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Warning Signs For Agents - Watch Out For These Compliance Red Flags

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What triggers increased surveillance by a financial services company? What causes companies to spotlight some producers and ignore others? What gets a producer on a company “watch list”? With companies using information technology to collect, process and interpret more and more information on producers, it is easy for companies to identify potential red flags and producers who deserve special attention.

The following are some of the most typical red flag warnings that companies use to trigger heightened monitoring and supervision. While there are other red flags that companies use based on the product sold or the distribution channel, the ones below tend to be the most common.

Replacements, exchanges and switches

o Large number of replacements or a high percentage of business coming from replacements–signals increased risk of improper replacements.

o Several replacements from the same company-signals potential targeting of a company for replacement sales.

o Use of the same rationale or explanation for the replacement on all replacement forms or use of a rationale based on the client’s dislike of the current company-signals that the producer is avoiding fully answering or addressing the rationale for replacement.


o A number of sales to seniors-signals increased potential risk for improper suitability.

o Use of the reason, “Customer refused to provide data” as why no suitability data is provided-though this may be a valid excuse for some applications, over-use leads to concern that the producer is using the excuse to avoid dealing with suitability.


o Number of complaints from customers- the greater the number of complaints, the greater the likelihood that something is definitely wrong with the producer’s sales process.


o Incomplete applications that require follow up by underwriting or new business-incomplete apps may signal an attempt to hide information.

o Delayed applications-the longer an application sits, the greater the likelihood that there is a potential problem with it.

Lapse rate

o High 13-month lapse rate-signals potential problems with the producer’s sales process; e.g. not doing needs-based selling or using high pressure tactics.

Company standards differ, so what is a large number of complaints from customers may be one complaint per quarter for one company, for example, and three per quarter for another. Nevertheless, these types of standards tend to be the key indicators that companies use to identify producers who may be selling improperly, and therefore, need close supervision.

Companies also may apply different standards to different groups of producers. For example, a company may have a higher standard for newly contracted producers or inexperienced producers than for producers with experience who have worked with the company for 24 months or more.

Many companies keep their specific standards secret so that producers do not know what will trigger a red flag. Their concern is that knowledge of the standards may reduce their effectiveness. They may also withhold information about their standards because of concerns about legal exposure from published standards.

If your business is characterized by some of these red flags, then it’s likely that your business is being carefully monitored. Monitoring can involve:

Delays in underwriting as applications are carefully scrutinized.

Company contact with clients.

Requests for additional information.

Increased frequency of on-site visits and audits.

Requests to field management for increased scrutiny and surveillance of practices.

What can you do if you think you are under surveillance? Review your business practices and focus on reducing the factors that might be generating red flags. Review company policies and procedures and make certain that you know the most up-to-date ones. If you have any confusion about what is the appropriate approach to take, contact the company and ask for clarification. The best way to avoid being scrutinized is to demonstrate a track record without these red flags.