Deferred Annuity Sales: Where Rests
The Responsibility For Suitability?
Unless you have been in the mountains of Afghanistan for the past 18 months, you are aware that the deferred annuity business in this country is under attackby regulators, the media and trial lawyers.
Federal regulators, state regulators and even self-regulatory bodies are all in a contest to see which can become the “alpha regulator” with respect to the sale and issuance of annuity contracts.
The financial press has long been skeptical about the usefulness of deferred annuities and the popular press seems to be echoing this skepticism. Trial lawyers, always eager to find new venues to garner legal fees, seem to believe that the annuity business is vulnerable to their predations.
The suitability of the recommendation of the purchase of an annuity contract by a consumer seems to be at the focal point of many of these attacks on the annuity business. Rules applicable to registered broker-dealers have long required that such a broker-dealer not recommend the purchase of a variable annuity unless it is positively found that the purchase is “suitable” for the purchaser. Now, state insurance regulators are adopting rules extending various forms of suitability requirements to annuity contracts in general.
These requirements give rise to the question of where responsibility for suitability lieswith the salesperson, with the selling entity or with the issuer of the annuity contract itself.
The rules of the National Association of Securities Dealers traditionally have placed the responsibility for the suitability determination squarely on the selling broker-dealer.
Those state insurance regulators that are adopting suitability requirements for non-variable products seem to want to place the responsibility on the insurer that is issuing the contract. Unfortunately, there also seems to be some confusion as to how much involvement the states want to have in the suitability and sales process for variable annuities. There appears to be overlap in some areas between state insurance regulators and those charged with oversight over VAs and there appear to be gaps in other areas.
Regardless of how the jurisdictional lines get drawn with respect to suitability enforcement and rule-making authority, suitability screening and determination are going to be with us for the foreseeable future.
Some regulators seem to hold the opinion that deferred annuities are suitable only for people below a certain age. Thus, they have adopted rules that make it difficult to sell such products to elderly consumers.
Other regulators almost seem to be taking the position that deferred annuities are never suitable. Much of the print and broadcast media also seem to subscribe to this position.
It is not the purpose of this article to attempt to explore beliefs regarding what are and what are not “suitable” sales of deferred annuities nor to discuss the subject of annuities in the payout stage. Instead, it presents thoughts on how various segments of the industry, working together, can ensure that proper and knowledgeable suitability analysis is performed in connection with the sale of all annuitiesnot just for variable annuities.
Proper suitability screening is not only good compliance practice, it is also good business.