As if the finalized Department of Labor fiduciary rule is not enough of a challenge for the annuities market to tackle, several other regulatory and compliance issues are still important for carriers, producers and independent marketing organizations to focus on this year.
Kevin Mechtley, consultant with First Consulting and Administration, outlined compliance issues likely to be faced by annuities providers this year during a webcast in conjunction with the National Association for Fixed Annuities (NAFA). Mechtley based his David-Letterman-style top 10 list on interviews with regulators and carrier compliance experts.
Continue reading to find out the top 10 regulatory and compliance issues annuity providers will face in 2016.
Suitability remains an ambiguous term, which makes it difficult to comply with. Carriers have different suitability standards and rules. Broker-dealers have different suitability standards in their reviews. Regulators perceive suitability differently from state to state. Some regulators are uncomfortable with automated supervision systems or shifts in supervision to IMOs because of perceived conflicts of interest. And product innovation further muddies the waters.
“Suitability remains a bit of a moving target,” said Mechtley. “What regulators don’t like is using product innovation as a crutch to make the sale suitable.”
To make matters even less clear, the new DOL fiduciary rule will not supplant existing state laws on suitability. Carriers and producers will have to figure out how to comply with both rules. However, the DOL rule will only apply to qualified money while non-qualified money will remain under state suitability rules, creating confusing scenarios in which advisors and carriers will have to wear two sets of compliance hats.
Technology advancements have led to automated procedures that are changing the industry, but further innovations like big data, electronic processing, wearable technologies, the Internet and social media will continue to foster change in the industry.
Mechtley said carriers and IMOs fall into three basic technology adoption categories:
The “innovators” who are investing heavily in technology and innovation and aren’t content to wait and see where the industry is going. They are leading the industry to its destination.
The “fast followers” who want to go where the innovators are going, but they don’t want to be first. They want to learn from the innovators’ successes and failures and then only adopt the successes.
Finally, there are the “slow adopters” who will wait until a majority of the industry adopts technologies before they make a decision.
Fixed annuity providers are likely to be fast followers or slow adopters, said Mechtley.
“I believe many companies are willing to sit back and wait and see what other companies and competitors are doing and how ongoing litigation unfolds,” said Mechtley. “Eventually companies are going to have to make changes, but I don’t expect many fixed annuity companies to be the earliest adopters.”
Technology like analytics could lead to competitive differentiation during the next two decades, especially as millennials and young customers increasingly seek online options for purchasing insurance. But technology will also give rise to new compliance challenges, such as privacy issues, cybersecurity breaches and increased disclosures.
8. Regulator concerns
Regulators are concerned with annuity advertising, carrier supervision of IMO activity and lack of monitoring of super agents.
“In the regulator’s eyes, not all agents are created equal,” said Mechtley.
Regulators consider it their job to protect individual consumers, so one complaint with merit is enough to land producers, IMOs and carriers in hot water even if the rest of their business is squeaky clean.
7. Generic advertising
Advertisements with no carrier name are a rising concern for regulators. The Wild West mentality of just a few years ago where everything and anything was acceptable is gone.
Now, carriers are very sensitive about advertising that could get them in trouble, said Mechtley, and many require that all advertising that names or references the carrier be reviewed for compliance.
6. Carrier compliance officer concerns
Carrier compliance officers mention problems with surrogate agents, cross-border sales, pretext issues and unapproved advertising as their primary concerns.
Mechtley said there is value in working with these officers to help prevent front- and back-end problems with compliance.
“It’s a relationship business after all, and that’s not just between agents, lead generators, IMO principals and carrier VPs, but also between those business units looking out for your best interests.”
5. Advertising compliance
Advertising is always a hot-button issue when it comes to compliance, and regulators are still concerned about advertising that could be misleading to annuity novices.
Mechtley listed several tactics annuity providers should steer clear of in their advertising to avoid compliance issues, including unfair comparisons, absolutes, scare tactics, unsubstantiated terms, confusing the advertisement with government approval, implying licensing beyond actual authority, and out of date statistics and testimonials.
To stay on the right side of compliance with advertising, endeavor to be truthful and provide accurate and understandable disclosures where necessary. Use timely statistics, and obtain and keep an approval record for all testimonials. Always disclose that insurance products may be offered for sale when you use a call-to-action. Be mindful of state inducement laws.
