, ISHC agreed to pay the Agency “…8% of the aggregate subscription proceeds received from purchasers of units introduced….”
The clients indicated that the DR met with them and advised them to sign the subscription agreement and invest in ISHC units. The DR provided the subscription documents to them and witnessed their signatures. They are dated July 8, 2008. The clients also indicated that the DR told them that the investment was secure and that he had also purchased units. As a result of making the investment, the DR prepared a letter on the clients’ behalf that instructed Transamerica to cancel an existing insurance policy. This letter was written on the Agency’s corporate letterhead. They said that over the next number of years the DR instructed them to sign a number of documents related to the investment. As noted above, the Report also contained a letter that the DR wrote to the clients regarding the state of the ISHC investment and advice as to how the clients should vote on an upcoming vote.
The DR’s general response is that the Agency’s activities did not constitute another business and that they consisted of a referral arrangement whereby Agency clients were referred to ISHC. In essence he argues that referring a client to another business does not mean that you are engaging in the third party’s business. While the DR raises a variety of issues about other investments that the clients made, the authorship of the MFDA complaint form and how the investigator assembled the material, the DR does not take issue with most of the factual assertions set out in the Report and, to a large extent, they are objectively proven by the documents themselves.
We agree with the DR that the critical question before us is whether or not his activities were just referrals rather than another occupation or business. However, the analysis of this question is not limited to concluding that he was referring clients because the agreement between his agency and ISHC was called a “Referral Agreement.”
In light of all of the evidence, we believe that the Agency was engaged in another business or occupation and that this should have been disclosed to the AIC. In this case the DR did not simply refer Agency clients to a third party who, in turn, conducted business with the clients. The DR gave the clients promotional material and advice as to the investment. He witnessed the signature of the documents and sent them additional documents for their signature after the investment was made. He also wrote to them with advice as to how they should vote on one particular corporate matter or transaction and this letter was written on the Agencies letterhead. One would not expect to see this if the DR was operating in his personal capacity apart from the Agency.
The DR states that he was engaged in the same sort of referral arrangement that one would have with a mortgage broker whereby an insurance agent might recommend that a client contact a particular broker in the event that they required a mortgage. This comparison is disingenuous at best. When an insurance agent refers a client to a mortgage broker, one would not expect to see the insurance agent complete mortgage application forms with clients and witness their signatures or promote one mortgage company over another. Likewise, a referring insurance agent would not be the person to provide additional mortgage documents to the clients for their signatures on an ongoing basis or update them on the status of their mortgage. In light of his activities, references to him being the “Advisor” on the account documents are completely accurate. He explained the investment to the clients and advised them to proceed. He clearly was their advisor and was operating through the Agency in relation to the ISHC transaction itself and his involvement was much more than simply referring them to ISHC.
As to the applicable sanction, we normally have the ability to levy civil penalties in an amount not exceeding $1,000.00 per offence pursuant to s. 480 of the Act and 13(1)(b) of the Certificate Expiry, Penalties and Fees Regulation, A.R. 125/2001. However, as in the case regarding the DR’s personal license, the applications at issue were submitted more than three years ago and the three year limitation period to issue civil penalties has passed. Therefore, we cannot issue a civil penalty in regard to our finding. We also have the ability to suspend an agency’s certificate of authority for a period of time or revoke it for one year. However, the imposition of this type of sanction would not be typical given factors such as the length of time that the DR and Agency have held certificates, the fact that this is the Agency’s first offence and the nature of the non-disclosure. Therefore, we decline to levy any further sanction. This does not, however, change the fact that we found the Agency guilty of the offences as alleged.
This Decision was made by way of a motion made and carried at a properly conducted meeting of the Life Insurance Council. The motion was duly recorded in the minutes of that meeting.
Date: January 19, 2016__
_________Original Signed By __________
Kenneth Doll, Chair
Life Insurance Council
Extract from the Insurance Act, Chapter I-3
Appeal
482 A decision of the Minister under this Part to refuse to issue, renew or reinstate a certificate of authority, to impose terms and conditions on a certificate of authority, to revoke or suspend a certificate of authority or to impose a penalty on the holder or former holder of a certificate of authority may be appealed in accordance with the regulations.
Extract from the Insurance Councils Regulation, Alberta Regulation 126/2001
Notice of appeal
16(1) A person who is adversely affected by a decision of a council may appeal the decision by submitting a notice of appeal to the Superintendent within 30 days after the council has mailed the written notice of the decision to the person.
(2) The notice of appeal must contain the following:
a) a copy of the written notice of the decision being appealed;
b) a description of the relief requested by the appellant;
c) the signature of the appellant or the appellant's lawyer;
d) an address for service in Alberta for the appellant;
e) an appeal fee of $200 payable to the Provincial Treasurer.
(3) The Superintendent must notify the Minister and provide a copy of the notice of appeal to the council whose decision is being appealed when a notice of appeal has been submitted.
(4) If the appeal involves a suspension or revocation of a certificate of authority or a levy of a penalty, the council's decision is suspended until after the disposition of the appeal by a panel of the Appeal Board.
Address for Superintendent of Insurance:
Superintendent of Insurance
Alberta Finance
402 Terrace Building
9515-107 Street
Edmonton, Alberta T5K 2C3