Across the Globe, the Regulatory Vise Tightens

During the 2012 annual meeting of the Million Dollar Round Table, held in Anaheim, Calif., June 9-13, editors of Summit Business Media’s LifeHealthPro group—Warren Hersch of National Underwriter Life & Health, Brian Anderson of Life Insurance Selling and Daniel Williams of Senior Market Advisor—met with MDRT members from Australia, Canada, the U.S. and the U.K. to explore regulatory, practice management and product issues and trends in the four countries.

The roundtable participants included Brian Ashe, president of Brian Ashe and Associates Ltd., Lisle, Ill.; Adrian Baker, a senior partner at St. James Places, Bristol, England; Herb Braley, Jr., president and CEO of Braley Winton Financial, Toronto, Ont.; and Scott Morrison, principal of Summit Financial Group Ltd., Auckland, New Zealand. The following are excerpts.

Hersch: MDRT President Jennifer Borislow and AALU Regulatory Reform Committee Chair Larry Rybka warn that advisors’ practices are increasingly threatened by government restrictions on agent compensation, most notably in respect to commissions. What government regulations are you facing in your respective countries and how well are you dealing with them?

Ashe: In the U.S., one area of concern in the health insurance market is the imposition of the medical loss ratio [of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act], which has effectively imposed price controls on life insurance companies as well as limits on what agents can get paid. The result is that agents who sell insurance have experienced a 20% to 80% reduction in commissions.

Yet agents are expected to offer more service and be more informed relative to how the new regulations will apply. So you’re they’re spending more time and getting less pay. That affects not only the base compensation to agents, but also the ability to pay for support staff and other expenses needed to run a practice.

The second big area of concern is the proposed fiduciary standard for broker-dealers. Underpinning the proposal is a belief that only advisors who operate under a fiduciary standard can act in the client’s best interest and that commissions are unethical. This proposal represents the greatest challenge facing commission-based agents today.

Baker: In the U.K., we’re just six months away from implementing one of the largest shake-ups in financial services in the last 30 years: the Retail Distribution Review. The legislation affects not just commissions, but also renewal commissions.

On January 1, 2013, every advisor will have to satisfy new educational requirements of the U.K.’s Financial Services Authority. There has been a massive loss of agents from the industry because of the time and cost of retraining. If you’re an independent advisor after January 1, then you can only accept fee-based compensation.

One of the most significant issues stemming from the new law is renewal commissions on policies. Clients must have the opportunity to discontinue renewal commissions if they believe they’re not receiving adequate advice or service.

For agents who have been in the business a long time, this change could have a massive effect on their income. We expect that many clients will cash out policies and buy new ones so they can turn off renewal commissions, which advisors can only receive for sales concluded before 2013.

Braley: While we’ve been watching regulatory developments in the U.S., the U.K. and elsewhere with interest, not much has happened in Canada bearing on compensation. But I imagine that Canada will abolish commissions at some point.

Many of the major insurers in Canada are now auditing our files on a “friendly basis.” This auditing used to be limited to mutual funds and other investment products for compliance; now it’s happening with life insurance products.

Our advisors are staying ahead of the curve by disclosing that we earn commissions on sales when gathering information in client meetings. At sale closings, we also have them sign off on forms indicating they’ve been told we earn such commissions. 

Morrison: We in New Zealand are half-way between the regulatory regimes of Canada and the U.K. Since enactment of the Financial Services Act of 2008, which was fully implemented 18 months ago, all investment advisors must meet educational requirements of a revised version of the National Certificate in Financial Services—unless they satisfy recognized alternative qualifications or designations—to become an Authorised Financial Adviser.

Most advisors have taken six months away from their practices to do this. As of 18 months ago, if you weren’t an AFA, then you couldn’t sell investment-based products.

Originally, the new educational requirements were supposed to cover both insurance and investments, but the government didn’t have the systems to cope with getting everyone through the AFA program. So they scaled back the requirement to Category 1 investment products.

Insurance products fall into Category 2. We expect that within 18 months Category 2 insurance advisors will be subject to the same requirements as Category 1 investment advisors. So we’re putting all of our insurance advisors through the AFA curriculum to stay ahead of the regulations. 

After the new law went into effect, about one-third of advisors in New Zealand left the business. Also, valuations of existing practices declined because prospective buyers understood they could acquire sellers’ businesses at lower prices.

This has been an issue for many older advisors who had built up commissions-based practices over many years and had hoped to sell the businesses at retirement. When they could no longer get the prices they expected without the AFA designation, many were forced to do the exams.

Respecting commission disclosure, during the initial client meeting, we first have to describe to clients the commission we receive. Once they agree to the sale, we then have to give them a secondary commission disclosure statement, which specifies the up-front commission and subsequent trailing commissions.

Ashe: The new laws in the U.K. and New Zealand impact not only up-front commissions of advisors in these countries. If your renewal commissions drop between 20% and 80%, the resale value of your practice is much reduced. For many advisors, the renewal commissions represent a significant portion of the personal wealth they’ve accumulated over 30 or 40 years. The resale value of their practices has been totally compromised with a stroke of pen.

Hersch: Producers are also expressing growing alarm over government controls on the sale of certain products. Here in the U.S., we have the recent example of FINRA’s efforts to extend its regulatory supervision to fixed indexed annuities. In India, we’ve noted the recent ban on indexed universal life products, which Ms. Borislow says has resulted in a 50% decline in the Indian contingent of MDRT’s membership within the past year. How are you adapting to increased government regulation, restrictions or bans on the sale of certain life insurance products in your countries?

Ashe: In the U.S, we’re seeing greater regulation of products having anything to do with securities. Question is why fixed indexed annuities were put into the same classification as securities, since the product’s principal is guaranteed by the life insurance company. 

FINRA’s attempts to regulate the products resulted in a lot of confusion for broker-dealers. Some B-Ds prohibited their reps from selling fixed indexed annuities unless they were licensed in securities. One [MDRT] Top of the Table agent told me there is so much fear over this issue that his B-D will not allow him to sell a variable annuity unless the prospect has already owned a VA for five years.

Baker: Five years ago, the British government started taxing dividends inside pension schemes, which used to be tax-free. This significantly affected fund values, just at a time when pension funds were diminishing dramatically because of the financial crisis.

More recently, the government reduced the annual pension contribution limit to £50,000—about $70,000 per year. Previously, there was no maximum. The lifetime maximum for a pension fund was also cut to £1.4 million from the previous unlimited maximum.

These changes have dramatically affected pension planning in the U.K. And they have advisors asking, “What’s next?” There has been much talk that the government will eliminate the tax-favored treatment of pension contributions.

Braley: In Canada, providers of segregated funds–variable annuities–have had to substantially increase their capital reserves to maintain contract guarantees. As a result, many Canadian life insurers are exiting the business; only a handful still offer the guaranteed lifetime withdrawal benefit in the contracts. We’re writing the products like crazy now because the guarantees may not exist much longer in their current form.

Morrison: The New Zealand government hasn’t intervened with any of the products we sell. But the government generally aligns itself with developments Australia. Among other changes, The Australian Securities Commission now requires that consumers sign a 40-plus page policy application form to complete a purchase.