In short, ask yourself if an annuities novice could be misled by the ad, and if the answer is yes, don’t run it, according to Mechtley.
4. Product innovation
The fixed index annuities of today barely resemble “old-fashioned” annuities from the early 2000s, said Mechtley. Product innovations have substantially changed annuity products during the past decade, however the rules governing them have more or less stayed the same.
Exotic indices are one area that have become popular because they tell a good story to customers.
“IMOs and producers love a good story, because good stories are much easier to sell,” said Mechtley. “The key is: The story needs to be based in truth or it’s a problem.”
Regulators are concerned with indices that only show positive growth or that are not being adequately explained to customers.
“I’m not even sure the seasoned actuary would be able to explain how some of these work and that’s the issue the regulator has.”
3, 2, 1. The DOL rule — questions
The newly finalized DOL rule is probably the biggest compliance challenge annuity providers will face this year, and therefore it takes up the top three spots.
The rule expands the definition of what it means to be an ERISA fiduciary, which includes two functions. The duty of loyalty requires that an advisor act in the best interest of the client and avoid conflicts of interest. The duty of prudence requires advisors to make recommendations with skill and the care that a prudent person would, based on the customer’s unique situation.
“I’ve talked to all kinds of different people about this, and people have all different opinions,” said Mechtley. “Everyone has a different feeling on the impact it will have on the fixed annuity industry. Some believe it’s doomsday, others see more of a minimal impact and everything in between. I think it’s definitely going to have a big impact.”
Many questions about how the ultimate effects of the rule remain, including how the DOL fiduciary rule and existing suitability rules will work together.
“If 60 percent of sales are now under the fiduciary standard, why are we sticking with suitability at all?” asked Mechtley. “Will carriers want two standards? What about customers who have one qualified and one non-qualified annuity? Will producers be able to put on two separate hats?
“How will insurance-only producers comply with the rule that only allows them to offer the best possible product for the customer? What if that product can’t be sold due to lack of an appropriate license? There’s a lot of questions left to be answered.”
2. DOL rule considerations
Recordkeeping will become extremely vital under the new rule and extend beyond records of sales to include analysis about why certain products were recommended.
The effect on product evolution remains a question mark. Some people believe the rule will stifle product innovation. Mechtley believes product innovation will accelerate as companies work to figure out ways to differentiate their products with new designs targeted at meeting the standard of the ‘best’ product for customers.
“If every product looks the same, as a fiduciary, the only thing you can offer and say it’s the best is probably the one with the highest rating, because otherwise it would be very difficult to make the argument that you provided the best product unless there’s some differentiating factor,” he said.
Errors and omissions premiums are likely to rise, and producers and distribution will have to learn to separate qualified and non-qualified sales.
Compensation may come down as plaintiffs look for low-hanging fruit for potential lawsuits. Mechtley said high-compensation products are a likely early target for litigation. Sales trips and incentives will probably decrease or go away because of the appearance of conflict they create.
Finally, more disclosures are likely to be necessary under the rule and the disclosure process could become more arduous.
1. Comply or fight?
Providers don’t have forever to comply with the rule. There is a one-year deadline (April 10, 2017) for compliance written in the rule, so it’s important to get started now with steps such as:
Training for producers and carrier employees, IMO marketers and anyone else involved in the sale or recommendation of an annuity sale
Revising all policies and procedures to incorporate fiduciary analyses
Analyzing where your competition is and determining your own risk appetite
Creating new customer-facing disclosures
Legal and legislative challenges to the rule are already starting, and providers will have to decide how much energy they want to spend on compliance vs. fighting the rule, said Mechtley.
“Litigation will probably come from a variety of interested parties and groups with the intent to kill the rule or get a stay,” said Mechtley. “There may be some merit, but it’s generally difficult to fight agency law in a court. Legislation will be another avenue, and it has already started with bills pending in the House and Senate. This is a bit of an uphill climb though, because as we all know, the legislation would eventually need to be signed into law by the president, who will most certainly veto it on arrival.
“Meanwhile, implementation must also forge ahead during the fight,” continued Mechtley. “The way I like to frame it is ask yourself, what percentage chance do you think the fight has of winning and removing the rule entirely? If you are an optimist and say 50 percent, 50 percent of your energy, time, money and resources should be spent fighting the rule. But 50 percent of your time should also be spent implementing it.”
Let’s continue the conversation on Facebook!