WASHINGTON — MetLife’s securities sales unit today was fined $20 million and ordered to reimburse $5 million to customers for wrongdoing related to sales of replacement variable annuities from 2009 to 2014.
The action was announced by the Financial Industry Regulatory Authority (FINRA), which cited MetLife Securities, Inc. “for making negligent material misrepresentations and omissions” on variable annuity (VA) replacement applications for tens of thousands of customers.
Specifically, according to FINRA, MetLife’s securities unit in some cases overstated the cost of a customer’s existing VA contract, while failing to tell them about cheaper replacements. FINRA found that from 2009 through 2014, the firm misrepresented or omitted at least one material fact relating to the costs and guarantees of customers’ existing VA contracts in 72 percent of the 35,500 VA replacement applications the firm approved, based on a sample of randomly selected transactions.
”Each misrepresentation and omission made the replacement appear more beneficial to the customer, even though the recommended VAs were typically more expensive than customers’ existing VAs,” FINRA said, noting that the unit’s replacement business constituted a substantial portion of its business, generating at least $152 million in gross dealer commission for the firm over a six-year period.
According to Michelle Ong, a FINRA spokesman, the settlement involved the second highest fine ever imposed by FINRA. The largest was a $50 million fine against Credit Suisse First Boston Corp. in proceedings in 2002 related to initial public offering issues. An additional $50 million was levied against CSFB by the Securities and Exchange Commission, Ong said.
Joseph M. Belth, professor emeritus of insurance at Indiana University, said replacement has been a huge problem since the beginning of the life insurance business in the U.S. in the first half of the 19th century.
“The reason is that sales of life insurance policies and annuity contracts are driven by commissions,” Belth said. He said New York’s Regulation 60 and other such regulations are attempts to deal with the problem.
“I believe that violations of the type found at MetLife would be found at many other major firms as well,” Belth said.
An industry lawyer in Washington, D.C., who asked not to be named, agreed. He said the settlement was a “significant matter” for the insurance industry, citing New York’s Regulation 60, as Belth did, especially since the Department of Labor’s new fiduciary standard rule imposes an upgraded standard of care for sale of investment products such as annuities into retirement accounts.