How to buy an insurance brokerage in Ontario: licences, ownership rules and what transfers

General insurance brokers in Ontario are registered by the Registered Insurance Brokers of Ontario (RIBO) under the Registered Insurance Brokers Act. A buyer of an Ontario brokerage is buying a business that may only operate while it is registered, and RIBO says the brokerage, whoever owns it, must be fully compliant with the Act, regulations and by-laws at all times. This guide covers who regulates the firm, what the firm registration and the Principal Broker role require, what RIBO says about a change of ownership, and what to ask the seller for. For the national picture, start with buying an insurance brokerage in Canada.

Who regulates insurance brokers in Ontario

Under Ontario’s Registered Insurance Brokers Act, no person shall act as an insurance broker unless the person is a registered insurance broker under that Act, subject to the exceptions the Act sets out. The Act continues RIBO as a body corporate without share capital, and every person it registers is a member of that body. Ontario’s Insurance Act points the same way: it defines “broker” as an insurance broker within the meaning of the Registered Insurance Brokers Act. The Act also bars anyone from using the title “registered insurance broker”, or a similar designation, unless they hold a certificate as a registered insurance broker under the Act.

The firm registration and the Principal Broker

RIBO requires any business, whether a sole proprietorship, a partnership or a corporation, to register as an active firm licensee before it is eligible to sell or distribute general insurance in Ontario. Managing general agents seeking voluntary registration are included. The firm must also appoint a Level 3 unrestricted licensed individual as Principal Broker, who is responsible for managing the firm, overseeing employees and ensuring the business follows the Act, its regulations and the by-laws. If you plan to run the brokerage yourself, ask whether you hold, or can obtain, that Level 3 licence. If you plan to employ someone in the role, ask who that person is before you sign. RIBO also says a brokerage office must be separate and distinct from other businesses, and that a firm which will share space with other businesses can request an exemption. Separately, RIBO says a firm may operate only an insurance brokerage, or a brokerage combined with life insurance services; for any other business it must obtain a Secondary Business Exemption, approved before the other activity starts. RIBO adds that all firms must have a trust account to obtain and maintain their registration. Ask whether the seller’s premises or other business lines raise any of these issues.

What RIBO says about selling a brokerage

RIBO publishes guidance on a sale. It states that members are at liberty to sell their brokerage at any time and to anyone. It adds that the brokerage, whoever owns it, must be fully compliant with the Act, regulations and by-laws at all times. The guidance is headed for corporate members and a share purchase. RIBO identifies two key regulatory provisions that arise when a brokerage changes ownership, and it recommends consulting qualified specialists, especially legal and accounting, on the sale or acquisition of a brokerage.

Trust accounts and commissions at closing

The first provision RIBO names is that the brokerage must be trust positive at all times. RIBO says the vendor cannot remove commissions from the trust account and take them into income if the removal is non-compliant or could result in a trust deficiency. It says the transition of commissions should be agreed in the purchase and sale agreement, and that the brokerage must be trust positive before and after the sale. Ask for the trust account records and ask how the agreement allocates commissions earned before closing. Ask your accountant and lawyer how the brokerage will stay trust positive on the closing date itself.

Capitalization and insurance

The second provision concerns equity capitalization. RIBO states that a corporate brokerage must keep a minimum capitalization at all times, being the greater of a fixed amount and the sum of the deductibles on the members’ errors and omissions and bond insurance policies. RIBO says it often sees new owners out of compliance with this regulation because too much trust money was removed by the vendor or the new purchaser. Confirm the current amount with RIBO rather than relying on a summary. If the seller’s capitalization sits close to the minimum, work out how the sale, any payout to the seller and any new borrowing will affect it. RIBO also advises making the professionals involved in the sale fully aware of the minimum trust and equity requirements.

What to ask the seller for

Build the document request around the two RIBO provisions and the firm registration. Ask for:

• RIBO’s record of the firm’s registration and the name and licence level of the current Principal Broker.
• Recent trust account statements and the records behind them, so your accountant can test whether the brokerage is trust positive.
• Evidence of the corporation’s current capitalization, and the errors and omissions and bond policies with their deductibles.
• The draft clauses dealing with commissions earned before and after closing, and any proposed payments out of the brokerage to the seller.
• Any RIBO correspondence, audit or discipline matter involving the firm or its licensed individuals.