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Regulation and Compliance > State Regulation

The 4 Main Components of Compliance

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Thirty-two: That’s the official number of compliance steps that affect your sales of life insurance, annuities, and other financial products.

Almost every agent, however, is in violation of at least one of these guidelines, rules, regulations, mandates, common laws, and statutes that are required by federal and state governments and other bodies.

There’s no need to panic, however. The seemingly impossible task of fully meeting compliance can be dealt with in an organized and rational way — but first, we need a little perspective. Here’s where we create the 33rd, 34th, and 35th rules to add to the existing list.

Agents are subject to the rules and regulations of various states. The vast majority of those rules and regulations are designed to protect the public by constraining agents and insurers or creating a situation where they are obligated to perform certain tasks.

If an agent should find themselves at odds with the regulations, their defense that they followed the spirit of the law will always prove a poor substitute for having met it to the letter.

It is not better to ask for forgiveness than for permission, and you should view with suspicion anyone who says it is. Agents make enough honest mistakes, and we do not need the additional burden of making intentional violations.

Most requirements include record-keeping and other checks designed to actively prevent agents from getting out of line. For instance, you can’t acquire or maintain licenses or selling agreements without errors and omissions insurance, you have to pass tests on money-laundering and such, and you must manage policy delivery correctly — or else you don’t get paid.

Proper observance of the other compliance elements is initially entrusted to you as both professionals and as citizens. We have, for instance, the constitutional right to publish advertisements without prior restraint, but if we bypass compliance approval, we may eventually find ourselves in trouble with both our company and state regulators. Following is a discussion of the four main groups of compliance concerns and the practical issues that surround them. (See sidebar for specific elements contained within these four main issues.)

Not that many years ago, life agents needed little more than a rate book, and a new agent could be forgiven for thinking that training was their chief activity.

In a recent interview, Sandy Praeger, president of the National Association of Insurance Commissioners, said, “As far as training areas go, that is usually under the purview of the insurer. The personality of the trainer can often determine how the agent handles compliance issues. If there is an overbearing emphasis on sales, then compliance issues might be overlooked by the agent. It takes a happy medium of stressing both company and consumer goals as agents are being trained.”

Prospecting consists of planning and executing an approach to the public. Planning is mostly legwork. Actual execution, however, requires visual or verbal presentation material. The fundamental rule here is that all material must be submitted to your compliance officer prior to use. “All material” includes the obvious ad copy and related bits plus phone scripts, emails, and other material used to contact the public by the agent or on the agent’s behalf.

If, for instance, if you buy leads or accept “free” leads from an outside vendor, or if you employ persons or companies to contact the public, you remain fully responsible for each contact, even if that it was made before you bought or received the list of leads. The material used to make these contacts must be submitted to compliance officers before you act on it. Reputable lead-generating firms are aware of these needs, and they can provide you with the necessary material or, if you’re lucky, the contents thereof may already have been approved by the firm. You should always check that this is being done. Note that an outside agency may have gained exception from the no-call rule while contacting the people on their lead list. This exception cannot be inherited by purchasers or recipients of that list. In short, agents retain all responsibility, but they lose any exception.

Sales process
We all know this process is heavy on the paperwork; even veteran agents can find themselves lost in forms and functions related to some of their more complex transactions.

“I find that a common, careless, and costly mistake agents make is to fail to fill in a required blank on a form,” said Greg Atkins, a 25-year veteran agent in Smithville, MO. “I work to eliminate this error by marking the non-applicable blanks with an ‘N/A.’ It’s a simple step but forces me to consider each question or request as it comes up.”

Atkins went on to say that he relies heavily on his assistant to scrub his work before submission.

“I don’t see how an agent can operate efficiently, while staying out of trouble, without a first-rate assistant to shepherd the producer through the sales process. If agents wait for their home office or compliance department to discover their mistakes, they may jeopardize the sale and their standing with the client. The only safe and responsible way to deal with such problems is to quickly identify them and immediately contact the client or prospect.”

General public interest
Insurance agents are a handy group from which politicians can draft free assistance. If terrorists are laundering money, politicians can use the Patriot Act to dragoon the insurance professionals. If the government can’t meet its quota of hoodlums, they can use the Violent Crime Control Act to enlist insurance professionals. Over the years, dozens of public policy odds and ends have become agents’ uncompensated responsibility. You may view this as either your patriotic duty or a denial of due process, but nonetheless, you must cooperate, or else you may lose your livelihood.

Putting it all together
It’s important to note that these four broad areas do not function independently. Consider the case of agents who sell products they don’t understand. It’s should be self-evident that they haven’t taken full advantage of all available training opportunities and that they are not exercising due diligence. True, they may still manage to complete the suitability paperwork, but are they truly capable of making an informed decision regarding suitability or are they merely speculating? If their lack of product knowledge should lead to a serious complaint or legal action, what are their options? Should they plead ignorance as a defense against a claim of dishonesty?

“One of the current problems across the nation is the idea of ‘suitable sales’ of insurance products for older citizens,” said Praeger. “The purchase of life and annuity products is often a complex and confusing process for consumers of all ages. To address this issue, the NAIC adopted revisions to our Suitability Model in 2006 that apply to all consumers. Basically, the revisions in the model state that the insurance producer must have reasonable grounds for believing that their recommendation is suitable for the consumer.”

The most common, yet serious, compliance complaints against agents often come from former or current clients.

If a client should complain, it will most often be related to suitability, due diligence, or practices that are deceptive or in bad faith. It is at this point you may discover how difficult it can be to demonstrate your compliance with subjective issues such as intent, judgment, and understanding. Nonetheless, if you can produce, from impeccable files, a clear, accurate, complete, and up-to-date record that you have complied with all the specific legal requirements, you may someday smile again. If, on the other hand, you cannot establish and present a record that you met strict compliance, you may be less likely to favorably impress the stern regulators, arbitrators, and adjudicators who might now be giving us the fish-eye.

The insurance business requires that agents comply with both minor and major rules. As professionals, you should observe and obey the rules and strong suggestions that rely on your professionalism with the same zeal as those that are actively enforced.

When serious trouble comes, it most often arrives from your current or former clients. We must be careful in maintaining all compliance records, but it is in your best interest to go the extra mile to create and preserve documentation of all your dealings with all your clients.

In matters of public interest or in your relationship with your companies and the public at large, it is essential that you do the professional’s requisite work and forget the idea that making pleas for forgiveness is sufficient to meeting compliance.

Stuart N. Speer, CFP is a financial planner with Heritage Advisors, LLC in Overland Park, KS. He focuses on pre and post-retirement planning and serves as his firm’s insurance compliance officer and securities principal. He can be reached at [email protected].

Common Compliance Issues and Their Specific Elements

Training. State licensure, mandatory certification, and optional certification; state continuing education, and the requirements set forth by agencies and firms with whom the agent does business.

Prospecting. Advertisement, direct solicitation, Do-Not-Call lists and other public privacy requirements.

Sales process. Product knowledge and due diligence, product suitability, policy replacement (model replacement law, agencies’ requirements, and state-specific forms), field underwriting, application taking (federal identification requirement, federal privacy releases, state requirements, and agency requirements), policy delivery (free-look, buyer’s guide and other required publications, cancellation, and reinstatement), consumer privacy notification and consent.

General public interest. Anti-money-laundering and Patriot Act, Violent Crime Control Act, and foreign identification.


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